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

Appreciate it. We have Clint Stein from Columbia, CEO and President. And we're cruising into the end of the conference. You're my last one. I'd say maybe I saved the best for last. I don't know, we'll see.

I don't know. You have a twinkle in your eyes.

We have half an hour together. We'll see how this goes. A lot of people know Columbia, but I've said in prior sessions, the attendance numbers are up pretty dramatically, a lot more generalist interest in the banks. So I think you probably feel that as well. But give us maybe a 30,000-foot overview of Columbia, just so people understand the bank.

Okay. Yes, we're headquartered in Tacoma, Washington, roughly $52 billion in assets, right around 300 retail locations and physical locations throughout the 8 Western states, completed our merger of equals 2 years ago last week. So if some of you haven't seen me in a few years and you're like, "Man, he has really aged," I have. It was a heavy lift, but it's well in the rearview mirror. And so we're pretty excited about what we've created.

Okay. Good. The economy is a topic in every one of these meetings, people ask about tariffs and overall borrower sentiment. How are you feeling about the economy? I know you have a few different submarkets that you guys are banking, but what's your general view of the economy? And if you have any thoughts on tariffs, please share those as well.

Yes, we haven't figured out the tariffs yet. We've been in meetings. But by the time we wrap up the conference, they may be lifted, who knows. I...

One guy says turn off the TV for a couple of weeks, and then I'll have an answer for...

It's like social media. If you don't have it, you're a lot happier. So if you don't watch the news, you're a lot happier. But we were asked the question about customer sentiment. Like literally the day after the elections, we started getting questions, have you seen an uptick in lending? And it's like the elections just happened. And we never really saw a change one way or the other in terms of customer sentiment. They're very optimistic, the established businesses are still growing, they have a lot of opportunities in front of them. Smaller -- the very small businesses, just like the lower -- moderate wage +level consumer, they continue to struggle with the inflation that we've had and things. But the more established businesses, they're still doing great and lots of confidence. So cautiously optimistic is how I would say they are right now. And the caution is just around, are the tariffs going to be here for a while? Is it just a negotiating chip or -- and then if they are here for a while, how does that actually impact their business? And some of our customers are actually not disappointed with the tariffs. They've had Canadian companies that have dumped product onto their -- into the U.S. and makes it difficult for them. And so they're looking at it, and I used the analogy in one of our meetings earlier, it's the timber industry, and the equivalent for them is like waking up -- us waking up as bankers and finding out that they're finally going to tax credit unions. It'd be like, "Yes, it's about time, level the playing field." So I think there's good and bad. But broadly, for us, for our customer base and the markets we're in, I don't think it's going to change people's behavior much.

Do you feel like the sentiment is better than a year ago?

I think it -- maybe a little bit. I think maybe a little, but it was pretty good a year ago. I think where it's getting different is with the rate reductions we've had, now people are looking at it, and there was a psychological barrier they had of they didn't want to pay us 9%, have us pay them 4%, even though the net spread was probably the same as when we were paying them 4 basis points on their deposits and charging them 5.5% on a loan. So I think with the prospect of the rates have come down 100 basis points, depending on do we get 1 cut, 3 cuts this year, 0; they're closer to having -- doing things than what they were a year ago. So that's probably got them a little more optimistic.

Okay. I think you're maybe one of the few CEOs that has more hotel nights days than I do. So I take your sentiment indicator as a pretty good indicator for what's actually going on?

Yes. Well -- and all that loyalty and status gets you two free bottles of water and maybe a late checkout and a stiff neck.

But you are truly a road warrior, so this is real feedback, right?

Yes. This -- I mean, that's -- one of the differentiators for us is myself and members of our executive team are constantly, throughout the entire footprint, meeting with our bankers, meeting with our customers and seeing firsthand what we're doing and seeing the businesses that they've built and the appreciation for our role in helping provide them access to capital and being -- continuing to grow with them.

Okay. How do you want us to think about the pace of growth for the company. I know you're not -- really don't want to guide to loan growth, but you've got a few things going on. You have some runoff in certain areas of the business, but it feels like you're more optimistic in other areas of the business. Talk about that mix?

