Columbia Banking System Q2 Earnings Call Highlights

Key Points

• Columbia Banking System beat expectations on profitability and fees, reporting Q2 EPS of $0.73 and operating EPS of $0.76, while non-interest income of $88 million exceeded guidance. Management also said expense controls and Pacific Premier-related synergies came in better than planned.
• Loan balances slipped even as commercial lending grew, with total loans falling to $47.2 billion from $47.7 billion due to payoffs in non-owner-occupied CRE and runoff in transactional loans. The company said it is sticking to disciplined pricing rather than chasing volume in a competitive market.
• Capital returns remain a major priority, as Columbia returned more than $300 million to shareholders in the quarter through dividends and buybacks and still had about $530 million of excess capital above long-term targets. Management also said it has “zero interest” in whole-bank M&A and prefers to keep repurchasing its own stock.

Columbia Banking System NASDAQ: COLB reported second-quarter earnings per share of $0.73 and operating earnings per share of $0.76, with management saying results reflected continued progress on balance sheet reshaping, expense discipline and shareholder capital returns.

Chairman, CEO and President Clint Stein said the quarter “once again” reflected the company’s core priorities: delivering consistent results, improving long-term profitability through balance sheet changes and returning excess capital to shareholders. He said Columbia continued to emphasize relationship-based growth while resisting pricing and structures it views as unattractive.

“Columbia does not chase growth for the sake of growth,” Stein said. “We are seeing pricing and structures in the market that we believe are irrational, we will not meet them.”

Loan Balances Decline as Commercial Growth Offsets Some Runoff

Co-President Chris Merrywell said new loan origination volume totaled $1.3 billion, in line with the prior quarter. Commercial loan production, including owner-occupied commercial real estate, rose 9% from the previous quarter and 49% from the year-ago quarter. That helped drive a 5% annualized increase in commercial loans.

However, total loans declined to $47.2 billion from $47.7 billion at March 31. Management attributed the decrease to elevated payoffs in non-owner-occupied commercial real estate and continued runoff in transactional loans.

CFO Ivan Seda said the transactional portfolio declined by roughly $270 million during the quarter, while C&I and owner-occupied commercial real estate grew by slightly more than $250 million. He said commercial loans, including owner-occupied commercial real estate, now represent 42% of the loan portfolio.

Co-President Tory Nixon said competition in commercial real estate lending has become “pretty choppy,” with some loans refinancing away from Columbia. He said the company is not changing its underwriting standards or cutting pricing to retain volume, though he added that the bank has seen growth in its real estate pipeline at structures and prices it considers acceptable.

Net Interest Margin Expected to Move Above 4%

Columbia reported a second-quarter net interest margin of 3.93%. Seda said the figure included a three-basis-point headwind from one-time credit-related interest reversals. Adjusted for that item, he said margin was essentially flat with the prior quarter.

Seda also pointed to a lower-than-expected yield on investment securities, caused by higher interest rates affecting accounting adjustments tied to expected prepayment speeds on mortgage-backed and related securities. He said that was a four-basis-point headwind in the quarter.

Despite those factors, Seda said the company still expects net interest margin to move “up to and beyond” 4% in the third quarter on a quarterly average basis. He cited continued loan remixing, repricing opportunities and balance sheet optimization as drivers.

On deposits, Merrywell said seasonal tax-related outflows occurred early in the quarter, with balances stabilizing in May and June and beginning to expand seasonally in July. Deposit campaigns have generated new accounts with nearly $1.5 billion in deposits year to date through July, he said.

The company also maintained deposit pricing discipline. Merrywell said the spot cost of interest-bearing deposits declined four basis points from March 31 to 1.94% as of June 30. However, Seda and Merrywell both noted that competition for deposits has intensified, with some competitors again offering rates above 4%.

Fees Beat Guidance; Expenses Come in Below Outlook

Non-interest income was $88 million on a GAAP basis and $91 million on an operating basis. Seda said the result was above the company’s guided range of $80 million to $85 million, even after adjusting for a unique $3 million bank-owned life insurance gain. Columbia expects non-interest revenue in the mid-$80 million range for the third quarter.

Management highlighted growth across treasury management, commercial cards, merchant services and wealth management. Nixon said treasury management revenue was up just under 9% year over year, while international banking, commercial card and merchant businesses were each up about 9.5%. He also said commercial card spend topped $100 million in June for the first time, up 14% year over year, and that the combined wealth business had a record-setting second quarter.

Operating non-interest expense was $366 million. Excluding intangible amortization of $38 million, the run rate was $328 million, below guidance. Seda attributed the lower expense level to Pacific Premier-related synergy outperformance, core expense management and timing of strategic reinvestment.

Stein said Columbia exceeded the cost-saving target it set when it announced the Pacific Premier acquisition and was materially below the merger-related deal cost estimate disclosed at the time of the transaction. Seda said the company exceeded its cost synergy target by $5 million. For the third quarter, Columbia expects non-interest expense excluding CDI amortization to be in the $330 million to $335 million range, with a similar range expected for the fourth quarter.

Credit Metrics Stable; Capital Returns Continue

Provision expense was $27 million, reflecting loan runoff, credit migration trends and modest changes in economic forecasts used in credit models. Seda said credit metrics remained stable and healthy. The allowance for credit losses covered 1.01% of total loans at quarter-end, or 1.26% when incorporating the credit discount on acquired loans.

Chief Credit Officer Frank Namdar said agriculture remains the main area he is watching, though he noted signs of stabilization. He also said the company is monitoring smaller borrowers, including SBA and small business credits, but those portfolios are “still holding in pretty nicely.”

Columbia returned more than $300 million to shareholders during the quarter through dividends and share repurchases. Seda said the company repurchased 6.6 million common shares, returning approximately $200 million through its buyback program.

The company’s common equity tier 1 ratio was 11.6%, and its total risk-based capital ratio was 13.4% at quarter-end. Seda said Columbia had about $530 million of excess capital above its long-term target ratios as of June 30, with $200 million remaining under its current repurchase authorization. Tangible book value rose 1% during the quarter to $19.22.

Seda said share repurchases are expected to remain in the $150 million to $200 million range for the third quarter, and management plans to discuss future repurchase authorization plans on the next earnings call.

Management Rules Out Whole-Bank M&A

During the question-and-answer session, Stein said Columbia has “zero interest” in whole-bank mergers and acquisitions. He said Pacific Premier was the “missing piece” to the franchise the company envisioned, and he emphasized that buying back Columbia’s own stock remains the best investment.

Stein said the company may consider a small bolt-on business at some point if it supports fee income or deposit generation, but said management is not interested in a transaction that would increase the share count.

“Now we’re having fun again,” Stein said. “Our people are having fun. We see the momentum that’s out there. We don’t want to disrupt that.”

About Columbia Banking System (NASDAQ:COLB)

Columbia Banking System, Inc is a bank holding company that operates through its principal subsidiary, Columbia State Bank. Headquartered in Tacoma, Washington, the company provides a full range of banking and financial services to commercial, small business and consumer customers. Its branch network is concentrated in the Pacific Northwest, with locations across Washington, Oregon and Idaho, where it aims to combine local decision-making with the resources of a larger institution.

The company's offerings include commercial real estate lending, construction and development financing, equipment and small business loans, and deposit products such as checking, savings and money market accounts.

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