Columbia Banking System, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's first quarter 2021 earnings update. At this time, all participants are in the listening mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you are on the telephone and you require assistance during the conference, please press star then zero. As a reminder, this conference is being recorded. I would like to turn the call over to your host. Clint Stein, President and Chief Executive Officer of Columbia Banking System.

Thank you, Michelle. Welcome and good morning, everyone, and thank you for joining us on today's call as we review our first quarter results, which we released before the market opened this morning. The earnings release and accompanying investor presentation are available at ColumbiaBank.com. During our past few earnings calls, I've commented on our bankers remaining externally focused despite the pandemic. They continue to show up in person and operate within the confines of a post-COVID world. Their determination allowed us to attract new clients and deepen existing relationships. The momentum that was building at the end of last year accelerated in the first quarter, which is typically our seasonal weakest. The core team dedicated to round two of the Paycheck Protection Program was extremely efficient, which limited the time our bankers were not able to dedicate their full attention to supporting our clients. As a result, excluding PPP, we achieved the first quarter record for new loan originations. We had another quarter of impressive deposit inflows. and our financial services group revenues for a new quarterly high surpassing the old record set just last quarter. Our performance is the outcome of a very deliberate strategy and focus on continuing to build our business throughout the pandemic, while at the same time ensuring the safety of our employees and clients. We activated our well-tested pandemic response plan early which gave our teams more time to shift resources in response to changing state mandates and new federal stimulus programs. At the same time, we continued to support all of our clients, ensuring that their immediate needs were met and longer-term plans could move forward. The benefits of this strategy are evident in our loan production and deposit growth, as well as in the strength of our loan pipeline. We could not be more proud of every one of our employees, As a team, we expanded relationships with clients and each other and improved our operating leverage while meeting the challenges of a very unique economy. On the call with me today are Aaron Deer, our Chief Financial Officer, Chris Marywell, our Chief Operating Officer, and Andy McDonald, our Chief Credit Officer. Following our prepared remarks, we'll open the line and take your questions. However, 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 time, I'll turn the call over to Aaron. Thanks, Clint, and good morning, everyone. During the quarter, Columbia generated net income of $51.9 billion, or 73 cents per share. Pre-tax pre-provision income of $63.6 million was down $6.8 million from the fourth quarter of 2020, primarily due to lower net interest income stemming from a combination of lower asset yields, less income from interest recoveries, and security prepayments. Compared to the first quarter of 2020, pre-tax pre-provision income rose $4.2 million due to reduced funding costs, stronger mortgage banking activity, and lower expenses. Total deposits ended the quarter at $14.8 billion, which was an increase of $898 million from year end. The inflows were largely in non-interest-faring accounts and were spread throughout our footprint. The increases attributed to federal stimulus, including round two of PPP, as well as new relationships and tempered spending and investment by our clients. Our cost deposits dropped one basis point linked quarter to four basis points, matching our all-time low. Total loans ended the quarter at $9.7 billion, which was an increase of $249 million from year end. First quarter loan production was $895 million, including round two PPP production of $511 million. Loan balances excluding PPP loans increased slightly to $8.8 billion. New loan production excluding PPP was brought on at an average tax-adjusted coupon rate of 3.70%, which compares to the overall portfolio, also excluding PPP, of 3.98%. The net interest margin of 331 was down 21 basis points on a linked quarter basis. There were a number of factors behind the drop, but the most impactful was lower coupon rates on loans, which contributed 11 basis points to the decline. Much of the remaining drop stemmed from less interest income on the early repayment of certain CMBS, and a large interest recovery on a non-accrual loan in the prior quarter, which together contributed about 10 basis points of pressure. Non-interest income was down slightly in a linked quarter basis to $23.2 million, though this was up $2 million from the first quarter of 2020. The modest linked quarter decline was mostly due to seasonally lower mortgage banking income, though we were actually pleased with how well mortgage volumes held up. Non-interest expense of $83.6 million was down just slightly when compared both on a linked quarter and prior year basis. Notably, our compensation expense in the first quarter benefited from the favorable impact of capitalized origination costs for Round 2 PPP loans. This benefited the quarter by $5.5 million that was partly offset by $923,000 of data processing costs for Round 2 origination. In addition, we recorded a $1.5 million provision for unfunded commitments. We look for our quarterly expense run rate to return to a mid to upper 80s run rate for the remainder of the year. Provision for income taxes decreased $4.2 million on a linked quarter basis to $16.8 million, representing a 19.5% effective rate. 