Q3 2021 Columbia Banking System Inc Earnings Call
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Okay.
Welcome to Columbia banking systems third quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
On the telephone and should require assistance during the conference. Please press Star and then zero.
As a reminder, this conference is being recorded.
I would now like to turn the call over to your host Clint Stein, President and Chief Executive Officer of Columbia banking system.
Thank you Norma welcome and good morning, everyone and thank you for joining us on today's call as we review our third quarter results, which we released before the market opened this morning.
The earnings release and accompanying Investor presentation are available at Columbia Bank Dot com.
Before we begin I want to welcome to nearly 200, New Columbia Bank employees, who joined US from Banca Congress Holdings on October 1st.
I've spent a lot of time over the past few months getting to know the California team and I'm excited about their contribution to the future growth of our company.
Today, we reported third quarter net income of $53 million or <unk> 74 per share.
Third quarter was very busy as our bankers deepen relationships in our existing markets.
Resulting in substantial growth in both our core loan and deposit portfolios.
Income rose across the board and expenses were well controlled.
Our operational teams worked tirelessly to ensure an efficient and successful close of the bank of Commerce Holdings acquisition.
Finalizing our entry into the California market.
And shortly after the third quarter ended we announced our planned combination with Umpqua holdings.
We expect the momentum to continue in the fourth quarter and into next year as our bankers remain laser focused on expanding existing relationships and winning new business.
On the call with me today are Aaron deer.
Our Chief Financial Officer, Christian very well, our Chief operating officer, and Andy Mcdonald, Our Chief Credit Officer.
Following our prepared remarks, we'll open the line for questions.
I do need to remind you that we may make forward looking statements during todays call.
For further information on forward looking comments, please refer to either earnings release or website or our SEC filings.
At this time I will turn the call over to Eric.
Thank you Glenn good morning, everyone.
During the third quarter Columbia generated net income of 53 million or <unk> 74 per share driven by solid fundamentals adjusted for $2 2 million of acquisition related costs pretax pre provision income of $70 8 million was our second best quarter on record trailing only the second quarter of 2020, when we recorded a large.
Gain on our visa B shares.
Positive flows remained exceptional with balances up $608 million during the quarter to 16 billion at September 30th reps.
Representing an annualized growth rate of 16%.
Over the past 12 months deposits grew by $2 4 billion or 17% our cost of deposits from the third quarter remained at a historic low of just four basis points.
Total loans net of PPP increased by $183 million or 8% annualized to $9 2 billion at September 30th.
Remaining PPP loans totaled $337 million at period end and the remaining net deferred fees still to be realized was $8 million as of September 30th.
We originated $366 million of new loans during the quarter. This new production was brought on at an average tax adjusted coupon rate of three 5% or 9%, which compares to the overall portfolio rate excluding PPP is 383%.
Our investment Securities portfolio was $6 9 billion as of September 30, which was a linked quarter increase of $692 million driven by $971 million of purchases.
Purchases had an average weighted yield of 148% and a duration of five five years. The portfolio's expected yield is 178% with a duration of four nine years.
The net interest margin rose one basis point linked quarter to $3, one 7% and net interest income rose by $7 1 million overall loan income rose on a linked quarter basis benefiting from the accelerated amortization of PPP loan fees, partly offset by lower interest income from declining PPP Bally.
<unk> <unk>.
Excluding the impact of PPP. The net interest margin declined 15 basis points to 3%, reflecting continued asset yield pressures and increased balance sheet liquidity, but as interest rates and the operating environment improves we expect our margin to rebound as existing in variable.
Existing variable and floating rate loans re priced higher.
And cash flows from the securities portfolio are redeployed into higher yielding loans.
Noninterest income rose $1 2 million on a linked quarter basis to $24 million part of the increase was from our 750000 gain on the.
Sale of HSA accounts with the remainder of the increase largely due to higher loan revenue they'll all business lines posted solid results.
Noninterest expense of $90 million included merger related costs of $2 2 million for the Merchants' Bank of Commerce transaction, excluding acquisition costs noninterest expense of $87 8 million increased $4 2 million on a linked quarter basis. Much of this increase stemmed from a smaller Fas 91 benefit on the compensation line.
As the previous quarter had elevated loan originations through the PPP activity means.
Meanwhile, the September quarter also had some outsized facilities maintenance and technology costs.
