Columbia Banking System, Inc. Q3 FY2023 Earnings Call

Thank you for being here. Welcome to the Columbia Banking System's Third Quarter 2023 Earnings Conference Call. Currently, all participants are in listen-only mode. After the presentations, we will have a question-and-answer session. This call is being recorded. Now, I would like to introduce Jacque Bohlen, Investor Relations Director for Columbia, to start the call.

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.

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 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 the 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. The 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.

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 highlight 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.

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.

Thanks, good afternoon.

Hi, Jeff.

I wanted to address the margin guidance you have for the full year. To reach the low end of the 385 for the year, it seems that margins would need to significantly decline in the fourth quarter. Could you help clarify the conditions that would lead to achieving the low end of your margin guidance for the year?

Jeff, this is Ron. Good morning or good afternoon. That would be similar to what we saw last quarter. It depends on customer deposit flows. If we're doing well in that area, we will be at the upper end. If not, we'll be at the bottom end. I feel pretty good about our position heading into the quarter.

Yes, that's correct.

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?

It was really centered in two commercial accounts with the bank. Both had been struggling for quite some time, and one of them decided to cease operations. That one became nonperforming, and the rest is mainly linked to a slight increase in the 90-day plus category in residential construction. Geographically, one was in Portland, specifically in the Pearl District, and the other was in California.

Okay. Got it.

I mean, I will say that, the third quarter has a few holidays in it that impact collection activity. Any impact to collection activity hampers, 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.

Yeah. We're always looking at how can we become more efficient. And I do think that there are 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 new markets. And Chris and Tori have made some strategic hires in existing markets. You know, in Chris's prepared remarks, he mentioned Northern California. So we're going to continue to be opportunistic within legacy markets, but also invest in those newer and 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.

Yeah, and Jeff, we'll talk about that. That's an updated guide in January as we look into '24. Yeah, it's actually a specific number, $21 million. So we've got a gross of 164 and then down to 143.

To answer your question you asked about branch consolidations, we have five leftover from the original ones that we did. And when we look at our go-forward, we're very pleased with our footprint. I think we're in a good spot with those and don't anticipate anything further.

Hi. Good afternoon, everybody.

Hi, David.

I was hoping maybe we could just touch on the funding side and specifically focusing on the core funding side, exclusive of the broker deposit increases that we talked about earlier. I'm just curious what you're seeing there as we dig in. It sounds like core trends are stabilizing, that you're actually having some success attracting new clients, which may be difficult for us to see in some regards, just given clients utilizing excess liquidity. I'm just curious some of the underlying trends that you see there within your core deposit franchise where you're seeing the most opportunity to drive core deposit growth and attract those new deposit clients and how new core deposit pricing is trending.

David, hi, this is Tory Nixon, I'll talk a little bit on the commercial side of the house and let Chris kind of chime in on the consumer side of the house. You're seeing a few different things. One, folks are using excess cash to invest in their companies when and where appropriate rather than borrow. So the borrowing side is just less robust than it was a year ago. Folks are also looking for yield where they can with any excess deposits. We have done a really nice job connecting with our existing customer base and just looking holistically at their relationship. And with that in mind, kind of focusing on where they may have funds at other places and talking about bringing those funds to Umpqua Bank, and we've had a lot of success with that. That will continue without a doubt. We had a lot of success this quarter with it. And we've got a really nice pipeline as we kind of move into Q4.

Yes, pretty much the same piece on that, David. I would add that on the new side, our rates are very competitive in the market, but where we're really seeing the opportunities to deepen relationships is in talking with the customers, taking them through our relationship model, asking questions about what else they have out there. And we continue to source deposits from other institutions. As well, the teams have really kind of moved towards, there is still some minor integration, but not technology types of things. And our teams are out jointly calling together in all of our markets and winning new business just with their outward-bound efforts.

One of the things happening in our marketplace is significant disruption from other financial institutions, which presents us with many opportunities. We are actively engaging in our markets to connect with potential clients, and we are finding success in these efforts.