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, Erin, and good morning, everyone. We have worked hard, partnering with our clients, to help them and their businesses remain viable and healthy over the past year. This has resulted in deeper relationships and upward momentum, which is evident in the tremendous deposit flows and strong loan production in what is typically our seasonal low quarter. While round two PPP loan production has been a major focus, we have also emphasized business as usual. And this approach has allowed us to win new business during a tough year and to create new opportunities as communities begin to exit the economic crisis. As Clint noted, excluding round two PPP loans, we achieved a new first quarter loan production record of $384 million. This was the sixth highest production quarter ever and follows the quarterly record of $468 million set during the fourth quarter of last year. Loan production was offset by a decline in utilization of 2% during the quarter and 7% in the past year, which was a headwind of $92 million and $326 million, respectively. The decrease is partly due to typical seasonal agricultural paydowns, a shift in funding from existing lines to PPP loans, as well as delayed investment from uncertainty within the economy. Nonetheless, We continue to be pleased with the momentum of loan production and are optimistic with a healthy pipeline that is expected to generate quality loan production in the months to come. As of March 31st, our round two PPP loan production supported over 4,100 clients, and we received more applications in this round than we did in round one, where we funded all qualified loan applications. We are proud to support our communities by providing critical funding in support of both existing and new clients. Excluding PPP, quarterly production mix was 63% fixed, 33% floating, and 4% variable. Overall, the portfolio mix is now 9% PPP loans, 48% non-PPP fixed, 31% floating, and 12% variable. The composition of the loans in the first quarter benefited from the favorable impact of, oops, our compensation, portfolio remained relatively unchanged with a small increase in CNI due to additional of round two PPP loans. Gross of unearned income, PPP loans were $915 million at the end of the first quarter, Since we opened the forgiveness portal in mid-August, we have received over $550 million of payoffs and paydowns, all related to round one of the program. Deposits grew by $898 million in the quarter and at an unprecedented 37% or $4 billion over the past 12 months to $14.8 billion as of March 31st. A deposit mix remained at 60% business and 40% consumer. Over half of the increase during the quarter was in-demand deposits, and as of March 31st, the deposit base was evenly split between non-interest-bearing and interest-bearing. We continued to drive exception rates down, and as was mentioned, our cost of deposits declined to an industry-leading four basis points. Fee activity remained robust during the quarter, with financial services and trust revenue at a new high, up 10% over first quarter 2020. And although residential mortgage activity slowed on a linked quarter basis, it drove loan revenue up by 61% or $2.8 million when compared to the prior year quarter. This offsets declines in deposit account fees from the increased liquidity on customer balance sheets. At the end of March, we announced the move of our Tigard, Oregon branch to a new financial hub location. Just like our Ballard and Boise Neighbor hubs, the Tigard Financial Hub will offer the same banking experience geared towards helping our clients achieve their comprehensive financial goals, including investments, trust services, and other financial considerations. The Tigard Financial Hub is scheduled to open in July. Now, I will turn the call over to Andy to review our credit performance. Thank you, Chris. This quarter's ACL totals $148.3 million. a reduction of almost $850,000 from year-end. Net charge-offs of only $47,000 led to the provision release for the quarter. Our forecast assumes annual gross domestic product to increase to 5.7% for 2021, with the unemployment rate predicted to end 2021 at 6.2%, and improvement from the 6.6% last quarter. As noted before, we use IHS market for our economic forecast. The improved forecast is counterbalanced by continued stress in the travel and leisure industries, which are showing signs of stabilizing. 