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

Okay. Well, thank you, everyone, for being here. We are at the end of the conference. And we're going to wrap it up with Columbia. We have Clint Stein here and, I guess, Super Bowl Champion, Tory Nixon, you could say as well. I was going to ask Clint who the better athlete was on this stage, and I know it's not me, but...

It's definitely not me.

Okay. All right. Well, it's Tory. Tory, then.

By default then.

Yes, right. We're good. But thanks for being here. I know you've been on the road for a couple of days at another conference. I saw your schedule here. You guys have had a long day. So I appreciate you being here, and we'll just kind of hammer through some of these questions and if anybody in the audience has questions, you can go ahead and fire away as well.

Absolutely.

Yes. Good. So Clint, just we're about a year post merger close. Difficult to get it done, but you got it done. There's been some adjustments and things like that. But just start out, give us a big picture, what is Columbia and Umpqua together? What are you excited about? And company description as well.

Yes. So we're in 8 Western states, $52 billion in assets. The core of our franchise is in the Pacific Northwest. From a market share perspective, it's the G-SIBs and us. So what we had set out to create was a -- the preeminent regional bank headquartered in the Northwest. Individually, we were both trying to do that. That hasn't existed since U.S. Bank sold in the late '90s. So we felt like there was an opportunity and that's the franchise we envisioned when we began the merger talks, and that's what we have today. It's there. We're -- but depending on how you want to think about it, I guess, we'll say from a regional bank standpoint, we're the fourth largest headquartered west of the Rockies, but you have one that's a specialty bank. You have one that's trying to stay under $100 billion. So we really feel like throughout the 8 states that we're in, we've got a lot of opportunity.

Okay. Biggest markets that you're in?

Seattle, Portland, San Francisco, L.A., San Diego, Phoenix, Salt Lake, Denver. Did I miss any?

Boise.

Yes, Boise.

Okay. Okay. Good. Tory, maybe this is for you, primary economic trends in your markets, what you're seeing? How do you view the overall marketplace?

Well, I think the -- I mean the West is pretty dynamic. I think economy is doing quite well. There's been a lot of conversation over the last couple of years in the resiliency of the economy and our customers. And I think we talk a lot about the performance of our customers and how they're doing and opportunities that they have and growth in their industries and in their verticals. And doing quite well. I mean it's a good economy. It's not as robust. I mean there's always -- there's been a conversation around investment in the future for a lot of companies and guys to just kind of sitting on the sidelines for a little bit to figure out what the future really holds for them in terms of rates and other opportunities. But by and large, people are doing well. Customers are doing well. We have a big C&I focus in the company. So we're pushing really hard on the expansion of full relationship banking in the C&I front, and that's kind of all hands on deck doing that.

Okay. Okay. Good. And just overall, lending environment, kind of loan demand, what you're seeing from clients and any changes in it?

Yes. I mean loan demand is -- for us, loan demand is still pretty robust. There are some markets where we are in that our competitors aren't doing a lot. They're kind of just sitting on their hands a bit. And that's given us some opportunity. It's certainly down from what it was 18 months ago. And I think we've had more conversations in the last 6 months or so around should I borrow -- I'm going to buy a piece of equipment or I'm going to do some sort of expansion, should I borrow for that? Should I just pay for it in cash? And I think we've had more people opt to kind of use their own capital rather than go find [ debt ] for that. But -- and that's a little bit of a shift. But overall, still some good solid demand. And a lot of what we're doing is market share. I mean, we're really trying to work hard and take market share. And so that provides us opportunity because we've got good borrowers from other banks that we're just trying to pull into the company.

Okay. Bigger balance sheet helps with that, I'm assuming. Anything on commercial real estate? Any appetite there from your company in terms of growth? And how is that environment?

I'll start with if it's a relationship, we'll still do commercial real estate. We still have a tremendously talented team that does that. But if it's just transactional, then we have zero interest in it.

Sure. I remember the fun we went through with COVID in your office portfolio. You're saying, but these are dentists. But it feels like you've performed pretty well from that point of view.

Yes. And it continues to perform well. We didn't like frank up our Chief Credit Officer, but he looks well rested despite the time change and 3 days of meetings. And so yes. So I mean just we're not seeing the issues that other parts of the country are. And even if there are -- I think that there will be banks that will have some credit issues with CRE even in our footprint, but it's the way they underwrote them. And it's how deep they went into the properties that 3 years ago, 4 years ago is when they made their mistake. And if you recall, at that time, we were passing on tens of millions of dollars of volume every quarter because of the underwriting. I think what one thing unique for both companies really is the real estate portfolio is very granular. So -- and our office portfolio is all suburban. We're not an urban downtown Seattle or San Francisco office lender at all. Our multifamily is very granular. Same thing, it's suburban stuff. So this is performing different than urban markets. The suburban markets are strong, occupancy is high and performing quite well.

