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

All right. Good afternoon, everybody. I appreciate you all being here. My name is David Feaster. I'm a member of our bank research team here at Raymond James. And I get the privilege of covering Columbia Banking System. They're a $52 billion asset bank with operations across the West Coast, Pacific Northwest, and it's the result of the MOE with Umpqua closed about 2 years ago, almost 2 years ago exactly. So congrats on the anniversary. We're joined this morning by President and CEO, Clint Stein; we've also got CFO, Ron Farnsworth; and Consumer Bank President, Chris Merrywell. So we're going to host this as a fireside chat today. I'm going to moderate it. But look, this is you all time. You got questions, hop in, interrupt. Don't be shy. So let's just jump right into it.

Maybe starting out, like I said, it's a 2-year anniversary of that transformational deal. You all have been busy to say the least. The market has evolved pretty materially since that deal was initially announced. I'm just curious, high level, could you touch on the vision for the bank as we look forward? We've got the integration behind us, converted, closed, all that. If we look in the next year kind of 10 years, what's your vision for the bank?

Yes. We certainly have covered a lot of ground. I saw a head shot they updated right after we announced the merger, and I look 10 years older now. So it was definitely a heavy lift. Thinking about this concept of having a crystal ball and saying where we're going to be in 5 years or I think even you said 5 to 10 years. But I looked back and 5 years ago, we were $14.5 billion of assets. And at that time, I had a view of how do we get to $40 billion over 10 years. So I'm not going to promise that we're going to double the size and more than double the size of the company in 5 years. But I look at our position in the market and what we set out to create and you've heard me say this on earnings calls, we're running the company today that we thought we could create. Now we still have some work around the edges to just make it the best version of itself that it can be. But our position and placement in the market, there's truly no other bank like us. And that's creating opportunities for us from a customer acquisition standpoint, from a employee recruitment standpoint, and it's just -- and continuing to grow relationships we have with long-standing customers. So I think the future is very bright. And it's nice. We're having fun again. I've told some people, I actually played golf for the first time in 2 years. And what I discovered is I'm still crappy. But we're starting to enjoy, our bankers are excited. We go and go into a room of them, and you can't tell which company they came from. And that's what you always strive for is it's we, and you see the excitement, the things they're working on. So I think we're positioned very well.

That's great. And look, we've spent a lot of time together doing these kinds of meetings conferences, and DRs. One of the biggest takeaways that I've had is just to focus on more consistent execution. Look, the economic backdrop has been pretty volatile over the past few years to say the least. And performance was admittedly a bit volatile as we're going through the integration, but things have really stabilized. Performance has been solid. Is that a fair characterization about just that increasing consistency being a key focus? And could you just discuss what that means from your perspective?

Yes. It's -- I'll say it's I've been relentless with pushing for the drive for consistency and we have a mantra that we used throughout last year, it was wash, rinse, repeat. And it's just next quarter do the same thing we did last quarter, execute, control the controllables. It's not shouldn't be taken that we're not continuing to evolve and innovate and grow our business and those things. It's not just staying stagnant. But we can do those things, and we have throughout our history, and still deliver those consistent results. And so I think how I define it is no surprises, just if there's -- things will bubble up, it's banking, but not have it where the Street is surprised. And if we do that well, we did it in '24. We're doing it. The plan is in '25 and forward, so I don't know how many quarters, maybe it's a good question for the audience. How many quarters do you have to have before you forget about 1 quarter where we missed.

It's a good question. Maybe shifting gears towards the growth side. You listened to fourth quarter earnings calls, there's a lot of hope and optimism out there, right? Could you just touch on customer sentiment from your perspective. We spent a lot of time talking about the -- what you're hearing from your lenders and the activity and expecting what's on the come. Have you started to see -- have you started to see some of that hope and optimism start to translate into pipelines or the balance sheet yet?

Yes. I started talking last summer about in various meetings that our bankers were very optimistic and excited about the things that they had in their pipelines. But at that time, I said I haven't seen it translate onto the balance sheet yet. We saw that in the fourth quarter. I think C&I loan growth was annualized at 9% -- a little over 9%. First quarter is always a weaker quarter. And so that's -- some of it's driven by timing of when line utilization kicks in, say, in our ag book, it still feels like winter in the Northwest. So it's going to be a late spring. And so I think that is more of a Q2 type of event, which it's usually late March, early April. And I guess in speaking with our line of business leaders, how they describe their pipelines are solid and building. And they feel like they have a lot of momentum. And this is not just doing more stuff with existing customers, but it's also new names to the bank. They're -- and they're really excited for the second quarter, third quarter of the year.

