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

Great. Well, thanks, everybody. We're excited to continue the mid track -- mid-cap bank track with Columbia. We're joined by Clint Stein, the President -- or the CEO; and Tory Nixon, the President. Thanks, guys, for coming out.

Maybe starting off high level. It's been an exciting few years for the combined Columbia/Umpqua franchise since the announcement of the merger. Maybe you can share some high-level thoughts on what you've sort of learned over this time and where your focus is sort of now?

Yes. I think you said exciting time. I think the last 3 years have aged probably 10 years. Tory hasn't, but I have. I would say the regulatory environment and framework, it's the first time I've seen where partisan politics have crept into that. Maybe I was naive, and it was always there, but it was very overt and it took us 17 months to get a deal, 15 months to get the approval. And then they put 2 nonstandard closing conditions that cost us another 2 months. That's for 2 great healthy banks, no community group protests. Community groups were actually calling, saying, "When are you going to approve it?" And so that's a little, I guess, disheartening. I think if you can avoid the DOJ, and that's a takeaway from me because that costs us 11 months of the time. But I think on a positive side about our company and what we set out to create, I've said on our earnings calls that we're running the company. It's here today. But we're less than 2 years into it, but it feels like all the heavy lifting is behind us. Our bankers are on their front foot. They're proactive. They're excited about the products that they have and their ability to serve customers across the full spectrum. And I'd say what I thought that we would have for talent has been a pleasant surprise to the upside. And I was very bullish on the talent that I knew that was in both organizations before we came together. But we just -- we have a tremendous team. We have some great customers, and that's the best part of what Tory and I get to do is go out and spend time with our bankers and with our customers.

I would say that was definitely a surprise for us on the Street, the length of time for closing and involving the DOJ. I mean does it feel like the regulatory environment has moderated since then? Or is it still as stringent? Not that you're in the middle of a deal right now.

The regional office for the Fed, the FDIC, we kept the Oregon charter, so the state of Oregon, they were great throughout the whole process. It was D.C. where things got kind of ground to a halt. And so I think it's important to clarify that. The regulatory, I guess, the supervisory aspect of our exams, they've looked at everything, compliance, IT, the cull through the loan portfolio, multiple ways, and the exams have been great. And so that really kind of surprised me because we passed through the $50 billion threshold, and I fully expected that we would get some supervisory recommendations and they'd want some additional processes put in place and things. But credit to the team, and in particular, I think that premerger, Umpqua Bank was already preparing for the $50 billion threshold. And so we were able to leverage that. And it's served us well. Knock on wood, right? Your next exam, you're only one exam away from something. But I've been pretty pleased with that aspect of it.

The reason I -- we can shift to the growth side. You said that you've been positively surprised with the -- I think the internal opportunities in the combined company. We haven't really seen loan growth materially inflect those since the merger. Can you talk about what you're seeing on the loan production side? And which segments you expect to see where you have been able to pick up over the next few quarters?

Sure. The loan -- the -- I'll go back a little bit. There was a pretty significant shift in the company just about a year ago, really to focus really hard and heavy on relationship banking. So Umpqua Bank historically had obviously had more transactional lending than Columbia did, but we came together. We made a very concerted effort, so we're going to be a relationship bank, period. And so the shift there began and started to take, I think, hold then pretty nicely. We also then simultaneously made a shift from real estate, doing a lot of real estate lending to really focusing on C&I, a really good move for the company. Relationship banking in totality, focused on C&I has given us, I think, a lot of really good momentum in the organization. Pipeline has been steady for the last couple of quarters. And it's a good loan pipeline. It's -- the mix has shifted. It was more real estate and less C&I and then over the course of the last year, it's shifted to be less real estate and more C&I. So we're getting things done in the company exactly like the way we talked about and what we wanted to do from the get-go. I foresee that like we talked about a single -- low single-digit loan growth for the organization on a kind of an annual basis. But we're seeing nice new names to the banks. So bankers are bringing in new relationships. They come with everything, C&I loans, really good healthy operating accounts and deposits and then core fee income. And the one part of the pipeline, it's probably the strongest and had the highest growth, has been the fee income pipeline. Centered in treasury management, commercial card, merchant services, our national banking business and all that's really kind of taken hold. And it's a combination of I think the banks coming together, and maybe one of the legacy banks didn't have access to some products. And so they're leveraging that for the customer base that we had. And then as we bring it in, I mean we're not making loans to people that we don't have the deposit accounts and have a full relationship with, so.

