Columbia Banking System, Inc. (NASDAQ:COLB) Q4 2023 Earnings Call Transcript

Columbia Banking System, Inc. (NASDAQ:COLB) Q4 2023 Earnings Call Transcript January 24, 2024

Columbia Banking System, Inc. misses on earnings expectations. Reported EPS is $0.4481 EPS, expectations were $0.8. Columbia Banking System, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Columbia Banking System’s Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to introduce Jacque Bohlen, Investor Relations Director, to begin the call. Please go ahead.

Jacque Bohlen: Thank you, Valerie. Good afternoon, everyone. Thank you for joining us as we review our fourth 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 provisions of Federal Securities Law.

For a list of factors that may cause actual results to differ materially from expectations, please refer to Slide 2 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: Thank you, Jacque. Good afternoon, everyone. 2023 was a tremendous year for Columbia. We closed and integrated our transformational merger with Umpqua Bank, expanding our footprint to encompass eight Western states and creating one of the largest banks headquartered in the West. We achieved targeted net cost savings ahead of schedule and 6% above our original projection, even after taking franchise reinvestment into account. With the integration behind us, our priorities in 2024 and beyond have shifted to focus more fully on optimizing performance and driving shareholder value. Fourth quarter was noisy and our results reflect that. The FDIC special assessment and other elevated expense items brought our quarterly expense run rate above prior guidance.

Our cost of funds reflects the rate environment and the associated impacts of repricing CDs and higher-priced funding sources like public deposits and brokered funds. While these items matched quality of our core deposit base, they do not dilute it. Relationship banking drives our franchise value and it’s the value proposition we bring to new and existing customers. Our fourth quarter results do not reflect this value and we are focused on improving controllable variables to offset macro-driven headwinds. Looking to the year ahead, the competitive environment for deposits and the impact of higher rates is likely to persist, and the macro credit environment will likely normalize at minimum. We are well situated to benefit during times of stress, should they emerge.

Our talented associates, skilled franchise and offerings and customer-focused business model provide us with the resources to win business and long-term drive consistent, repeatable performance. 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 our earnings presentation. Slide four lays out our Q4 performance ratios, knowing the decline in the quarter was driven primarily by the decline in non-interest-bearing demand deposits as customers continue to utilize cash, higher provision for credit loss based on slightly worsening economic forecasts, and higher expense including the FDIC special assessment. These are five-quarter views and recall we closed the combination at the end of February. Slide five shows our summary balance sheet noting our deposits in total were flat from Q3, given seasonal inflows primarily on public deposits mostly offset customers’ use of cash.

Our tangible book value is up 13%, as our accumulated other comprehensive loss was halved during the quarter as bond markets rallied. On slide six, we highlight the income statement trends. GAAP earnings were $0.45 per share, impacted by declining merger expense as we completed the integration along with fair-value changes due to market yield changes. On an operating basis, we earned $0.44 per share in Q4, lower than expectations again driven — again given non-interest-bearing deposit flows, higher costs on interest-bearing deposits and an increased provision with slightly worse economic forecasts, and higher expense driven primarily by the FDIC special assessment, which at $33 million reduced GAAP and operating EPS by $0.12 per share. Turning to slide seven, we break out Q4 GAAP earnings to help investors understand the non-operating and merger-related impacts on results.

The first column represents our Q4 GAAP results with net income of $94 million or $0.45 per diluted share and return on tangible common equity of 12%. The second column includes our non-operating designation for income statement changes mostly related to fair-value swings along with merger and exit and disposal costs included in non-interest expense, which are detailed out in the appendix. These net $2 million of income in Q4 earnings, resulting in the third column for operating income. Again, our operating income for Q4 was $91 million or $0.44 per share. And results were impacted by the FDIC special assessment and reserve build, given again slightly worsening economic forecasts. The appendix shows trending on each of these columns and the fourth column includes discount accretion and CDI amortization.

Noting this 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 $0.13 per share net for merger accounting was equivalent $0.25 per share added to tangible book value in Q4. We’ll continue to highlight and trend it here to aid investors in valuing all earning streams. And our tangible book value excluding AOCI increased $0.27 during the quarter, $17.35 per share. Moving to the next section on slide nine, we highlight net interest income in margin. Our NIM declined to 3.78% for the quarter, driven primarily by a higher cost of interest-bearing deposits more than offsetting increased loan yields and lower costs from term debt.

Slide 10 breaks out the repricing and maturity characteristics of the loan portfolio, noting 41% is fixed, 30% is floating and 29% are adjustable. On slide 11 provides an updated view of our interest-rate sensitivity under both ramp and shock scenarios. We’ve 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 risk has 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 fourth quarter, our interest-bearing deposit portfolio has priced in 47% of the Fed funds rate increases. Notable here is the cost of interest-bearing deposits which was 2.54% for Q4 and 2.71% for the month of December.

