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

All right. Good morning, everybody. Thank you all for being here. My name is David Feaster. I'm a member of the bank research team here at Raymond James, and I have the privilege of getting to cover Columbia Banking System. It's a $52 billion asset bank with operations across the West Coast and the Pacific Northwest, and it's the result of an MOE with Umpqua Bank that just closed about a year ago. So congrats -- just about a year ago. Congrats on that anniversary. We're joined this morning by President and CEO, Clint Stein; Commercial Banking President, Tory Nixon and Chief Credit Officer, Frank Namdar. We are going to host this as a fireside chat today. I'm going to moderate it, but this is yours time. So if you got questions, jump in, don't hesitate to interrupt. Please don't be shy. So with that, let's just jump right into it.

So like I said, it's the 1-year anniversary basically since that transformational combination. It's really been about 2.5 years though, since the announcement, and it's been busy. The market has evolved, obviously, since the deal was announced, the record pace of Fed rate hikes, a couple of major bank failures, no big deal kind of the usual. Curious, maybe high level, could you just touch on the vision that you initially saw when you brought these 2 companies together, and how that's changed at all? How your long-term business changed at all today?

Sure. I don't think that long-term vision has changed. What our first conversation when we contemplated this merger was the lack of a Northwest-based regional bank. The Northwest hadn't had a regional bank really since U.S. banks sold in the late '90s. And what court and I discovered is that individually, both banks are trying to fill that void, both felt like scale was important, and you can pick a number. The number that I had 2.5 years ago is that Columbia needed to go from $20 billion to $40 billion over time. And I think that court felt like Umpqua needed to go from $30 billion to $50 billion. So the merger, as you mentioned, David, closed a year ago. And with that, we've created that Northwest based. And it's actually we're throughout the west, now but we have a concentration of our activities are in the Northwest. So we've created what we set out to do. Now it's just about execution. And I'd say the events over the last 2.5 years, the inflation, the 550 basis points of rate increases that you mentioned, the tight labor market, the volatility that we've seen just in the industry. I think all of those things reinforce the importance of scale and the resiliency that we have on our larger balance sheet now.

And to that point, I think you're right. I think the increased scale is kind of validated with the MOE. But with that increased scale, we put out the updated expense guidance last night in the new deck, I was hoping you could maybe just talk about some of those initiatives and your thoughts on expense efficiencies going forward.

Sure. We'll have a lot more detail in terms of kind of line by line on what those initiatives are in our first quarter earnings call. We're very much as a management team working through those items. I think the biggest, I think, area, I'll point you to in terms of opportunity is you just look at our expense ratio. And if you look at where that's at relative to peers, it shows that we have an opportunity, and that's what the updated guidance reflects. We set the org structure in place. We started working on it late '21, finalized it in January of '22. Now we've had a year of running the company. And so we see where we have additional opportunities to be more efficient, more effective and also where we have just some excess layers within the company. So I know it's kind of a high level, but we really do plan to give a very detailed recap and current status update on the April earnings call.

All right. We look forward to that. And so -- but you've had a lot of success attracting new talent, expanded into new markets even before the deal was closed. What -- from your standpoint, is it attracting those folks to you? Why are folks choosing to come to Columbia? And are you still seeing that talent magnet engaged?

I'll say, absolutely, the talent magnet is engaged. I think Tory refers to it as the Goldilocks syndrome. If you think about where we're at, and what I mentioned in my opening remarks about us being really the only Northwest based true regional bank. If you look at our market position throughout the West. And from a standpoint, if you have a bank that's trying to stay under $100 billion. You have 1 that's approaching it, but also it kind of has a different focus on us. You have an ethnic focused bank, and you have us, and then you have the G-SIBs. So if somebody really wants to be in a company where they have access to senior leadership, they can see the difference that they make every single day in terms of their activities. They're out winning business. They're serving the customers, meeting the customers' needs. It's an environment that people want to be a part of. And I'd say our top performers are very proficient at referring us to colleagues maybe they've had in their past or people that are part of their network. And so there's that piece of it that kind of builds on itself as well. So -- and that's what we saw during -- even with the merger pending, we were able to attract some really, really good talent and expand into the Colorado, Utah and Arizona markets.

Let's shift gears to deposits. Obviously, as we all know, that's the real franchise of the bank, and maybe one of the more controversial parts of the quarter. Obviously, higher rates of pressured deposits industry-wide. Seasonality seems to become more pronounced though, right, than we've seen in the past couple of years. I was hoping you could maybe touch on the competitive dynamics on the deposit front. Maybe what investors might be misunderstanding on the deposit issues that we saw. And just elaborate because you guys gave a little bit of updates on the deposit trends. Just elaborate on what you're seeing thus far early in the first quarter.

