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

Thanks, everybody. Sorry for the brief delay. We're excited to have Columbia Bancorp with us -- or Banking Systems with us for our final mid-cap fireside chat of the conference. I'm really excited to have Clint Stein, President and Chief Executive Officer; and Chris Merrywell, the President of Columbia Bank, join us. Thanks a lot, guys.

Yes. Thanks, Jared.

Thank you.

It's been a busy year for you all. Maybe just give a quick start with how things are going so far this quarter, what you're seeing sort of in broader trends, and then we can maybe jump into talking a little bit about your deal?

Yes. We strive to be boring. And if I think about just like the core operations of our company, it's been just kind of steady state, not in a bad way. We've talked in the past about the seasonality that we see in our customer base. And starting on the deposit side, we've seen what we would expect in terms of a seasonal uptick in deposits. But we've also seen the results of our bankers and customer acquisition. So from that standpoint, very pleased with what we're seeing quarter-to-date. On the loan side, growth continues to be elusive, but our bankers are doing the right things. They're excited about their pipelines. We're staying disciplined in the type of customers that we're pursuing. And I mentioned on my second quarter comments on the earnings call that we're focused on profitability, not growth for the sake of growth. And I know some of your counterparts, that's a challenge for them to figure out because they just want to run their model off of some sort of growth in earning assets as opposed to really digging into the elements of what drives that. So I would say that it's been business as usual for 98% of our employee base this quarter. We have Drew Anderson with us on this trip. He would argue that it hasn't been business as usual because he has facilities, he has technology, he has operations, all the things that have been impacted by the Pac Premier acquisition, the rebranding and all of those things. But for the core of our company, it truly has just been another quarter of consistent performance.

With the deal, maybe just give us a recap of what the deal really brings to the table for you, what you're excited about with the addition of Pacific Premier?

Yes. For us, I made a comment when we announced the deal, and it's -- I think it's in the deck that it says it accelerates our strategic goals for Southern California by a decade or more. It really exceeds it for what would be -- what I would view as the rest of my career in terms of the density that it brings. And we've had questions about Pac Premier kind of shut down lending a few years ago and made a call on what they thought was going to happen with the economy and those things. And I viewed that as their deposit base is a mere image of ours. It's actually priced a couple of basis points better than what ours was. So it's something, aspirationally, Chris is a competitive guy. He wants to beat that. And so as we prepare for what might be Fed cuts coming up next week, he's got a very sharp pencil there. But the quality of that deposit base, the quality of their people, the excitement that we saw when we announced it and we went out and we met with several hundred of their key leaders, we were in market last week, and what was it, Chris, probably 500 people that we met with. That level of excitement, we've never seen at this moment in time of where you're bringing a group on board. The cross-business referral activity started last week. And I mean, it was very surprising in terms of the level of it.

Every branch has made a referral to something they didn't previously have. It's been fantastic. The engagement is off the charts.

We had another bank yesterday speaking a lot about their pending deal and the cultural integration and how important that is. I guess to your point, Chris, how much do you feel like you're going to have to sort of train this new group to promote that cross-sell? I mean it sounds like it's good early stages, but is that sort of part of that culture? What do you see working? And where do you see things maybe needing some investment in time or training?

Yes. We have a little different approach than they did from the standpoint of being proactive and outbound and calling out small businesses. And from day 1, we do these town halls before we ever came together. And what I took away from it is when they were done, everybody kind of talks and you can see people gravitate to where they went. The branch managers gravitated around our leader of retail. It was something I've never seen before. And so they were asking questions and they were very engaged. So the good news is our conversion is not until mid-January of next year and training starts rolling out next week. They're fully engaged. They're ready to go. They want to be outbound, and it's something I really haven't seen before. And so it's really exciting to have them so engaged. We'll start training. We'll roll out a campaign, we have one going on right now, but -- and they're participating. But they'll start training as early as next week on the CB way that we call it. It's our relationship selling strategy. It's not promotional pricing. It's none of that. It's what we have off the shelf and doing the right things, asking questions. So from that standpoint, they're so excited about being outbound that yes, it's going to -- I think it's going to be fantastic. I couldn't be more excited about it.

