Columbia Banking System, Inc.

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

Thank you, Catherine. Welcome and good afternoon, everyone, and thank you for joining us on today's call as we review our fourth quarter and full year 2021 results, which we released yesterday after the market closed. The earnings release and accompanying investor presentation are available at ColumbiaBank.com. 2021 was another record year for Columbia in terms of loan production, balance sheet growth, wealth management fees, and earnings. For the first time in our history, net income exceeded $200 million, assets surpassed $20 billion, and $2 billion of new loan originations were generated outside of the PPP program. We closed the Bank of Commerce holdings acquisition on October 1st, and on October 12th, announced our pending combination with Umpqua Holdings. The BOCH integration has progressed as planned and will conclude during the current quarter. A constant theme on every earnings call over the past two years has been our commitment to remain open and laser focused on helping our clients keep pace with the changes affecting their lives and businesses. The efforts to which our bankers have gone to support each other and our communities has been impressive and it's typical of who we are, working to build strong relationships, being innovative, and growing our people is the bedrock of our culture. It was in place long before COVID-19 has guided our operations throughout the pandemic, and it will continue to propel us as we work to meet new challenges and grow. So we transformed from a $21 billion company into the leading regional bank in the West. I want to thank all of our bankers for their dedication to keeping relationships with clients and each other at the forefront. We will continue to work hard for each other, our communities, and our shareholders. On the call with me today are Aaron Deer, our Chief Financial Officer, Chris Marywell, our Chief Operating Officer, and Andy MacDonald, our Chief Credit Officer. Following our prepared remarks, we will be happy to answer your questions. I do 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'd like to turn the call over to Aaron. Thank you, Glenn. Full-year net income of $203 million and EPS of $2.78 included a full quarter of earnings from our merchants' acquisition of approximately $4.3 million. Our performance was a reflection of strong growth in loans, deposits, and fee income Combined with prudent spending and strategic investment, excluding costs related to the merchant's acquisition, an UMCOA combination of $14.5 million pre-taxed pre-provision income was a record $282 million, exceeding the prior record set in 2020 by $12 million. Fourth quarter earnings of $42.9 million and EPS of $0.55 were a linked quarter decrease of $10.1 million and $0.19 respectively mostly due to the D2 provision for the merchant's loan portfolio. Quarterly pre-tax, pre-provision earnings declined by $1.9 million to $66.7 million, with the decrease attributed to $9.6 million of higher merger-related costs and $6.3 million less interest income from the PPP portfolio, partly offset by the full quarter earnings from merchant's operations. Total deposits exceeded $18 billion at year-end, up $2.1 billion from September 30th, and $4.1 billion over the past year. The merchant's acquisition contributed $1.7 billion to the sequential increase, and our cost of deposits held steady at an all-time low of just four basis points for both the quarter and the year. This is down from seven basis points for all of 2020. The merchant's acquisition added over $800 million of liquidity to the balance sheet, propelling the investment portfolio to $8.1 billion, split 27% held to maturity, and 73% available for sale as of year end. The securities investment yield increased on a linked quarter basis from 1.82% to 1.98%. However, both quarters benefited from the prepayment of interest. Absent this, the investment securities yield remained level at 173. Encouragingly, new purchases during the quarter had an average yield above this level at 193 and a duration of 4.5 years. The net interest margin decreased 12 basis points on a linked quarter basis to 3.05%, mostly due to a decrease in the loan yields driven by a reduction in accelerated PPP fees and partly offset by higher yields and securities due to prepayment interests. Excluding PPP fees and prepaid interest, the net interest margin declined one basis point to 299. The impact to margin from the merchant's acquisition was de minimis. For the year, the net interest margin decreased by 48 basis points due to reductions in loan and investment yields of 30 bits and 42 bits respectively, as well as greater liquidity on the balance sheet. PPP loans added eight basis points to the margin in 2021, driven by 19 million of accelerated fee recognition as loans were forgiven. This compares to 2020 when PPP loans negatively impacted the margin by two basis points with only $6 million of accelerated fee recognition. We believe our balance sheet is very well positioned for a prospective rise in interest rates. Given its asset sensitivity, we see significant opportunity in terms of improving yields as the Fed begins to normalize monetary policy. Currently, $2 billion of loans within the portfolio are at their floor and we anticipate $658 million to increase with a single 25 basis point rate hike. Meanwhile, our deposit costs remain among the lowest in the industry. Total loans rose by $1.1 billion during the quarter to $10.6 billion, with $1 billion coming from merchants. Adjusting for PPP forgiveness and day one merchant balances, loans increased $228 million, or 9% annualized. New loan production was brought on at an average tax-adjusted coupon rate of $357, which compares to the overall portfolio, excluding PPP loans, of $378. Non-interest income increased $282,000 on a linked quarter basis to $24.2 million, with $776,000 for merchants. For the year, non-interest income decreased