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spk11: Thank you for standing by and welcome to the Columbia Banking System's first quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 1-1 on your telephone. As a reminder, today's conference call is being recorded. At this time, I'd like to introduce Jackie Bolin, Investor Relations Director for Columbia, to begin the conference call.
spk01: Thank you, Valerie. Good afternoon, everyone. Thank you for joining us as we review our first quarter 2023 results, which we released shortly after the market closed today. The earnings released in corresponding presentation, which we will refer to during our remarks this afternoon, are available on our website at ColumbiaBankingSystem.com. With me this morning are Clint Stein, President and CEO of Columbia Banking System, Chris Meriwell and Tori Nixon, the presidents of Umpqua Bank, Ron Farnsworth, Chief Financial Officer, and Frank Namdar, Chief Credit Officer. After our prepared remarks, we will take your questions. During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to slide two of our earnings presentation, as well as the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release and throughout the earnings presentation. I will now turn the call over to Clint.
spk04: Thank you, Jackie. Good afternoon, everyone. It was an extraordinary first quarter for Columbia. We closed our merger with Umpqua Holdings Corporation on February 28th, reinforcing Umpqua Bank's position as the largest bank headquartered in the Northwest. and creating one of the largest banking franchises headquartered in the West. At $54 billion in assets, our broader scale and additional products and services enable us to meet the needs of our customer base in expanded ways. Over the past 18 months, our organization has attracted top talent in new and existing markets. These leaders and teams, alongside our seasoned longtime bankers, continue to win new business and expand existing relationships. This activity has thrived despite the ongoing preparation for the integration of Columbia and Umpqua. I'm very proud of what our team accomplished during the first quarter. In addition to closing the merger, we also completed two branch divestiture projects and successfully converted our core systems. Careful planning and the dedication of our exceptionally talented team enabled us to achieve these accomplishments. I want to thank our associates for their commitment and diligence throughout this busy period. It has enabled us to remain on track to realize our targeted cost savings by the end of the third quarter. In addition to the heightened activity surrounding the merger, our associates were also engaged with customers throughout the industry events that unfolded in March. We were uniquely positioned during this period given our robust customer engagement surrounding the core systems conversion. Our teams were able to expand conversations already taking place to discuss Columbia's diversified business model, granular deposit base, and tailored solutions for those looking to add products like our insured cash sweep service. With a historic first quarter for our company, our customers, associates, and communities are already benefiting from enhancements provided by the merger. We remain committed to supporting communities throughout our eight-state footprint as evidenced by our five-year, $8 billion Community Benefits Agreement. This agreement supports community development, expanded home ownership, and small business formation. In that light, I'm pleased to announce we contributed $20 million to the Umpqua Bank Charitable Foundation in March. With the merger closed, our shareholders will quickly begin to realize the expected benefits of our strengthened operations and improved financial performance, along with significant capital accretion. And now I'll turn the call over to you, Ron.
spk16: Okay. Thank you, Clint. And for those on the call who want to follow along, I will be referring to certain page numbers from our earnings presentation. Starting on slide four, now that we've closed the merger, we present here updated overall financial metrics expected as compared to the original projections in October of 2021. The changes in fair value since then led to significant rate-related discounts, which will accrete to interest income over time. With that, our tangible book dilution was larger, but our expected gap accretion and return on tangible equity increases significantly with a similar earn-back. With our core system conversion completed a month ago, we are on track to achieve our expected cost synergies of $135 million on an annualized basis by the end of the third quarter this year. Next, on slide five, we present updated fair value marks at closing as compared to announcement. Given the increase in treasury yields and inversion of the 10 versus 2 spread since announcement, we ended with $1.76 billion in discount marks, with all but $130 million of that related to rate. Again, these rate discounts will accrete to interest income, providing a significant and stable additional earnings stream over time, which we'll highlight in a few minutes. Also noted lower on the page is the larger core deposit and tangible balance, which will be amortized to expense over time. On slide six, we carry forward the discount marks in CDI at closing and also present the current balances as of quarter end. For the AFS securities discount, the decline from closing to quarter end resulted from writing off existing premiums at close of roughly $200 million, along with removing the discounts of $165 million on the $1.2 billion of bonds sold as part of a restructuring. The remaining decline of approximately $15 million was accreted to interest income. Slide 7 projects our cost synergy realization estimate at quarter end through the year. On an annualized basis, we estimate we've realized $25 million of cost synergies in the month of March run rate, with an additional $21 million achieved post-conversion, which will reduce our run rate in April. Looking forward, we expect to realize a further $59 to $64 million in annualized cost savings by the end of the second quarter, or approximately $15 to $16 million on a quarterly basis, achieving these synergies evenly throughout the quarter. Slide eight covers our liquidity, including deposit flows during the quarter. For comparability, we presented the table on the left as if we were combined for all periods presented. Total