Columbia Banking System, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Columbia Banking Systems' fourth quarter and full year 2020 earnings update. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session through both the telephone and web. To ask a question over the phone, simply press star 1. To ask a question via the web, click the Q&A button on the lower left-hand corner of your screen, type your question in the open area, and click the submit button. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Dean Stein, President and Chief Executive Officer of Columbia Banking System. Please go ahead, sir.

Thank you, Carmen. Welcome and good morning, everyone. And thank you for joining us on today's call as we review our fourth quarter and full year 2020 results. Our earnings release and investor presentation are available at columbiabank.com. Amidst the turmoil in 2020 caused by the pandemic, social unrest, turbulent financial markets, and contentious election cycle, Columbia achieved another record year. Pre-tax, pre-provision income of over $270 million was our best year yet, eclipsing the record set just last year by $25 million. The pandemic drove our provision expense for credit losses to an all-time high, yet full-year net income and EPS were still very strong at $154 million and $2.17 respectively. During last quarter's call, we mentioned that our pipelines were rebuilding. Our bankers' business development activities during the quarter exceeded expectations, delivering a record $468 million of new loan origination with deposits up to a new high of $13.9 billion. We are very proud of the resiliency, adaptability, and dedication our employees exhibited during 2020. Our business activities continue in a near normal capacity with bankers winning new client relationships and completing important operational initiatives that immediately improved our operating efforts. They accomplished so much more than simply remaining open for business during COVID. On the call with me today are Aaron Deer, our Chief Financial Officer, Chris Meriwell, our Chief Operating Officer, and Andy McDonald, our Chief Credit Officer. We'll be happy to answer your questions following our prepared remarks. 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 filings. At this point, I'll turn the call over to Aaron to review our financial performance. Thank you, Glenn. 2020 earnings of $154 million and EPS of $2.17 were materially influenced by the economic impact of the pandemic on our net interest margin and credit loss provision. The steep decline in interest rates at the end of the first quarter was offset by a higher volume of lower-yielding earnings from PPP loans and investment securities, both funded by our small deposit imposed during the year. Interest income was further supported by the interest rate collar implemented at the beginning of 2019. Expenses were carefully managed at $345 million, which was the lowest level since 2017, the year of the Pacific Continental acquisition. Fourth quarter earnings of $58.3 million and EPS of $0.82 were an increase of $13.6 million and $0.19, respectively, on a linked quarter basis. Quarterly pre-tax pre-provision earnings increased $8.3 million to $70.4 million with the rise driven mostly by a combination of accelerated loan fees from the payoff of PPT loans and a recapture of credit loss provisions. Though there were other favorable operating trends in the quarter that contributed to the upside and helped to offset continued pressure on core asset yields. Total deposits ended the quarter at $13.9 billion. up $270 million from September 30th and $3.2 billion over the past year. The quarterly increase was mostly interest-bearing demand and was spread throughout our footprint. The annual increase is attributed to federal stimulus, including PPP loans, as well as reduced spending and higher savings by both retail and commercial clients. Our cost of deposits declined from one basis point during the quarter to five basis points, which is down 21 basis points in the fourth quarter of 2019. The increase in deposits created additional liquidity, and we moved a significant amount of our excess cash into investment securities during the quarter that were making mindful of potential deposit outflows heading into 2021. As a result of these investments, our securities portfolio increased $928 million to $5.2 billion. Despite this considerable growth, the composition and duration of the portfolio did not change materially. The investment securities yield declined just one basis point to $221 million, I should note the fourth quarter yield benefited from an early repayment on two Fannie Mae CMBS bonds. Without these one-time payments, the yield would have been 2%. The net interest margin improved five basis points on a linked quarter basis to 352. The increase stemmed from the acceleration of 4.9 million of PPP loan fees due to pay downs or forgiveness by the SBA. This added 14 basis points to the margin. On a standalone basis, the PPP portfolio yield was 