Yes. I would rather us maintain our current asset size or even contract it if it improved profitability. And we talked at this conference last year about some portfolios that were transactional in nature and remixing those off the balance sheet. So that's a multi-year process, unless something dramatic happens with rates coming down. But we started chipping away at it. I think that the multifamily portfolio is down to about $3.7 billion now. But it's just going to take time. That's going to mute the bottom line loan growth number. And so the fourth quarter is a great example. I think it was a little over 9% annualized C&I growth for the quarter. We felt really good about that for a couple of reasons. One, our bankers had been telling me that their pipelines are building, and they were excited about what they were seeing in there. But prior to the fourth quarter, I hadn't really seen it translate onto the balance sheet, saw it in the fourth quarter. And then with the runoff in the other portfolios, the bottom line number was low single digits. And so that's kind of the reality that we have unless we get to a point where we remix those portfolios or sell them versus just letting them amortize off.

Margin accretive though, this shift, right? Margin and return it accretive?

Yes.

Talk about the merger. You said it's been 2 years. Do you feel like everybody is fully on the same page in terms of mission of the company and loan generating capability, deposit generating capability, everybody is on the same page?

Yes, it's been -- it's actually been over 3.5 years since we started working...

It was [indiscernible] all us.

Yes because we were mistreated by regulators in D.C. So I'm really happy to see some change there. The second anniversary of closing the merger was last week, and -- when we first announced, and I asked a lot of people what their thought was, how long does it take to truly bring two companies together in a merger, and the prevailing response was it's a 2-year process. And that was kind of my belief as well. I would say starting about July, August, the integration was fully done, the social aspects of it was completely behind us. We're operating as one team. Folks are referring to built a trust or referring business amongst groups. There's -- you go into a room -- we do town halls pretty frequently, you go into a room and you don't know which company they came from, you don't know; where, candidly, a year earlier; it was like a junior high dance, two opposite sides of the room. So feel really good about where we're at and, and it's now -- I think I told you we're having fun, and so a good place to be.

Okay. One of the, I guess, strategic goals that you've talked about is increasing density in certain markets. Can you talk a little bit about that process, how you're going about it, where you are in that process?

Sure. Yes. And it truly is different on a market-by-market basis. We have great density, say, Sacramento through Northern California, all throughout Oregon and throughout Washington. Out of our roughly 300 retail locations, I think 260 of them are in that geography I just described. Market share is the highest in the Northwest states, the highest of any non national bank. And so we feel good about that. But we're still notably behind like a BofA, U.S. So we see a lot of opportunities to go and continue to take market share there. But that's more of a hire the right individual, just continued customer prospect theme, things like that. In the other parts of our footprint, we just opened our first retail location in Colorado on Monday that opened in Denver. We've had a commercial team there for about 2.5 years. That branch when it opened, because the way we did it, already has $140 million of deposits. So we're excited about what we can do in Denver. Colorado Springs is also in the process of being built out. Phoenix, we have 2. We opened 2 locations in -- retail locations in Phoenix, we've had banking teams there for a couple of years. We have 2 more that are being permitted. And if you think about like that MSA, it's the fifth largest in the country, you can get -- they have those loops, which everybody -- it seems kind of crazy, but they're actually very effective at moving traffic. So you can get to just about anywhere, any time of day in the Phoenix Metro area in 30 minutes. And my threshold is if you want to sit down with somebody, there's a lot of stuff that's either are bankers owing to their offices or it's done digitally. But if you want to sit down with somebody and solve a problem or talk about something, 30 minutes is probably reasonable that you would drive. So we feel really good about that we've got the infrastructure we have it in place by the end of the year in the Phoenix area. Maybe a fifth location comes on at some point, but that's a big maybe. And then you look at Southern California, and that's a market that we've been studying and trying to figure out. We have a few branches there. We have several banking teams, and they've done tremendous -- I mean, just with very limited infrastructure. We have a $1 billion branch in our Irvine branch. It's the size -- half the size of this room. So that's...

Is that a profitable branch?

It's very, yes. Very profitable. And then the banking team upstairs has a very large portfolio as well. And so it's a market that is so big, though, that we could probably work the rest of our careers and still be saying "We need to figure out how to add more density in that market." But that's a priority for us as well, just because of the success that we've had there over the last 10 years, and what we see as opportunity going forward. And there's not really -- it's not really a dominant bank in that market anymore.

Right. And is this primarily lending driven and then you're adding the bench and some of the money comes in through deposits or how -- loan to deposit on some of these branches?

I'll say it, it's primarily commercial banking driven, and then the retail infrastructure is built to support the needs of our commercial customers, would love to get their wealth management business as well. And so all of those types of activities sometimes require a retail physical brick-and-mortar branch. And also, there's a lot of banks that go into these different markets that we're in because they're growth and they just put an LPO. And the community doesn't really buy into that you're a real bank and that you're there for the long haul unless you plant a flag pole and start becoming part of the community. And that's another aspect of it, is that we -- if we're in a market we're going to provide the same product services, enthusiasm, community support that we do in Tacoma or Portland or Spokane or any of the other kind of core legacy markets that we've been in for -- throughout our history.