You've laid out a target of low single-digit growth today with an increasingly focus on C&I, right, deemphasizing CRE a bit. Could you just touch on how you make that transition to C&I and just kind of the outlook for growth more broadly?

Yes. So our company is 32 years old. I -- this is my 20th year. This was our focus before I started 20 years ago. It hasn't changed as we lead with C&I. And I think that's where during different times in cycles, banks say they're going to get into C&I or they're going to focus more on it. Our approach has always been to start with C&I. The C&I relationship. I'd simplify it. It's -- we want to bank businesses of all sizes. We have our wealth management platform, which I'll give a plug we use, Raymond James as our broker-dealer. It's been wonderful, huge upgrade as a customer myself from what we had before. But we have the wealth management platform to bank the owners and executives of those companies. And then we have a robust retail network to support their needs as well. But it starts with bank the business. And so it's ingrained in our DNA. It's an expertise that has to be learned over time and you can't -- in my opinion, you can't just take a CRE lender and make them a good C&I banker and probably can't take a C&I banker, make them a good CRE lender. So -- and we're still going to do commercial real estate for customers and those that have true relationships with us. What we're not doing and what we're remixing of the balance sheet are transactional loans. We have the multifamily portfolio. We've talked a lot about that over the past year. Credit, absolutely zero credit concerns. But it's a $4 billion portfolio, and there's only $17 million of deposits associated with that. So it's like that's somebody just placing a transaction in our book. And so that's the stuff that we stopped, and we stopped that on legal day 1 of the merger.

Yes. You've also had a lot of success hiring. You were expanding into new markets even before the deal was closed. What is attracting folks to Columbia today? And just how do you think about continued hiring and where are you adding new bankers?

Yes. I'll go back to what I said with the previous question. It's our position within the market. I mean we truly are uniquely positioned. And so I think it's appealing for bankers that high performers want to be part of a company that they know they're making a difference in. So we're small enough, they can still see the difference they make in our company. But we're large enough, we can go to with any bank in the market. The other thing is access to decision-makers that's important for them and for their customers, and we're very visible across our footprint. And I think probably much more so than some of our counterparts at banks that are maybe half our size -- and I think we have a pretty good culture. And our best recruiters are our top talent and their networks. And that's part of where we're seeing some of the high-quality individuals that find their way to own Umpqua bank is through word of mouth and just maybe people they worked with in a prior institution or 2.

Makes sense. Let's shift gears to the other side of the balance sheet. Let's talk about deposits. I mean that's the real franchise value of a bank. As we all know, your deposit franchise is really strong. Fed cuts has created some opportunity to rationalize deposit costs maybe a bit quicker and reduce -- maybe make the competitive landscape improve a little bit. But I'm curious, could you just touch on the competitive dynamics in the deposit side? And where you're seeing the most opportunity to drive core deposit growth in some of the initiatives you got there? And then just touch on the seasonality too, because seems like seasonality has become more pronounced than it has over the past few years.

I always say, David, you pack a lot into a question. We've had a full day of meetings. I'll see if I can track with all of that. But we see -- broadly, we see mostly sanity in terms of deposit pricing and competition right now. We've seen Wells Fargo get a little aggressive in the CD space, and that's fine. What we're really focused on are those operating relationships. And so the pricing and the quality of the composition of our deposit base kind of takes care of itself if we truly are bringing in new customers and getting their operating accounts. We have been able to -- I'd say where we're at now with the Fed kind of on hold is just make the micro adjustments different tier here, different product over here, moving a couple of basis points and then just observe and don't see what's happening. We have some CDs that were , I think, what is it, Chris, about $1.2 billion. Yes, he gave me the thumbs up. And that reprices this quarter. So we're continuing to walk things down. But -- but I think that deposit -- the competition for deposits isn't going to diminish anytime soon. Around seasonality, pre-COVID, we could set our watch by whatever was going on, on deposits. It's like we always knew end of December, you're going to have some distributions and tax payments and people just buying stuff and the deposits would go down and you saw that in the fourth quarter. Average deposits were up quite nicely for the quarter, but period-to-period, they weren't. And then first quarter is a seasonally low point. Usually, we'll see outflows in January, February, it starts to rebound. And then in March, usually, we'll get some more outflows. And then it starts to build in the second quarter and history is anything we were typically back to even or maybe a little up from the prior year-end. And then the summer months through the fall, the deposit growth just is usually where we see it materialize. That's what we experienced last year. It's what we're experiencing almost by the week in terms of as I watch it -- so I feel really good that it is that seasonal behavior. We're not losing customers out the back door or anything like that, that it's just the nature of our book.