4.46% and benefited the margin by five basis points. In addition, the bank had a $1.7 million recovery of interest on a non-accrual loan that paid off, adding five basis points, as well as the two early payoffs of investment securities I just mentioned that contributed $2.5 million of interest income, or seven basis points to the margin. For the year, the net interest margin decreased 59 basis points due to decreases in loan and investment yields of 69 bits and 28 bits, respectively, as well as greater liquidity on the balance sheet. DPP loans only contributed two basis points due to decline as accelerated fee recognition offset the low 1% interest rate. Total loans ended the quarter at $9.4 billion, down $261 million from September 30th, driven by $302 million of payoffs in the PPP portfolio. Excluding PPP loans, balances rose $40 million to $8.8 billion. New loan production was brought on at an average tax-adjusted coupon rate of $336, which compared to the overall portfolio excluding PPP loans of $405. Non-interest income increased $1.1 million in a linked quarter basis to $23.6 million due largely to higher mortgage banking revenues stemming from strong volumes, improved sale execution, and a one-time benefit of roughly $1 million from a change in our sale methodology. Non-interest expense decreased to $815,000 on a linked quarter basis to $84.3 million, largely due to a $1.3 million recapture of provision for unfunded loan commitments. Our non-interest expense ratio declined to 2.05% for the quarter, and our operating efficiency ratio decreased three points to 53%. We expect our quarterly non-interest expense run rate to be in the mid to upper 80s in 2021. The provision for income taxes increased $6.8 million on a linked quarter basis to $16.8 million, representing a 22.3% effective rate, which was elevated due to the higher level of taxable income in the final quarter of the year and to true up our full year effective rate to 19.8%. We expect our 2021 tax rate to be in the range of 19% to 21%. And with that, I'll turn the call over to Chris. Thank you, Aaron, and good morning, everyone. As Clint noted, fourth quarter loan production of $468 million was a new quarterly record, propelling full-year production, excluding PPP loans, to $1.4 billion. Total loans declined from $9.7 billion to $9.4 billion, mostly due to the payoff of PPP loans. Line utilization remained stable during the quarter at 46.6%. When compared to the end of 2019, total loans increased by $684 million, primarily due to open PPP loans of $662 million as of the end of 2020. During a year of unprecedented challenges, our bankers' focus on relationships with our clients resulted in loan levels consistent with those before the pandemic. This is a win and credit goes to everyone throughout the company for pulling together to move our clients' businesses forward in a time of significant need. Excluding the impact of the PPP portfolio, loans grew by $40 million during the quarter. Growth was centered in the CNI and CRE portfolios, which increased $64 million and $35 million respectively during the quarter. Record production in both portfolios was offset by payoffs and continued low line utilization. CRE growth in warehouse and retail segments and CNI growth in rental and leasing and public administration segments were offset by declines in agricultural loans. Mortgage loans increased by $46 million, mostly due to the purchase of a $50 million portfolio at the end of the quarter. Residential mortgage activity continued at an accelerated pace during the fourth quarter, driving non-interest loan revenue higher by $1.3 million on a linked quarter basis. The quarterly production mix was 55% fixed, 41% floating, and 3% variable. The overall portfolio mix now stands at 7% PPP loans, 48% non-PPP fixed rate loans, 32% floating rate, and 13% variable. PPP loans were $652 million at the end of the year, with over $300 million of payouts and paydowns since the forgiveness portal opened in mid-August. If that wasn't enough, we've opened our new portal for round two of the program on January 19th, and once again experienced a large volume of applications. Our bankers and back office teams are actively working with our clients to ensure that loans are funded as quickly as possible, and we are seeing great results. Deposits grew by $270 million during the quarter and $3.2 billion during the year, to end the year at $13.9 billion, as Aaron mentioned. The deposit mix shifted from 62% business and 38% consumer as of September 30th back to our typical 60%, 40% business-consumer split at December 31st. The decline in business deposits is attributed to our normal seasonality. From a product perspective, deposits as of December 31st were evenly split between non-interest-bearing and interest-bearing. As part of our branch strategy, we completed the consolidation of two branches during the quarter, and we continue to evaluate our distribution system as we move forward. And now I will turn the call over to Andy to review our credit