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

All right. Good morning, everybody. My name is David Feaster. I'm a member of our banking research team here at Raymond James, and we are very pleased to have Columbia Banking System here with us. The bank is a high-quality West Coast franchise, a tremendous core deposit base and a strong organic outlook and it's just recently closed their transformative acquisition of Umpqua, creating a $50 billion asset bank with incredibly strong profitability. The deal just closed last week. So we are extremely excited to have you here with us and give us all the details. But from -- you also have a lot going on with the conversion here, which is scheduled for in a couple of weeks here. So you don't have much going on. So thank you for joining us. From the company, we've got CEO, Clint Stein; CFO, Ron Farnsworth; and Director of IR, Jacque Bohlen. So we're going to host this as a fireside chat today. But if you have questions, feel free to jump in. Let's make this interactive.

So with that, let's just jump right into it. So man, it's whatever we having gotten this deal closed? I know it was quite an ordeal frustrating and -- but it's done. So -- and I'd argue in today's world that this deal makes as much, if not more since than when you first announced it. I guess, could you maybe just talk about, given the economic backdrop, given the rate environment, some of the things that you're more excited about with this combination today than when we first talked about it.

Yes. No, it was a long time coming. Some of you -- there's some familiar faces out here, and some of you have heard me say this, that I shared with Cort O'Haver a couple of months ago that I was in my 40s when we announced the deal and I turned 52 this year. And so right before I turned 50. But it illustrates just how lengthy of a time it was. And yes, the rate environment is different. But when we contemplated this merger, it wasn't trying to time it around any sort of environment. We've been bankers for a long time. We know that on average, every 7 years, you're going to go through a business cycle. And so -- and even with the rates, I mean, there's a lot of conversation on rates. But if you look back over the last 100 years, we're coming out of, and we're still on the low end of what normal rates would be. So from that perspective, it illustrates that purchase accounting is broken. Ron Farnsworth, our CFO is over there. He will be available afterwards for 2 or 3 hours. If anybody wants to go through the details of purchase accounting and why it makes no sense. But that's really the major impact that's different from what we expected, but it's all geography. The economic impact or the earnings power of the company, it hasn't really had changed those assumptions. What we've learned, I was pretty excited when we announced the deal based off of a few months of diligence and conversations and getting to know people. But post announcement, spending time in the various markets, meeting leaders and bankers throughout the cost system, that's really the quality of what I saw with the senior leaders and the executives it's throughout the whole company, learning more about the sophistication of the treasury management and payment solutions capabilities. that has the bankers that came from Columbia really excited. So it's -- the question that I get asked a lot is, okay, what -- what surprised you? What are you going to unwind? And there's really nothing that's a negative surprise. It's just been reinforced with more time, more interactions that this was the right deal for our 2 companies.

I mean we've spent a lot of time talking about the complementary nature of these 2 businesses. As you've gotten into this -- have you -- has that only reinforced that expectation? And as you've gotten deeper into these 2 businesses, as you -- I mean, have you identified other opportunities, man, I didn't even think about that at the beginning. This will be really cool that we can roll out or any other cross-sell or synergistic opportunities.

Yes. No, that's absolutely been the case. When I mentioned the treasury management platform and payment solutions. There's the ability to offer purchase cards to our commercial clients. I mean that's huge. Our bankers are really excited about having that. The example that we zeroed in on early on was the ability to have leasing platform for our clients, not just -- we talk a lot about it in the health care space because we have roughly $1 billion of loans in that sector and doctors love to lease equipment, but our retail branches are really excited and to have the capabilities of FinPac. And so there's a host of other things, being able to take our wealth management platform and layer it across a larger customer base creates opportunities as well. So we didn't model -- we didn't include in the model revenue synergies, obviously, but it's pretty exciting to see how bankers from both companies have embraced what the other company is bringing to the table, and that's back to that complementary nature not identical, but -- and not contradictory to philosophy, just very complementary to what each individual company was doing.

That makes a lot of sense. But uncertainty is a difficult place to operate in, especially in terms of employee morale and -- and I'm just -- you touched about being visible across the footprint. What are some of the things that you've done to help keep that up, to keep employees engaged? And I mean, it's hard to make some management decisions when you're just kind of in this purgatory spot. Just what are some of the things that you did to address that issue? And then, again, you touched on it a little bit, the pulse of your clients, the clients and your employees now that the deal is closed.

