Columbia Banking System, Inc. (COLB) Earnings Call Transcript & Summary

Good morning, and welcome to the Umpqua Holdings Corporation Fourth Quarter 2022 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. At this time, I would like to introduce Jacque Bohlen, Investor Relations Director at Umpqua to begin the conference call.

Thank you, Catherine. Good morning and good afternoon, everyone. Thank you for joining us today on our fourth quarter 2022 earnings call. With me this morning are Cort O'Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, President of Umpqua Bank; Ron Farnsworth, Chief Financial Officer; and Frank Namdar, Chief Credit Officer. After our prepared remarks, we will take questions. Yesterday afternoon, we issued an earnings release discussing our fourth quarter 2022 results. We have also prepared a slide presentation, which we will refer to during our remarks this morning. Both of these materials can be found on our website at umpquabank.com in the Investor Relations section. 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 laws. For a list of factors that may cause actual results to differ materially from expectations, please refer to Slides 2 and 3 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 reconciliation provided in the earnings presentation appendix. I'll now turn the call over to Cort.

Okay. Thank you, Jacque. For the fourth quarter, we reported earnings available to shareholders of $83 million. This represents EPS of $0.38 per share compared to the $0.39 reported last quarter and $0.41 reported in the fourth quarter of last year. On an operating basis, which excludes a number of interest rate-driven items and merger expenses that Ron will review, EPS of $0.46 compared to $0.47 last quarter and $0.44 in the fourth quarter of last year. While the variance between 2022 and 2021 fourth quarter EPS was minimal, the components shifted dramatically as higher interest rates and 16% loan growth during 2022 drove a 31% increase in net interest income Q4 to Q4, leading to a 25% increase in pre-provision net revenue despite the dramatic decline in mortgage banking revenue. Over the past year, we have made a number of structural changes within the mortgage banking segment intended to reduce expenses limit the impact of MSR changes to the income statement and moderate portfolio mortgage growth. Additional actions planned through this quarter will continue this work. Mortgages remain an important product for the bank and for our customers, and we remain committed to serving our communities throughout the West. However, we are shifting our mortgage operations towards a retail bank model, and we expect a smaller gross and net impact to financial statements than under our prior operating model. Turning now to our pending merger with Columbia Banking System. We announced earlier this month that we received FDIC approval and intend to close at the end of February. Our teams are focused on closing and core system conversion scheduled for this quarter alongside a heightened level of customer outreach. We are laser-focused on execution, and we look forward to providing you with an update on next quarter's call when we are officially 1 team. As you know, there are a lot of moving parts over the next couple of months, and our near-term focus is on achieving targeted cost savings, providing high-touch service to our customers as we complete the integration process and giving our teams and our associates the tools to drive the revenue synergy opportunities that we have been discussing for over a year now. Back in October of 2021, we never imagined there would be over 16 months between announcement and close. However, there has also been significant upside to this time line. We have been waiting, but we have not been idle. The joint culture work, which was originally planned to occur post closing has touched the majority of Umpqua Associates and Columbia associates, and it has a framework that enables us to be 1 team on day 1. The planning, prepping and the brainstorming that has taken place over a year has enabled the development of synergistic products and tools, and we are excited for our combined teams to use them immediately. Further, and perhaps more importantly, the earlier decoupling of our integration planning from legal day 1 enables us to maintain our originally scheduled core conversion date this quarter despite our targeted February 28 closing date. I want to take this opportunity to thank our dedicated associates for the countless hours and incredible heart that they have put into their work. I'm impressed and humbled by your dedication I joined Umpqua Bank in 2010 and have been honored to lead this outstanding organization for the past 6 years. While it may be bitter sweet to pass the reins, I know I am placing them in capable hands. And as Executive Chair, I look forward to watching the combined organization service customers and its communities throughout the West, while providing enhanced shareholder return. And with that, Ron, take it away.