How about looking more on the C&I side? Where do you see similarities and maybe differences in the approach? You had said that they had slowed down sort of the pace of lending. What are you going to have to do there to really get things going?

Well, I think that to tag on to Chris' comments about the excitement that they have. I mean, they're ready to hit the ground running. And literally, the day after the announcement and the first town halls we did, their questions were around what types of deals do you want us to look at? How does credit approval work? How do we get deal flow through? And -- but I'll go back to that it's really -- one of the key differences that I look at in that market in particular, is they were a lot like what Columbia Bank was pre-Umpqua in terms of the size of customer, the types of C&I businesses that they pursued. And in Southern California, we've been more upmarket because we had very limited infrastructure. And so you had to kind of pick and choose. You couldn't really kind of be a mass C&I bank in that market. Now with over 40 locations and the granularity that they bring to us, I look at that as a great attribute because big deals move the needle when you put them on. When they pay off, they move the needle the other way. But those kind of lower $15 million to $50 million revenue customers are very sticky, very loyal and it just helps diversify the impact of if there's any type of downturn, if there's payoff activity. The one thing that we do see, and we've seen this over the years many times as you go through different cycles is that our customers build very attractive businesses that end up selling. And so sometimes that impacts your overall net growth. So that's why we really focus more on what are the activities, what are they doing to develop business? What do originations look like as opposed to just focusing on a bottom line growth number. Because as those businesses sell, then we have a robust wealth management platform, and they're no longer a borrower, but either they're already in existing or they become a wealth management customer for us.

Do you think there's a need for any sort of additional changes at the local market leadership level to implement the growth strategy? Or do you think you have the team on the field that you need?

I think we've got the right people there. Their Head of Commercial Banking, Jamie Robinson. He's right in the market. He's right there. He's going to lead that charge for us. We've paired him up and he's reporting to our Head of Commercial Banking, Richard Cabrera, who is right in Orange County. He lives there, works there already. So I think it's a natural fit. We retained their regional leaders from that business. So it's really intact, and it's more about how do we do business and teaching them that and then going to market. They've been pretty excited. As Clint said, they were asking, how do I process a deal? Who do I go to for approval and all of that? We've changed very little for them. And so they [ weren't ] ready to go. But the leadership is intact. We pivoted retail away from Jamie because we have a little different approach, and we want to get more outbound into the small business. It's a very robust market for that. And he was very accommodating to that and said, yes, that makes perfect sense. And I think they're off to the races, yes.

Great. With the deal, you're just under $70 billion with obviously a growth trajectory that at some point will get you closer to what's currently the $100 billion threshold. How are you thinking about the infrastructure, the investments in systems and processes as you approach $100 billion? And if we see some tangible relief from that level, does that change your expense expectations sort of maybe over the next 3 years?

Yes. We've had this question quite a bit, and we hear different numbers. We hear numbers that it's $20 million of incremental expense, it's $50 million of incremental expense. And I always say it's like you play golf with that. That guy says, I've only played 3 times this year, and he goes out and he shoots a 75. You don't know where individual banks are in terms of their preparedness. You don't know what kind of infrastructure they have. You don't know how developed the risk management processes are. And so when you hear those numbers, I think there could be a lot of variability in what it actually is. We're so far away from $100 billion. I mean we're 70% of the way there. The way we look at it is we have pre-Pac Premier, we've talked about, call it, $6 billion of loans that we want to remix off our balance sheet. I think there's another roughly $3 billion that comes with Pac Premier. No credit issues. We're not concerned about the credit side. It's just -- they're just transactional real estate loans, and that's not the core of our franchise. So you have $9 billion that needs to come off there. We're originating $1 billion to $1.1 billion a quarter of the type of stuff that we will continue to do. You add in Pac Premier and let's say that number goes to $1.4 billion.

