Columbia Banking System, Inc. (NASDAQ:COLB) Q3 2023 Earnings Call Transcript

Columbia Banking System, Inc. (NASDAQ:COLB) Q3 2023 Earnings Call Transcript October 18, 2023

Columbia Banking System, Inc. beats earnings expectations. Reported EPS is $0.79, expectations were $0.71.

Operator: Thank you for standing by. Welcome to the Columbia Banking System’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. At this time, I’d like to introduce Jacque Bohlen, Investor Relations Director for Columbia to begin the call.

Jacque Bohlen: Thank you, Valerie. Good afternoon, everyone. Thank you for joining us as we review our Third Quarter 2023 Results which we released shortly after the market close today. The earnings release and corresponding presentation, which we will refer to during our remarks this afternoon are available on our website at columbiabankingsystem.com. With me this afternoon are Clint Stein, President and CEO of Columbia Banking System; Chris Merrywell and Tory Nixon, the Presidents of Umpqua Bank; Ron Farnsworth, Chief Financial Officer; and Frank Namdar, Chief Credit Officer. After our prepared remarks, we will take your questions. During today’s call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the Safe Harbor provision of federal securities law.

For a list of factors that may cause actual results to differ materially from expectations, please refer to slide two of our earnings presentation as well as the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release and throughout the earnings presentation. I will now turn the call over to Clint.

Clint Stein: Thanks, Jacque. Good afternoon, everyone. Columbia’s third-quarter results reflect our associates’ emphasis on activities to generate business and drive efficiencies for our franchise. Our focus on balanced growth resulted in relationship-driven expansion in our loan portfolio and higher non-interest income. Despite industry headwinds, we continue to see stabilizing deposit trends. Integration activities are winding down as we are now in our eighth month since the merger closed. I’m pleased to report we achieved $140 million in annualized cost savings through quarter end, surpassing our originally announced target of $135 million. These savings are net of franchise reinvestment, which included investments in talent, products, technology, and strategic locations in the global markets.

While our formalized cost savings objectives related to the merger are coming to an end, our focus on efficient growth is not. We will continue to seek out offset store investments, driving our business forward in an efficient manner, while enhancing shareholder value. Our talented associates, expanded footprint and customer focused business model provide us with the resources and opportunities to profitably grow market share throughout the West. Our future is bright and I look forward to providing updates on these objectives in subsequent quarters. I’ll now turn the call over to Ron.

Ron Farnsworth: Okay. Thank you, Clint. And for those on the call who want to follow along, I will be referring to certain page numbers from the earnings presentation. Slide four lays out our Q3 performance ratios, noting stability in the NIM, our operating efficiency ratio of 52%, and our return on tangible common equity of just over 20%. These are five quarter views and recall, we closed the combination at the end of February this year. Slide five shows our summary balance sheet, noting our $0.8 billion of deposit growth exceeded net loan growth, resulting in a loan-to-deposit ratio falling back to 89%. We also reduced our short-term Federal Home Loan Bank borrowings this quarter by $2.3 billion which lowered our off-balance sheet in spring cash position to $1.9 billion.

On slide six, we highlight the income statement trends. GAAP earnings were $0.65 per share, impacted by declining merger expense as we complete the integration along with fair value changes, due to higher interest rates. On an operating basis, we earned $0.79 per share in Q3 about flat with Q2 as the increase in provision for loan loss was offset by declining non-interest expense, as we realized cost synergy. Operating PPNR was up 6.5% to $259 million in Q3. Turning to Slide 7, we break out Q3 GAAP earnings to help investors understand the non-operating and merger-related impacts on results. First column represents our Q3 GAAP fully combined results with net income of $136 million or $0.65 per diluted share, and return on tangible common equity of 17%.

The second column includes our non-operating designation for income statement changes again mostly related to fair value swings along with $23 million of merger and exit and disposal costs included in our expense, which are further detailed out in the appendix. These net to a $28 million reduction in Q3 earnings resulting in the third column for operating income. And again, our operating income for Q3 was $164.3 million or $0.79 per diluted share with our return on assets at 1.2% and return on tangible common equity at 20.5%. We added pages to the appendix trending on each of these columns. The discount accretion will be a steady and reliable source of interest income over time, as the majority is driven by rate, not credit, providing us with a steady build of capital over time.

And recall the CDI amortization does not impact tangible book value. So the $0.17 per share for merger accounting was the equivalent of $0.28 per share added to tangible book value in Q3. We’ll continue to highlight and trend here to aid investors in valuing all earning streams. And our tangible book value excluding AOCI increased $0.45 during the quarter to $17.48 per share. Moving to the next slide on section 9, we highlight net interest income in margin. Our NIM was steady from Q2 at 3.91%, resulting in $481 million of net interest income. The NIM excluding merger accounting was 3.28%. We reduced excess liquidity and cash flow in Q3. We should have a positive effect on our NIM in Q4. Both measures were at the upper end of our prior guidance, driven by the increase in customer deposits this quarter.