Okay. Thank you, Cort. And for those on the call, I want to follow along, I'll be referring to certain page numbers from our earnings presentation. Starting on Page 9 of the slide presentation, which contains our performance ratios, both on a GAAP and operating basis. The adjustments to our internal operating measures include various fair value changes from interest rate volatility, along with merger and exit disposal costs, which are detailed in the appendix on Slide 30. Our NIM continues to strengthen up 13 basis points in Q4 to 4.01%. Our GAAP PPNR ROA was 1.82%, while our operating PPNR ROA was 2.1%, and operating ROATCE increased to 16.2%. Turning to Page 10, which contains our summary quarterly P&L. Our GAAP earnings for Q3 were $83 million or $0.38 per share. On an operating basis, we earned $99 million or $0.46 per share. For the moving parts as compared to Q3, net interest income increased $17.9 million or 6%, representing continued earning asset growth combined with the recent Fed rate increases. We had a provision for credit loss of $34.9 million, with the increase driven primarily by a slight deterioration in the consensus economic forecast. Noninterest income increased mainly related to changes in the nonoperating fair value marks as detailed later in the appendix, and noninterest expense increased $17 million mainly from merger expense and a nonrecurring increase in other expense. As for the balance sheet on Slide 11, loans were up $650 million and deposits increased $250 million. This difference, net of the decrease in interest-bearing cash was funded with short-term borrowings. On the lift in investment AFS related primarily to a lower unrealized loss. Our total available liquidity, including off-balance sheet sources ended the quarter at $12 billion, representing 38% of total assets and 44% of total deposits. And noted on the bottom of Slide 11, our tangible book value increased in part due to the lower AOCI rate mark on AFS investments. Slide 13 highlights net interest income noting the increase to $306 million in Q4 resulted from the recent rate increases along with continued strong loan growth. From a rate volume standpoint, increase in rates led to $16 million of the $18 million increase with volume and mix making up the $2 million difference. Following that, on Slide 14 of the presentation are the trends for our net interest margin. [indiscernible] again, our NIM increased 13 basis points in total to 4.01% in Q4. We present a waterfall on the margin change on the right of the page, noting our loan and cash yields more than offset rising funding costs. And key for me here is following the 125 basis point increase in the federal funds rate during Q4. Our NIM for the month of December was 4.02%. The next slide includes information on the repricing, the maturity characteristics of our loan portfolio, noting no significant change in the repricing mix this past quarter. And following that, on Slide 16, on the upper left, we've included our projected net interest income sensitivity for future rate changes in both ramp and shock scenarios over 2 years. This is a simulation we run in back test quarterly and assumes a static balance sheet. The upper right shows our sensitivity from last quarter and comparing the 2, that we've taken steps this quarter to reduce sensitivity and will continue to do so in future quarters. The deposit beta used in the current simulation is 53% on interest-bearing deposits for future rate changes. The table on the left shows our deposit betas from the current rising rate cycle. While on the right, we show them from the last rising rate cycle for comparison. Our beta then was 42% on interest-bearing deposits. Our cost of interest-bearing deposits increased from 23 basis points in Q3 to 77 basis points for Q4. And our cumulative data for this cycle to date is now 18% on interest-bearing deposits. The spot rate at year-end was 107 basis points. We expect inspiring deposit costs to increase again in Q1 but stay well below our model level. Next, on Slide 17. We detail our consolidated noninterest income trends learning continued weakness within our mortgage banking segment was mostly offset by a positive fair value change on loans carried at fair value. Turning to Slide 18. On expense. The majority of the increase this quarter related to merger expense for our upcoming combination with Columbia. In addition, we had an increase in state and local taxes, along with other expense, which I do not view as recurring. The next 2 pages include the segment disclosures on a GAAP basis, with the core banking segment on Slide 19 in the Mortgage Banking segment on Slide 20. The operating non-GAAP stats by segment are later on Slides 32 and 33. Suffice it to say, the core banking segment continues to benefit from rising rates and continued loan growth, while mortgage banking reported a second consecutive quarterly loss. Cort mentioned plans underway earlier within mortgage banking. And a couple of final items before I turn it over to Frank. On Slide 22, we've included the quarterly loan balance roll forward. Quarterly loan growth was driven by $1.3 billion in new originations and net advances, offset by $0.6 billion in payoffs and maturities. We've intentionally slowed down nonrelationship lending production. Given continued pressure with industry-wide deposit outflows following continued tightening by the Fed. Slides 23 and 24 provide additional statistics and composition on the portfolio, and there are no significant changes in the quarter. And next, let me take your attention to Slide 25 on CECL and our allowance for credit loss. As a reminder, our CECL process incorporates a life alone reasonable and supportable period for the economic forecast for all portfolios, with the exception of C&I, which uses a 12-month reasonable supportable period, reverting gradually to the output mean thereafter. We use the consensus economic forecast this quarter updated in November. Overall, the forecast reflected continued high expected inflation and interest rates with a slight uptick in peak unemployment rates. With this, we recognized a $32.9 million provision for credit loss, with $7 million of that for the quarter's loan growth, and $26 million for the slightly deteriorating economic variables. This page shows the commercial and leasing portfolios driving the majority of the increase, but they are most sensitive to the unemployment rate forecast, which again increased slightly on peak from 4.1% to 4.5% over the horizon. The ACL increased to 1.21% at quarter end, up from 1.16% in Q3. And lastly, I want to highlight capital, on Page 27, knowing that all of our regulatory ratios remain in excess of well-capitalized levels. Our Tier 1 common ratio is 11%, and our total risk-based capital ratio was 13.7%. The bank level total risk-based capital ratio was 12.9%. We declared a $0.21 per share dividend on January 11, payable February 6 to holders of record as of January 23, and equivalent to the fourth quarter's level. Given our targeted February 28 closing date for our merger with Columbia, we expect the next dividend action to be determined by the combined Board. And with that, I will now turn the call over to Frank Namdar to discuss credit.