How do you think about deposit growth? Growing core deposits while reducing costs is not easy to do, but you're doing it. You've had a lot of success with these small business campaigns. I believe you're on your fourth one. Could you just touch on some of the growth initiatives that you got in place and where you're having the most success?

Yes, those small business campaigns through our retail branches have been very well received, and it's not promotional pricing, promotional products. It's just bundled products off-the-shelf pricing. It's more of just a focus and a little spirited friendly competition amongst markets and regions. And so it gives people -- it just keeps them excited about going out and asking for business and bringing in those new relationships. That was something that Columbia always did premerger. The Umpqua retail model was different. It was more call it, sit and serve. And so it took the balance of 2023 for Chris and his team at retail and retail leadership to train 60% of our branch managers and small business bankers on what Chris isn't that creative, he's in the back of the room. So he's listening to what I'm saying. It used to be the CB way and then with this creativity, he calls it the UB way now. And -- but it really has been impactful. And it's not something that starts and stops. It's not like -- it's just a way of doing business. And the campaigns are just a way of adding excitement around it and the retail leaders do a great job of building that excitement.

That's great. And it's kind of putting that all together, right? I mean we talked about loan growth, some optimism there, continuing to reprice things higher and remix on that side. The -- you got a great core deposit base and driving core deposit growth there. How do you think about the margin trajectory? Rates are obviously a key factor in that and core deposit growth are probably 2 of the bigger ones. But I just -- curious, how do you think about the margin trajectory as we go forward understanding that it's now put on an input. But just kind of curious, how do you think about the margin as we look forward? And where do you see the most upside to the margin near term?

Deposit flows -- I mean it's as simple as that. That's really what's going to drive any margin expansion or any contraction, it will be what happens with noninterest bearing. And we do -- we've been pretty stable for the last several quarters for sure in terms of that noninterest-bearing ratio at if we include the public funds, it's like 32%. If we exclude it, I think it ticks up to 34%. So again, all of that remixing that was occurring and creating noise in '23, I think, has settled down. So really is as simple as what happens on the deposit flows. We get a little bit of lift with loans repricing and doing some things. But if we can bring in good solid core deposits and then lower our use of the wholesale markets, it's a pretty big tailwind.

Yes. Another pretty big focus for the bank is improving the core fee income contribution. You've got some really great fee income lines. You've got the brokerage, you got the card business, mortgage, just naming a couple on top of the traditional banking fee lines. Could you just touch on some of the key initiatives that you're working on, businesses that you're interested in expanding into either organically or through M&A and opportunities to cross-sell across some of those existing lines.

Yes. I think you gave me the answer just in the question. It's do more with existing customers -- that's the biggest opportunity that we have. And that was part of the rationale for the merger was take what each company had individually and layer that across the combined entity. But you have to develop one, the knowledge of our capabilities. I'm thinking about our associates. Two, you have to trust your internal business partner that they're going to execute on behalf of the customer. And that's the biggest piece is that until they know that you're going to execute as flawlessly as what they will, they won't make the referral. That's the other part of having -- being at the point where we're at. And really what I started seeing behavior-wise last summer is those relationships have been built, that trust has been earned and they're starting to really get some momentum on those things you mentioned, whether it's referring somebody into home lending, whether it's referring so many -- for corporate cards or the big piece is the wealth management side and what they're doing on the -- not only the financial services aspect, but also on the trust side as well. And there's a few things also that we're working on. And some of it is just pretty basic, but we have too much in terms of fee waivers and reversals. My rule of thumb is you're always going to have something just as part of normal course of business, but it should be 5% or less. I think we're like 18% on some things. So the challenge is how do you walk that back. If somebody's had a fee waived for 10 or 15 years, you have to kind of thread the needle. So those are some of the areas that we're looking at.

