Columbia Banking System, Inc. (NASDAQ:COLB) Q1 2022 Earnings Conference Call April 21, 2022 2:00 PM ET
Company Participants
Clint Stein – President and CEO
Aaron Deer – EVP and CFO
Christopher Merrywell – EVP and COO
Andy McDonald – Chief Credit Officer
Conference Call Participants
Jeffrey Rulis – D.A. Davidson
David Feaster – Raymond James
Christopher Mcgratty – KBW
Operator
Good day and thank you for standing by. Welcome to the Columbia Banking System’s First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to the speaker today, Clint Stein, President and Chief Executive Officer of Columbia Banking System. Please go ahead.
Clint Stein
Thank you, Catherine. Welcome and good morning, everyone, and thank you for joining us on today’s call as we review our first quarter results. The earnings release and accompanying investor presentation are available at columbiabank.com. Our first quarter financial performance was outstanding. Net income of $57.5 million and EPS of $0.74 per share were the best first quarter on record. Our bankers delivered with solid loan and deposit growth, credit remains stellar and expenses were well managed.
During the quarter, we also completed the integration of the Bank of Commerce Holdings acquisition and integration activities related to our combination with Umpqua Holdings are also proceeding very well. The integration management office led by executives from bank has done an excellent job seeking out and addressing any challenges that can arise in a sizable combination. As a result, teams from both companies have come out to ensure a smooth and timely close to once [indiscernible] regulatory approvals are received.
On the call with me today are Aaron Deer, our Chief Financial Officer; Christopher Merrywell, 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, our website or our SEC findings.
Aaron?
Aaron Deer
Thank you, Clint and good morning to everyone. First quarter pre-tax, pre-provision income of $67.4 million, net income of $57.5 million and earnings per share of $0.74 were all new first quarter highs in spite of $7.1 million of merger related costs which decreased earnings by $0.07 per share. Average earning assets increased by $3.80 billion from the first quarter of 2021, including $1.8 billion from the Merchants Bank acquisition. This combined with the partial quarter impact with 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 pre-tax, pre-provision income increased by $704,000 adjusting for merger related costs, PPNR 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 we 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 inflows were predominantly in our Money Market Sweep product, and our cost of deposits remained at our all time low of just 4 basis points. Total loans ended the quarter at $10.8 billion. Excluding PPP balances loans increased by $219 million or 8.4% annualized. Growth was propelled by $464 million in new loan originations and a modest increase in line utilization. PPP forgiveness and pay downs dampened overall loan growth by $101 million, reducing total loan growth to $118 million, but still a solid 4.4% annualized.
The net interest margin of 3.12% was up 7 basis points on a linked quarter basis, mostly due to higher yields and investment securities and that was largely due to lower premium amortization on the portfolio. PPP loans had a positive 3 basis points impact on 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 361, which compares to the overall portfolio exploiting PPP of 384. Notably, our balance sheet remains very well positioned for the rate increases expected to continue through the year. 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 at $24.2 million. Favorable nonrecurring items during the quarter included gains of $868,000 and $311,000 respectively, on the sale of loans, and the Health Savings Account portfolio acquired from Merchants Bank. In addition, we had a $395,000 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. The 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 rates to be closer to the mid 90s. 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 2022 tax rate to remain in the 20% to 22% range ahead of our combination with Umpqua.
And with that, I’ll turn the call over to Chris.
Christopher Merrywell
Thank you, Aaron. It’s been a busy quarter and we are seeing positive results from investments in our production and our support teams. As 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 continued 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 deepened the existing and build new relationships in all of our markets. Both producers and clients across our footprint, appreciate the value of the upcoming combination with Umpqua and the increased capabilities that it will bring. Our pipelines remain full and to our satisfaction.
Line utilization was 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 has 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, and 15% variable. As a result of higher rates, we saw a drop in our mortgage warehouse business during the quarter, with total [ph] loans dropping from $75 million to $57 million. Overall, the composition of the loan portfolio did not change materially.
Deposits grew at an 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 were fairly steady at 48% noninterest bearing and 52% interest bearing. During the quarter we moved our WA [ph] branch to a new financial hub location. And in July, we will be opening our Proctor District financial hub in Tacoma and have begun construction on a new financial hub in Astoria, Oregon. These full service locations are uniquely focused on helping our clients achieve their comprehensive financial goals including investments, trust services, and other financial considerations.