Slide 10 breaks out the repricing and maturity characteristics of the loan portfolio. Noting 42% is fixed, 29% is floating, and 29% are adjustable. Slide 11 provides an updated view of our combined interest rate sensitivity under both ramp and shock scenarios. We have taken proactive measures to reduce the balance sheet sensitivity to a future declining rate environment. You can see here the trending over the past year where our rates down risks have been reduced significantly. And noted below, we calculate our cycle-to-date funding betas, which are calculated on a combined company basis over the periods presented for comparability. As of the third quarter, our interest-bearing deposit portfolio has priced in 37% of the Fed funds rate increases.

A close-up of a customer signing a mortgage document inside a bank branch.

Notably, here is the cost of interest-bearing deposits, which was 2.01% for Q3 and 2.18% for the month of September. And again the lift this quarter was influenced primarily by the additional broker deposits, which were used to pay off maturing Federal Home Loan Bank advances for a relatively neutral impact on our funding costs. The cost of our spending liabilities was 2.77% for the month of September and 2.78% at September 30, relatively in line with the 2.72% for the entire quarter. Slide 12 breaks out non-interest income items, moving we had continued growth in service charges and card-based fees, due to higher revenues from customer-related products. The change in loans held at fair value at the bottom was a direct result of the increasing long-term yields this quarter.

Next up on slide 13, we’re happy to report we exceeded our original cost synergy target of 12% or $135 million. As of quarter end, we’ve achieved $140 million in annualized go-forward cost synergies as we finalized our integration. We expect that we’ll lift to $143 million by year-end. And again these amounts are net of re-investments made in various areas. Normalizing in the month of September expense ex-CDI with $81.3 million, which would be $245 million for the quarter, in the middle of our prior Q4 guidance range, which we reiterate at $240 million to $250 million. On the right side is the waterfall from the prior quarter, with reductions driven by lower comp, occupancy, and contract costs. To better help investors, given the combination accounting and moving parts on slide 14, we provide an updated outlook for 2023 on several key financial statement items.

Our current outlook is consistent with last quarter’s update with a tighter band around the margin as the third quarter results came in at the upper end of guidance, given favorable customer deposit flows. Moving ahead to the next section on the balance sheet. On slide 16 we detailed out the investment portfolio. The table takes you from current par to amortized cost to fair value. Knowing the difference between current par and amortized cost is the combined net discount, which will be accretive to interest income over time. The decline in market value this quarter, of course, resulted from higher market yields across the curve. As you can tell, I’m excited about this portfolio as it gives us a significantly higher and stable earnings stream with greater optionality.

The overall book yield was 3.61% with an effective duration of 5.7% as of quarter end. Slide 17 covers our liquidity including deposit flows during the quarter. For comparability, we presented the table on the left, as we were combined for all periods presented. Total deposits increased $0.8 billion or 1.9% in the third quarter and customer accounts increased $89 million, and again we use the brokered loan with excess cash to fund a portion of the home loan bank borrowing reduction. The upper right table details are off-family sheet liquidity with $12.2 billion available as of quarter end. And below that, we had cash and excess bond collateral not pledged for lines to arrive at total available liquidity of $19.1 billion. This represents 142% of uninsured deposits as of quarter end.

Slide 18 provides the loan roll forward, noting we sold $159 million of non-relationship reservoirs in Q3. Our loan portfolio increased 3% on an annualized basis when the sale was excluded. Turning now to slide 19, we present the remaining balance of discount marks as compared to the prior quarter and at closing. For the AFS portfolio, the acquired discount was reduced to $23 million via accretion to interest income. In our earnings release detail, we include this $23 million, along with $90 million of higher bond interest income from the portfolio restructure we completed post-close to arrive at the $42 million total accretion for bonds. On the loan side, we had $29 million of rate accretion and $6.4 million of credit. The total marks declined $93 million in Q3, through a combination of accretion to interest income and the loan sale.

And finally, in the back on Slide 26, we highlight our regulatory capital position, noting our risk-based capital ratios increased roughly 25 basis points as expected in Q3. We expect to quickly approach our long-term capital targets of 12% on total risk-based capital, which will provide for enhanced flexibility to return excess capital to shareholders. And with that, I’ll now turn the call over to Frank.

Frank Namdar: Thank you, Ron. Slides 20 through 22 provide select characteristics of our loan portfolio, including the composition of our commercial books and an overview of our office loans that highlights this diversified granular portfolio primarily supported by properties located in suburban markets. Moving on, Slide 23 displays our reserve coverage by loan category. Additionally, the remaining credit discount on loans provides a further 23 basis points of loss-absorbing capacity. The $37 million provision expense recorded in the quarter accounts for several factors, including shifts in the loan portfolio mix and trends in credit migration. The slight uptick in nonperforming loans during the quarter suggests a move toward a more standard credit environment following a phase of exceptionally high quality.