Lastly, the provision for income taxes decreased $1 1 million on a linked quarter basis to $13 5 million, representing a 23% effective rate. We continue to expect our 2021 tax rate to be in the range of 19% to 21% for the higher end of that range is looking more likely and with that I'll turn the call over to Chris.
Thank you Erin and good morning, everyone. Our peers have been busy generating strong loan production of 366 million.
Third quarter.
On the 1 billion produced in the past six months.
Outside of PPP at the same time, we have active we've replenished our pipelines, which remains to our satisfaction.
Deposits have continued to rise at an annual rate of a stable always didn't at 16% to 17% range and fee income up.
Across the board.
We are winning new business by taking advantage of the disruption in the marketplace because of who we are simply said we have followed a different process. We believe that people wanted to community and personal contact and our banking relationships and we have delivered on that on a multifaceted level.
Accordingly quarterly loan production was predominantly C&I and CRE focused.
This was centered in real estate leasing construction and health care sectors across our markets.
Line utilization, which has been low throughout the pandemic rose slightly to 44, 9%.
<unk> rising by 141 million to $5 1 billion and exceeding 5 billion for the first time in our history.
The quarterly production mix was 58% fixed 40% floating and 2% in variable the overall portfolio was 4% PPP.
2% non PPP fixed, 33% floating and 11% variable the composition of our loan portfolio remained relatively unchanged.
As Aaron mentioned deposits grew by 608 million during the quarter and by $2 4 billion over the past 12 months.
The quarterly inflows have trended towards demand accounts over the last year and as a result, the split has changed from 51% non interest bearing and 49% interest bearing to an even split of 50 50 between the two as of September 30th.
Fee income continues to be a bright spot.
Card fees are up during the quarter from increased transactional volumes loan fees are up in alignment with loan production and CV financial and Columbia Trust Company continued their breakout year with yet another record quarter.
Residential mortgage activity remains strong in the third quarter with approximately 65% related to refinancing and 35% related to purchases.
As part of our ongoing branch rationalization process, we consolidated three branches in September and October.
We have announced another new record in January of 'twenty two.
And in light of our announcement of the <unk> partnership we are now evaluating a retail.
<unk> strategy across the combined footprint.
Now I'll turn the call over to Andy reviewer.
Thanks, Chris.
This quarter's allowance for credit losses remained at $143 million, resulting in no new provisioning for the quarter.
All of our credit metrics improve which offset any additional provision requirements from loan growth and a weakening economic forecast.
The IHS Markit economic forecast, we use assumes a full year GDP growth of five 7% for 2021 and four 5% for 2022.
Current forecast is less favorable than the forecast used for last quarter with the full year GDP was forecasted at six 7% for 2021.
We ended the quarter with an allowance relative to period end loans up one 5%.
And adjusting for PPP loans, the allowance to period end loans increased to 155%.
NPA is for the quarter remained stable at 13 basis points.
Past due loans for the quarter were eight basis points compared to 17 basis points last quarter.
Net charge offs were minimal and only amounted to about 200000 or one basis point annualized.
Problem loans, which we define as loans rated watch or worse declined from $804 million last quarter to $724 million as of September 30th.
We are continuing to see credit quality improve across the whole portfolio, including the COVID-19 sensitive segments. When you compare to a year ago and problem loans were about $1 1 billion you can see healing within the portfolio.
Now while consumers are shopping again, they may not like the wait time for their products or the sticker prices of those products.
Businesses are dealing with supply chain problems as well as labor shortage.
All of this is causing increased inflationary pressures.
So we remain watchful of the impact of these forces may have.
Nevertheless, we remain confident in the resiliency and strength of the overall portfolio Clint.
Thanks, Andy.
We expect to finish the year strong.
As our bankers maintained an external client centric focus with the objective of growing our existing loan and deposit portfolios.
We have a deep bench of talented team members, who in the coming months, we will complete the integration of bank of Commerce holdings, while working towards finalizing the combination with <unk>.
Our current and future prospects are very bright and it is a privilege to lead such a talented team.
This concludes our prepared comments as a reminder, Andy Chris and Erin are with me to answer your questions and now Norma We will open the call for questions.
Thank you as a reminder to ask a question you will need to press Star and then one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
And our first question comes from David Feaster from Raymond James Your line is open.
Hey, good morning, everybody.
Hey, David.
I just wanted to start out on growth.
Growth was again stronger than expected production is holding up well.