And on the commercial side, I guess, what's the success level been on getting those treasury management and the other services?

Very high. Yes, very, very high. And for us, we think about a win, bringing a new name into the bank, has all of those parts of it. It has operating accounts. It has fee income that we're putting -- will materialize in 3 to 6 months as we kind of onboard everything. And we're having a lot of success with it.

When you look at some of the headwinds to growth, the nonrelationship lending run down and the deemphasis on commercial real estate, how long -- how much more time do we have as those sort of season out? And do you have a target for your CRE capital concentration? At this point, you're still a little bit higher compared to some of the peers. Is that a primary focus as you're looking at the CRE side?

Do you want to take that one?

We'll take turns. So on the CRE concentration level, there's just with the purchase accounting marks, it brought our capital ratios down. Capital continues to grow. I think we'll be really close to 300 at quarter end, probably still a little bit above. We've talked throughout this year and had a slide in one of our IR decks about repositioning the balance sheet. And that's $4 billion of multifamily and $2 billion of jumbo resi, all transactional stuff. That's really the last piece that we have, in my view, in -- and then we'll have the balance sheet that we want. It will clean up the funding base, push off the brokered and wholesale funding. And right now, that's just simplistically, if you think about it, that's creating a pretty modest -- well, I guess, not modest, but 70, call it, $70 million to $75 million annualized headwind to earnings. So that if the Fed cuts rates next week, like everybody expects, with each move, that headwind gets less and less. And then -- so we kind of feel like we've already weathered the worst of the storm in terms of having that under-earning portfolio, and it's incrementally going to get better just with rate movements. And then we'll get to a point where when we push that off the balance sheet, then it has a pretty sizable impact on ratios and it would lower the CRE concentration ratios down pretty meaningful.

Do you have a long-term target for where you want to see that CRE concentration once all those normalize?

We do. It's under 300. And the 300 is something that I don't know why that picked up momentum, I think, with New York Community and some of the stuff there. But that's been around for a long time, since 2005, the first time an FDIC examiner showed me a spreadsheet that was red, green, yellow with banks that had CRE concentrations. And all it is, is you have to have enhanced monitoring procedures and underwriting guidelines. But we know that it's a focus for the investment community. We believe that it's [ abeying ] on our multiple. And also just with the shift to -- away from doing anything that's transactional real estate, that's going to bring those numbers down well below 300. I think our -- kind of our risk appetite and what we put in, in that, is about 280. But I think once again, when that multifamily portfolio rolls off, we're going to be well below that.

I would -- if I could just add, we've got some really, really good real estate customers. And we will -- we definitely have enough dry powder to continue to lend to those customers in what they're doing. All real estate is not created equal. And we -- our portfolio is really strong. It's a suburban portfolio. It's not high-rise urban stuff, and it just -- it's performing extraordinarily well. So we're going to continue to do. We've got a great real estate team at the bank, and we'll continue to do it, just we're going to outpace any kind of real estate lending we do with C&I.

You look over the last 1.5 years, there's just been a huge amount of disruption in your markets, especially California. How is this playing to your strategic decision-making process? And which areas do you think that creates going to be a new opportunity for you?