Slide 24 provides an overview of our consolidated credit trends. In general, our credit performance is and has remained positive, excluding the anticipated trend in FinPac chargeoffs. FinPac chargeoffs remained elevated during the third quarter, still centered in the trucking sector of the portfolio. However, the plateau and related early-stage delinquency trends we discussed on last quarter’s call resulted in a reduction in FinPac net chargeoffs, which react on a lag to delinquencies. Excluding FinPac, charge-off activity at the bank remains at a very low level. I’ll now turn the call over to Chris.

Chris Merrywell: Thank you, Frank. Turning to deposits. Slide 25 highlights the quality of our granular deposit base. As Ron noted, customer deposit balances increased during the quarter despite the continued effects of market liquidity tightening and inflation. Our teams remain active in their markets, and their focus on customer acquisition and retention resulted in net deposit increases throughout many of our business lines. Strategic expansion also supports our business generation activities. We opened our first retail branch in Utah during the third quarter, supporting our intention to pick businesses, their owners, their employees, and any others in the communities we serve throughout our eight-state Western footprint.

We also selectively added to our talented associate base, including the addition of two key bankers in Northern California, one in commercial and one in wealth management. We continue to capitalize on opportunities our expanded customer base provides and our commitment to our relationship-focused model. I’m pleased to announce our wealth management team had the best quarter in our company’s history. We are positioned well throughout our markets to win business and drive balanced growth. I will now turn the call back over to Clint.

Clint Stein: Thanks, Chris. Our regulatory capital position is outlined on slide 26. We remain above both well-capitalized and our internal threshold targets. And as Ron discussed, we expect capital to continue to accrete quickly in the coming quarters, providing us with ample flexibility for future shareholder return. This concludes our prepared comments, the team is now available to answer your questions. Valerie, please open the call for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open.

Jeff Rulis: Thanks, good afternoon.

Clint Stein: Hi, Jeff.

Jeff Rulis: Wanted to kind of look at that margin guidance you’ve got for the full year. Looks like — you know, to hit the low end of the 385 for the full year, you got be — looks like it’s got to kind of really tank in the fourth quarter in terms of margin. What was — I guess if you could kind of frame up the environment of how you hit the low end of the guidance for the full year on margin?

Ron Farnsworth: Jeff this is Ron. Hey, good morning or good afternoon. That would be similar to what we saw last quarter, right? So it depends on customer deposit flows. If we’re on the upper — positive on that front, will be on the upper end. If we’re negative on that front, we’ll be on the bottom end. Feel pretty good about it, heading into the quarter.

Jeff Rulis: Okay. So again, all right, it seems pretty well, I’ll move on. On the credit side, just on the increase in nonperformers, could we kind of break out what type that was in and perhaps where within the footprint?

Ron Farnsworth: It was really centered in two commercial accounts with the bank. Both of them had been struggling for quite some time, and one of them just decided to cease operations. And so that one migrated into nonperforming, and the balance of it is really associated with in terms of nonperforming assets, there’s a slight escalation in the 90-day plus in residential construction. They were — in terms of geography, they were located — one of them was located in Portland, kind of the Pearl District of Portland, and another one was located in California.

Jeff Rulis: Okay. Got it. And I guess the expectation, if we kind of track FinPac losses like you said, kind of a lagging indicator on — tied to delinquencies. Is that still the case that we’ve seen that plateau, and if we follow delinquencies that continue to come down on that end?

Ron Farnsworth: It is still the case. I mean, I will say that, things — the third quarter has a few holidays in it, that impacts collection activity. Any impact to collection activity really hampers, obviously reducing those past dues. And we had that in the third quarter. Had we not had that in the third quarter, we would have seen some further improvement. But that trend should continue, obviously into the fourth quarter. Fourth quarter is usually another difficult one for collection activity, but we make sure that we’re staffed up to handle it. So we feel we’re continued to be on track.

Jeff Rulis: Okay, one last one on the expense front. I don’t know if it’s possible to launch here a ’24 expense growth expectation. It’s a big year of cleaning up, and you got a little extra on the cost savings on the deal in the fourth quarter. But maybe not, if you can’t point to a figure, just talk about kind of big picture. I think you kind of spoke to Clint, sort of continuing to optimize is sort of the message. But any big-picture sort of branch consolidation or larger investments that may come in ’24?

Clint Stein: Yeah. We’re always looking at how can we become more efficient. And I do think that there is opportunities for us to do that. As we’ve already started, we’re well into our 2024 planning process. So that’s what I was alluding to. We’re going to continue to invest, especially in our de novo markets. And Chris and Tori have made some strategic hires in existing markets. You know, in Chris’s prepared remarks, he mentioned California — Northern California. So we’re going to continue to be opportunistic within legacy markets, but also invest in those newer markets and those high growth markets. But we’re going to challenge ourselves to do that by finding offsets and efficiencies in other parts of our organization as opposed to just simply letting expenses ramp up. In terms of kind of a launch point for modeling purposes, I’m going to defer to Ron on that.