Just frankly there were some things that we just didn't get right in the fourth quarter and part of that was on the deposit side. Some of our messaging wasn't on target with things like CD renewals that we're going to step up a couple of hundred basis points, and that was pretty significant. We had -- I think, some opportunity to maybe pricing is lower than what we did during the quarter. So that impacted it. And we've started to see at the tail end on easing of, I think, competitive pressure from a market standpoint. And we probably didn't react as fast as what we should have there. Those are all the activities that Tory and Chris Merrywell have been leading this quarter in terms of better pricing discipline, more discussion and monitoring of trends real time, and so what we're seeing in the quarter, it's kind of the tale of 2 months right now. January was really a continuation of the activity that we saw in December, where we saw net migration out of noninterest-bearing into interest-bearing deposits were kind of flattish, but there was that mix shift happening. But then in February, we saw a rebound and noninterest-bearing deposits grew, I think, about $85 million. But that's still -- for quarter-to-date, we're still down about $425 million in terms of shift into interest-bearing. Total deposits are up marginally. But first quarters usually are seasonally, I guess, most seasonally volatile quarter. And March is a month where tax payments come in, bonus payments, things like that. So the trends that we've seen in January and February may not hold in March, but I'll say that February was a very encouraging month.

How do you think about core deposit growth going forward though? I mean, obviously, that's the whole grill, right? What's kind of the road map and the strategy for you to grow core deposits going forward?

I think there's a couple of different avenues. One is what we've always done, which is lead on the left side of the balance sheet with C&I get the operating accounts, get the treasury management business. And those are oftentimes a long sales cycle. And that activity has been ongoing. Our bankers, as we've been out speaking with our commercial teams. They're excited about the opportunities they have in front of them, especially given where a lot of competitors have kind of pulled back in the market. And on the C&I side, they have a green light to go out and win new business, deepen existing relationships. And then I'd say the other side of that, David, is on the retail side. We spent much of '23 getting our full retail network kind of coached up on how to ask for the business, call it consulting sales. It's not product pushing, but it's about being more outwardly bound and less inwardly and transactionally focused on paying and receiving. To that end, part of the activity we saw in February is we launched a focus on small business operating accounts. It's a bundled thing. It's not promo pricing or anything like that. And in the first 3 weeks, they generated a little over $100 million of small business operating accounts. It's very granular. It's -- I think average account size is 62,000. And so that's the power of 300-plus retail locations working in concert with our wealth management group and with the commercial and middle market teams.

There's a lot more conversation around potential cuts. I'm curious how you think about your ability to reprice deposits lower? How quickly could that happen in the first cut or 2 if we did see cuts in the back half of the year?

I think with some of the things that we've seen, I'm pretty optimistic on our ability to do that. I know Tory has been working really closely with his team, and he and Chris together on that. And I don't know, Tory, if you want to give some specifics.

Well, I would just say that we -- even today I put all our effort in having conversations with customers in bringing even the cost of deposits today down. 15, 25, 50 basis points, so -- and it's kind of like -- I think it's a little bit of grill warfare, where it's a one-by-one conversation and negotiation. Nothing is in blanket across the board. But it's good healthy conversations with the value that we bring as a company as a bank to our commercial customers, in particular, and being able to reprice deposits based on that value what we do for them. So we've had a lot of success here in late January and February, and I think that will continue. And I think it positions us very well when there is a rate reduction, and you'll be able to do that to even a greater degree.

Maybe switching gears a little bit to the margin side. Obviously, the secondary impact from the deposit cost in the quarter was a lower-than-expected margin guidance we tweaked the guided range a little bit just for the timing of rate cuts. But I'm curious, how do you think about the core NIM trajectory as we look forward? And what are some of the key drivers from your perspective on achieving the top end of that guidance relative to the low end?

I think it's a couple of basic things. One, the updated guidance, I think, reflects the -- Ron and his team's internal modeling on the timing of the first rate cut getting pushed back from March. We also have 2 months of activity, so we can see kind of where we're at within that range right now. And so if you just take that guidance it assumes that the NIM will trough here in the first half of the year. And then as Fed rate increases kick in, then it will start to increase. And so I think the timing and amount of any Fed action will dictate how much we get to it's the midpoint of the range, if it's the high end of the range, if it's the low end. And so that's yet to be seen. The other thing is it comes down to net deposit growth and in particular, what do we see on the noninterest-bearing front. So if we're able to see a stabilization there and/or growth in noninterest-bearing deposits then that can pretty meaningfully impact where we end up in that range.

And last one on the funding side before I promise we move on. Just -- could you just touch on -- in the slide deck, you talked about some ways that you're looking to optimize the wholesale funding side. I'm curious some of the maneuvers that you're working on there and how do we ultimately release -- reduce reliance on wholesale funding as we look forward? And then are you starting to see any reprieve kind of at the top end on the higher cost sources of funding?