Okay. What are you seeing on deposit pricing in general? I know it was probably less of a [ flat ] at legacy Columbia and then you pushed it together in deposit costs went up a bit. What are you seeing now in terms of your ability to push deposit down?

Yes. Chris Merrywell has made it his personal mission to -- he's got a goal, and I won't tell you what the goal is because everybody will adjust their models. But when I ran deposit pricing years ago, it was -- when rates were near zero, and I think I got us down to like 3.54 basis points total cost of deposits. And then Chris took over, and he got down to like 3.66 or something. He didn't quite get the record. And now he feels like it's out of sight. We're not going to go back to near zero. So he's got a little higher number in mind. But it'd be pretty impactful if we get there. And so he's laser-focused on pricing discipline. We have our rack rates, and they're fairly modest. And then there's limited levels of exception authority before it has to either go to Chris, Tory, the two presidents of the bank; Ron, our CFO; or Drew Anderson, who runs product. So that's really, I think, instilled discipline that was very consistent with what we had premerger, but maybe wasn't as prevalent in the first 2 or 3 quarters following the merger. So as a result, been able to still kind of fine-tune even with the -- it's almost a little easier to do it in between Fed moves because so visible, right? Everybody sees the Fed cut rates, so they go and they look to see what the bank did on their deposit rate versus when you're kind of in a pattern like we are right now, you can just kind of take a [ tier ] and look and study the market and drop it a few basis points and observe and see what happens. And you do that enough times and through enough products, and pretty soon it starts to add up.

So like you guys are on a mission, arms around everything, and you've got some tailwinds.

Yes, absolutely.

Okay. CD repricing, it seems like you've got a big number coming due this quarter. How has that been progressing so far?

Yes. I think the numbers are about $1.2 billion, and it -- as it's repriced at retention rates, it's just rolling over whatever the rack rate is. And I think our retention is high 80s, low 90% on those. So that's yet another element of a tailwind for us.

Okay. Can you talk a little bit about where you're generating deposit growth today and a little bit on the wholesale funding levels and what your longer-term plan is with wholesale funding?

Yes. Long term, I'd like to not have any wholesale funding. It's a great tool when you're in a tightening scenario and things. But I think it just -- it masks -- we have a very high-quality core deposit franchise. And when you have wholesale funding on there, it can mask the quality of that, and it's also more costly. So the least cost option is develop good solid core deposits. The small business campaigns that are retail and small business bankers have been doing, it's this product bundling, and it's just more of a coordinated sales effort. It's not any type of promotional pricing or anything like that. They did 3 last year, had really good success. The current one that started at the first of the year ends next week, and I'll say I'm very pleased it's made a noticeable impact on what typically we would see for seasonality in our deposit base. The first quarter is usually the seasonally weakest, and we see more deposit outflows. And Ron on the call, guided to that a little bit. But the campaign is done very well. A lot of hard work goes into it, but it's nice to see those results.

Yes. That's good. That's good. Any preference for the rate environment for you?

Yes. I mean if we could get the low end down a little bit and keep some steepness to the curve, I think that would be ideal. But Fed doesn't ask me what I want per curve, so...

How about coming down from the long end like we've had, is that -- that feels okay to you?

Yes and no. I mean, it obviously helps with your AOCI marks and some of that stuff, but I would rather keep a little more steepness to the curve.

Okay. For the fee income business perspective, where are you optimistic, where are you seeing some of the growth potential for your company?

Yes. So for those of you who are wondering why we have two empty chairs up here, but we were going to throw Chris and Ron a curveball and have them join us. And this would have been a great question for Chris, but he could have done some bragging on all the hard work they've done, but they're hiding in the back of the room. So I'll take a stab at that.

I'll have [indiscernible] take the question.

Yes. It's one of the things that we were excited about with the merger was we did things just enough different or we brought different things to the table. It wasn't just two banks doing the exact same thing and mashing it together. And we felt like that would create opportunities to sell products across each company's customer base and that, that would lead to fee income opportunities. The challenge with that is until you develop a relationship with your internal business partners and you develop trust and you know that they will execute, people won't make those referrals. And so that's a lot of the work that was being done over the first 1.5 years. And why I said, starting in about July or August, the social aspect of our integration was behind us is because that's when I started seeing that cross-functional collaboration, people partnering to figure out how they could provide more comprehensive solutions to their customers. And we're seeing the results of that in the wealth management space. Those guys either did a very, very good job of sandbagging or -- their budget. But they've come out of the -- started the year off very strong. Columbia didn't have commercial card. That's been -- there's been a huge uptick on that from customers that came through the Columbia side of the transaction. There's just other things. And some of it is blocking and tackling. We waive too many fees. And it's like -- it's very -- I don't want to give you a number, but it's over $10 million of fees that we should just be collecting. And the hard part there is how do you unwind that if somebody has been on a fee waiver for 10 years. But if we don't start trying to tackle that, then you won't get the advantage or the benefit of that fee income.