Thank you, Ron. Turning back to Slide 26. Our nonperforming assets to total assets ratio of 0.18% was relatively steady with past quarter's levels, and our classified loans to total loans ratio of 0.73% was similarly stable. Our annualized net charge-off percentage to average loans and leases was 19 basis points in the quarter up 8 basis points from the third quarter's level as net charge-off activity within the FinPac portfolio increased as expected. Following elevated charge-offs and strategic credit tightening implemented during the pandemic, charge-offs in the FinPac portfolio were notably below the historic 3% to 3.5% range for several quarters. As we have discussed on past calls, we have anticipated a gradual migration to historical norms within the portfolio. And accordingly, FinPac net charge-offs increased to 2.84% in the fourth quarter. The uptick from 1.36% in the third quarter reflects an increase in net charge-offs, primarily within FinPac's transportation portfolio. On a risk-adjusted basis, the FinPac portfolio, which is 6% of our consolidated loan portfolio remains the most profitable segment of our loan book with an average risk-adjusted yield in the 10% range. It can also serve as an early warning indicator of trends that may shift to the overall portfolio. However, we do not see any associated weakness in the bank portfolio, which had a charge-off level of just 1 basis point in the fourth quarter. For contacts, bank charge-offs of $550,000 for the fourth quarter and only $2.7 million for all of 2022 is a near de minimis level of activity on a portfolio nearing $25 billion. We continue to be very pleased with our credit quality metrics. We remain confident in the quality of our loan book as we continue to pursue high-quality loan growth balanced with effective and active risk management practices. Back to you, Cort.

Thanks, Frank and Ron, for your comments. And now we will take your questions.

[Operator Instructions] Our first question comes from Jared Shaw with Wells Fargo.

Maybe looking at the jumping off point here for margin as we -- as you go into the year, you have great yields on loans. It looks like maybe you've benefited from some spread widening and betas performing better than earlier expected. Do we think that, that starts to revert to a more normalized level, both spreads and maybe data quickly at the beginning of '23? Or do you -- or are you optimistic that, that could -- those benefits could stay with us a little longer?

Jared, this is Ron. We -- I talked about the spot rate on interest rate deposits being 107 bps at the end of the year. So we do expect to see continued increase in spring deposit costs into Q1. We'll also get the benefit though of almost an extra 100 bps on in asset yields, if you take the quarter amount versus the December amount looking forward. So I feel good about the margins staying around current levels at the end of the next quarter, definitely not dropping back to where it was pre. So from that standpoint. Let me turn it over to Tory to talk about spreads.

Yes. Jared, it's Tory Nixon. On the spread front, I think we've been pretty fortunate spreads have kind of stayed level for us for the most part in our C&I business and our real estate business. The one difference is we've got spread increases in some of the construction business. So we feel pretty good about that. I know that there are other places where that's contracting. But for us, we seem to be holding pretty steady. I think it's kind of a mix of our customer base.

Okay. All right. That's good color. And then just as a follow-up. When we look at the mortgage banking business and some of the restructuring that you're going to do there, what should we be thinking mortgage banking revenues look like as a percentage of fee revenue once that model is sort of fully reflected and integrated across the broader franchise?

Jared, it's Ron. I'd say, obviously, lower from that standpoint, but also volumes and expand some profitability or contribution to the bottom line will also be lower. So the key on that is much less volatility and we've got the hedging on the MSR asset at this point. But hard to say what a specific percentage will be, we'll definitely update you as we get through the balance of the changes over the coming quarter and talk about it in April and July as we look out for the balance of the year on a combined basis.

We have a question from Jeff Rulis with D.A. Davidson.