You packed a lot into 1 question, David. I think it's what about 6:15 AMR time. So I'll try to get all that, but if I don't touch on everything, just remind me. I think as we look at -- first, if you haven't seen it look at the updated slide deck. There's a new slide in there that talks about some long-term performance-enhancing levers that we can pull. And in particular, it's looking at what we have on the balance sheet right now. And we have a rather large securities portfolio came over through the merger from Columbia. We have a lot more in long-term low-yielding multifamily, 1 of the 4 family loans that came over from the Umpqua side. As we look longer term and figure out what's the optimum amount for securities portfolio to manage our liquidity and pledging needs. We can do a remix there. If you look at -- or I think back to all the conversations we've had on stepping back from transactional type business in doing relationship-oriented lending and banking and getting the full relationship. That's probably another easily $5 billion today, that's, let's say, is earning around 4%. And we have roughly $8 billion of wholesale and brokered funding on the balance sheet. So you take a little bit of a mix out of there, and that's what that chart is demonstrating when rates allow for it at or near par, and we'll evaluate if it still makes sense. And that really does a couple of things. It cleans up the funding stack, but it also really -- in about $300 million of capital, but it also has a pretty nice impact on performance ratios like ROAA and the efficiency ratio and things of that nature. So I think the last part of that is, are we seeing a relief on the funding side? Yes. We were probably 5.5 each in the fourth quarter on the wholesale brokerage side. I think that's down to 5.20, 5.30 so far this quarter. So we have seen a little bit of relief on that front as well.

That's great. You nailed it. Good job. Maybe switching gears to the lending side. I'm curious, could you just touch on loan demand more broadly, the economic backdrop across your footprint? And just where are you seeing opportunities? Where are you seeing loan demand and just the health of your clients? What are some of the issues that they're facing and concerned about today?

Yes. Tory and I are out in the market, meeting with our teams all the time. So I'm going to sit this one out and let Tory give you his perspective.

Sure. I think it varies greatly by market in the Western states, each market is a little bit different, but there still is -- in some markets, there's less competition. So people have pulled back and giving us a real opportunity especially on C&I side, our big focus for the bank is C&I relationship growth with C&I lending. We have a really strong pipeline, and there's demand throughout the footprint. Probably most notably, I think, in our de novo markets, Colorado, in particular, has been really strong for us. Southern California is really strong for us, has been for a while. Pacific Northwest always kind of is. So good C&I demand. On the real estate side, we can be -- I think we're a really good real estate lender, and we can be very picky and choosy on what we're going to do, and who we're going to do business with. And most of what we're seeing is really just existing customers with different projects that we're looking at. So feel really good about the prospects or what our customers are seeing, they're pretty resilient. I mean we've been talking about any kind of downturn in performance from our customers for a while, and it just never seems to materialize and through all the conversations we have with them, they've been able to maneuver through COVID and inflation, everything else, and they're performing actually very, very well. So very optimistic about that.

Maybe -- could you touch on, you look at the senior loan officers survey, right? It says competitors are tightening standards, demand is weakening. I'm just curious, is that from a practical standpoint, is that a fair assessment that you guys are still willing to lend. Is that allowing you opportunity to gain market share?

100%. I mean it gives us -- I mean we have been very conscious in the conversation about the strategy of the company and the growth in C&I space. And as Clint said, giving green light to our bankers in the markets for good relationship-driven C&I growth. So their arm got great products and services and capability to do it, and it's a market share play for us, and we're having, I think, a lot of success in all of our markets.

Maybe switching gears to credit. Obviously, it's a hot button topic these days. We've been seemingly waiting for this credit cycle to appear for a couple of years now. But we're at least starting to see signs of normalization, right? Earliest impacts, you'll see in FinPac, obviously. But just wanted to get your sense on the credit backdrop, where are you starting to see weakness, if at all, what you're watching closely, and maybe how you're approaching stress in the book?