performance. Thanks, Chris. This quarter's ACL totals $149.1 million, a reduction of $7.8 million from the third quarter, comprised of net charge costs totaling $3.1 million, and a provision release of 4.7. The lower required allowance was the result of an improved economic outlook offset by management adjustments for COVID-related exposure in the commercial real estate segments of the portfolio, specific to restaurants, office, retail, and hotels. Consistent with my comments last quarter, the momentum and path of the recovery will continue to be threatened by the coronavirus pandemic. While downside risk has narrowed, numerous risks still remain, such as the fourfold increase in COVID cases throughout Q4, the slow rollout of the vaccine, black decline in GDP over November and December, and continuing localized lockdowns in our footprint. Our model assumes annualized gross domestic product to decline in the first quarter of 2021 by 2.8% before rebounding and ending 2021 with a fourth quarter increase of 3.2%. The unemployment rate is predicted to end 2021 at 6.6%. As a reminder, we use IHS market for our economic forecast. As I noted previously, we continue to apply an overlay this quarter for what we consider high-risk commercial real estate and downstream potential impacts of permanent job losses at a significant Northwest employer. These amounted to a combined $11 million in Q4 and increase from $5 million in Q3. Much of this thought process is driven by the lockdowns which occurred during the fourth quarter in our footprint. we ended the quarter with an allowance relative to period-end loans of 1.58%. Adjusting for the PPP loans, the allowance to period-end loans increases to 1.7. NPAs for the quarter were relatively unchanged at 21 basis points. However, as you know, I like to adjust for PPP loans, and I believe this provides a more consistent comparison as we move forward. With this adjustment, NPAs do not increase, but declined by two basis points, so again, relatively unchanged. Past due loans for the quarter were 28 basis points compared to 15 last quarter, and net charge-offs were annualized at 13 basis points for the quarter versus eight last quarter. Our impaired capital ratio improved modestly from 25.3% to 23% thanks to a decline in substandard assets. In summary, While our credit metrics improved for the quarter, I would still characterize them as stable. On the risk rating front, loans rated watch or worse declined $129 million during the quarter. We saw watch loans decline $57 million going from $393 million to $336 million. Special mentioned loans declined $57 million to $297 million. and substandard loans saw a decline of $15 million. At year-end, we had approximately $321 million in substandard loans. These changes decreased our watch and below risk ratings from 11.1% to 10.1% of total loans. Again, very stable metrics. Okay, deferrals. At the close of the quarter, we had 147 million in active deferrals, or roughly 1.7% of our portfolio, excluding PPP loans. This is up modestly from 114 million deferrals at the end of the third quarter. I would note that about 23% of these loans are criticized classified assets. The deferral bucket is comprised of 50 million in clients with first deferrals and 97 million of clients with second deferrals. Approximately 45% or 44 million of the second deferrals are related to an Oregon State deferral program. Unique to our footprint and others doing business in Oregon is a statute that allows borrowers with loans secured by real estate in Oregon to obtain a deferral simply because they have real estate domiciled in Oregon. This statute expired December 31st. So these borrowers will begin making payments again this month unless the Oregon legislature amends and extends the statute. Most of the deferrals continue to be in the hospitality portfolio, which accounts for $39 million of the active deferrals. As mentioned before, this is consistent with our strategy relative to the sector and does not cause us to be any more concerned than when we entered the pandemic. The remaining balance of deferrals are really spread out across a wide variety of businesses. The portfolios were identified back in April of 2020 as being some of the first to be impacted by the pandemic, which includes our dental, retail, hotel, healthcare, restaurants, and aviation portfolios amounted to about $2.4 billion as of December 31, 2020, or roughly 24% of our loan portfolio. If we exclude the dental and healthcare portfolios, this number drops to $1.2 billion, or 13% of our portfolio as of December 31, 2020. The largest portfolio we identified again was our dental portfolio. As previously discussed throughout 2020, we believed the impact on this portfolio to be truly transitory. When we look at the credit metrics for this portfolio, that story bears out. Past loans represent 97% of the portfolio. Special mention in substandard loans actually declined in the fourth quarter. We have only one loan on deferral for $715,000. Past dues are only one basis points