Payoffs and pay downs are still a headwind, but I just wanted to get some of your thoughts on the drivers how much does.
The strength you think just from a general improvement in the economic backdrop versus the new hires you've made in the client PPD client acquisition and just whether you think this high single digit pace of growth is sustainable.
Well I'll start David this is Clint.
And then quickly turn it over to Chris.
This is something that I think as a result of a very intentional approach that we took.
In the middle of the second quarter of last year and that was.
A mindset of continuing to operate in a business as usual or in as near normal of our capacity as possible and.
In spite of the pandemic and the disruptions created from that and I think that.
Our thought at the time was that this would give us momentum as.
As a society certitude.
Reemerge towards more of a normal.
Operating environment and I think if you look back at our.
Our growth in our production over the past four quarters Youll.
You'll see that that momentum has continued to build and that's why I think sprinkled throughout our prepared remarks, you probably noted a lot of optimism and so I'll step back now and let Chris add some additional context.
David.
I'll leave it hits on all of the things that were embedded in your question there, but as Clint said about our process I think a lot of the <unk>.
It goes to our teams and how they approach Dean open being in front of clients being there when they had questions and they can still come in and make a deposit and they still have bankers that we're actively involved in reaching out and talking to them.
That has helped with our existing clients and our retention, but more importantly, what we saw is.
Relationships from other institutions to followed it is much different process that are that are moving and voting with their feet. If you will.
Because of what we get and that we were open when when clients don't have access to branches to bankers. They begin to look for other options and I think we've been the beneficiary of that and so again I would say a lot of the credit and the congratulations goes to our teams for being opened in a safe manner.
And continuing to prospect.
Okay. That's helpful. And then maybe could you give us an update on the bank of Commerce deal I know, that's gotten somewhat overshadowed a bit but this is your first foray into California.
An update on how the integration has gone house production trending over there.
Have you gotten any deeper into that transaction now that they're part of the bank just any updates on your thoughts on that deal.
Sure.
Yeah.
Yes.
Maybe externally has been overshadowed by the announcement of our.
Our of our combination with home club, but certainly internally it hasnt.
I'll make my second trip to.
To the bank of Commerce footprint next week My second trip this month.
And hence my my prepared comments about over the past several months getting to know.
Our team members that joined us from.
From Boc H and <unk>.
I'm excited I'm as excited or more excited about what they bring to the combined organization as I was the day that we announced it back in June.
And I think that with all of the things that we had envisioned.
Entry into California.
It was if it was just that it was a it was an entry.
Our strategy has always been to have a much much larger presence.
Throughout California, and the combination with encore accelerates that dramatically and I think that it also celebrates opportunities that we solve with.
With the bank of Commerce combination or acquisition and Thats having.
The size and scale, where clients don't outgrow.
Our bankers.
Being able to continue to grow with those businesses being able to bring some of the business back on the balance sheet being able to pursue relationships that maybe they had and at.
At prior institutions that were.
Two large four.
For the balance sheet at bank of Commerce.
As well as the additional career opportunities in development opportunities that being part of <unk>.
Larger organization will provide to all of the folks that joined us from bank of Commerce.
Okay that makes sense great.
And then just just wanted to touch a bit on your asset sensitivity and kind of how you guys are thinking about managing liquidity at this point.
I guess whats the strategy going forward and I know you guys have been active and innovative in the past managing your sensitivity just with the right color that you guys have done just curious if there's any thoughts on swaps or other derivatives at this point just in light of the potential steepening of the curve.
Hey, David.
No.
I guess the visit of strategy.
Or being considered at the moment, but.
We feel very good about our positioning in terms of our asset sensitivity.
Put in some additional detail or some new detail I guess I should say.
Investor deck that helps you kind of better understand how the portfolio will behave.
But I think it's also worth noting that the.
How do we think about that.
And how we model that internally and what we share.
It's pretty conservative.
One thing to think about is when you look at the say the asset sensitivity table that we put into our Qs and Ks.
That has a.
A deposit beta sensitivity of about 50%, but if you look back at the last rate rising cycle.
Reality is that our actual performance was less than 20% so.
So our asset sensitivity.
<unk> is obviously very strong and we're.
We feel like we're very well positioned for.
We hope to be a rising rate environment hopefully.
Not too far future.
Certainly the trends that we've seen of late on that front in terms of some steepening of the yield curve are very encouraging and.