The lift this quarter was influenced by several factors. The decision in Q3 to replace maturing Federal Home Loan Bank advances for broker deposits was essentially neutral to the cost of interest-bearing liabilities. But it drove nearly 30% of the increase in interest-bearing deposit costs between Q3 and Q4. Approximately 15% of the quarter’s increase relates to an increase in the average balance and rate paid on public deposits and approximately $900 million in customer CDs with largely 12 and 13 month terms matured during the quarter, with many repricing upwards of 200 basis points higher. The cost of interest-bearing liabilities normalizes for balance sheet management decisions and the quarter’s 30 basis-point increase was significantly lower than the increase in interest-bearing deposit costs.

Cost of interest-bearing liabilities was 3.02% in Q4, compared to 3.15% for the month of December and 3.19% as of December 31. Slide 12 breaks out non-interest income items knowing the largest changes in Q4 related to interest-rate driven line items. The changes in loans held at fair value at the bottom was a direct result of decrease in long-term yields this quarter. Next up on slide 13. We know we achieved $143 million in cost synergies guided last quarter, exceeding our original target of $135 million by 6%. This amount is net of re-investments made in various areas, while we will continue to target efficiency improvements with the integration now largely complete. We no longer consider future cost-saving opportunities to be merger-related.

Q4 expense was above our previously guided range due to several elevated expense items. Noted on the right side is the waterfall from the prior quarter, with the increases driven by higher repairs and maintenance, equipment purchases, a branding campaign and most notably, the $33 million FDIC special assessment. On slide 14, we introduced our outlook for 2024 on several key financial statement items. Our net interest margin remains sensitive to customer deposit balances, with growth driving margin stability and perhaps expansion as we replace wholesale funding and outflows driving contraction. Our interest-rate outlook, which incorporates three rate cuts in the back half of the year does not meaningfully impact prepayment assumptions related to purchase accounting.

Our expense outlook incorporates a low-single-digit level of growth from Q4 adjusted run-rate. We see areas for efficiency improvement to offset the costs associated with franchise reinvestment and inflation. To that end, we consolidated five branches this month. 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 increase in market value this quarter, of course, resulted from lower market yields given the bond market rally, again with the unrealized loss halving. Just over half of the portfolio is now sitting with an unrealized gain at year end, which gives us significant flexibility to manage the balance sheet moving forward.

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 3.59% with an effective duration of 5.4 at quarter end. Slide 17 covers our liquidity including deposit flows during the quarter. Total deposits were essentially flat in the fourth quarter. Seasonal and targeted increases in public deposits nearly offset contraction in small-business balances, as other categories were relatively unchanged. The upper right table details are off-balance sheet liquidity with $11.7 billion available as of quarter end. Below that, we had cash and excess bond collateral not pledged for lines to arrive at total available liquidity of $18.7 billion. Slide 18 provides the driver of 3% annualized loan growth in Q4.

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 $21 million via accretion to interest income. In our earnings release detail, we include this $21 million along with $16 million of higher bond interest income from the portfolio restructure we completed post-close, to arrive at the $37 million of total accretion for bonds. On the loan side, we had $27 million of rate accretion, $5.4 million for credit. The total marks declined $69 million in Q4 through accretion to interest in Q4. And finally, in the back on slide 26, We highlight our regulatory capital position. Then our risk-based capital ratios increase 20 basis points as expected in Q4.

We do expect to quickly approach our long-term capital target of 12% on total risk-based capital, which will provide for enhanced flexibility to return excess capital to shareholders. With that, I will now turn the call over to Frank.

Frank Namdar: Thank you, Ron. Slides 20 through 22 provide select characteristics of our loan portfolio, including composition of our commercial book and an overview of our office portfolio, which continues to perform well. Moving on, slide 23 highlights our reserve coverage by loan category. Also, the remaining credit discount on loans provides for an additional 21 basis points of loss absorbing capacity. The $55 million provision expense recorded in the quarter was primarily driven by a slight worsening in the economic forecast used in the credit models along with credit migration. Delinquency and non-performing loan movements over the past two quarters suggest a move toward a more standard credit environment following a phase of exceptional high quality.

Slide 24 provides an overview of our consolidated credit trends. In general, our credit performance is and has remained causative, excluding the anticipated trend in FinPac. FinPac charge-offs remain elevated during the fourth quarter, still centered in the trucking portion of the portfolio. We continue to expect a slow recovery timeline over multiple quarters for this portfolio. Excluding FinPac, charge-off activity at the bank remains at a low level. I will now turn the call over to Tory.

Tory Nixon: Thank you, Frank. Turning to deposits, slide 25 highlights the quality of our granular deposit base. As Ron noted, small businesses use of cash drove a reduction in customer deposits during the fourth quarter, as other commercial balances and consumer accounts were relatively stable in aggregate. The fourth quarter included normal course of business, use of cash, like distributions, dividends, and year-end tax payments, while public balances experienced a related increase. Public deposits were positively impacted by targeted efforts by our teams to grow public relationships in local communities as we work to reduce wholesale funding balances. Our teams remain focused on driving balanced growth in deposits, loans, and core fee income as they work to expand existing relationships throughout the bank, bringing new prospects into the bank.