So I would just say one of the -- I think that the -- our industry has disruption all the time. It seems like it never ends. And try to take advantage of it best you can, I mean in this way, I mean it's like what we strongly feel is we're a people-centric organization and this is a people business, and people want to bank with people. And so it's really kind of a talent play more than anything else. And when you have disruption of other things going on, it's just how do we leverage the brand and the strength and the power of Umpqua Bank to go out and recruit talent that we want on our team. And we've obviously had a lot of success in Southern California with a bunch of hires that we made over the years. Super proud of the teams today and we've got de novo offices in Utah, Colorado and Arizona. And all are running, are in the black financially within a year. I mean they're -- we attracted really good people. And then in turn, they attract really good customers. And so we will always be looking for talent and whether there's disruption or not in the market. But there's obviously a real opportunity for us to continue to grow in those de novo markets as well as Southern California. And it's a huge opportunity for the bank, and we've got great momentum, and we'll continue to pursue growth in Southern California.

Tory, when you talk about recruiting people and bringing in those new clients, what's the value proposition that you're sort of pitching to them? You have other banks that are also trying to go out and take market share and take people. What's making the processes where they come to you?

So I would say -- Clint would also give some really good answers, but I think that's a great question, and it's something we work really hard on. I mean when you think about our industry and the commoditization of the industry and how we want to differentiate ourselves, we want to do it in basically 3 ways. One is the size and scale of the company, being $50 billion in the size that we are today in the markets in the West. We've got a balance sheet that can bank all sizes of companies on the commercial side, small businesses, all the way up to large $1 billion revenue companies, and we have those in the company. So you got the size and scale piece, it's great, combined with capabilities. So a lot of -- we've invested a lot of money over the years in technology and products and things that commercial customers particularly want and need to run their businesses with -- and combine those 2 with the service model, it's a community bank service model, and it's kind of a win. And you do those 3 really, really well, and you can win a lot. And the bankers that we're recruiting and bringing into the company over the last decade have been bankers who want those things. I mean they -- nothing against a big money center bank, but they just -- they want to be able to make a difference. They want a balance sheet that they can bank, people that they know in their market. And they want the capabilities to do that and they want to be able to make a difference to the company. And so kind of get the best of all worlds, and that's very attractive for people. You combine that, I think, with the culture that we have at Umpqua Bank, it's a great place to work and people have fun. And you kind of enjoy what you do. It's not a really difficult sell, to be honest, and it's fun to do. Probably the funnest part of my job is going out and just trying to get people who want to come work in the company.

And the other thing I think that we do a little different is access to executive management. And it's -- it shows our support for our bankers. It shows our interest in their customers and their business, and they're very proud of typically of what they've accomplished in. And I just -- I don't think that the banks that we're competing with and where we're taking business, they don't have access to the C-suite. And it's not that we bring any great talent to the table that's not already there or anything. It's just a matter of handing your card, and you say, if there's ever anything I can do for you, here is my cell phone number. And that's -- they don't get that at some of the other places that we're competing against.

Yes. Sure. Maybe shifting onto the deposit side. It's been a really competitive environment for deposits. Obviously, over the last 18 months, you've seen the DDA balances declined from about 41% at the beginning of '23 to 32% today. Can you talk a little bit about what you've learned about your deposit base over this period of time and how that's certainly informing your decisions going forward?

I still think that we have a structural advantage to our deposit base. But we were rounding up to 4 basis points at one point and roughly 50% noninterest bearing. But that's when rates were -- interest was kind of meaningless. I mean it was a rounding nuisance for most people. So they were concerned about leaving it in that account. I think now that the rates are very meaningful, we were really trying to assess, okay, where is that threshold? Where is it going to bottom out? And how are we going to compare it to the rest of the industry? And I think we have -- we've seen some stability over the last 5, 6 months. So it feels like it's kind of settled in. The new business that we're bringing in, Tory mentioned new names to the company. We've also talked about some of the small business campaigns that we've run. And that mix is -- of what's coming in is pretty consistent with where we're sitting, so kind of that low to mid-30s.

You mentioned the small business campaign. Can you give us an update on how that's progressing? It seems like you had some early success. What's the outlook for that? And is there any other opportunity like that, that you could potentially lean in on?