To further benefit that we hope to see a remixing from the investment securities portfolio into the loan portfolio, obviously has got tremendous on balance sheet liquidity.
Right now Thats investments portfolio is throwing off about $700 million annually.
That we can redeploy into loans and.
That amount actually increases as we go forward so.
We're very well positioned and comfortable but how that looks going forward, especially in a rising rate environment.
Alright, thats great color thanks, everybody.
Thank you. Our next question comes from Jeff <unk> from D. A Davidson your line is open.
Thanks, Good morning.
Good morning, Jeff question on.
Aaron I might have missed in your prepared remarks, the discussion on the margin specifically you mentioned.
Dissipating a rebound.
But could you frame that up again I apologize for missing I, just wanted to get that straight.
Just.
No near term my expectations that we're probably going to see continued.
Margin pressure, just given where new asset yields are coming on both on the loan book in the investment securities portfolio, but with an anticipated.
Patient.
Rising rates, that's when we would expect to see a rebound.
Okay. So weak.
Okay.
I guess the follow up is.
Maybe more specifically to <unk>.
Spread income expectations, and I think you've kind of touched on a little bit with what you think you would do on liquidity, but what if you do have broad.
NII expectations.
Could you share that.
We haven't given guidance on our NII expectations, but.
Obviously, we had the benefit of PPP this quarter, that's going to go away, but now on a go forward basis of course, what the merchant bank.
Transaction that is going to benefit that that number on a go forward basis.
Okay great.
Clint.
I've got two questions on the.
On the Umpqua announcement in the first being.
<unk> had a couple of weeks to digest this and also get feedback from others.
The first question being what do you think the most misunderstood piece of that combination that you've that you've heard that you've had to sort of dispel and then the second thing is.
The biggest risk that you see from a combination integration et cetera.
Thanks.
Yeah.
Well I think the.
The response to the.
To the first question and we stated this.
On the Investor call at the announcement and I don't know that.
Did it necessarily resonated.
And that was the statement that we made that we are more similar than what the market perception has been.
And.
And I realize that we've spent.
The past.
Sure.
Several months getting to know.
Each other organizationally on a very very detailed level.
No.
Yeah.
Guess.
As we progress.
Towards the close and then through the integration.
I think it will become more.
More apparent too.
To everybody on the outside looking in.
That we truly are much more alike, and we are different.
And so I do think that there's a there's a bit of a perception issue there.
I think the biggest the biggest challenge.
Pivot to the second part of that question the biggest challenge going forward.
As is.
As we go through the integration.
Maintaining our external focus.
And that's something that very confident and.
And our ability to.
Bring both our companies together into one.
It's going to be.
Very.
Powerful dynamic.
Environment.
But I do think that in some of these instances really in any type of merger activity there.
There could be.
A tendency to become inwardly focused for a period of time.
And so that's something we're very very much aware of.
We spoke about the office of integration that we're setting up.
That is very.
Very active we have.
Steering committee meetings going already on that we have four.
For what I'll consider very very bright minds.
<unk>.
Both companies two executives one.
<unk> <unk> from our executive team that are going to be fully dedicated to that office of integration.
And I think a good way of.
Thinking about it is.
How we went through the PPP process and.
The first round for for the whole industry forced everybody to become inwardly focused and was an all hands type activity.
But then when we went through the second round of PPP, we had a very similar outcome.
But many of our bankers the vast majority of them were able to maintain your external focus and that pivots back too.
David's question about the momentum and the growth opportunities that we've had so that's it.
At a high level.
Our plan to combat that risk and I feel really good about our prospects there.
I appreciate it thanks.
Yes.
Yes.
Thank you.
Our next question comes from John Armstrong from RBC capital market. Your line is open.
Hey, Thanks, good morning, everyone.
Jonathan.
Maybe for you, Chris you kind of alluded to in your comments, but what.
What changes with your approach on expenses with the pending merger.
Kind of what are you spending on now and where are you maybe pausing a bit.
I think when you look at our approach has always been one of consistency.
We don't put out a big announcement of the branch consolidations, it's just the.
The normal course of business I think with Clint as our CEO.
Always some previous calls talked about offsets when we're making investments into technology and things of that nature and I expect all of that to continue to.
To continue to move forward now as we come together and theres going to be opportunities.
The investor deck is out and talks about some of those opportunities.
And I wouldn't expect that we're going to change culturally who we are with our approach to expenses.