That makes sense. And so again, kind of putting all that together, we've got improvement growth, margin expansion, fee income growth, we got visibility into revenue growth that's on horizon, right? How do you think about positive operating leverage this year? Does that revenue flow primarily to the bottom line? Or is there any appetite to potentially increase spend just given the tailwinds from stronger revenues? And what investments do you have kind of on the horizon?

So we still have -- if you recall last year, I think it was $82 million was what we carved out in expenses. And the goal was to hold $12 million of that back to reinvest, whether it's things in the new markets, some of the technology platforms, things of that nature. So there's a little bit of that investment that still needs to happen. But broadly, we have the systems that we need. They're contemporary. We're not -- we don't have a duct tape together holding a cord in the wall or anything. So I feel really good that we've got the right infrastructure. We'll continue to invest. Our approach has always been to invest in CapEx and operating expense that will help grow the company. There's probably the technology sides where we're really looking at some use cases and things. They're pretty low cost right now, but could improve just efficiencies, and those are more back-office type things. But broadly, our view is -- or my view is you have to have an offset. You want to go do something you have to have an offset. And even in the de novo markets, where we're putting in branches now, they've earned the reinvestment. I mean they're making -- they're in the black. They're making money. We're just reinvesting in those markets to help them and the bank be more successful.

Yes. Maybe switching gears to capital. You're obviously -- you've got a very strong balance sheet. Capital is still accreting. You're building back pretty close to your targets. How do you think about capital priorities and capital return here? With current valuations, I'd argue buybacks are extremely attractive. But there's also investors are interested in a lot of various other things, including restructuring, optimization strategies. How do you think about capital return here and your -- kind of your top priorities?

So the #1 priority is the stability of our quarterly dividend, and we have no concerns over that. Capital continues to build, just like what we anticipated it would with the merger. We believe that it will continue to grow at a level that prudent growth wouldn't fully absorb. And so then it gets to what are the other alternatives. And right now, buybacks would be very attractive, even more attractive today after what happened in the market. But -- we are at a point where we're above our long-term targets. Our long-term targets for you take any regulatory ratio at 150 basis points on to the criteria to be well capitalized. And that's -- those are our targets. So for total risk-based capital, that's been the constraint. I think when the merger closed because of the rate marks, it dropped us to 10.9% or something on that. with 12.7%, we forecast it's going north of 13%, if we don't do anything. And so we're there. The TCE side, it's a little lower. Historically, that 12% risk-based capital would give you somewhere in the proximity of 8% TCE. and that's where we're at if you back out the AOCI and that's all on governments secured bonds. So I'm not too concerned about that being a limiter in today's environment and knowing what the source of that is.

Yes. We got a couple of minutes left. I've got a couple more questions, but I wanted to open up to the audience before. So maybe let's shift gears to credit. I'd tell you, when I talk to portfolio managers, it's seemingly one of the bigger hangups. Basically, the question is where are we at in the economic cycle. And we've been waiting for a credit cycle for the past couple of years at this point. and it has not manifested itself yet. We're seeing signs of normalization, and you guys saw that in FinPac, right, but that's stabilized at this point. I just wanted to get your sense on the credit backdrop broadly, the health of your clients. And just what you're seeing in terms of credit across your footprint?

Yes. We're seeing consumers and small businesses are the very, very small businesses, they're stressed. And they've used their cash reserves, and we've seen a little bit of noise in the small SBA, small business, really small SBA loans. And other than that, everything else, it's just kind of normal course of business stuff. It's usually operator error, death, divorce, all of those things that keep credit folks up at night. Frank still says credit scoring and so there's not -- we're not seeing anything -- just kind of out and meeting with customers, there's a lot of optimism. They're doing great. And maybe things have slowed down for them, but they were at such a pace that they couldn't keep up. And now it's -- they're able to staff appropriately either maybe their margins are down a little but they're still growing their business. And so that's where I worry is if that comes to a screeching halt then what vertical is that going to be in.

Yes. Yes. It's a good point. Well, we've got a breakout session downstairs. We thank you for being here. We appreciate you. Come join us downstairs.