and non-accruals are two basis points. We will likely be removing this as a pandemic impacted portfolio for our 2021 reporting. The next largest segment we identified as having high risk relative to the economic disruption caused by COVID-19 is our retail portfolio. we have approximately 512 million in retail-related exposure, excluding PPP loans. It's comprised of commercial real estate and commercial business loans and represents about 6% of our total loan portfolio. The largest part of our retail exposure is comprised of commercial real estate loans, which account for approximately 452 million of the total, or roughly 88%. Again, to give you an idea, of the types of retail properties we finance. The most common are small four to five day strip centers located in suburban communities and standalone single tenant properties. In addition, the portfolio contains grocery anchored centers and mixed use properties. We are not in large downtown core metropolitan areas, nor do we finance regional malls or big box retailers. For the entire retail portfolio, 95% is tax rated, of which 5% is watch, which we also categorize as a tax category. It is a slight improvement over last quarter and continues a positive trend. While this trend is encouraging, remain cautious given government-mandated COVID closures and government-mandated deferrals. Okay, deferrals in this segment are up slightly from the third quarter from 1% to about 1.3% with half on their first referral and the other half on their second deferral. However, it is still a significant improvement from earlier in the year when deferrals accounted for 16.4% of the portfolio. Using added origination values, the average loan-to-value for the portfolio is 50%, with 98% of the portfolio having loan-to-value less than 75%. We have stress-tested this portfolio for equivalent decline in value as seen during the Great Recession. The average loan-to-value rises to 63%, with about 76% of the properties having a loan-to-value less than 75%. Obviously, we're pleased with how this portfolio is performing, but we remain cautious, and our expectation is that we will see weakening in this portfolio throughout 2021. Let's discuss hotels next. We have $327 million in hotel loans, representing about 3.5% of our loan portfolio. Again, to give you an idea of the type of hotels we finance, most have one of the following flags. Holiday Inn, Best Western, Choice, Marriott, and Wyndham. In total, flagged properties comprise 77% of the portfolio. The average loan size is $1.5 million. Today we have $39 million on deferral, which is down from last quarter when approximately $62 million was on deferral. However, $31 million of the $39 million is on its second deferral. For us, this is not surprising as we are executing on longer-term strategies. We do expect deferrals will continue to decline in this category. For the fourth quarter, we actually saw some healing in this portfolio. Loans rated special mention and substandard declined from $180 million to $145 million as the leisure travel properties performed well in 2020. It appears that since folks did not go to Hawaii, Puerto Rico, or Europe, they chose to go to the Pacific Coast, national parks in Idaho and Oregon, as well as other recreation areas in the Northwest. Similar to the retail commercial real estate portfolio, we continue to do stress testing on this portfolio as well. The average loan-to-value for the portfolio based on originated appraised value is 54%, with 97% of the portfolio having a loan-to-value less than 75%. On a stress basis, about 55% of the portfolio has a loan-to-value less than 75%. Let's move on to the non-dental healthcare portfolio, which is about 254 million in total, excluding PPP loans. Similar to the dental portfolio, we saw the impact of the pandemic here to be transitory. Problem loans have remained steady at around 1.4% of the portfolio for the last three quarters, and this is down from 2.5% at year-end 2019. Past dues are consistent at 10 basis points, and payment deferrals have declined from 107 million to 250,000, which really only represents one client. Next up is restaurants and food services. This, of course, is a portfolio that has been very impacted by government actions attempting to control the COVID-19 pandemic. After having been forced to close in the spring of 2020, and then again in the late fall and early winter of 2020, we anticipate further weakening in this portfolio throughout 2021. We have approximately $173 million in this portfolio, excluding PPP loans, with two-thirds comprising commercial real estate loans. Today, 82% is watched or better. down from 86% at the end of the third quarter. Thus, watch and worse loans increased $5 million to $35 million. In absolute terms, not big numbers, but directionally, it demonstrates the effects of governmental action. We granted 157 deferrals for about $66 million in this portfolio. Today, we have 12 payment deferrals for about $8 million. Last quarter, this portfolio had 16 million in deferrals. Similar