Now, I will turn the call over to Andy to review our credit performance.
Andy McDonald
Thanks, Chris. For the quarter we released $7.8 million from our allowance. This reduces our allowance from 1.46% to 1.37% compared to period end loan total. Driving the release was a decline in problem loans. Substandard loans declined $68 million to around $303 million or 2.82% of total loan 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 level. To a lesser extent, a modest decline in the loss rate for pass 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, and as such did not have a marked impact on our reserves for the quarter. For example, last quarter, the unemployment rate was expected to end 2022 at 3.4% and remain at or below pre-GAAP, pre-pandemic levels throughout the forecast period. The current forecast also assumes the unemployment rate will end 2022 at 3.4% and remain near pre-pandemic levels throughout the forecast period. The current forecast assumes full year GDP growth expectations for 2022 of 3.3% compared to previous expectations of 4.3, so less 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 in the near-term, we remain cautious as we look further down the road.
Okay, back to Clint.
Clint Stein
Thanks Andy. Our regular quarterly dividend of $0.30 was announced this morning. This quarter’s dividend will be paid on May 18 to the shareholders of record as of the close of business on May 4. This concludes our prepared comments. As a reminder, Andy, Chris and Aaron are with me to answer your questions.
Now Catherine, we will open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open.
Jeffrey Rulis
Thanks, good morning.
Clint Stein
Good morning, Jeff.
Jeffrey Rulis
Hey a couple of questions on the loan portfolio the non-PPP payoffs and pre-pays, 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 can touch on the line utilization, what exactly was that percent that you touched up you said was it was up a bit?
Aaron Deer
Yes, I think the line utilization was up something like 60 basis points. Let me see if I’ve got the exact number for you. Yes, it rose from 43.3 to 43.9. And what was the question on the PPP balances?
Jeffrey Rulis
What was pre-pays and payoffs in the non-PPP, I think it was a little over $200 million in the current quarter if you combine those, how does that compare to the fourth quarter? In other words, payoffs and prepays…
Aaron Deer
Oh the non PPP balances, yes, they were down sequentially.
Jeffrey Rulis
Okay, fair enough. I guess just boiling that up rolling into your growth outlook and expectation, a pretty strong seasonal quarter on a — production wise, how either specific or otherwise, just loan growth expectations for the year?
Clint Stein
Yes Jeff, I think that, you know, there’s still a lot of liquidity out there and there’s a lot of competition. You know, I think 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. We had had some new people that joined us back in the fourth quarter that we talked about, we’ll start to see some production ramping up from that team and we’re working on other things as well. But I think that mid-to-high single digits is the right place to be.
Jeffrey Rulis
Okay. Switching gears a little bit to the margin, you mentioned premium amortization down linked quarter, was that still an expense or did that flip to recapture in the quarter?
Aaron Deer
No that’s still run as an expense, but it was down sequentially, probably around $5 million.
Jeffrey Rulis
Got it. And Aaron, if you look at net of PPP impact the margin up 10 basis points linked quarter to 309. What happened, as compared to the March, monthly average on margin, the 309?
Aaron Deer
The sequential progression for the month when you back out kind of all the different noise was actually pretty flat. But we didn’t get the real benefit in the loan yields until the last couple of weeks of the quarter. And so that’s just now starting to come through. But I think what a good number to look at what are what are tax adjusted loan coupon was ex-PPP and that was up 2 basis point sequentially to 384 from 382 and that’s obviously very well poised to continue to see some nice lift here going forward.
Jeffrey Rulis
Great, thank you.
Operator
Thank you. Our next question comes from David Feaster with Raymond James. Your line is open.
David Feaster
Hey, good morning, everybody.
Clint Stein
Good morning, David.
David Feaster
I just want to touch — just go back to the origination, which was great to see another record quarter. I just wanted to get a sense of what you think is driving that? Is it, you know, there’s 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 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 and just the composition of that?
Christopher Merrywell
Yes David, this is Chris. And I mean, you’re right, it is a combination of all of that. But statistically, I would say that it’s been a long time 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 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, it’s fairly well balanced between true C&I 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 trend in combination, and you see, not just our bankers, but you see our clients looking at the potential of what’s coming downstream to potentially do more for them, they are voting on that aspect and signing up early.