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 $11.7 million in Q1 and an increase from $11.1 million in Q4. Our adjustment is driven by the continuing impact of the pandemic affecting hospitality, shifting dynamics in office and retail, and business closures and capacity restrictions in the restaurant industry. We ended the quarter with an allowance relative to period end loans of 1.53%. Adjusting for the PPP loan, the allowance to period end loans increases to 1.69%. NPAs for the quarter were relatively unchanged at 20 basis points. However, I always like to adjust for PPP loans as I believe it provides a more consistent comparison as we move forward. With this adjustment, MPA did not increase much, only one basis point to 21 basis points. Passing loans for the quarter were 11 basis points compared to 28 basis points last quarter. Net charge-offs, as noted earlier, were essentially nil versus 13 basis points last quarter, and our impaired capital ratio was 29.4%. Problem loans, which we define as loans rated WOT or worse, declined from $955 million last quarter to $920 million as of March 31st, 2021. We did see migration downward from WOT and special mention two substandards here in the quarter, which also impacted our allowance for grant lawsuits. Aviation, hospitality, and restaurants were categories where we saw the negative migration. Okay, deferrals. At the close of the quarter, we had 71 million in active deferrals, or less than 1% of our portfolio, excluding PPP loans. This is down from the 147 million in deferrals at the end of last year. Deferrals, for the most part, continue to run off as expected. We continue to classify our retail, hospitality, restaurant, and aviation portfolios as portfolios subject to an elevated level of risk due to the pandemic. In aggregate, these portfolios account for about 1.3 billion or 13.1% of our loan portfolio. As alluded to for the past few quarters, we have removed our dental and healthcare portfolios from this classification. Both of these portfolios exhibited stable metrics throughout 2020. Problem loans remained very modest in this segment. There were no past dues in either portfolio and deferrals were less than one million or less than one basis point on a combined portfolio of 1.1 billion as of quarter end. Okay, so for those that we still classified. Retail is the largest segment at 574 million in loans outstanding at the end of the quarter. While we remain concerned over the pandemic impact on this portfolio, problem loans are actually down year over year. We had no past dues in this segment, non-accruals were only three basis points, and no retail loans were on deferral as of March 31st. PPP loans have certainly made a difference for our borrowers in this portfolio. While these statistics are all positive, we continue to be cautious, however, given the colloquial evidence we see in our footprint. Hospitality at $336 million has shown a mixed bag of results. In total, problem loans in this segment declined during the quarter and now represent about 56% of the portfolio, down from 66%. However, we did see substandard assets increase to 26% of the portfolio from 23% a year in. There is clearly a bifurcation in the portfolio between those which are leisure-oriented and those which are business-oriented. Leisure properties have weathered the pandemic much better than our original expectations, while business-oriented properties continue to struggle. Leisure travel accounts for about 69% of our portfolio, while business accounts for 31%. Restaurants, which account for about $227 million, saw a modest amount of negative migration during the quarter. Problem loans increased from 21% to 23%, and criticized classified assets increased from $29 million to $33 million. We had about 7 million in deferrals in this portfolio at quarter end. Similar to the retail businesses, PPP loans have had a meaningful impact for restaurant operators. As of March 31st, 57% of our restaurant operators were at 50% occupancy. However, with rollbacks put in place by governors in both Oregon and Washington, that has dropped to 39% as of today. thus demonstrating the fickle nature of this pandemic and the economic recovery as we move forward for this industry. However, with the summer months arriving, outdoor dining will be returning to our footprint. This combined with the increasing number of people becoming vaccinated all bode well for the restaurant industry in the Pacific Northwest. Finally, the aviation portfolio at roughly $137 million down by about $25 million from a year ago, was relatively stable during the quarter. As in past quarters, no loans are past due, all customers continue to pay as agreed, and no loans were on deferral. Almost all the news in this area has been positive, with some airlines projecting to be cash flow positive by the end of this quarter. With that, I'll turn the call back over to Clint. Thanks, Andy. As noted in our 2021 proxy statement, Columbia Bank's commitment to social responsibility is in full alignment with our corporate values. To learn more about our efforts in this area, we invite you to visit our new ESG page found in the investor section of our website. There you'll find information supporting our commitment to sound environmental, social, and corporate governance principles. Our regular quarterly dividend of 28 cents was announced this morning. This quarter's dividend will be paid on May 26 to shareholders of record as of the close of business on May 12. This concludes our prepared comments. As a reminder, Andy, Chris, and Erin are with me to answer your questions. And now, Michelle will open the call for questions.

If you'd like to ask a question, please press star then 1. If your question isn't answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from Jeff Rulis with DA Davidson. Your line is open.