Q1 2022 Columbia Banking System Inc Earnings Call
Good day and thank you for standing by welcome to the Columbia Banking systems first quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
I would now like to hand, the conference over to your Speaker today, Clint Stein, President and Chief Executive Officer of Columbia Banking systems. Please go ahead.
Thank you Katherine and welcome and good morning, everyone and thank you for joining us on today's call as we review our first quarter results earnings release, and accompanying Investor presentation are available at Columbia Bank Dot com.
Our first quarter financial performance was outstanding net income of $57.5 million and EPS of <unk> 74 cents per share or the best first quarter on record.
Our bankers delivered with solid loan and deposit growth credit remained filler and expenses were well managed.
During the quarter. We also completed the integration of the bank of Commerce Holdings acquisition.
And the integration activities related to our combination with Umpqua holdings are also proceeding very well.
The integration management office led by executive simple space has done an excellent job seeking out and addressing any challenges that can arise in a sizeable combination.
As a result teams from both companies have colette to ensure a smooth and timely close once the necessary regulatory approvals are received.
On the call with me today are Aaron Deer, our Chief Financial Officer, Chris very well, our Chief operating officer, and Andy Mcdonald, Our Chief Credit Officer.
Following our prepared remarks, we will open the line and take your questions.
Before I turn the call over to Aaron I need to remind you that we may make forward looking statements during the call for further information on forward looking comments, please refer to either our earnings release or website or our SEC filings Erin.
Thank you Clint and good morning, everyone.
First quarter pretax pre provision income of $67 4 million net income of $57 5 million and earnings per share of <unk> 74 cents for all new first quarter highs in spite of $7 1 million of merger related costs, which decreased earnings by something cents per share.
Average, earning assets increased by $3 8 billion from the first quarter of 2021, including $1 8 billion from the merchants Bank acquisition.
This combined with the partial quarter impact of the Feds March rate increase resulted in an increase in net interest income of $22 million or 18% over the prior year period.
Linked quarter pretax pre provision income increased by 704000.
Adjusting for merger related costs P P and our decreased by $4 1 million, partly due to the seasonal reset of payroll taxes and benefit costs.
As well as increased expense related to the higher starting wage way implemented at year end and more recent annual Merit adjustments. In addition loan related expenses normalized from a low level in the prior quarter.
Total deposits ended the quarter at $18 3 billion, which was an increase of 289 million from year end first quarter end tourists were predominantly at our money market sweep product and our cost of deposits remained at our all time low of just four basis points.
Total loans ended the quarter at $10 8 billion.
Excluding PPP balances loans increased 219 million or eight 4% annualized growth was propelled by $464 million in new loan originations and a modest increase in line utilization.
P. P P forgiveness and pay downs dampened overall loan growth by 101 million, reducing total loan growth to $118 million, but still a solid four 4% annualized.
Net interest margin of $3, one 2% was up seven basis points on a linked quarter basis, mostly due to higher yields on investment securities and that was largely due to lower premium amortization on the portfolio.
PPP loans had a positive three basis points impact in the first quarter, which was down from six basis points in the fourth quarter.
New loans were brought on at an average tax adjusted coupon rate of $3 61, which compares to the overall portfolio. Excluding P. P. P of 384, notably our balance sheet remains very well positioned for the rate increase is expected to continue through the year still.
Still we may not see all of that benefit materialize in new loans, given the intense price competition across our footprint as industry liquidity remains very high.
Noninterest income was relatively flat on a linked quarter basis of $24 2 million favorable nonrecurring items. During the quarter included gains of 868000, and 311000, respectively on the sale of loans and the health savings account portfolio acquired from merchants Bank.
In addition, we had a 395000 gain on the sale of a vacant branch property.
These one time items offset declines in mortgage banking and loan related income attributed to the higher interest rate environment.
Noninterest expense of $105 1 million increased by $2 4 million linked quarter. After adjusting for merger related expenses of $7 1 million in the first quarter and $11 8 million in the fourth quarter noninterest expenses increased by $7 2 million to $98 million.
Linked quarter increase was mostly due to the aforementioned rise in compensation costs and loan expenses as well as a $2 5 million increase in the provision for off balance sheet liabilities.
Seasonally elevated compensation costs drop offs and merchants bank cost saves are fully realized we expect our expense run rate to be closer to the mid ninety's.
The provision for income taxes increased $2 5 million on a linked quarter basis to $15 6 million, representing a 21, 3% effective rate and we expect our 'twenty two.