Some of them might be willing to go through a conversion and things of that nature. And I think that just bodes well for the process and what we’ve laid out there. The new teams are starting to hit their strategy, you know, it takes a little time, a team that we announced that came on at the end of the fourth quarter, they’re about 90 days with us and we’ll start to see some positive impact from them as well. And then again, it’s just kind of a normal aspect of where we’ve always been, being out in front of clients and recognizing opportunities. I would also mention that we’re seeing some positive uptick in the healthcare space, both regionally and nationally, as well.
David Feaster
Okay, that’s helpful. And then maybe just following up on the pricing front, comparing the new production rates, quarter of a 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?
Christopher Merrywell
Yes, I don’t think the competition has really changed much. We’re still seeing some things where we’re choosing to 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 are right, the increase came late in the quarter. We’ll see what takes place, anything down the road. But I would expect this is just kind of looking down the pipe that pricing competition is not going to let up, but the rise in rates should give us a little, a little lift as well.
David Feaster
Okay, that makes sense. And then maybe shifting gears to the other side of the coin, just talking on deposits, I mean, the 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’re, you know, you have the benefit of being able to be pretty defensive on this just given the strength of your 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 trends with deposits would be helpful.
Clint Stein
This is Clint. Our crystal ball on that is a little fuzzy. Historically, the first half of any year has been very little if any deposit growth and the last two to three years that hasn’t been the case and obviously posted 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 rising rate cycle a few years ago, was many of our customers, with the deposit mix we have been heavily weighted towards commercial and 50% non-interest bearing gives us a structural advantage. But for those that rate is meaningful.
We pushed several $100 million dollars off balance sheet during the last cycle through our CB 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 will 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 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 Chris to see if he has anything he wants to add.
Christopher Merrywell
The only thing I would really add there is our client base is not as interest rate sensitive as some organizations. And I think you’ve seen that over the historic performance of the cost of funds and such. The options that Clint mentioned, we’re already looking at some of those. And we’ve seen a little bit of movement, but it’s not enough at this point to offset the growth that we’ve had. And yes, and I would say, I think that Clint talks about the crystal ball, I think every time we’ve said we kind of think that’s going to be flat, we end up being wrong. So it’s really hard to pinpoint and it is what I’m trying to say there. But we’ll keep managing it very closely and keep a close eye on it.
David Feaster
That’s helpful. Just one quick follow on to that. Do you have a sense of how much was from existing clients versus maybe new clients that you brought in?
Christopher Merrywell
No, I don’t have that right here with me.
David Feaster
Okay, thank you.
Operator
Thank you. And our next question comes from Chris Mcgratty with KBW. Your line is open.
Christopher Mcgratty
Hey, good afternoon. Maybe a question just on the environment and how it’s changed since the merger was announced, more on the marks and the assumptions on the accretion from the deal. We’ve seen, I guess, two questions. Number one, we’ve seen a lot of banks move securities into held to maturity to avoid the hit to OCI. I guess first question is, is that something with the combination is that might be being considered? And two, how might the marks changing from when the deal was announced impact capital return pro forma? Thank you.
Clint Stein
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 you’re looking for. Relative to how we think about the deal and the impact of rates and the marks, I’m somewhat indifferent. The value that we saw in this combination, was really executing on a shared long-term vision. And, and that long-term vision hasn’t changed. The more that that we’ve gotten into the integration planning, the more excited I am about exceeding that vision. And, I say long-term, well, we’ve all been at this for the better part 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 wasn’t trying to time a business cycle, or beat a rate movement or anything, it was the right time for us to consider this combination. So what creates some noise in the modeling? I’ll let Aaron speak to the work. I know, Aaron and Ron and their teams have put a tremendous amount into modeling and analyzing that impact. But I just wanted to kind of frame it that I really look at that as kind of the short-term component of what really is a long-term decision that both our companies made.
Aaron Deer
Yes and I would echo what Clint has said on that front about staying focused on the fundamentals. But from the rate impact point, I guess, I would first point out that we did, in fact, move a good deal of our AFS portfolio into held to maturity late last year, and it’s a patient of rising rates and that helped give us a little bit of protection here, as rates have started to move.
Going forward, I would expect that there’d be good rationale for continuing to hold some of that there, but more specific to the marks as they will be impacted, for the deal, we’ll be looking at certain asset categories that would have 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-net it’s an accounting change. The fundamentals are not really changed by those interest rate movements.
Christopher Mcgratty
That’s great. Thanks Aaron.
Operator
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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