Yes. I mean I think you start to see some, I would say, normal expected weakness in the smallest of borrowers, the consumer. And I fully expect that to continue. We're seeing slight upticks in charge-off activity in the personal lines of credit that HELOCs, that sort of thing. But again, it's nothing material, and it should be expected any time you raise rates to the degree that the Fed has raised rates over the past year. This is the effect that it has. But systemically, within the overall loan book at the bank, I mean, it's extremely stable. There are no areas of systemic weakness within the FinPac portfolio, we're working through the trucking portfolio losses, which was isolated to the trucking portfolio and is kind of an offshoot of the pandemic and the glut of goods that was stuck in various ports throughout the country for a period of time. And that was really isolated to the last half of 2021 and the 2022 vintages. So we're feeling good about that. That has peaked and is now on its way down, and we're looking at some potential portfolio sales within that company to kind of counter some of the losses that we've taken over the past few quarters, and that is looking very positive as well. Within our CRE book, there's essentially nothing past due within that overall CRE book. We have not taken any losses in the book, the 2 portfolios that everybody is very interested in that I speak about until I'm blue in the face. Our multifamily and office, those 2 portfolios, again, I mean, there's essentially nothing past due. One of the things that we really track closely is repricing and maturities within both of those books. And I can tell you through 2025, each of those loan books have about $250 million repricing each. That's on an office book of $3 billion and a multifamily book of call it, $5 billion. And so it's extremely granular on a loan basis. Each loan averages roughly $1 million, call it, that is going to be repricing. So that is easily manageable. We've got programs in place to stay ahead of it, to reach out on a customer-by-customer basis 6 months prior to those events to ascertain how the customer is doing, what's their plan, and how can we help. So we stay ahead of it. And so again, I think to Tory's point, we've got wonderful first line of defense. We call it relationship managers on the front side, especially in the commercial real estate group, and that will continue to keep us ahead of what, if anything, is coming.

That's helpful. Maybe touching on the capital front. We're close to that 12% total RBC target. Obviously, you're going to have -- want to have some buffer on it, right? But I'm curious, how do you think about capital priorities? Is capital preservation, primary focus just given the regulatory backdrop and uncertain economic backdrop, or look, shares are on sale, you've got a well-covered dividend. I'm just curious, how do you think about capital priorities and potential capital return at this point?

Well, I'd say, first and foremost, it's our regular dividend. That's something we're committed to. A question that's come up is the yield. Well, I really kind of focused on the payout ratio. And we feel really good about maintaining the regular dividend. We look at our capital forecast and premerger, both companies had the same virtually identical long-term capital targets. And you can take the 4 regulatory ratios at 150 basis points to well capitalized, and those are our long-term targets. I think our longer-term issue when we look at the accretion income that comes back in, the earnings power of the company is how do we keep from getting too far above those targets? The binding constraint we have right now is total risk-based capital. At the parent, I think, we're 11.9%, goal is 12%. At the bank, we're 11.6%, I believe. So we've got a couple more quarters where to get the bank to that 12%. But then with our stock at the level that it's at now, once we get a buffer above that, that would keep us in a position to be a pretty quick conversation, I think, with our board about putting a buyback authorization in place. So I guess that's probably if we look out over, let's say, the next 4 quarters, longer term, something that's depending on where market valuations are and different things, we're still going to have that capital continue to grow. We're going to grow organically. I don't see a -- what we would consider a prudent rate of organic growth, outstripping the capital generation of the company, net of the regular dividend. So if buybacks are attractive, absolutely. If they're not, well, then we have a history from time to time of doing special dividends as well. But I think that would be kind of the last component of trying to manage ratios from getting too far above those targets.

Maybe last question before opening it up. How do you think about the long-term strategic view? Like if we look up 5 to 7 years down the road, obviously, there's a long organic growth trajectory like you just talked about. What does the bank look like in terms of size? And how does M&A potentially play into that? Obviously, we're still working through the Umpqua deal, but you've got a long track record of doing strong M&A. I'm just curious kind of how do you think M&A might play into that longer-term strategic outlook.

So I'm hesitating, David, because I know in 5 years, you're going to come back, and you're going to play this back, and you're going to go, you were wrong. If I rewind 4 years ago, then my thought was, and I think I mentioned this earlier in one of the questions was conversation that we were having and this is premerger discussions with Umpqua was, how do we get to $40 billion over a 10-year horizon. And what states do we want to be in? And I wasn't sure -- I was pretty sure we could get to $40 billion. I wasn't sure that we would get coverage in all the states. We're beyond $40 billion, as you know, with the merger. We're in every one of the states that we wanted to be in. And so we have scale, the scale to remain relevant no matter what happens within the industry. I think consolidation absolutely needs to continue within the industry, but that's at a majority of banks that are subscale or really wouldn't move the needle for us. So while we both have had in our history, a lot of M&A, I think we say it's more than 75 banks comprise our legacy balance sheets. We went back and tracked it with acquisitions we've done and acquisitions that the acquired banks have done. So we've done our part, I guess, in consolidating the industry. Now our focus is how do we drive the most value out of the company that we have. And we think that there's tremendous opportunity to do that. So M&A is not something that we're really focused on. We think the best way to drive value is execution on what we've created, what we worked hard in the last 2.5 years on and in particular the last year together as a team on building.

We might have time for one question if anybody's got any. We'll have a breakout downstairs. But thank you all for coming. Appreciate it.

Thank you.