deposits declined 4.9% in the first quarter, or 3.6% when excluding the divestiture required with the combination. Market liquidity tightening and the impact of inflation on consumer spending continued to pressure customer deposit balances. We utilized short-term federal home loan bank borrowings to fund the outflows, along with adding $2 billion for higher on-balance sheet liquidity. The upper right table details our off-balance sheet liquidity, with $9.7 billion available as of quarter end. Below that, we add cash and excess bond collateral not pledged for lines to arrive at total available liquidity of $17.9 billion. This represents 121% of uninsured deposits as of quarter end. On the next page, slide nine, we detail out the investment portfolio. The upper left table takes you from current PAR to amortized costs to fair value. Noting the difference between current PAR and amortized costs is the combined net discount, which will be accreted to interest income over time. The $94 million of gross unrealized gains at quarter end came primarily from the marked Columbia portfolio as the bond market rallied in March, while the gross unrealized losses relate to the prior UMPQA bonds, which were not marked. I mentioned earlier we sold $1.2 billion of marked Columbia bonds the first week of March and reinvested $0.9 billion as part of a restructuring. We sold front end cash flows and purchased longer dated bonds to extend duration slightly, benefiting our interest rate sensitivity, which I'll cover in a few minutes. The chart on the right breaks out the overall portfolio between the portion with unrealized gains versus losses. noting 6.1 billion of the book is in a gain position with a book yield of 4.53% as of quarter end. As you can tell, I'm excited about this portfolio as it gives us significantly higher and stable earnings stream with greater optionality. The overall book yield was 3.62% with an effective duration of 5.7 at quarter end. And lastly, we only have 2.4 million in HTM bonds which represents some CRA-related bonds with no unrealized loss. Now, to better help investors, given the combination of accounting and moving parts, on slide 10, we provide an updated outlook for the remainder of the year on several key financial statement items. The accretion estimates noted on the lower half of the table accrete based on the effective interest method, meaning they should be fairly stable near term and declining slightly over the life of the portfolios. They will provide significant interest income and capital build over time. We also provide an updated outlook for our quarterly expense run rate, which we expect to be in the $260 to $270 million range in Q2 when CDI amortization and merger expenses are excluded. We expect this level to trend down to $240 to $250 million in Q4, reflecting the expected achievement of all communicated expense synergies by the end of the third quarter. Slides 12 through 14 provide summary financials for Q1, but I want to take you forward to slide 15. Here, we break out Q1 gap earnings to help investors understand the non-operating and merger-related impacts and resulting core bank results in the far right column. The first column represents our Q1 gap results, with a net loss of $14 million driven entirely by merger expense along with the initial ACL provisions. The second column includes our non-operating designation for income statement changes mostly related to fair value swings, along with $116 million of merger costs included in non-interest expense, which are detailed out in the appendix. These net to an $86 million reduction in Q1 earnings, resulting in the third column for operating income. This is the key page, the bridge from GAAP reported earnings, isolating non-operating fair value changes, then the merger-related items of discount accretion, CDI amortization, and the CECL Day 2 double count, then to adjusted operating income. Now, in the merger-related items column, we have $32 million of net discount accretion from the marks discussed earlier for one month, along with the $88 million initial ACL provision, commonly referred to as the CECL Day 2 double count. Also included is $13 million of CDI amortization for the one month. The value in this column will be a clear view of the net earnings impact from the merger accounting, which will be substantial, and again, build capital over time. And that takes us to the far right column, which presents the bank excluding the merger accounting marks. Again, the interest rate environment introduces a significant amount of purchase accounting accretion and amortization into our reported earnings, and slide 15 breaks out the components. This will enable investors to view the earnings power of Columbia outside purchase accounting adjustments while also seeing the meaningful net capital generation we expect these adjustments to produce over time. Okay, with that, moving ahead for a couple more items. Slide 17 breaks out accretion from net interest income, and slide 18 does the same for the margin. In the footnote, we highlight the NEM for just the month of March was 4.31% as reported, and 3.55% excluding the accretion. The excess liquidity held on balance sheet had a 10 basis point impact on the month of March NIM, but an insignificant impact on net interest income. Slide 19 breaks out the repricing and maturity characteristics of the loan portfolio, noting 46% is fixed, 24% is floating, and 30% are adjustable. Slide 20 provides an updated view of our combined interest rate sensitivity under both ramp and shock scenarios. We've taken proactive measures to reduce the balance sheet sensitivity to a potential declining rate environment, including the bond portfolio restructuring discussed earlier, along with using short-term wholesale borrowings. Combined with more locked-out bond cash flows, this acts like a swap for rates down environments. You can see here the trend over the past few quarters where our rates down risk has been reduced significantly. And noted below, we calculate our cycle-to-date funding betas which are calculated on a combined company basis over the periods presented for comparability. As of the first quarter, our interest-bearing deposit portfolio has priced in 28% of the Fed Fund's rate increases. Notably, here is the cost of interest-bearing deposits, which was 1.33% for the month of March, compared to the quarter-end spot rate of 1.43%, highlighting stability. And with that, I will now turn the call over to Frank.