Yes. So they just kicked off on -- no pun intended, it's a football theme, the one -- the current campaign, and it's goes through November 15. The summer one, June and July, brought in just over 3,000 new small business accounts. That was a little over $150 million of new deposits. Average account size was about $60,000. The campaign that we did February through April was over $350 million in deposits, roughly 6,000 accounts and average size of about $56,000. We still have 99.6% of those accounts that were opened in that first campaign. They're active. So it wasn't like somebody just switched. There was no promotional pricing, anything like that. It was more a matter of just focusing over 300 retail locations, focusing the business bankers on these are all the tools in the toolbox that you have. And you can go compete with anybody and then giving them a goal and just letting them go do what they did. So that will be ongoing. They'll take a little break during the holidays and then they'll do probably another March Madness-type campaign. And that's complementary to them, what we're doing on the commercial side where those tend to move the needle in bigger chunks, but they also take longer because they're more complex customers and moving something. I spoke with a new customer over the weekend that is doing a systems conversion. So she said her CFO is pleading with her, don't change banks until we get through that. And so that kind of stuff always drags the timeline out. Anything to add?

No, I think it's well said.

What's the pricing look like on those types of deposits? Are they less price sensitive since they're smaller business? Or are they fairly sophisticated and you're getting the relationship that you're paying up for it?

Yes, it's pretty much all coming in at rack rates. I mean there may be an inflection here or there, but that's -- typically, it's the larger accounts that make up the bulk of any exception pricing that we do.

When you look at the larger commercial relationships on the deposit side, how important is ECR and conversations around the value of the deposits that they're bringing to the bank when you're negotiating for those relationships?

Yes, I mean depending on the relationship itself, it can become very important. But for most folks, it's probably -- I mean if there's a piece of it that's valuable, and we've got to make sure that we're pricing that even appropriately for kind of what they do and what they want. But at the end of the day, it's -- it tends to be kind of a full service negotiation. So it's going to be -- if there's a loan involved and a lot of times, there is, like the pricing on the loan, pricing on deposits, ECR, other things that -- on the fee income side, and kind of looking at the big holistic picture to make sure that we're providing value for them and value for the bank. And so kind of -- it's very hard to just pick one piece of it out, but there are just -- it's all kind of tied together. And obviously, that's the kind of customer we want with which we can sit and negotiate the whole thing with them. Because they, in turn -- I mean we did a study that if somebody has 4 or more products, commercial products, they're 4x more profitable to the bank than if they have less than 4. And it's -- when you have a lot of products, you're going to make more money, but you're also going to provide a much better experience for the customer.

When you look at the broader liquidity and funding profile of the bank, you have, what, 7% public funds, 8% roughly broker deposits. How are you thinking about those components as part of the longer-term funding and deposit side as these other areas grow?

Yes. Well, the short answer is on the brokered wholesale side, I'd like to just clean up the funding [ snap ] and have -- not have much of anything there unless it's some sort of asset liability play. And a lot of that will happen when we restructure the loan book and get rid of the transactional real estate. The public one is a little different. So we have the operating accounts, but then what we grew last year was their excess liquidity that typically, they just deposit it with their state treasurer's pool. And usually, what happens is those pools will lag on the way up because it's just based off of whatever they're investing in. And so it's a lower cost alternative to brokered or wholesale borrowings. Now the opposite happens when rates go down. It typically lags and so then it doesn't make sense. And so you just have a conversation with them, you lower the rate below the pool rate and then just go back to the state pools. So that's probably as we go through the next couple of quarters, you'll see some stuff in the public deposit side, and that's all it is, is that it will be the lower cost option.

Okay. Maybe shifting to sort of some of the margin dynamics. We're assuming that our model, three 25 basis point cuts by year-end, and I think your most recent guidance assumes one cut in December. And if we do get faster rate cuts, how does that impact your plans for deposit pricing, particularly around the CD side?