We have any Ted Lasso fans here. It's the hope that kills you. The -- it's -- that was the biggest challenge with the protracted time line was the uncertainty. And we had people that wanted to retire. And they planned a summer vacation then they replanned the fall vacation then they thought I'm going to have ski season. And so that's -- it was unfortunate to see that they didn't have certainty around that date. We had folks that didn't have go-forward roles. And they are ready to start their next chapter in life, and they weren't able to do so or didn't have certainty around when that was going to happen. But -- and what we did is we just -- we overcommunicated frequent town halls, town halls again throughout the footprint as time went on. We about this time last year, we started working on the combined culture, and we had it ready to launch in early summer. So we went -- took -- I think we just finished the last one about a month ago. We did about 16 culture workshops throughout the footprint, put about 4,000 associates through those. And so that was one benefit of having time was on day 1. Everybody in the company knew who our stakeholders are, they know what our corporate values are and what our purpose is. So that work would have been done either way on that time line, but had we closed. So in the middle of last year, that would have been a work in process and that might have created some additional anxiety for people not knowing what kind of company that we were going to be.

Yes. One of the other really impressive things is often in these types of deals, I know everybody -- some other banks around you were looking their chops, ready to pick off some lenders, which you've actually recruited, expanded in market and into some ancillary markets, it's pretty impressive the way that you've been able to recruit. What is attracting new lenders to Columbia, especially at a time when the deal wasn't even closed.

Yes. It's -- first, it was even a little surprising to us that we had the amount of and the quality of bankers that from the outside that saw what we were building and wanted to be a part of it. There is some disruption in the marketplace with some other competitors that were going through merger activity and reorganizations and things. And so that opened the door. And I think they see a $50-plus billion institution in 8 Western states that's continuing to grow. It's got a great reputation for having a solid culture, a great place to work. And then the banking community is pretty small, and they know each other in the different markets. And so word-of-mouth. I mean our high performers are our best referral source.

Yes. Yes. So the deal is now closed. For you to be able to keep that March conversion date intact is extremely impressive. I don't know, again, you don't have much going on, so thank you for being here. But how are you able to do that? I mean, the integration management office, I know that helped. But how are you able to keep that conversion date intact? And what are some of the things that, again, maybe this time played into your favor in some regards -- some of the guardrails that you put in place to help minimize disruption.

Yes. subtle pressure and a refusal to hear that we're going to slide it to a backup date. No, in all seriousness, you mentioned the IMO. We're very fortunate that with the experience and the level of M&A that both companies had previously done to have 2 senior members of the executive team lead that. And they have other duties that they're focused on, but their primary purpose and focus for the last 18 months, and it started actually preannouncement was when this March conversion date was set and they started working towards that immediately. But what it's really -- I guess, I know the individuals. I know their skill set, their experience, how well they're working together. So it doesn't -- it wasn't like I ever doubted that as long as we were closed, we were going to hit that conversion date. What I am really pleased with, and it was what we were hoping we could achieve is by setting up the IMO that all the planning and the noise of integrating processes, new policy planning for the systems integration, all of that is handled by the IMO, and our customer-facing bankers have been focused on continuing to grow the business, take care of the client and in a very much a business-as-usual manner. And I think that gets back to your prior question of attracting talent. There wasn't a disruption in the ability to grow and take care of our clients within either organization.

And maybe just stepping back a little bit. I mean, when we first talked about this deal. I mean, the pro forma earnings power and the profitability of this thing was pretty impressive. And we had no rate hikes baked in there. And if you step back and start thinking about the rate environment, again, maybe some -- I know your conservatism when we go in with guidance, how do you think about the pro forma earnings power of this franchise and the profitability is once we get this thing -- I know you haven't provided formal updates, but help us think about that.

Yes. We did put pro forma -- updated pro formas as of 12/31 last week. But in terms of the earnings that we were expecting the first full year relative to where they're going to be. I'm still very comfortable with where we're going to end up.

Yes. And maybe just touching on technology. This has been a major driver in a lot of other MOEs, this wasn't in years. It does -- it might create some opportunity on the tech front to maybe accelerate some investments, bring some other technologies. Could you maybe just touch on the tech front. And again, technology is arguably more important today than it has been in a long time. But some of the things that you're excited on the technology front coming out of this.