We'll run and we'll use the office of integration.
To highlight things that are where there's overlap.
There's locations that have overlap and will walk through our thoughtful process on when and how we institute.
Savings, but I would expect that to be.
A collaborative process that.
Has very similar results to what we've done previously.
Okay.
Thank you for that and Eric can you review.
A couple of puts and takes on expenses to kind of get back to our core can you give us those again.
Sure.
Reported were about $90 million right.
About $2 2 million in merger related costs.
There was about $500 million.
Column.
Technology fees that were.
We'll call them nonrecurring I guess, but they were just unusual items.
Also had about 500000.
Goodbye.
Sorry.
In technology costs, and then another 500000.
Kind of some outsized branch maintenance costs that just kind of happened to hit during the quarter.
And then of course, there is also the provision for unfunded commitments during the quarter.
Obviously can bounce around depending on.
Utilization in commitments, but but that was also a factor in the quarter.
Okay. Good thank you for that.
Couple of other questions, but the new loan production yields look like they are up quite a bit from the previous quarter is that is it simply mix or is there something else happening there.
It's mostly mix John.
The second quarter.
As you remember May remember, we had a few large shareholder.
Hi credits very competitive deals that we have brought on so it's really the mix.
Okay. Okay. Good.
And then Aaron another question for you I think you were talking about slide 10 earlier.
The rate sensitivity.
Updates.
Yes.
What's new on here I guess, the way that I read it as it was at 20.
25 basis point hike above.
About $3 billion of your $4 2 billion in variable and floating rate re prices is that is that the message you're trying to get across with us.
Yes, I think.
In particular the.
The chart in the upper right gives you a sense previously we werent kind of disclosing what we did.
Kind of what happens at each hike in terms of.
Influenced.
Kind of what comes out from under from under the floor for <unk>.
The Florida I should say.
So we're just given a more granular level of detail there for you to kind of understand the pacing of how it's going to play out.
Okay. Good that's very helpful.
And then Andy I think you thought youre going to get away without a question, but how are you guys thinking about.
Reserve and provision levels are at this point, obviously things look very clean but.
Any thoughts on that.
Yes, I think it's going to continue to be the dynamic between the economic forecast and I still continue to believe that the portfolio will continue to heal and then you've got loan production. So those are the three things that I see as the drivers going forward I mean, certainly the economy is I think GDP came out of it.
2%.
For the last quarter or so so hopefully loan production stays there the pipeline I think is pretty good.
So it's really going to be sort of that forecast, which is a huge seasonal driver.
But we continue to see healing in the portfolio, which is helping offset the declining forecast.
Okay. Okay. Thanks for everything I appreciate it.
Thanks, John.
Thank you and our next question comes from Andrew <unk> from Stephens. Your line is open.
Hey, good morning.
Good morning.
Hey.
I'm looking at the kind of growth by portfolio. This quarter I think a little over half of it came from residential real estate.
Was this just from retaining more kind of mortgage production on balance sheet in your mortgage business.
Given kind of the really strong deposit flows should we expect to see the residential portfolio continue to build from here is kind of a levered.
Deploying some excess liquidity or as I think about kind of the prepared remarks, it sounds like the growth outlook was pretty optimistic.
Should we expect growth to shift back more towards commercial.
Yes.
Right.
Andrew I think if I understand it correctly.
We did choose to retain some mortgage production during the quarter, we made a small purchase.
As well as about $30 million.
Metrics such that it made sense that we were.
Do that.
Ni is still a big purse.
Part of what we're doing and when I look at the pipeline and go forward I would say that yes commercial is more of a driver of where we're going but we saw an opportunity and it made sense during the quarter.
Understood. Thank you.
And then Aaron I apologize if I missed this but do you have.
For the new Securities purchased during the quarter.
The new purchases were the average was one 4%.
Encouragingly, we've seen an upward trend and that not surprisingly given what we've seen.
Rising slope of the curve, so hopefully, we'll see that trend higher from here.
Got it thanks, Okay. The rest of mine were asked and answered already I appreciate it.
Yes.
Thank you.
And I am showing no further questions at this time I would now like to turn the conference back over to Mr. Stein for any closing remarks.
Thank you for attending our third quarter earnings call and as always.
Please please reach out if you'd like clarification or additional detail on anything we discuss this morning. This concludes our call have a great day goodbye.
This concludes today's conference call. Thank you for participating you may now disconnect.
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