spk17: Thank you, Ron. Turning to slide 23, the addition of the historical Columbia loans at fair value was the primary driver of the quarter's loan growth, as new originations were nearly offset by payment activity. Slide 24 details select characteristics of our loan portfolio by major category, with added detail surrounding production during the first quarter. Our portfolio is diversified by mix and geography. Average loan size displays the granularity of the portfolio and where applicable, average loan-to-value and debt service coverage supports the quality of our underwriting. Additional industry detail for our commercial portfolio is provided on slide 25, further highlighting our diversification by industry and collateral type. Let's spend a little time on slide 26, which provides an overview of our office portfolio in response to increased investor focus on this asset category. Like other verticals, our office portfolio is characterized by a diversified mix of granular loans that exhibit strong credit metrics. Our average office loan is $1.3 million. The average loan to value of the portfolio is 57%. And the average debt service coverage of the non-owner-occupied portion of the portfolio is approximately 1.75 times. Properties are located across our broad western footprint and majority are in suburban markets. We have very limited exposure to core downtown metro markets. 83% of our office loans have a guarantee in place and performance of the portfolio remains exceptional. Past due and non-accrual levels Our de minimis at a combined 1 million and criticized balances represent only 2% of the overall portfolio and less than 20 basis points of our total loan portfolio. We remain very comfortable with our office exposure given the characteristics I've outlined. Moving on, slide 27 highlights our reserve coverage by loan category. with the majority of the quarter's bill driven by 32 million added as part of the merger for historical Columbia PCD loans and 88 million initial provision booked for non-PCD loans. The remaining 17 million provision expense primarily reflects changes in the economic forecast using credit models. Slide 28 provides an overview for our consolidated credit trends and notes the additional 28 basis points the remaining credit discount on loans adds to our loss-absorbing capacity. Overall, our credit trends are benign outside the anticipated trend in FinPAC charge-offs. Delinquency and charge-off activity in the FinPAC portfolio remain centered in the trucking sector of the portfolio, and we believe delinquencies in this area have reached plateau as the supply-demand imbalance in this specific space evens out. These factors drive our expectations for another quarter of elevated charge-offs in the FinPAC portfolio as delinquencies continue to roll through the later delinquency bands. We continue to view these trends as isolated to the FinPAC portfolio given the unique characteristics of their obligors, and we have obviously witnessed no spillover to the broader commercial portfolio, or other sectors within the FinPAC portfolio. Excluding FinPAC, charge-off activity at the bank remains at a de minimis level. Though classified asset ratios did increase, they do not represent any notable changes in classified asset balances when viewing the combined portfolio. I will now turn the call over to Chris.
spk02: Thank you, Frank. Shifting the focus to deposits, Slide 29 highlights the quality of our portfolio. 41% of balances are in non-interest-bearing accounts. Of the overall, consumer balances comprise 41% of our base with the average account balance at $20,000. Commercial balances make up the remaining 49% of our deposit portfolio with the average account balance at $108,000. The company offers multiple deposit solutions like our insured cash sweep service, the ability to collateralize select accounts, and opportunities for enhanced returns through Columbia Wealth Management. These products provide our customers with the flexibility they seek and improve the stability of our granular deposit base. At quarter end, just 36% of our deposit portfolio was uninsured, screening on the lower end of peer averages. Net contraction in our deposit balances on an organic basis during the quarter reflects normal customer uses of cash, the impact of inflation on spending, and market liquidity tightening. Offsetting these headwinds to net expansion was continued growth in new account balances as customers transferred funds into recently opened accounts throughout the quarter. We also continued the development of our franchise throughout the West. With the merger closed, we now have deposit and other capabilities in Utah, which further enables us to bring full banking relationships to the company. We will continue to invest in this market and throughout our other geographies. We believe this will lead to enhanced long-term organic growth opportunities. With the core systems conversion now complete, our teams have an invigorated focus on generating balanced growth for our franchise. Relationship banking within our communities drives our purpose, and our broader footprint, expanded set of products and services, and our collaborative spirit across our teams support our expectations for continued success. And now, back to you, Clint.