By 2022 attacks rates remain in the 20% to 22% range ahead of our combination with Umpqua and with that I'll turn the call over to Chris.
Thank you Erin it's been a busy quarter and we are seeing positive results from investments in our production and our support teams.
Aaron mentioned.
Non PPP loan production of $464 million was the largest first and our fourth highest quarter on record.
This is on the heels of our best quarter in company history ex PPP of $640 million in the fourth quarter of 2021.
Our bankers continue to be successful in winning new business in the face of an intensely competitive lending environment.
As the economy has reopened and expanded our bankers deepen existing and build new relationships and all of our markets.
Both producers and clients across our footprint I appreciate the value of the upcoming combination with encore and the increased capabilities that it will bring.
Pipelines remain full and to our satisfaction.
Line utilization rose modestly during the quarter.
Increases in construction line utilization were offset by the normal seasonal decrease in agriculture.
Across the footprint, a cold wet spring delayed plantings for many crops, resulting in weaker than normal advances we anticipate this to reverse in the second quarter as the warmer drier weather returns.
The quarterly production mix was 65% fixed 25% floating and 10% variable.
The overall portfolio now stands at 1% PPP loans, 54% non PPP fixed 30% floating 15% variable.
As a result of higher rates, we saw a drop in our mortgage warehouse business during the quarter with total loans dropping from 75 million to $57 million.
Overall, the composition of our loan portfolio did not change materially.
Deposits grew at an annual annualized rate of 6% during the quarter and 24% over the past 12 months.
The sourcing of deposits was stable at 59% business and 41% commercial.
Similarly, the mix of deposits is fairly steady at 48% non interest bearing and 52% interest bearing.
During the quarter, we moved our Bellevue way branch to a new financial hub location.
And in July we'll be opening our property district financial hub in Tacoma and have begun construction on a new financial hub and a story of Oregon.
Full service locations are uniquely focused on helping our clients achieve accomplishment financial goals, including investments Trust services and other financial considerations.
Now I will turn the call over to Andy to review our credit performance. Thanks, Chris for the.
Quarter, we released seven 8 million from our allowance.
This reduces our allowance from 146% to $1 three 7% compared to period end loan totals.
Driving the release was a decline in problem loans.
Substandard loans declined $68 million to around $303 million or 282% of total loans.
And special mentioned loans declined $30 million to around $70 million or less than 1% of total loans.
Problem loans as a percentage of total period end loans is now approaching pre pandemic levels.
To a lesser extent a modest decline in the loss rate for past rated loans due to our most recent level of low charge off activity also contributed to the release.
The IHS Markit forecast, which we use for modeling purposes was fairly stable compared to last quarter.
As such did not have a marked impact on our reserves for the quarter.
For example last quarter the unemployment rate was expected in 2022 at three 4% and remained at or below pre GAAP pre pandemic levels throughout the forecast period.
The current forecast also assumes the unemployment rate will end 2022 at 344% and remain near pre pandemic levels throughout the forecast period.
The current forecast assumes full year GDP growth expectations for 2022 of three 3%.
Compared to previous expectations of $4, three so left but not material.
In summary, we are seeing credit quality metrics similar to that which we enjoyed pre pandemic.
While we are pleased with this performance we remain cognizant of the current global environment and instability in Europe .
Along with the inflationary pressures here at home.
So while we are optimistic for the future performance of the portfolio near term we remain cautious as we look further down the road.
Okay back to Clint.
Our regular quarterly dividend of <unk> 30 was announced this morning. This quarter's dividend will be paid on may 18th to shareholders of record as of the close of business on may 4th.
This concludes our prepared comments as a reminder, Andy Chris and Aaron are with me to answer your questions.
Now Catherine will open the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Jeff <unk> with D. A Davidson your line is open.
Thanks, Good morning.
Good morning, Jeff.
A couple of questions on the on the loan portfolio the non PPP.
Payoffs in Prepays I think in the current quarter was a little over $200 million combined.
Do you have what was that figure last quarter and then.
If you could touch on the line utilization what exactly was that percent.
You touched on it that it was up a bit.
I think the line utilization was up something like 60 basis points.
It was.
If I've got the exact number for you.
Yeah, It's rose from 43, 3% to $43 nine.
And what was the question on the PPP balances.
What was I think prepays in pay offs.
And the non PPP I think it was a little over $200 million in the current quarter it'd be combined knows well how does that compare to the fourth quarter in other words.