Okay. Okay. Good. I do want to circle back on credit a little bit later. We won't give you the mobile mic, but we'll circle back on that. One of the things that we do in these sessions, we do talk about the economies and maybe some of the wrong perceptions that people might have. We had a bank yesterday who wanted to talk about Chicago. Talk about California a little bit. Is it a vibrant market? Is it a market that's losing people and it's a lost cause. Talk a little bit about maybe your perceptions on that state.

Yes. So we -- California is an incredibly robust market. We talk -- and the number is pretty close here. So forgive me if I'm off just a bit. But we did a study a few years ago where we looked at just businesses of all sizes in -- from, for those that know the geography, from the Grapevine, which is just north of Los Angeles South to the Mexican border, the same number of companies as from the Grapevine all the way through Northern California, Oregon and Washington -- Oregon and the State of Washington. So relatively close. And it just shows the density of the Southern California market. And that's one of the reasons why several years ago, Umpqua Bank kind of, pre the deal here, made a pretty sizable investment in the commercial banking world in Southern California. I think even today, it sits really nicely for us. So California is an interesting place, and there's a ton of opportunity, I think, for our bank in California. There's a lot of disruption in the market with some M&A stuff that's going on. And we have a good group of bankers that -- it's been a really high-growth area for us.

And even with the out migration, some of it is not even out of the state. So some of the Bay Area has gone over Sacramento. Some of the other markets that we're in, Boise, Salt Lake, Denver, Phoenix have been -- have benefited from a growth standpoint from that migration from California. But there's still 35 million, 36 million people in the state. And so to Tory's point, there's a tremendous amount of opportunity. 10-plus years ago, we kind of steered clear of California because of the -- we just didn't understand the politics and the business environment. But what we learned was it went from Sacramento, up I-5, to Salem, to Olympia. And so whatever happens in California, pretty quickly it follows and ends up happening in Oregon and Washington as well. And so that's why 3 years ago, we made the pivot and moved into California, and of course, Umpqua has been there 20-plus years.

Yes, in Northern California.

Okay. Okay. Good. Maybe just last one on kind of economy and loan growth. You're targeting kind of a lower single-digit loan growth rate for the company. But what is possible over time in your mind? And what do you think is a comfortable pace of growth for the company longer term?

Well, I'll throw a number out there, and then we'll see if Tory disagrees with me. But my view has always been if you're more than double GDP, then you have to really think about what are you doing? Are you taking on -- are you taking on more risk? Or are you just taking market share? Is it a disruption? And so understanding that, but I'd say just as kind of a general baseline, I'd look at that as kind of if GDP's at 2% and you've got loan growth at 4% or 5%, that's probably okay. But if GDP is 2% and you're at 12% and there's no disruption, what are you doing to generate that kind of growth? And it is possible, but I think it's also an opportunity to just reassess and make sure that you're not taking an undue risk.

I would say just the difference would be, are we getting loan growth from higher credit -- larger credit facilities from existing customers? Or are we taking market share and you could like differentiate that. I mean we want all the market share of good, solid C&I borrowers in the Western states. And if that turns into be 6%, 7%, 8%, 9% growth, I mean, that's good -- that's going to be a great business for us. We've got a lot of momentum and a real clear focus on the strategic plan for the company. So we'll see.

Yes. Okay. All right. Other side of the balance sheet, deposits and funding. It's been an interesting year. And you also had the merger coming together and there's a lot of things going on. And I know you want to provide some comments on what you're seeing on deposits at this point in time. So what are you seeing on deposit flows? What are you seeing on pricing? And what message do you want to get across to us?

Yes. Well, I'll start by saying with the fourth quarter and some of the repricing that we saw, it caught the market by surprise. It caught us a little bit off guard in some aspects, and that should never happen. So we spent the first few weeks of the quarter really kind of dialing in and making some changes in terms of pricing authorities, educating and reeducating some of our bankers on how to have a conversation around deposits with customers. And I think that, that's -- it's been a lot of work on Tory and Chris' part with their teams. But I think we're seeing it pay dividends already in the quarter. I'll defer to Tory to talk about kind of maybe more of the specifics around the pricing and some of the deposit flows that we've seen in January and February.