spk04: Thanks, Chris. Our regulatory capital position is outlined on slide 30. We remain above both well-capitalized and internal threshold targets, and as Ron outlined, we expect capital to accrete quickly in the coming quarters. As a result of the merger, we have adjusted our dividend declaration timeline so that it is similar to the one previously utilized by Umpqua Holdings. This concludes our prepared comments. The team is now available to answer your questions. So Valerie, please open the call for Q&A.
spk11: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. One moment for our first question. Our first question comes from the line of Jeff Rulis of B.A. Davidson. Your line is open.
spk09: Thanks. Good afternoon. Good afternoon. I guess to start, I appreciate all the detail in the deck. Maybe I'd go first to the to the cost or the expense run rate. Ron, you kind of rattled through that. I missed kind of the stair step as you go through Q3. And I guess you ended at 240 to 250 in Q4. But could you repeat that piece again?
spk16: Yeah, I think you summarized it well. We've got $25 million we have included within our run rate for the month of March. There's another $21 million that is in place, but at the end of the quarter, which will be reflected in Q2. So we talked about that. And then on that slide seven, we show you the ramp for the additional 59 to 64 million we expect to achieve on an annualized basis in Q3, which will put us at the 135 level by the end of Q3. 59 to 64 million additional in second quarter, and then the balance in Q3 will end at 135, annualized again at the end of Q3 looking forward. The guidance we gave for Q2 on the expense side reflects those trends along with the Q4 amount noted in the far right note column on that Outlook page.
spk09: Okay. Great. Thank you. And then the, I guess if I were to jump to capital, your comment about expect to accrete that quickly. And I just, I don't know if you've got projections on kind of year end or expectations for those capital levels. And I guess that's question one. Question two would be, you know, other tools with the deal closed now? Do you look at the buyback, the other ways of deploying that capital as that grows?
spk16: Hey, Jeff, this is Ronald. On the first one, very much we have a forecast on the capital build, and it's going to be in the range of 20 to 30 bits on the risk-based measures across, you know, the various separations over the course of the year and into the following year and the year after. This has got a long life. This will be a long-lived level of accretion that also, interestingly enough, just given the nature of how rates have moved up over the last year, you'd have to go significantly below where rates were prior to last year in order to see a real acceleration in prepay on a lot of those instruments. So excited about that. That 20 to 30 bps would be a quarterly accretion in the capital ratios.
spk04: And Jeff, this is Glenn. I'll just add that as you do the math in terms of just what the accretion adds and then factor in earnings, you can pretty quickly reconcile Ron's comments and mine about the capital generation and the capabilities of the company. With respect to a buyback, I don't see anything this year. I think that just all the volatility that's out there and the fact that we'll be building in the next couple of quarters to our long-stated, long-term target capital ratios. We'll let that occur. And then if market conditions are favorable, by all means, it'd be something that Ron and myself would have a discussion with our board and make sure that that we're being good stewards and keeping the appropriate amount of capital so we have the flexibility to run our business through the entirety of any cycle, but also, you know, not have too much capital sitting around that hurts our returns for our shareholders.
spk09: Okay. Thank you. And maybe one last one for Chris. Just on the deposit side, Could you comment on flows in April so far is kind of the first part of that. And then second, you talked about expanding tools into Utah. And I guess your expectations for the growth through the end of the year, if you think you could scratch up from 331 levels. Thanks.
spk02: Sure. Into April, with the conversion Behind us, still early behind that, you're looking at getting some people back out into the markets. We've also launched our own deposit promotion. Trends are good on that out of the gate, and that's been out for a couple weeks. More, though, I'm starting to see, and I know Tori's seeing it as well, we're seeing clients and prospects that are coming to us requesting new business. Now, I can't put a dollar amount on it for you right at this time, but it's certainly a very positive sign to see the new business flow that's coming in as well as the multiple conversations that are going on with existing clients around one retaining their deposits and to looking at opportunities they might have with funds that are held elsewhere expanding into into Utah we should be up and going sometime during the quarter to attracting actual deposits and and would expect that team, which hit the ground running on the loan side, to be able to drive a good amount. Again, I can't put a dollar amount on it of exactly what we would get, but we've always been excited about the market, and I don't see the experienced bankers that we have having any trouble bringing in deposits on that. And then we will look into the other states where we have loan production offices as well, and I would say more to come on that. We're certainly looking to be full service across all eight states. And I don't know, Tory, did you want to add anything?