We see tremendous opportunity with our existing customer base to grow fee income. We launched Smart Leads in 2020 as a way to capture additional business with our existing customer base through predictive analytics. We generated an additional $11 million in revenue since 2020, with $5 million generated in 2023 alone, highlighting increased traction with our teams and the benefits of our scaled organization. We will continue to selectively invest in talent, technology, and locations that enable us to profitably expand our businesses as the efficiency opportunities Ron noted maintain our dedication to growing in a cost-effective manner. And lastly, our loan deposit and core fee income pipelines remain robust. I will now turn the call back over to Clint.

Clint Stein: Hey, thanks, Tory. Our regulatory capital position is outlined on slide 26. And as Ron discussed, we expect capital to continue to creep quickly in the coming quarters, providing us with ample flexibility for future shareholder return. This concludes our prepared comments, and our team is available to answer your questions. So, Valerie, please open the call for Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of David Feaster of Raymond James, your line is open.

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Q&A Session

David Feaster: Hey, good afternoon, everybody.

Clint Stein: Hey, David.

David Feaster: I appreciate all the guidance and maybe just talking about starting on the margin and digging into some of the impacts of rate cuts. I’m curious how you think about the NIM trajectory. Obviously, you guys include three cuts in your forecast. How do you think about the impacts and cuts? You guys have done a great job managing the downside in the rate sensitivity scenarios. I’m just curious how you think about the trajectory and of the margin and how quickly you’ll be able to reprice some of those core deposits on the way down?

Ron Farnsworth: Yes, David, hey, this is Ron. Great question. You know, as I look into ‘24, I mean, if that were to come true, we see three rate cuts in the back half of the year or X number of rate changes, as the market’s predicting. Really key with that is what happens to the deposit betas. And in those rates down scenarios, I think we’re pretty conservative in these numbers with betas in the low to mid-30% range. Whereas on the rates up side, we’re now at 47% and we model 53%, 54% on rates up. So something tells me you’re going to see most banks probably be north of their model results on the rates downside, just given nature and the fact that the deposit moved up so quickly. So with that, it would suggest that there could be potential upside on it. But again, under all of it is going to be what’s going on with underlying customer deposit flows, right? So that’s still the main driver versus beta, as I would suggest.

Chris Merrywell: And hey, David, this is Chris. I’ll add to the rate part of that discussion that between Tory and myself and our teams, we’ve already looking at the competitive market. We’re looking at where rates are trending. I think they’ll start to see us start moving potentially ahead of any sort of rate cut scenario and putting in place the long-term kind of more plan of if we get a rate cut and pick your month, what are we planning to do? So all of that’s being laid out right now, and we should be launching that relatively soon here. But yes, just trying to get ahead of that aspect of it. And I think you see the market is already kind of moving in that direction. So it’ll just be a matter of historically can we follow or can we lead as we’ve done in the past and that would be the ideal situation.

David Feaster: Okay that’s helpful and maybe kind of just a follow-up to some of this just staying on the deposit side, in the prepared remarks it was alluded to some of the declines being attributed to small business declines. I’m curious maybe, what are some of the drivers of that from your standpoint? Obviously, there’s some seasonality, but how much of it’s activating deposits versus paying down debt, using cash to fund growth, or just less profitability at this point for some of the small businesses? And just curious, it’s early in the first quarter, just curious, are you seeing things stabilize? And how do you think about core deposit growth going forward?

Clint Stein: Yes, you got a lot in there, David. I would say the uses that you mentioned, absolutely, you’re seeing that completely across the board. You are seeing some small businesses that good operators have the ability to increase their prices and things of that nature, but for many of them, inflation is certainly taking a big impact and that goes across all items from products, service to the employment inputs and things of that nature. We move into really kind of more of a seasonality type of situation in the first quarter as well. I would say we’re in contact with the small business customers through our local presence, mainly through the branches. People are positive, but they’re also, let’s say, looking down the road for when something’s going to take place that’s going to provide them some relief. We haven’t seen that quite yet. And I think Tory can speak to a little bit more onto the commercial side there.

Tory Nixon: Yes, David, this is Tory. On the commercial side, it’s pretty kind of typical with the end of the year and Q4. The one difference is you saw people that took — they take excess cash that they have in their operating accounts and want to reposition that into some interest-bearing account just it’s kind of good course of business on their point — from their standpoint, but you know it’s a trip — it’s a typical use of cash, of dividends, distributions, tax payments, those types of things. Investments, as some customers are making investments and doing it with cash instead of borrowing for it. So kind of some typical stuff that we’ve seen in the last year or so.

Chris Merrywell: Yes, and David I’d say Tory and I talked quite a bit about the momentum that’s building and our team’s getting excited about being out in the market, integrations behind them, and we’re seeing new business start to come on with some of the other things that are going on out there. Now it’s coming on at a higher cost than we’ve seen in the past, but we’re driving those operating accounts, we’re getting the full relationships with the focus and like I say Tory and myself see stories almost every day about somebody somewhere in the footprint bringing in a new name into the bank.