$1.4 billion, $1.5 billion.

Yes. And kind of the rule of thumb is you have to do 3 to 4x depending on what's going on in the economy and with the customer base. So if you want $100 million of loan growth in the type of stuff we do, you have to do between $300 million and $400 million of originations just to counteract prepayments and payoffs and amortization in the book. So if you use that rule of thumb and you just do the math, we're -- it's going to be a long time before we approach that $100 billion threshold organically. And so there's 0 pressure on us to start building that infrastructure. And as I've mentioned before, our focus is more profitability. And by remixing our balance sheet and getting the composition, so it looks more like kind of historical Columbia. That gives us the opportunity to improve revenue, profitability and still stay roughly $70 billion.

I guess that's -- a follow-up to that. With this deal at $70 billion, do you feel you have sufficient scale? You said organically, it's going to take you a long time to get to $100 billion. Is there any reason to think you need to get bigger from here? Or is this sufficient scale for the time being?

So 5 years ago, we had a strategic retreat with our Board. And my biggest concern at that time was relevancy, and we're in a consolidating industry. We were sub-$20 billion at the time and very relevant. And I think $20 billion today is very relevant. I don't know that it's relevant 5 years or 10 years from now. And so what we wanted to do was just achieve a level of scale so that no matter what happens in the industry, we've got something of value for our shareholders, and we've achieved that. Candidly, we achieved it with Umpqua Bank. Our focus was the Northwest and creating that undisputed regional champion in the Northwest. And then as we did that, we saw Pac Premier, and we had kind of a beach hold in Southern California, 4 branches, roughly $750 million in deposits per branch. So it's such a deep market that we were trying to figure out organically, how do we tackle that market. And Pac Premier was the missing link, and it was actionable. I think the price was right, the deposit base was, as I've mentioned, a mirror image of ours. And so now I sit here and at $70 billion, I feel like we're in the sweet spot. If you look at banks headquartered west of the Mississippi, there's only 4 of us in that regional space, and there's not one that's identical to us, and there's not one that has that market presence up and down the coast. So our focus is just making it the best version of what it is today that it can possibly be consistent performer, top-tier performer. And I feel like no matter what happens in our industry now that we have the scale today to always be relevant.

Great. Thanks. We have a few questions for the audience. Maybe we can pull those up. Busy day at the end of the conference, but we'll run through them. What's your current position in Columbia shares? One, long; two, equal weight; three, underweight or short; or four, not involved?

Personally, mine is long. I'll give you...

I mean, overweight long.

You guys can plug in as well. So a little bit of a mixed room, some long, some short, some not involved, but a good opportunity to have a discussion. Which would have the largest impact on improving the relative valuation of shares of Columbia from here? One, better relative margin performance; two, above peer loan growth; three, better expense control; four, credit quality outperformance; five, more active share repurchase; or six, accretive bank acquisition because we're asking all of the mid-caps to get a sense of where people's thoughts are? So from here, share repurchases, buybacks and better margin performance. Any thoughts as you're looking at that?

Yes. One of the things that we've been talking about the last couple of years was that we're a capital return story and all the value that's unlocked. I mean, personally, I tell everybody, I'm a recovering CPA and purchase accounting doesn't make any sense. But in the current rate environment, it unlocks a lot of value. And it's basically a non-dilutive capital raise as that comes in. And we've seen that if you look at the 2.5 years since we closed the Umpqua deal, where our capital ratios have gone up a couple of hundred basis points, we're now above our long-term targets. And once the dust settles from the Pac Premier close, it's, I think, going to actually increase the level of capital accretion that we'll have and increase our ability to significantly look at share repurchases. And I see that, that's 50% of it. Relative NIM performance is 10%. So 60% of that, I think, are things that just all the work we've done, we're positioned to deliver on. Above pure loan growth is the other 40% and...