to the hotel and retail segments, we see this area taking some time to heal, and we are not surprised by the negative migration. Certainly, the current round of PPP funding will greatly benefit this segment. We do stress testing again on this portion of the portfolio. And on a pre-pandemic basis, the average loan-to-value is 58%, with 94% having a loan-to-value less than 75%, again, on a pre-pandemic basis. Under our stress test scenario, average loan-to-value rises to 73%, with only 55% having a loan-to-value less than 75%. The last portfolio I'm going to discuss is our aviation portfolio. is comprised of both direct exposure to domestic airline carriers, as well as entities that lease airplanes and engines to airline carriers. In total, the portfolio is about 140 million, with about 96 million being direct exposure to U.S. domestic airlines, and the remaining 44 million in exposure to lessors. Today, most of the portfolio is rated watch, which is consistent with last quarter. Given the longer duration for recovery in this segment, risk ratings are highly dependent on borrowers' liquidity and run rate, or as we call it, burn rate positions. Of the domestic airlines we have exposure to, they have raised over $53 billion in additional capital to assist them through this pandemic. As such, this additional capital combined with expense reduction efforts results in our borrowers having between 18 to 35 months of burn rate. This does not include 6.5 billion more that was recently announced in additional payroll support agreements with the US Treasury Department. Based on the current burn rate, the airlines with the majority of our exposure have sufficient liquidity to get them into the fourth quarter of 2022. Most of the domestic airline exposure is secured by aircraft, with a pre-stressed loan devalued of 69%, and a current loan devalued would be closer to 74. However, on a stress test basis, the loan devalued rises to 89%. As for the leasing portfolio, which again is only 44 million, 50% of the exposure is in Asia, 26 in Europe, and 8 in South America. The rest is in North America and the Middle East. The majority of the portfolio consists of narrow-body aircraft with an average age of 8.7 years. We view the younger, more fuel-efficient aircraft as being the most in demand post-pandemic. Based on origination values, our average loaded value for this portfolio is 74%. However, based on what we believe to be today's value, probably closer to 78%. And on a stress basis, it rises to 91%. Similar to the domestic airlines, many of the lessors have been able to access the bond market and securitize unencumbered assets to bolster their liquidity positions. We estimate our lessors to have raised over $3 billion in liquidity through the third quarter. So while the climb back to profitability and more importantly positive cash flow for this industry will be protracted, it continues to attract the necessary capital to bridge them through return to profitability, which we do not anticipate until 2023 at the earliest. Okay, with that I'll turn the call back to Clint. Thank you, Hank. Despite the challenges of 2020, we remain focused on supporting our communities throughout the year. We extended our community impact by tailoring our efforts to meet the unique challenges of the year. Combined fundraising, company contributions, and employee giving generated nearly $400 in economic support across our program. This is a testament to our employees' dedication to the communities where they live and work. I'm particularly proud of the $315,000 they've raised for our Warm Hearts Winter Drive during the holiday season. Nearly $1.5 million has been raised to support more than 60 shelters over the derived six-year history. Our teams also supported communities through our Pass It On program, where we paid more than 350 small businesses over $600,000 to provide a service for someone in the community who was impacted by COVID-19 or the economic downturn. These are just a few examples of the ways our team expressed their dedication to our communities in 2020. I'm proud of their continued support and the commitment they demonstrated in the midst of a very challenging year. Lastly, we announced our regular quarterly dividend of 28 cents this morning. This quarter's dividend will be paid on February 24th to shareholders of record as of the close of business on February 10th. This concludes our prepared comments And as a reminder, Andy, Chris, and Aaron are with me to answer your questions. Now, Carmen, we will open the call for questions.

Thank you. And as a reminder, ladies and gentlemen, to ask the questions via the telephones, simply press star 1. To withdraw your question, press the pound key. To ask a question via the web, click the Q&A question button on the lower left-hand corner of your screen. type your question in the open area and click the submit button. Once again, to ask a question over the phone, press star one. Our first question comes from Jeff Rulish with DA Davidson. Your question, please.