Yes. No, you're right. There's -- I think it was early '21. I had a banker call me and they said, "We got to do something. We fell behind on technology. We can't catch up". And that's not the case here. Specific to Columbia, we had contemporary platforms. We changed out our consumer online banking platform in 2017, our treasury management system in 2018, all the other kind of things that I think of as bolt-on type solutions we had -- and when we were implementing technology, we were looking at this scale, the $30-plus billion. On the Umpqua side, they were looking at technology and saying, it needs to scale beyond $50 billion. And so when we're sitting here at roughly $52 billion today, the platforms that are in place, and we had some similar platforms we both use the same consumer online platform. But there's not a gap. There's a new loan origination system was just rolled out within the Umpqua environment. So that's probably something that would have been next on a stand-alone basis for Columbia to address. That's -- that's already there. So it's really -- I think, future technology needs will be just maintaining those platforms, making sure they don't become stale. And then like what's the next bolt-on? What's the next [ Zelle ], add sufficiency or convenience to our customers and saves us money in the back office. Those will be the types of investments we'll make. I think technology is important, but it's a tool in our business model that we lead with that relationships. And I spend a lot of time, as you know, out through our markets and meeting with our bankers and our clients. And that's the thing that's universal and it's been that way at Columbia. The opportunity that I've had to do calls with Umpqua bankers, same thing. It's not the sign on the building, it's the person that -- and that's what they want to make sure with the merger that they're still going to be able to deal with Kevin and Tyler or Todd and Stacy and...

Yes. And that kind of plays into the next question I wanted to ask you, let's touch on deposits. Obviously, deposits, look, it looked easy for the past couple of years. In 0 rates, everybody's flushed with deposits. Deposits are more valuable today than they have been in the long time. And I think the strength of your core deposit franchise is really underappreciated. I guess, could you maybe just touch on the competitive landscape on the deposit front? And what, from your perspective, has enabled you to be so successful depending on your deposit base?

Yes. I was in Central Oregon a couple of weeks ago, and there was a credit union had a billboard that for a 9-month CD [ APY ] 5.25%. And I couldn't see the fine print. So I don't know if it's like for balances between 99,000 and 101,000 and you got to buy a toaster or what -- but that's the kind of stuff that's out there. I think for us, that's not really our target customer. We've always been skewed towards commercial first, C&I, and that's why we have the wealth management platform and so we can bank the owners. And it's something that we started in 2007, we incorporated deposit gathering and goals into our commercial bankers' incentive plans, and we stopped calling them lenders at that time and started calling them bankers. And so it's been something that's just baked into our DNA. Umpqua Bank, likewise, under Tory Nixon's leadership did a similar shift and that was, what, 2016, I believe. And so that's why today we sit here with 48% of our deposits are commercial, 43% noninterest-bearing, a lot of those are operating accounts. And so they tend to be less price sensitive and harder to move because it's more of a relationship than a transaction.

Yes. And I guess, how do you think about managing deposit costs going forward? You touched on this a bit and your strategy to grow core deposits, you're coming at this from a position of strength, right? I mean we're sitting here, you've got plenty of liquidity. The deal in some regards helps that in that you've got all the rate marks you've taken all the pain. So you're coming at this from a real position of strength. I guess how do you think about managing deposit costs continuing to drive core deposit growth? And then from a retention standpoint, does it feel like most of that rate-sensitive borrowers have gone out of the system?

You packed a lot into that. So I'll answer the portion of it that I want to. It's -- it comes back to staying close to the client and understanding if they have excess liquidity sitting there, what do they intend to use it for. We've seen some are using their own liquidity instead of borrowing at current rates. What we're really mindful of is tracking to make sure we're not losing relationships because liquidity is coming out of the system, we're going to continue to see that, I think, for a while. But as long as we're not losing relationships or missing opportunities rather than have it go to Raymond James, if it's going to go into a brokerage side, we can send it over and keep it through our platform. So -- and then it's just through that process, remaining disciplined on rack rates and prudent with great exceptions and things of that nature.

How does being a $50 billion bank change that equation, right? Because now we're going -- you've got opportunity to move upstream to have more treasury management solutions. But at the same time, you're talking to more sophisticated clients that want to get paid for the cash that they have. How does being a larger institution play into that?

Yes. It's I think it's a continued progression of -- if you go back in time and you look at -- and I'll speak specifically to the history of Columbia, and you look at how the deposit base got over the years has gotten less retail, more commercial, it's everybody's noninterest-bearing percentage crept up because rates weren't meaningful. But when you look at what's sitting in there, is it a bunch of consumer low-balance consumer checking accounts? Or are they corporate operating accounts. And so I think that being over $50 billion does allow us to go up market on both sides of the balance sheet, and they are more sophisticated, but they also have larger operating accounts. They have maybe through the treasury management side if we get their merchant account and some of those things. You can drive additional fee income. And so I think it's a tailwind for us. And the other side of it, too, is a lot of these larger companies have operations up and down the West Coast or through the Intermountain states and that's our footprint. So we're where they are.