Hey, Dave, this is Ron, and again I'll come back to the comments we talked about earlier, or do we see continued customer deposit growth? And I'll feel really good about where we're at in a higher prolonged environment. I think maybe in terms of 2024 specifically, we'll definitely give you an update on that in January as we look into the year, but it's going to be the basic blocking and tackling. You heard Chris and Tori talk about continued customer deposit growth. We'll look there on that front.

Our focus is to be good stewards of capital. We have our long-term targets and have been very consistent with them. Even on a standalone pre-merger basis, our views on capital levels were consistent, aiming for 150 basis points above the criteria to be considered well-capitalized. Total risk-based capital has been our constraint. Regarding the 12%, we will explore all capital deployment opportunities. However, we don't expect a major shift the moment we surpass 12%. If we're generating 25 to 30 basis points of capital each quarter, we could quickly exceed our target by 5,000 to 7,500 basis points while still growing capital. Our forecasts indicate that there isn't a prudent level of organic growth that could absorb all that capital. Therefore, we will be considering capital return strategies as we manage those ratios. While you shouldn't expect it next quarter, I anticipate it will be a positive challenge for us as we move through 2024.

Hi, good afternoon.

Yes, this is Ron. Good afternoon. That was later in the quarter, roughly two to four months in tenure. That's how we managed all of this from a wholesale standpoint, including the Home Loan Bank Advances. And you're talking probably mid-5s in terms of cost.

Okay. And then I guess as you look at your borrowing position, where is that today relative to where you want it to be? And as that continues to mature, maybe just give us a schedule of how that matures and if the expectation is to replace that with additional brokered.

Yes. And again the Home Loan Bank Advances are also in that two to four-month tenor. So they're all repricing in that call it mid-5 as well. And that just gives us the most flexibility, right? And back to your second question, we're obviously sitting on more borrowing than what we like. It's in response to, of course, what's happened with the liquidity drain in the overall system over the past year. Ideally, over time, deposit growth continues to exceed loan growth, and we're able to pay those down with due plan.

Okay, that's helpful. It seems like the low end of the margin guide seems fairly conservative. And I'm just wondering as we look at NII, is that also kind of 50-50 for an inflection point in next quarter or even though there is some stability in the NIM? We could see another quarter of NII compression prior to that higher for longer really kicking in and benefiting the top line in '24.

Yes, regarding your question about Q4 and the guidance, any significant changes will depend on customer deposit growth. I am confident that we will not see a major shift in net interest income if customer deposits continue to grow in the portfolio.

It's going to be a gradual reduction over time, spanning multiple quarters to my best estimation.

Yeah, the par value is in the $185 to $190 range, so the discount was in the ballpark of 35.

Hey, good evening, everyone. How are you?

Good afternoon. Doing well.

I just wanted to follow-up on just the loan waterfall chart. Ron, I just wanted to make sure I understand the 343 from payoffs or sales. The single-family side, I think it was the 159 that's in there. And then the remainder of that is just payoffs, correct?

That's correct.

Yes, this is Tory. The success rate is very, very high. That's what we want to do. We had growth in the commercial side and our C&I teams of about 40 million or 50 million, and growth in the CRE teams at about 180. So, a lot of success in the rollover of that.

We choose not to provide that much detail surrounding ACL on that portfolio. We feel that there's enough detailed information provided elsewhere for the group to really ascertain the quality of our loan portfolio, which is high. Very good quality.

Yes, nothing specific, Brody. Without having that detail in front of me, it's hard for me to say, but what I would intimate from this is that we had extremely strong sponsorship on those deals, and they're relationship-based opportunities. So we have the banking relationship and know the client.

That was an owner-occupied commercial real estate piece of collateral. What we do initially, obviously, is we downgrade it, we then get the property reappraised, which did come in. And I've said on these calls historically about our lending discipline and our aversion to leverage. Well, it played out in this case because we got the property reappraised. We still have equity in the property and we continue to work with the borrower on trying to structure an orderly way out of this. We will not take a loss on this piece of property.

Thank you, Valerie. Thank you for joining us on this afternoon's call. Please contact me if you'd like clarification on any of the items discussed today or provided in our earnings material. This concludes our call. Goodbye.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.