There's some of the mechanics you walked through.

Yes. Lee talked about that remix and things. And so I'm not going to commit to #2. But the other 2, I think, with the stuff that Chris and his team are doing in generating new customer growth and what we're seeing, the impacts there, especially on the deposit side and our ability to reduce the wholesale funding levels that we have. So I think we've got 2 out of the 3.

All right. Number three. What will organic loan growth be at Columbia next year in '26? Again, this is a standard question for our group, but: one, 3% to 5%; 2, 5% to 7%; 3, 7% to 9%; or 4%, 9-plus percent. So overwhelmingly 3% to 5%. I think we certainly walked through some of that. And then number four, you like the decision to acquire Pac Premier? If not, why not? So one, yes, it was a good decision; two, no the deal was announced too soon following the Umpqua merger, which could lead to elevated integration risk; three, no capital levels were not high enough at the time of the deal announcement; or four, no, the acquired lending book footprint and/or the other core competencies are not attractive enough at the price paid. It seems like people like the growth opportunity.

Yes. And the question number two on elevated integration risk. That's something that I was very intentional on our earnings calls and investor meetings after we announced that, that we actually had a slide that showed over the last 15 years, our track record and history with acquisitions, and we showed Pac Premier's history. And I think we both had 10 different acquisitions that we had done. And the whole intent of that was to reinforce to people that look, the integration, we -- I mean, I don't want this to come across as arrogant, but I mean, we've got that. We closed it last week. At the same time, we rebranded the entire company to Columbia Bank. Over the course of the weekend, it went -- online banking apps changed, e-mails changed, signs changed, and it was just like it went Columbia Bank everywhere up and down the West Coast and throughout the West. And so that was the intent of that message. Sometimes you hear, people try to read too much into it. And so the thought was we put that message out there. We invited Steve Gardner to stay on our Board. Our Board is very adamant about wanting somebody with banking experience in the boardroom. And Steve has run a kind of a regional bank similar to what we are. And so he has a lot of perspective in terms of the challenges and opportunities that our industry provides. So that's why Steve is on the Board. But some of the narrative that we've heard is that we are creating -- we put that slide out there and my comments were centered around that now we've created this M&A super team, and we're going to go on a buying spree. And it's like, no, that's not the purpose. And hopefully, with my comments I made earlier about I'm content with -- we've -- Pac Premier was the missing piece to the puzzle. And so now it's just about just making it the best, highest performing company that it can be.

I think we have one more question. Okay. Any questions in the audience? Happy to open it up. Okay. Maybe looking now at the consolidated company and sort of going forward, what's the growth like in some of the newer markets that you've been entering earlier on your own, Colorado and Arizona. What's the outlook there?

Yes. I know some people feel like they've bought Colorado. We're taking it for free. We have had tremendous success in those de novo markets, and it starts with the right people. And we'll loosely call it a team and specific to Colorado. And the reason I say loosely a team is it was 2 people. And they just recently added a third person in our wealth management or private banking group. And over the course of their first year, those 2 individuals brought in $80 million of deposit relationships, over $40 million of loans. And so as you think about in a typical branch type setting, that would be a pretty high-performing branch, but you would have maybe 5, 6 FTE, you'd have infrastructure in terms of your facility and things. And these 2 individuals just sit in 2 offices in our administrative space that we have in Denver, and that's just one example. When we look at Utah and some of the investments that we're going to continue to make in that market and the types of well-established companies that we're winning their business and earning their trust. And then the other market would be Arizona. And just the way the traffic flows in the Phoenix area, my view is if we were to build our company today, it would be still C&I, lead with C&I first, wealth management platform to bank the owners and executives, but you need to have a retail network to support the needs of those businesses and those individuals and their employees. Phoenix is the -- depending on what stat you look at, what time of year it is, the fourth or fifth largest MSA in the country. We now have 5 locations there, and you can get to virtually any of those any time of the day within 30 minutes. So I feel like we've covered that market. And now it's a matter of if we find a key banker that's got a specialty, we'll add them. But in terms of the build-out for that market, it's essentially done. Maybe in a few years, we might want to add a couple of locations in the West Valley where there's a tremendous amount of growth. But that's kind of the, I guess, the prototypical example of what we're going to recreate in Utah and what we'll recreate in Denver. So it's not a ton of investment, but then the growth that comes in, back to my earlier comment about that you have to have 3 to 4x the growth if you have a portfolio just to manage the rundown and the natural amortization of those. In these markets, virtually every dollar of production is incremental growth.