Just a question on the expense side. I think you got operating expenses at [ 181 ]. I wanted to get a sense for any further cost saves versus -- I don't know if it's sold next-gen stuff versus growth and kind of as you melt the banks -- just thinking about that [ 181 ] number, is there any gifts to go lower than that? Or is that a pretty -- if we're modeling aside into the combination, that's a pretty good number to use.

I'd say probably less than that, especially with what's happened on the home lending side, right? Sorry, I don't have the [ 181 ] is on an operating basis. We also talked about there was about $5 million of, I'd call it, nonrecurring state tax adjustments that actually show up in expense, other expense, not in income tax expense. So you can easily knock about them by that, plus another $3.5 million to get to the rent. So that would be in the low [ 170 ] range, and that's before continued reductions in home lending moving forward.

Okay. So that tax true-up or whatever that figure was as -- that was included in your [ 181 ] operating, meaning that should back out.

Correct. Yes, correct.

Fair enough. Got you. And then on loan growth. I heard the comments from Frank and Cort in terms of sort of looking at risk out there and it doesn't appear to be spreading outside of the FinPac portfolio, just kind of thinking about loan growth for '23, I think just high level kind of where you see a growth rate, what seems doable?

Jeff, this is Tory Nixon. I think we remain very active in the prospecting side of the house on the sales side of the house. The customer base of the company has shifted quite significantly over the last several years. And we will continue to look for full banking relationships in the C&I space, in particular. So I see growth there continuing for the company. And we continue to hire folks and we continue to kind of work on the product side. And I feel good about loan growth for us over the coming year. I think demand is certainly down from 2022. Pipelines are down a little bit, but there's still really good activity, especially in the C&I space. And I feel comfortable in the mid -- low to mid-single-digit loan growth number. And I'm excited to see a current set of bankers continuing to work with our customers and continuing to find prospects that we want to bank.

And our next question comes from Brandon King with Truist.

Yes. So I wanted to get a sense of what your assumptions are for deposit mix shift so in the quarter? There were outflows from DDAs into interest-bearing, I saw there's uptick in CD deposits. So I just want to get a sense of what your assumptions are there in your current CD strategy?

Brandon, this is Ron. You say assumptions you're talking about just in terms of our interest rate sensitivity analysis.

No, just like where do you see -- do you see continued further remixing of DDA accounts into interest-bearing accounts going forward?

Got it. Yes, I would -- it's hard to say a specific percentage from that standpoint. What we saw here in the fourth quarter is like on the consumer -- about 2/3 of the decline in DDA was on the consumer side, about 1/3 on the business side. With the consumer side, it was simply through ACH trends as incomes were relatively flat, but outflows were up 10-ish percent. And so you see that decline. So it's hard to say if that's going to continue at that level. I think there will still be pressure on deposits in the industry as the Fed is tightening. On the commercial side, it's probably a little bit of a mix interest-bearing. I would expect we have used some exception pricing, [indiscernible] pricing, just to hold on to larger balance, more cost-sensitive deposits. I'd expect that will continue here into Q1 as well. So net-net, you probably should see an increase in more interest-bearing and the trends on the ACH side continue in the industry. That specific just to us, but probably we see continued pressure on the DDA mix.

Got you. Got you. And if the current CD strategy to kind of term out these time deposits? Or are you looking for more shorter duration funding?

On the CD side, it'd be generally between 6 and 12 months from that standpoint on the borrowing side, we've been in the 2- to 4-month range, just given LCR considerations.

Okay. And then I wanted to dig a little different loan growth. Multifamily has been a key contributor for a while now. Just curious what the outlook there is for multifamily growth and as far as how demand is looking. And then also in consideration of other banks on it seems like they might be pulling back from that space given concentration concerns.

Yes, Brandon, this is Tory. I think the multifamily business for us is it's pretty complicated in this regard. We do a lot of multifamily lending in our real estate group and then we have a specific multifamily division. And that specific multifamily division is where you saw -- we've seen a lot of growth over -- in 2022. We have -- that's really demand for that. It's very interest rate sensitive. So demand for that product is much less than it was historically in 2021 and 2022. So it's relatively flat for us. We continue to be active in the space where we can, and we continue to be active in the multifamily space in our real estate division, so larger projects. And I see the outlook there to be relatively flat for over the coming 6 to 9 months.

And we have a question from Andrew Terrell with Stephens.

We maybe go back to just the DDA balances, specifically on kind of the consumer side. I would be curious, as you look at kind of consumer accounts at your bank, if balances today still remain elevated compared to pre-COVID levels? Just trying to get a sense of if there's still kind of any surge deposits remaining on the bank rate type of analysis you've done there?