Payoffs in prepaid Hey, how is it.
Non.
Yes, they weren't they were down sequentially.
Okay Fair enough I guess, just following that all up.
Rolling into your growth outlook and expectation.
A pretty strong seasonal quarter on a row.
Production wise.
Either specific or otherwise.
Loan growth expectations for the for the year.
Yeah, Jeff I think.
Good.
There's still a lot of plausible.
A lot of liquidity out there and there's a lot of competition.
We've always been talking about mid to high single digits I think that's a fair place to still.
Project that out given everything that's going on in the market.
<unk> had some new people that joined us back in the fourth quarter that we talked about will start to see some production ramping up from.
That team and working on other things as well, but I think that mid to high single digits is the right place to be.
Okay.
Switching gears, a little bit to the margin you mentioned premium amortization down linked quarter was that.
Is that.
Still an expense or does that flip to a recapture in the quarter.
No that's still run it as an expense, but it was down sequentially probably around around $5 million.
Got it.
And Aaron if you look at net <unk> impact the margin up 10 basis points linked quarter to 309.
How does that compare to the March.
Monthly average on margin the 309.
Yes.
The sequential progression through the months when you back out kind of all the different noise. It was actually pretty flat, but we didn't get the real benefit in the in the loan yields until the last.
Last couple of weeks of the quarter.
And the.
And so that's just now starting to come through but I think what what a good number to look at is what our what our tax adjusted loan coupon was ex PPP and that was up two basis points sequentially to 384 from 382, and that's obviously very well poised to continue to see some nice lift.
Here going forward.
Great. Thank you.
Thank you. Our next question comes from David Feaster with Raymond James Your line is open.
Hey, good morning, everybody.
David.
I just wanted to touch this.
I'll go back to the origination just great to see another record.
Quarter.
I just wanted to get a sense of what you think is driving that is it theres a lot of factors is it the improved economic backdrop the benefits from the new hires that we've talked about less participations like you've mentioned moving upstream I suspect. It's a combination of all that but just curious your thoughts on what's driving the improved in our originations and then.
I know you talked about the pipeline being full but just in light of the record originations how was the pipeline trending quarter over quarter, just the composition of that.
Yes, David This is Chris and I mean, you're right. It is a combination of all of that but statistically let's.
I'd say that it's been it's been a longtime coming with our approach over the last couple of years of remaining open being there for our clients.
And ultimately for prospects. So we're winning new business is coming from external to the bank because of that approach our bankers have been in front of people in front of our own clients, they're seeing opportunities for strategic investments things of that nature, that's fairly well balanced between true C&I.
<unk> and CRE as well a little bit in the AG space and a little bit in construction as far as the new volume there, but honestly I think the approach and then when you look at the pending combination and you see.
Not just our bankers, but your share clients looking at the potential of what's coming downstream to potentially do more for them.
They're voting on that aspect and signing up early.
Some of them might be willing to go through.
Hey, good conversion and things of that nature, and I think that just bodes well for process and what we've laid out there. The new teams are starting to hit their stride you know it takes a little time, a team that we announced it.
It came on at the end of the fourth quarter, you know about 90 days with US we'll start to see some some positive impacts from them as well.
And then again, it's just kind of a normal aspect of.
Of where we've always been.
Being out in front of us trying to clients and recognizing opportunities.
Also mentioned that we're seeing some positive uptick in the health care space, both regionally and nationally as well.
Okay. That's helpful and then.
Maybe just following up on the pricing front compare and the new production rates.
Quarter over quarter, they were up a couple basis points. Obviously the rate hike came later in the quarter, but just wanted to get a sense of how pricing and new loan yields are trending and then just any thoughts that you might have on the competitive dynamics in the market today.
Yes, I think the competition has really changed much.
We're still seeing some things where we're choosing to do.
Walk away from long term low fixed rates things of that nature.
We are seeing some improvement in the clients that value the advice and what we're bringing to the table, we're seeing a little movement there.
You're right. The increase came late in the quarter well see what takes place.
Anything down the road, but I would expect and this is just a.
Looking down the pipe.
Pricing competition is not going to let up that the rise in rates should give us a little a little lift as well.
Okay that makes sense.
And then maybe shifting gears to the other side of the.
Cohen just talking on deposits.
Core deposit growth has been phenomenal you've got a tremendous low cost core deposit base just wanted to get a sense of how you think about deposit growth going forward in light of the rising rate environment. Obviously you are.