spk03: No, Jeff, this is Tory. I think the only thing I would add is for the first three weeks of April, deposit balances are down just a little bit, mostly in retail and consumer banking. And that's like typical tax payments and just kind of traditional outflow, not significant at all. And to Chris's point, a lot of activity inside the commercial bank on new relationships, prospecting funds, deposit funds for our customers from other institutions. So a lot of really, really good activities.
spk09: I guess putting it another way, I guess by year end, are you looking at, you know, in your budget from the 331 jump point deposit balances, are you in a stable down or up type mindset?
spk03: Yeah, no, I... I think there's a really great opportunity for us to grow the balances of the company, and we're all hands on deck to do that. We are continuing to focus on C&I relationships and full banking relationships, and what comes with that is core deposits, fee income, all those things that drive value for the company.
spk04: Jeff, I'll just add, there's a bit of a wild card in there. You know, and that's, you know, it appears that we've returned to kind of seasonal patterns that we haven't had since pre-COVID. And, you know, if you go back prior to 2020 and throughout the history of the company, you know, a lot of the positive deposit flows occur in the second half of the year, and they start to build. you know, late second quarter. So, you know, in addition to the activities that Tori mentioned and Chris, there's that seasonal pattern. And I would expect that that will return and behave as, you know, we've seen in the past. But then the Fed's still removing liquidity from the system. And so, and I think there's still, just from an industry perspective, there's still some of that activity that's yet to occur. So, that's why it's hard to just tell you, you know, yeah, it's up X percent. But I think I share the team's optimism on our ability to take market share and the conversations that we're having. And it gets back to my prepared remarks along the lines of not only the new teams, but our seasoned bankers. They're continuing to win new business and deepen those existing relationships. And so I think those activities, no matter what happens at a macro level, you'll see the positive benefits to our balance sheet.
spk09: Okay, appreciate it.
spk11: Thank you. One moment, please. Our next question comes from the line of David Feaster of Raymond James. Your line is open.
spk08: Hey, good afternoon, everybody.
spk16: Good afternoon, David.
spk07: Maybe just kind of staying on the deposit side, I'd be curious, maybe some of the flows that you saw in the quarter, if you could just talk a bit about You know, you talk about a lot of it's really a function of the declining balances and existing customers. I'm curious whether you saw that more on the commercial or the retail side and how much is that seasonality versus customers utilizing cash to pay down higher cost for the great debt migration, you know, into the wealth or versus turmoil from the banking failures or even the conversions.
spk16: Dave, this is Ron. Let me take a crack at that. Pretty wide-ranging. But I'd say overall, you know, traditionally, seasonally, it's like a bell curve over the course of the year, right? Stronger Q2, Q3, a little bit more pressure Q4, Q1, depending on the segment, et cetera. And on page eight, we did lay out the changes in deposits in that upper left table as if we were pooled or combined on a basis for comparability purposes. And when we look at the you know, ex-broker to the divestitures or the public deposit change on the customer account side, it's pretty evenly balanced between commercial and consumer, similar to just the overall mix of the portfolio, right? I think on the consumer side, it feels like a similar continuation of the inflation story we talked about last quarter for looking at Q4 results on the commercial side similar. So just the kind of effects of QT at the customer level utilizing cash from that standpoint.
spk02: Yeah, and David, you asked in there, there was a lot packed into that of, and you mentioned investments and things moving away because we've talked about that in the past. And we saw a very similar, I'd say it's probably a little bit of a larger activity than historical averages on that. But the really nice thing about this combination now is we have even more options that are available. And so all of the clients aren't looking to immediately move into a treasury bill or something of that nature with the insured cash that sweeps and the deposit promos that we have we've got our bankers have multiple tools available for them based on what the clients needs are and I think that just gives us maximum flexibility to to solve the issue that they have that makes sense
spk07: Um, maybe, maybe touching on the growth, the loan growth side, you know, obviously the, the, the market's pretty volatile right now, but I'm curious how demands trending from your standpoint, you know, how new loan yields are, what segments you're still seeing good risk adjusted return. Um, and maybe just, you know, you, you, you probably have some unique opportunities for growth, just given the deal and some bigger targets and opportunities to increase, relationships, does that maybe support outsized growth in the short run? I'm just curious how you think about the organic loan growth opportunities.