Yes. Look, so January was we had a migration of, I think, about $450-or-so million in DDA balances, kind of move over into interest-bearing. But February has been very different. We had -- we did have net deposit growth in January. We had some deposit growth in February. But actually even an increase in noninterest-bearing balances in February. So a really nice trend in February from January. The first quarter is always just from a cyclicality standpoint, usually a net outflow of deposits. So March is kind of still to be determined. But we've done some things in the company, I think, to really change the pricing on the pricing front. And we kind of put a chokehold on exceptions. So anything over 375 has to go to me or Chris to approve. And spend a lot of my day having conversations with bankers around what we're doing and why we're doing it. I think that's important. It's creating a lot of really good, solid discipline in the company that probably just got away from us a little bit in the last half of '23, but a nice change there. And we're -- interestingly enough, we're individually having one-on-one conversations with customers and talking about the rate being at whatever it is and kind of moving that down. And if it's 5 basis points, 10, 25, 50,just kind of re-configurating this conversation around the value that the company has and the relationship that we have with our customers, and that value is worth something. And so just kind of -- to Clint's point, kind of teaching the bankers -- or reteaching them on that part of it and making sure that we negotiate hard for what is a fair price for -- that we'll pay for deposits. And we're seeing that. And so what I'd like -- I know Chris is saying, when we -- he and I look at exceptions, the new exceptions coming to us are lower than where they were. So we're seeing a net migration down, which is good to see.

So does that January to February move, do you think that is -- is it seasonal? Or is it -- it's a result of some of these changes that you've [ made ]?

It's a result of the changes, for sure. But the first -- the way I said about seasonality is at the first quarter is kind of always like that. March is in an interesting month with tax payments and kind of like December is when dividends, distributions and other kind of things that happen. In March and early April are a big tax payment time. So that's just something that we have to be cautious.

So it's a pretty good sign?

Yes. Well, it's a good sign, actually. Very, very positive sign. In early March -- the first few days of March have been good.

In February, we launched through our retail network, a small business campaign. It's not a promo, it's not promotional pricing. It's just a bundled solution for our business bankers to just go out and actively market. And the first 3 weeks, we saw a really good traction. There's over $100 million in operating accounts that came in, very granular. I think the average size is around $62,000. And so that will definitely move the needle for February and is an encouraging sign because we spent much of '23 positioning the retail network to be more outwardly outbound sales oriented. It's not product pushing, but it's definitely not just paying and receiving transactions either.

Okay. How do those pricing discussions go with clients? And is it any less competitive on deposit pricing?

I think that the markets are all competitive. It's just we're competing with different institutions, depending on what market. So a downtown Seattle or a Portland or San Diego or Boise, you're going to -- you're -- I mean not Boise so much, where you're competing against big money center banks. In rural markets you're going to compete with smaller community banks. And so the competition, it's fierce no matter where you are. But the conversations with customers are going actually very well. I mean they understand the bank and the value that we bring to our relationship and that's a give and take in a 2-way street. And like any and every deal, even the lending side, it's no different, it's like it's got to be good for you as a customer, it has to be good for the bank. And so we both need to win. If you've got customers who just want everything in their favor, it's probably not the right kind of customer. So it's going quite well. And the bankers are very enthused and motivated in a way to do this and pull it off and I'm, like always, kind of really impressed to see the power of Umpqua Bank when we set our mind to doing so.

Yes. Okay. In the updated slide deck, it has a little bit lower range on the margin for the low end, but the rest of it is the same. Anything to note on that? Or is this -- it just feels like whatever the questions were in Q4, it feels like you have your arms around them. Is there anything else to note on that?

Yes. No, I think that's a fair assessment. When we put the range out there, the expectation was first Fed rate cut would be in March, and we know that's not going to happen or we believe that's not going to happen. And we also think that the NIM with all the steps that we've taken, everything we've discussed, it's got a better trajectory than what it had in the fourth quarter. But we think that it won't necessarily trough until we get that first rate cut or thereabouts. And so that's why we updated the guidance and lowered that bottom range by 5 basis points.

Okay. And you talked about 3 cuts. Is that right?

That's what we have factored in, yes.

Yes. Okay. Okay. Is there a better or worse environment for you?

Well, we also updated our asset sensitivity disclosure in there, and it shows that we are liability sensitive. So I think in the near term, higher for longer probably isn't the best scenario. If we get some steepness in the curve, that would definitely help. But just where we're at right now, getting a few rate cuts probably helps and it gives us some opportunity to then do some repositioning on the balance sheet that longer term will definitely improve our performance numbers.

Okay. Yes. It's a tough environment, obviously, to give guidance because it's shifting. It feels like we're getting back to normal, but it seems like it moves every day.

Yes. My hair started turning white when we started giving guidance.

I hear you. Expenses. You also altered expenses a little bit. A little bit better on expenses. Can you talk a little bit about what you're seeing there and some of the puts and takes on the expense outlook?

Yes. We set the org structure for the combined company. We finalized that work in January of '22 and when we did that, with the exception of some exempt employees in retail locations that were going to be obvious consolidations, we didn't adjust any or eliminate any positions in customer-facing areas. And so we wanted to run the company for a year. We wanted to see kind of where we had opportunities for improvements or I guess additional efficiencies. And we feel like we've got a clear view into what that is, and that's why we updated that expense guidance for, I guess, fourth quarter on an annualized basis. Our intent is on the first quarter earnings call to be able to give you a lot of detail in terms of what those actions are or were because many of them are -- some have already been done, and many of them are in flight as we speak.