You have the.
Benefit of being able to be pretty defensive on this just given the strength of your departure.
The deposit book, but how do you I mean do you expect deposit flows to at least slow or maybe migrate within the portfolio or would you even expect maybe some outflows just any thoughts on on trends with deposits would be helpful.
Hey, David this is Clint.
You know.
Our crystal ball on that is a little fuzzy.
Historically, the first half of any year is been very little if any deposit growth in the last the last.
Two to three years that hasn't been the case and obviously.
Posted.
Very very strong deposit growth in the first quarter.
And I think some of that is just our continued growth and some of the market share that we've taken in certain areas that are less susceptible to.
Seasonal fluctuations in deposits.
One of the things that we saw in the last.
The rising rate cycle, a few years ago was.
Many of our customers.
With the.
The deposit mix, we have been heavily weighted towards towards commercial.
And 50% non noninterest bearing gives us a structural advantage.
But for those that.
<unk> is meaningful.
We pushed several hundred million dollars off balance sheet.
During the last cycle through our <unk> financial services group and so we're able to still serve that client without cannibalizing the cost structure of our entire deposit base and so those would be some of the strategies that we'll be leaning on Chris and the entire team to implement as we go forward.
So if we see some.
Some declines in the deposits.
My expectation is it's probably related to activities like that more so than necessarily complete attrition, leaving the bank.
I'll turn it over to Christmas if he has anything he wants to add.
The only thing I'd really add there is our client base.
It's not as interest rate sensitive as some organizations and I think you've seen that over over the historic performance of the cost of funds and such.
Options that Clint mentioned, we're already looking at some of those in.
We've seen a little bit of movement, but its not enough at this point to offset the growth that we've had.
And yeah, and I would say I think.
Clint talks about the Crystal ball I think every time, we said, we kind of think that's going to be flat.
We ended up being wrong. So it's really hard to pinpoint it is what I'm trying to say there.
But we'll keep we keep managing it very closely and keep a close eye on it.
Just one quick follow on to that do you have a sense of how much was from existing clients versus maybe new client.
But you brought in.
No don't have that right here with me alright. Thank you.
Thank you and our next question comes from Chris Mcgratty with <unk>. Your line is open.
Hey, good afternoon.
Maybe a question just on the <unk>.
The environment and how it's changed since the merger was announced.
More on the.
The marks in the assumptions on the accretion from the deal.
We've seen it I guess two questions number one we've seen a lot of banks move.
Securities into held to maturity to avoid the OCI.
I guess first question is that something with the combination that might be being considered into how might the marks changing from when the deal was announced impact.
Capital return pro forma thank you.
Well, Chris This is Clint I'll start just kind of high level, and then I'll turn it over to Aaron for the actual substance.
That youre looking for.
Relative to.
How do we think about the deal and the impact of rates and the marks.
Yeah.
Somewhat indifferent.
You know the value that we saw in this combination.
Was really executing on a on a shared long term vision and and that long term vision hasn't changed.
You know the more that we've gotten into the integration planning the more excited I am about about exceeding that vision.
And you know.
Say long term well, we've all been at this for.
For the better part of our of our careers and we've been through multiple business cycles, and that's something that as a combined organization. We know we're going to go through.
And it's just the timing of it.
Our objective here was it trying to time, a business cycle or beta rate movement or anything.
Was the right time for us to consider this combination.
So while it creates some noise in the modeling.
I'll, let Eric speak to the work I know.
Aaron and Ron and their teams have put a tremendous amount into <unk>.
Model lean and analyzing.
That impact, but I just wanted to kind of frame that I really look at that as kind of a short term component of what really is a long term decision that our company has made.
Yeah, and I would echo with what were quaintly set on that front about staying focused on the fundamentals.
Just from the rate impact point, I guess I would first point out that we did in fact move.
A good deal of our Ams portfolio into held to maturity late last year in anticipation of rising rates and that helped give us a little bit of protection here as rates started to move.
Going forward I would expect that there would be good rationale for continuing to hold some of that there, but more specific to the marks and stake as they will be impacted.
For the deal.
We'll be looking at.
No.
Certain asset categories that would've been coming on at a premium now swinging to a discount that's going to increase the amount of goodwill, but as Clint indicated that's going to come back to us much faster in the form of net interest income so.
Net.
An accounting change it's the fundamentals are not really changed by those interest rate movements.
That's great color. Thanks, Eric.
Thank you and there are no. Other questions. This does conclude today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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