We already altered CD pricing earlier this year, and we really tried to price it where customers had an incentive to be in the kind of the 7-month time frame. We've lowered that more recently to keep them under 4 months. Again, if we're having success in growing full relationships and full C&I relationships, the funding mix, I think, will be less reliant on CDs over time. What we have in terms of -- like you said, if we get 75, 25, whatever, where would we end up? I know there's -- I think he left. Somebody that we met with earlier that was -- made the bold call that we're going to get 75 next week. I don't think that's the case. I think he's just having fun with us. But whatever it is, we will drop -- our rack rates are already pretty low. So it really comes down to what we do on exception pricing. And we've got a plan in place that we feel like we're going to be able to respond pretty quickly. And it's not just one and done, right? You said 3 cuts. We'll have some cuts next year, most likely. So it's something that's repeatable. It's really just kind of creating muscle memory for bankers and customers who really haven't been through a full up and down rate cycle in 15 years.

What about the broader trajectory on betas on the way down, when you look at them holistically? Is that you expect a lag and then an acceleration, or fairly consistent?

I think you'll have a very, very small lag. And then I think you'll have pretty consistent. And how we're thinking about it is anything that exceeds the beta that we have on the way up is a net win. And then I think if we get to where we're steady state, let's say a year from now, the Fed's on hold or in a neutral position, then I think there's an opportunity to do this kind of around the edges, fine-tuned pricing and get a little bit more in terms of rate reductions.

And then on the other side, how should we think about loan yields? In that same type of environment, you have the dynamic of running off in certain areas. How are spreads on new production? And what should we be thinking about as overall loan yields in a down rate environment here?

Spreads have been pretty steady for a while, actually. I think loan yields are kind of on a weighted average basis would be low 8s for us today, a new production across the entire company, obviously, different for a middle market customer and large middle market customer, one place versus a small business or something in a different place. But -- and so you'll probably see -- you're certainly going to see a reduction in that. But I mean again, I think it will be slower and won't be big giant downward moves on yield for loans. Because we still -- we're going to need to get paid for the risk that we're going to take, obviously, in the industry. And I think you see a little bit of movement.

And where are you seeing, I guess, early pressure on SOFR and some of the...

Yes.

So we have a couple of questions in the audience. Maybe we can turn to those, and we'd love to get any questions that you have of management as well. But -- so our first audience question is, what's your current position in the shares of Columbia, overrate, market rate, underrate or not involved? All right, it's a room full of owners, 78% overrate, 11% not involved, 11% underrate. It seems like most of the conversations we've had today it's been a lot of people that aren't owning the names yet. So this is a little bit of an outlier. So interesting. So second, on the mortgage side there, how low do mortgage rates need to go to spur a boost in origination volume? 6%, 5.5%, 5%, or 4.5% and lower? And we can get into a discussion on the loaning side after this. Let's see what the answer is. So 5%. It seems like it's at 5% or a little lower, definitely, to see a big spur. So it feels like you could be -- that's a benefit from that. And then the next question, how many basis points in rate cuts do you need to see for commercial loan demand to be impacted by Fed actions, 25, 50, 100 basis points or 150 or more? [indiscernible] Do you have any thoughts, do you think that -- how much is the rate environment holding back loan demand and loan growth right now?

I mean I think to a degree, it certainly is. I would probably agree with 100 basis point move would really kind of spur some demand. I think some of it's really administration too with the election and kind of trying to see what the overall kind of macroeconomic climate is going to be as best as you can figure that out. But definitely, I mean I don't think a 25 basis point move even later this month is going to do much for demand. But I think if you get close to 100, you start to see something.

And then our final question for the group, which would have the most impact on improving Columbia's valuation: above peer loan growth, better relative margin performance, strong fee growth, better expense control, credit quality outperformance, more active share repurchase or creative bank acquisitions? I can see people's answers. Better relative margin performance at 80%, 10% loan growth, 10% credit quality. It definitely feels like people are focused on margin across the names here and the ability to see that performance on the way down. Let's see if there's any audience questions, happy to pass the microphone. Anyone? No? Maybe we can talk a little bit about the fee income side and the mortgage business more specifically. But broadly, it feels like you're seeing some good momentum in fee income lines. And how has progress been in expanding the legacy Columbia offerings to the Umpqua franchise and vice versa? And I guess where are you seeing the most opportunity and the most focus right now?