Okay. Okay. Good. I can't wait.

A little teaser for you.

Yes. That's good. Anything to note on the fee revenue businesses? Anything that you're seeing there? Any kind of momentum or pressures there?

Yes. I would feel bad if I stole this from Tory because he's so excited about some of the pipelines there.

So looking at the pipelines and the excruciating detail all the time and the one that excites me the most is our fee income pipeline. I think we talked a lot about when the 2 banks came together, there was a lot of products and services that we had at Umpqua Bank that would be a great fit for the commercial space, small business and otherwise for legacy Columbia customers. And I think the bankers are doing a fantastic job uncovering opportunities, having the confidence to say, you have this product or this service someplace else and we're your bank. We want you to bring it here. So we're seeing a lot of growth in treasury management penetration, in commercial card, that kind of traditional international banking, FX business. So the pipelines look really good. I mean it's a slow-growing business for sure because it just takes a lot to actually really move the needle on the P&L, but I'm really happy with the momentum.

Okay. You have everything you need at certain point?

Yes, think so. Really do. I've always kind of felt that we have the products and services that we need and we've kind of developed them over the last couple of years. And kind of we can compete with any -- we really feel like we can compete with anybody, regardless of size, and have the products and services and that technical capabilities to serve the customer.

The coach -- you're coaching them up. Get out there and...

Yes. Get them fired up and get them going. Every day.

I can see it, yes. Absolutely. Risk appetite of the organization, has it changed at all with the merger?

I'll say no. But there were some opportunities for -- one of the things that Columbia didn't do for a long period of time as it grew, I mean, literally for a decade, was increase the hold levels. And so hold levels stayed like this, capital and assets went like this. And so we had actually derisked probably beyond a point of -- to where it impacted earnings. And -- but we started looking at it in 2018, 2019 and just didn't feel like it was the time to twist the dials just because we were so deep into the business cycle. And the merger gave us a great opportunity to reassess where should we be for a $50 billion organization. And Umpqua premerger had done a really good job of kind of scaling those levels as the company grew. And so we did scale our hold levels so that just for the increase in size to what Umpqua had premerger. So I don't think that necessarily changes the risk profile. You could say it actually improves it because those are the more sophisticated companies that typically have professional management teams and things. So -- but what it does is we're not feeding deal flow to end market competitors for -- if it's a $35 million credit facility and Columbia's kind of hold level was $25 million. Broadly, there were a handful of exceptions above that, but that was broadly where it was at. So that meant that we were feeding an end-market competitor $10 million and giving them an entry way into our customer. With the combined entity, we're not doing that anymore.

Okay. Okay. So a few minutes left. Anything on charge-offs? I know you talked about it a little bit. It seems like there's kind of 2 stories there. Can you just kind of break down your expectations and what you're seeing there?

Yes. Well, Frank's here so he can stand up and disagree if I get this wrong. But we believe that the FinPac level of charge-offs will plateau and start to normalize as we get deeper into the year. It's working through that owner-operator trucking portfolio, and that's really where the elevated charge-offs have been there. What we see at the bank is credit's still really good. We don't see anything systemic related to either verticals or geographies. But we just see normal course of business things. Operator makes a mistake, divorce, drugs. Those are the things that can take a good credit and then suddenly, special assets is busy. And those things happen. And it's unfortunate, but that's the stuff that we see not so much anything that's -- like we think that there's a credit bubble that's about to burst. It's more a normalization because we've been so far below historical what we had consider normalized levels.

Okay. Thumbs up. I kind of missed the old days when we go through like barley and potatoes, all the different crops.

We have even more now. We have rice, [indiscernible] and all kinds of stuff.

Clint, last question on capital thoughts and buyback. Is buyback of interest to you? And how do you feel about your current capital levels and where -- what's optimal for you?

Yes. This is still a capital return story. I mean we just celebrated the 1-year anniversary. And I think the protracted waiting period, it's been 2.5 years since we announced the deal. I think that people forget that it's just been 1 year. And the capital ratios continue to grow just like what we thought they would. We still have $1 billion plus of rate-driven accretion that's going to come into capital. And so we're 11.9% total risk-based capital at the parent, 11.6% at the bank. That's the binding constraint. Our long-term goals are 12% there. I feel really, really good about our regular dividend, and from a payout ratio perspective, I feel good about where we're at there. The dividend screens is high or the yield screens is high. Just because in my view, the Street's got us priced wrong. And so as we do get north of 12%, buybacks are going to be something that are going to be, I think, a great opportunity for us.

Yes. Okay. Clock struck zero.

All right.

Thank you for wrapping up the 2024 RBC Financial Institutions Conference.

Yes. Thanks.

Appreciate it, guys. Thanks.