spk03: David, this is Tory Nixon. I think you kind of summarized a lot of things in that question. I think there's great opportunity for the company to go forward and to do a lot of what you just described or just asked. I mean, I think there's the ability for us to certainly serve markets in all of the states that we're in, whether it's small business, whether it's in the consumer side, whether it's in commercial, middle market banking, in the real estate space. I mean, we just have a lot of capability. We've got certainly the opportunity as a combined company to increase hold levels and continue to expand credit facilities for customers, our customers as they grow. I think that's a great opportunity for the bank. I mean, we have a leasing capability for the organization that I think is being very well received by our CNI customers that typically wasn't available in the Legacy Columbia portfolio of customers. So great opportunity to kind of see us have a lot of financial strength and to be able very active in all the markets that we are in. And I'm excited about the ability to grow loans. Pipeline looks strong. It's actually just up a little bit from last quarter, which is nice to see. Demand in the marketplace is certainly not the same as it was six to nine months ago, but there still is demand. And I think to Clint's point earlier, we've got a great opportunity to take market share in all the markets that we are in.
spk07: Okay. And then just, you know, kind of in that question too, you know, how are new loan yields and what segments are you, are you still expecting to kind of drive that growth and give good risk adjustment terms?
spk03: Yeah, I think it certainly depends on the, on the asset class, but I think, you know, they're in the, they're near the 6% range on, on yields, maybe a little higher. And I mean, just, we've got, we've got, we've got a lot of dry powder, a lot of opportunity and able to serve our customers and, and, bring in new ones into the company.
spk07: Okay. And then you, you, you guys have done a great job continuing to expand at both Columbia and Umpqua with new hires and new markets. And we've already, we already touched on Utah. I guess as you look at your footprint and thinking about new hiring opportunities in the future of the bank, is this the time to be greedy, you know, and pick off new, new talent, just given the volatility, are you looking at new hires and, And if you are, is it primarily deepening existing footprints? I mean, you talked about continuing to invest in the franchise, but are you considering further market expansion?
spk03: So this is Torrey again. I'll talk about commercial. I'll let Chris talk about consumer a bit. We're doing all of those things. So we're looking to hire in the markets, the new markets that we've expanded into Arizona, Colorado, and Utah recently. We're looking to hire some really talented, folks in those markets. We have hired talent. We have recently hired talent in those markets. We will continue to do that. And then infill and the rest of the company. I mean, we continue to look at talented people and, you know, have a philosophy that we're going to bring talent into this company when we find it. And we've got a great story to tell there that, you know, you can obviously tell we're very excited about the future of this company. And when we think about the opportunity that we have and the opportunity that bankers in our markets have working here, they get very excited. So we continue to tell the story. We continue to hire people in the Pacific Northwest, in Northern California, in Southern California, in Idaho, you name it. We're continuing to broaden, expand, and push the bank forward.
spk02: Yeah, and David, what I'd add to that is the states where we have the commercial presence, we're certainly looking at bringing on the retail, as I mentioned. We'll bring on small business. to fill in where those loan production offices have historically been. And what I would say is that we're also looking at the wealth side of it and bringing that into the eight states and the areas that we're expanding as well. And I think both companies have always been opportunistic that when good bankers raise their hands, we're ready for them. And so I would say that's still out there. I echo Tori's comments about people are excited and when you think about the capabilities that we have and the balance sheet construction as ron described i think there's going to be plenty of opportunity for that yep thank you appreciate it and congrats on closing the deal thanks thanks thank you one moment please our next question comes from the line of chris mcgrady of kbw your line is open
spk10: Mr. McGrady, your line is open. One moment, please. One moment.
spk11: Our next question comes from the line of Jared Shaw of Wells Fargo. Your line is open.
spk05: Hey, good afternoon. Good afternoon, Jared. Hey, maybe just, you know, Staying on the track of opportunity, clearly there's been a lot of disruption with Silicon Valley and First Republic and just in general, some banks that are seeing more weakness. Maybe more specifically, do you see specific opportunities in some of those business areas, some of those markets to step in? I'm not sure when you talk about new commercial customers coming to approach you, any of that from... some of those specialty business lines that some of those banks focus on that could be an opportunity for you?
spk04: Yeah, Jared, this is Quint. I'll kick it off and then see if Tori and Chris want to add anything to it. The short answer is yes. We have seen opportunities We saw that actually in the days and hours leading up to Silicon Valley's failure. We've got a pretty diverse offering and we talk about our portfolio and you look in the slide deck and you can see both sides of the balance sheet. There's a lot of granularity and diversification. With that, we have a lot of very experienced bankers, and we won't do something if we don't have expertise in it, but there is some crossover. To the extent that there's crossover, we'll compete for the business, and I think we compete very well, and it will create opportunities. But in terms of going all in and shifting our focus, that's not necessarily the plan. We love the diversification that we have. We think that's a foundational element of strength for our company. But certainly, we'll be opportunistic when and where we can be.