by 2%. $10.4 million, but when adjusted for the Visa B share gain of $16.4 million realized in the second quarter of 2020, it rose by $6 million on the strength of card revenues, financial services, and trust income. Non-interest expense increased $12.6 million on a linked quarter basis to $102.6 million and included $6.4 million of new run rate expenses for merchants and an increase in acquisition and merger expenses of $9.6 million offset by a $2 million recapture for unfunded loan commitments. Our non-interest expense ratio declined to 1.97% for the quarter, and our operating efficiency ratio decreased three points to 51%. With the addition of merchants, we expect our quarterly non-interest expense run rate to be in the mid-90s range in 2022, excluding deal costs. Expenses could start the year a little higher given seasonal factors and without the benefit of the merchant systems conversion planned for late this quarter. The provision for income taxes has down slightly linked quarter to $13.1 million, representing a 23.4% effective rate. The higher rate stems from certain non-deductible merger costs, income earned in California, and other factors that true up our full-year effective rate to 20.9%. we expect our 2022 effective rate to be similar to the 2021 rate. And with that, I'll turn the call over to Chris. Thank you, Aaron. We had strong core loan growth in the fourth quarter powered by record production, excluding PPP loans. Quarterly production of $640 million was a new all-time fourth quarter high, propelling full-year production to $2 billion for the first time in Columbia's history. Normal seasonality provided a bit of a headwind during the quarter, with line utilization falling to 43%, and we continue to refill our pipelines, and they remain to our satisfaction. Loans ended the year at $10.6 billion, which was up $1.1 billion, or 12%, and excluding the PPP portfolio, up $1.3 billion, or 14%, during the quarter, with $1 billion attributed from merchants. Growth in CRE led the way during the quarter, with $307 million of production predominantly with rental and leasing properties, followed by C&I production of $199 million spread across all sectors. During the quarter, the mortgage team originated and sold $75 million of loans, with the mix 30% purchase and 70% refis. For all of 2021, 353 million of mortgages were originated and sold. The quarterly production mix was 62% fixed, 29% floating, and 9% variable. The overall portfolio now stands at 2% PPP, 53% non-PPP fixed, 30% floating, and 15% variable. PPP loans were $184 million at the end of the year, and merchants added $40 million, with overall payoffs during the quarter of $171 million. At year end, deferred fees related to the PPP portfolio totaled $3.8 million. With the addition of merchants, the geographic loan distribution is now 45% Washington, 31% 12% California, and 5% Idaho, with the remaining 7% in other states. We rose to number one SBA position in the Seattle district and are now the leading SBA lender in both the Seattle and Portland districts. Going forward, we have our sights set on being the leading SBA lender in all of the communities we serve. As was mentioned, deposits grew by $2.1 billion during the quarter, with $1.7 billion from merchants. The deposit mix did not change, remaining at 60% business and 40% consumer at year end. The product mix shifted slightly from 50-50 to 49% demand and 51% interest bearing. Clint mentioned the record-setting year that our wealth management group had, nearing $16 million in revenue. This has been the culmination of years of building internal partnerships and our focus on deepening existing client relationships, and we are very pleased with the progress. Now we'll turn the call over to Andy to review our credit performance. Thank you, Chris. The primary driver of the increase of $12.8 million in the allowance for credit losses over the quarter to $155.6 million is is the increase in the loan portfolio from the Merchant Bank of Commerce acquisition. A day one allowance for credit loss reserve of $2.6 million was added for purchase credit deteriorated loans in the acquired portfolio, and a $16.2 million provision was added for the remaining loans. These additions were partially offset by a more favorable economic forecast and improvements in the credit quality of the overall portfolio. The IHS market economic forecast is more favorable than last quarter, particularly with respect to unemployment, which is a major driver for the model. Last quarter, the unemployment rate was expected to end 2021 at 5% and remain above pre-pandemic levels through the end of 2022. The current forecast assumes the unemployment rate ends 2021 at 4.4%, and remained at or below pre-pandemic levels throughout the forecasted period. The current forecast for GDP continues to be healthy, with a full-year GDP growth expectation for 2021 remaining the same as the forecast last quarter at 5.7%, and growth expectations for 2022 only slightly lower than the forecast last quarter at 4.3%. Despite the continuing challenges the pandemic has been causing, our borrowers have been able to adapt to this new environment and have shown great resilience. NTAs for the quarter improved two basis points to 11 basis points, and pass-through loans were only seven basis points. Net charge-offs annualized were 13 basis points, and our impaired capital ratio improved from 26.2 to 21.7%. We are continuing to see credit quality improve across the whole portfolio. And on the risk rating front, loans rated watch or worse decline from $724 million to $626 million as of year end. Okay, back to Clint. Thanks, Andy. This concludes our prepared comments. As a reminder, Andy, Chris, and Aaron are with me to answer your questions. And now, Catherine, let's open the call for Q&A.

Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, if you would like to ask a question, press star 1. Our first question comes from Jeff Rulis with DA Davidson. Your line is open.