So the most growth in fee income is going to be just treasury management -- probably commercial card #1, treasury, just treasury management, international banking and then probably merchant services. And I think the 2 biggest opportunities we had as we came together was -- the first one was some of the fee income products that Umpqua Bank had that Columbia Bank didn't. And so the legacy Columbia Bank customer base, it's -- obviously finds them very attractive. So commercial card is the first one that just kind of jumps off the page, I guess. I think -- and so I think that's kind of played itself out quite nicely. I mean there's a pretty significant push in the company to make sure that we are having conversations that are providing solutions to people because they need those products. They want those products. They may have them in some other place. And we're telling them that you're not going have it over there, you want to have with us kind of thing. So -- because we have the capability to do it. So I think it's been very positive. The other one was the leasing business. So just kind of traditional bank leasing that -- there's the whole slew of legacy Columbia customers that just would be free -- either they wouldn't do it or they'd make a -- try to make a term loan out of it or something. It was -- so it's a great opportunity for those folks to refer into our FinPac leasing business. And so I think it's kind of played out very nicely for the company. It's things that we talked about prior to the merger.

And the other component is really seeing -- I mean both banks premerger had wealth management. We kept the Columbia model intact, and we're really seeing a lot of traction in terms of collaboration with commercial bankers and bringing in wealth and making those referrals, and again, that's a long sales cycle sometimes. But that's something we expected and we're seeing that come to fruition. The one thing we expected, the leasing opportunities for the legacy Columbia customer base. But a pleasant surprise was all the referrals that came through the retail network for that. I mean I guess I was just thinking it was all going to come from the commercial side, but retail has been really good with getting small businesses in there with the small ticket leasing.

And what about on the mortgage banking side? Are you positioned to really see an acceleration of opportunities as rates go lower? Or do you feel like you need to make some restructuring on that side or some investments?

I think Tory did a pretty good job of restructuring mortgage just prior to the close and really making it representative of a bank mortgage department where you're serving the mortgage needs of your customers and your communities and not necessarily looking and feeling like a mortgage company. And so that's the model that we'll have. I think as activity picks up, we'll get our fair share, but we're not going to pivot back to the prior model. It's going to remain -- I feel like, especially in a lot of the rural communities that we're in, that you have to have mortgage as an offering. Customers come to the bank and it could be an equipment loan, it could be an operating loan, it might be a mortgage. And so we're committed to the business. It is a ramp-up, ramp-down type of scenario. But I think that we've got a great leader in that group, and I think he's positioned the team well to respond that if we do get mortgage rates below 5% and there's a wave of refi activity, that it will be a net positive.

Maybe just in our final minutes here, just talking about expenses. The cost saves have been a big focus as we've come through this year. Can you just talk through the decision-making progress on the expense initiatives and what you're learned about that process? And what's been the response sort of internally, the focus on efficiency?

What -- I don't know if I'll say what I learned, but what we validated is that if you're actively managing your company and you care about making it the most efficient operation possible, you don't need a consultant. You don't need to pay a consultant millions of dollars to come in and spend 6 months and tell you what you should do. And that was our strategy from the start. We set the organizational structure in January of '22. We had to wait until March of '23 to close the merger and then start seeing how people were responding, who was scaling with the additional size of the company, where we had attrition that was unplanned. And when we set that, we didn't -- we essentially didn't eliminate any positions that were customer-facing. And so we had some redundancy, and that's what made it. We had the list. We had a year of data, and we were able to do the initiatives mostly within 60 days. So there's a few things that we talked about has spilled into the third quarter with contract negotiations and things like that.

Great. Well, thanks very much. That's the end of our time, but please join me in thanking the team from Columbia. Thank you to Tory.

Thanks.

Thanks.