spk03: uh victoria anything to add no i think you've summarized it really well i mean there's it you know i think there's that the opportunity exists in all of our markets and in you know we're going to we're going to stay to do what we do what we've historically done and do it exceptionally well in you know continue to find you know customers or people customers who want to be part of the bank or people who want to be part of the bank okay good thanks so then you know maybe shifting a little bit on on
spk05: capital, you highlight getting back to that CET1 target of 9%. Do you think, is that sufficient going forward? Is 9% high enough? Or do you think that maybe you end up needing to bring that floor up a little bit before really exploring other capital deployment opportunities?
spk16: Yeah, Chris, this is Ron. I'd say our long-term target on CET1 is 9, and we're at 8.9. So we'll be there heck, next month. I'd say on the total risk-based capital ratio, long-term, again, targeted is around 12%, and I expect we'll get there over the course of the year again through that earnings and accretion. The capital accretion bill is just coming off the financial benefit of both companies coming together, cutting the costs, and having the accretion. So that's really, you've got to look across all four ratios, both at the parent and the bank. And so, yeah, by default, then, that CET1 would be above 9%, but long-term target-wise, not significantly.
spk05: Okay, so you don't feel a need to change that or raise that in light of sort of the turmoil that we've seen in the last month?
spk16: In terms of long-term targets, no. There are times where you might want to be below or above, depending on which way the wind's blowing. And like I said, we're going to have quite a bit of capital generation over time. And again, you know, so much of the mark, I mean, 1.6 of the $1.7 billion in March was rate-related. like on the bonds, that's all, the vast majority of that is backed by government-to-government agencies. So, you know, it's interesting for you to think about, you know, the impact of the merger counting on this, reducing our capital ratios today, but then accreting back over time. I'd say to CET1, that's a measure I know a lot of analysts and investors focus on. You also got to look at the other ratios as well, though. In total risk-based capital, generally between the bank and the parents is where I'm targeting to be around 12 over time is a good sweet spot.
spk04: And I think the history of, you know, pre-merger both companies, that was always a challenge trying to walk it back down to those long-term targets. And you add in the accretion income as well as the earnings power after, you know, we get the full cost synergies baked in. That's still, I think, the primary challenge for us is, you know, in the coming years, is how do we keep those capital ratios from getting too far north of, you know, those targets. And you can pick any ratio. They're all going to grow pretty rapidly.
spk05: Okay. And then just finally for me, When we look at the average earning asset guide, do you see cash going back down to a – I guess where do you see cash going as a percentage of the balance sheet after we get through the end of March here, back down to 5%?
spk16: Yeah, and on that guide, we make in the note column that we assume we maintain an elevated level of cash. Of course, a lot of that is going to be subject to what happens from a macro standpoint with overall deposit flows. etc so but you know I say all else being equal if we brought on two billion dollars of additional off balance sheet liquidity on balance sheet just to have that on balance sheet and we're sitting at three it would be somewhere in the one to one and a half billion dollar range if we had not done that so that's probably a better representation of you know where I'd expect that in spring cash level the floor at yeah we had flexibility and we decided that it was appropriate to use that flexibility and just keep a little more cash on balance sheet during the
spk04: the near term. Yep, totally understand.
spk05: Okay, thank you. You bet.
spk11: Thank you. One moment please. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open.
spk14: Hey, good afternoon. The first one for me, just around the borrowings, the $6 billion of borrowings, and then two of it was for fund cash. But I guess what are your thoughts on how borrowings might trend for the balance of the year and whether or not you might use securities to sell securities, pay them down?
spk16: Yeah. Ideally, we're going to see our deposit activities strengthen over the course of the next couple of quarters post consolidation, as you heard. post-conversion as you heard Chris and Clint talk about earlier. So no plans to reduce the investment portfolio. That's very well structured. That's going to provide a lot of value over time. And that discount will accrete if we keep those now discounted bonds on the books. So plan on maintaining the wholesale borrowings, but then that'll fluctuate just as the opposite of what we see with the net loan deposit flows. So near-term relatively static.
spk14: Okay, great. And then you've had a lot of time with how long the merger took to close to identify the cost saves, make sure you can get the $135 million out. They're coming out sooner than previously thought. But are there, and it may not necessarily be the focus in the near term, but have you been able to quantify some additional cost saves above and beyond that $135 million? and whether or not, if so, how much, and could that hit the bottom line?