And because of the Pacific Premier acquisition, we've pivoted our, what was going to be an investment in trying to grow out Southern California. We've pivoted that into the Mountain states, Utah, Colorado, and we're seeing some really good traction with those team leaders about their plans and what they want to do. And so we're really optimistic about that.

What are your thoughts on CRE here? I know that this increases your capital concentration a little bit. You have some identified parts of the portfolio that you're running down. Are you -- do you have an appetite to add new CRE here or not at this point?

Yes. I mean for relationships, we'll continue to serve their needs if it's a developer, if it's office, if it's multifamily. The stuff we don't like is just the transactional where there's no ancillary business, there's no relationship. It's just a transaction. And we inherited what we had pre-Pac Premier from the Umpqua deal. We had Pac Premier inherited what they have from the Opus deal, and we don't have credit concerns. They're underwritten. I mean the underwriting on it was very solid. The credit quality is good. The performance, we've had very good performance from that standpoint. But it's just -- there's no other relationship. And so we can't drive any fee income out of it. We're not getting the deposit balances from it. But where we do have a meaningful relationship and a lot of times with some of these existing customers, if they're a developer, we will have their wealth management business as well. So as I kind of think about it, if you want to know what we're striving for from a balance sheet composition point of view, look at Columbia Banking Systems balance sheet in 2020, 2021, 2022, and that's the goal of getting that composition and that mix back. So less multifamily, we will still have some multifamily, less resi and more C&I.

Maybe with that broader backdrop and looking at capital, and you're talking about the ability of -- or the ability to grow capital with PAA. Where do you see the optimal capital levels for the bank that you're building here, especially, I guess, with the backdrop of maybe an improving regulatory backdrop?

I think it was 2010, so coming out of the financial crisis that we established our capital rate -- our target -- capital targets. And so if you think about what that looks like, and they're unchanged from that point in time because we feel like it's at a level sufficiently above what it takes to be considered well capitalized. So take the regulatory ratios at 150 basis points, and that's what our target is. And it doesn't mean we're always going to be above it or that we're always going to be right on that target. There's times where we might be below it. So when we closed the Umpqua acquisition, it took us to below 11% total risk-based capital, and that's been our binding constraint. And that was because the rate environment dramatically on us. We've grown that to now 13%. We think that we still have to finalize the marks and everything. It's just been a little over a week since we closed Pac Premier. But we think that those levels will be relatively unchanged because Pac Premier had so much capital that they're kind of funding their own marks on that balance sheet. And so once the noise settles, we accreted, call it, 85, 90 basis points of capital to those ratios over the past year. With the addition of Pac Premier, we would expect that we would accrete more than that, but we're already above our targets. And so the question that we get is, is this still a capital return story? And the answer is absolutely, yes. And that's conversations that we'll have with our Board next week, we'll have with our Board in October, we'll have with our Board in January as to what that looks like and the timing of that.

Great. I think we've hit a lot of topics here. I don't know if you have any closing comments or if not, happy to wrap it up here.

Yes, I don't have any closing comments.

Well, thanks very much. I really appreciate you joining us this year again, and thanks, everybody, for joining us here in the room.

Thanks, Jared.

Thanks, Jared.