Okay. On the expense side, kind of walk us through some of the expense actions that you've taken. And it seems like you've got a pretty tight, relatively flat expense guide for the coming year. A little bit about some of the puts and takes there.

Yes. Last year, Ron gave a guide. And the feedback we got was, I mean, he was -- it's between -- I think at that time, it was between $1 billion and $1.1 billion or something. And somebody said, that's a 10%, that's a big miss on your expenses, it's $100 million. So as a result of that feedback, I think he really tightened it up. But how I look at it is, we have our budgets. Everybody has a P&L internally that they're managing, and they're expected to manage it within those budgets. And if they -- Chris or Tory want to reallocate resources within their vertical and they have an offset, they have the flexibility to do that. If they want to increase what they're doing in terms of expense, then I get involved. And I think it's just establishing that discipline, that focus at every dollar matters. And we went through a pretty heavy lift with the expense initiative last year, and I think that really kind of opened people's eyes to -- that we can do more with less. And we're still reinvesting in our company. And we're not being shortsighted about it, we're just being diligent with how we spend the money.

Okay. Anything on credit? I know there's a little bit of churn in the book, but it feels like maybe there's an inflection on credit. How are you feeling about that in general?

Yes. When I talk with Frank, our Chief Credit Officer, he says it's boring. Credit is boring, and that's good. There's a little bit of stuff that we talked about on the call in the very small SBA side. The guarantees are in place, and they were perfected. There's no concern other than just working through that. And I'd say anything else is just normal course of business. I mean we're not in a risk-free business. And -- but what we're seeing, it's not systemic, it's maybe a little bit of a reversion to -- towards normal because it's been much less than -- lower than normal in terms of credit quality. But nothing other than just the typical stuff. Somebody dies, somebody gets divorced, it creates an issue with their business, and the bank has to get involved. That's the kind of stuff.

It's nothing.

Yes.

Capital return, it seems like you hinted at maybe some more capital return over time. But how do you want us to think through that?

So our long-standing capital targets have been take regulatory ratios at 150 basis points, and that's what it is. And for us coming through the merger, the purchase accounting marks took a lot of capital, dropped that total risk-based capital down to just under 11%. Midyear last year, we got back to that 12%. I think we finished the year at 12.7%. If we do nothing other than just pay our regular dividend, it's going to be over 13% here pretty soon. And then if we do -- continue to do nothing, it's going to be over 14%. And so we don't have concerns in the credit -- in the loan book. We don't see anything -- depending what happens with the tariffs and all of this, we don't see anything that says, "Well, we should really just be well north of those capital ratios." So it creates an opportunity to have a discussion with our Board about is it time to take other capital actions.

Okay. That makes sense. I don't want to give you PTSD, but any regulatory changes that you'd like to see happen that could be beneficial to Columbia?

I was glad to see the change at the FDIC. I woke up every morning and I turned on TV, I know I was waiting to see Elizabeth Warren pound her first about Marty Gruenberg's pension and that he needed to have it clawed back. Because if us as CEOs had done half the things that he let happen under his watch, that would have been -- how it would have played out. So I think getting some true leadership there so that you can have a conversation. I mean, we were their sixth largest bank they supervised. You can't even have a conversation with them. We're now under Travis Hill. You can call him up, and you can get on his calendar and we'll meet with him. So I think that's good. Deposit insurance reform, I mean most of the deposits are already covered. If you think about that they're under the limits, the way you can set up accounts and then the implied guarantee that the G-SIBs have is that -- so all of their deposits are guaranteed. So that would help us so that if there's any type of hiccup like what we went through with Silicon Valley and First Republic and Signature that we're not scrambling to have customer conversations and reeducating them and then going through the cost of putting some sort of reciprocal suite product in place. It just -- it would just take that narrative off the table. So that's #1 on my wish list.

Okay. We're just running up against time, but we've covered a lot. Anything else that you feel is important to talk about?

We've covered a lot of ground. I'd just appreciate the job you do for us, Jon and the opportunity to have this chat with you.

Okay. Great. Thank you.

Thanks.