Maybe let's switch gears to lending. You and Umpqua, both had really strong paces of organic growth. I think exceeding a lot of expectations in terms of what you're able to add from a loan growth perspective. But fourth quarter, we saw loan balances decline. I guess, what's your appetite for loans here? Where are you seeing good risk-adjusted returns? And how do you think about the organic growth profile of the combined entity?

Yes. So it was almost a frenzied insatiable appetite for earning assets in 2020, 2021 when all the liquidity was flowing into banks. And we saw -- we saw banks get very aggressive on pricing structure. And then towards the back half of last year when liquidity started coming out of the system. A lot of that stopped. But in the fourth quarter, we still walked away from a couple of hundred million dollars of production because we didn't either think the rate was we're getting paid for -- for the risk or the structure wasn't there. We saw one of the large money center banks do a 10-year fixed rate loan below the 10-year treasury. So you still see a little bit of that. And I just -- I chalk that up to -- it was quarter end and it was somebody had a goal they had to had to hit. But -- but that's where, for us, it's about maintaining that discipline and understanding that growth for the sake of growth doesn't necessarily create long-term shareholder value. And so we're focused on the things that will do that. We've intentionally slowed down transactional type lending, and we're just saving our dry powder for relationships and primarily leading with C&I. It doesn't mean that's all we're going to do because if we have a C&I customer and maybe their wealth management business and they want to buy a piece of land or something we'll do that.

Now maybe touching on the other side. I mean how do you think about credit? Because I mean you have a great reputation as a really strong underwriter, a really good manager of credit. How do you keep that discipline at being a larger bank, combining 2 banks together? How do you think about the credit culture and keeping that strength at this institution?

There's a couple of things that I'd highlight there. One in the -- if we think about one of the retirements that we had last week when we closed was Columbia's Chief Credit Officer, and he's been in the role almost 19 years. And so a lot of the metrics that you see, how we've performed even into and coming out of the Great Recession, we're a direct result of Andy's influence. Frank Namdar, who is the Chief Credit Officer at Umpqua prior to the merger and as a go-forward Chief Credit Officer, he and Andy both kind of started in their credit backgrounds at U.S. Bank. And so they have similar foundational thoughts about credit and risk and what they expect to see in terms of activities from the account officers and the analysis that gets put behind it. And so I think from a culture standpoint, it's very similar. And I think you see that with the performance of course had great credit performance as well. I mean, FinPac kind of skews that a little bit. But when you look at the risk-adjusted returns, they are pretty solid..

Maybe shifting gears to capital. Obviously, the rate marks impacted the tangible book in the short run, but you're going to be accreting capital back at a really fast pace. I guess, how do you think about your capital priorities as we come out of this? Historically, you've utilized basically every method of capital return, but how do you think about capital? Obviously, it's an uncertain economy, but how do you think about capital return?

Yes. It's -- so the biggest challenge that we've had from a capital standpoint is keeping the levels down to our long-term target. And on a stand-alone basis, our long-term targets were about the same. What we've said is going forward, we focus on total risk-based capital because from a regulatory standpoint, that seems to be the constraint. But take any of those measures and at 150 basis points to what you need to be considered well capitalized. And that's our long-term goal. And we may be on either side of that from time to time. But that's -- as we think about those targets, and I have the benefit of seeing your model.

It was perfect, right?

And Ron's. The capital accretion, there's going to -- that's going to be the challenge is keeping those ratios from going too far north of those long-term targets. And so first and foremost, stability of the regular dividend, that's always going to be a priority for us. Buybacks when it makes sense for us to do that. We have used specials at Columbia. That will be a conversation we'll have to have a board and kind of see where we're at. But -- and then organic growth I mean, there's a tremendous amount of opportunity in some of the markets that are outside the Northwest, I mean in the Northwest too, but with what we have in Southern California, Arizona and then through the Mountain states.

We got about time for 1 or 2 questions if anybody has any.

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I think everybody is kind of pulling back. And I think it's just that liquidity is tightening up. And we're not seeing any stress in our own portfolio in construction or hearing things now. We are hearing that labor is starting to free up, and that's probably a good thing because that's been a constraint. It's been labor and materials that have made construction pretty expensive. But nothing that's where people, I guess, are getting kicked out of their current bank and trying to find another bank or anything of that nature.

Well, thank you all for coming. We've got a breakout session downstairs. If there's any other questions, but thank you for being here.

Thank you.