spk04: Yeah, Matt, this is Clint. We have spoken over the past year that our internal target is actually above the $135 million. And if we seem overly confident in delivering on the $135 million by the end of the third quarter, it's because we have, in fact, identified up to that internal target. What we haven't done is we haven't disclosed what that internal number is, and there's a couple of reasons. One, with inflation and wage pressure that's happened over the past year and a half since we set that target, we wanted to maintain flexibility And then the other component of that is the investment in growing our franchise that Chris and Tori spoke about. So we wanted to make sure that we're still going to do those things. We're still going to make the appropriate investments, but net-net, we want to make sure that that doesn't dilute the $135 million or 12.5% cost saves that we promised to to investors so there is there is a higher internal target it's identified it'll it'll trickle in you know fourth quarter and beyond it could be diluted somewhat by other investments that we may elect to make talk about those you know at the time that they occur But then the other aspect of, you know, we put two pretty large banks together, and I think we did a really good job as a team of setting the org structure for a $50-plus billion bank. But we also know that there's probably areas where, well, not probably, we know there are areas where, yeah, we're a little heavy in terms of people or redundancy. And I think that's a longer term process of just fine tuning and making our company the best and most efficient it can be. And so that's the type of activities that you'll see in 24, 25, and then ongoing as we go through the years.
spk14: Okay, and then just around the deposit pricing outlook. It sounds like you're doing some promotional activities in some of your newer markets. But can you talk through, you know, the deposit pricing philosophy now that you guys are together? I mean, Legacy Colby wasn't very promotional when it came to deposits, but obviously, you know, with the combined entity that may have changed a little bit and, you know, the turmoil in March may have also changed. changed your view on pricing, you know, maybe going forward. Just any comments around deposit pricing outlook and in particular when the Fed stops raising rates.
spk02: Sure, Matt. Great question. And I would say that separately, we actually were very similar in our approaches to exception pricing and doing things of that nature. Coming together, yeah, we're still on the same track there. We do have some promo rates that are out there that's not just new markets it's existing markets it's all across the footprint and so that kind of sets the that sets a marker for us but we're still negotiating rates with with clients and looking at options looking at where what's the real need what are they really trying to do with the money and so as I mentioned previously lots of different ways to go about that you know the Fed and the slowing You know, I think that's going to maybe you'll see some lag. And I think deposit rates tend to lag that. And that's historically for both companies as well. So as it approaches the slowing, I think that, yeah, you start maybe getting near the peak of it. But then I'll always throw in the caveat of we don't know what competitors are going to do. And so we just have to maintain our discipline. We have to stay in touch with our clients and understand what's going on in the market. Tori, if you want to add anything.
spk03: Matt, the only thing I would add is that with all the conversations that we're having with clients, which is a lot, which has been great, the conversation is less about price and more about security and safety. Certainly, there's some price in the conversation, but a lot of it's around security and safety and explaining the balance sheet of the company and our earning stream and our deposit base, et cetera, is very valuable to the customer, our customer base. But then we have, as Chris, I think, talked about in his comments, we have a couple products that are really valuable to kind of take money and create incredible safety and security around it through our ICS product or CEDARS. And so we've done that on a lot the last, you know, couple months. I think we probably increased the ICS balances about $400 million to $500 million, which is just reciprocal, you know, insurance for deposits, especially on the commercial side. So, I mean, we've got a lot of options for customers and had a lot of conversations. And again, it's a little less about price and more about a relationship and about safety and security.
spk14: Okay, thanks. And last one for me, just housekeeping. Tax rate, what do you suggest we use going forward? Okay, thank you.
spk10: Thank you. One moment, please.
spk11: Our next question comes from the line of Andrew Terrell of Stevens. Your line is open.
spk13: Hey, good afternoon. Good afternoon. Clarification on the margin guidance. I think you noted the margin was 431 on a GAAP basis in March. I think the borrowings were about the excess cash and borrowings, about 10 basis points to that. In your full-year margin guidance, that 415 to 425, what do you assume for borrowings and cash? Do you assume it stays at a relatively similar level?
spk16: Yeah, we assume a consistent level and also recognize that that full-year number will also reflect the effective averages with, you know, the combination fully included for 10 of those 12 months, but not the full 12. So maintaining... consistent cash balances. And then I'd clarify one item. So when we talked about the impact of the excess liquidity, it was really referring to the month of March at the 355 would have been ballpark 365 had we not brought on that excess borrowing. But, you know, insignificant impact in terms of net income, but 10 bits on the margin.
spk13: Yep. Got it. Understood. Okay. And on the core fee income side, it looks like when I adjust the The items called out that the core operating fee income was around $47 million or so for the quarter, I guess. Again, there's several moving parts here. Can you help us out with just expectations for kind of a core fee income run rate moving forward?
spk16: Yeah, we didn't provide a guide on that, but I can tell you for the month of March, none of this income, excluding, again, the fair value change type stuff, was $22 million just for the month on a combined basis.
spk13: Okay, so imply, yeah, okay. That makes sense. And last one for me is just on the office. I appreciate all the color here on page 26 of the presentation. A couple of questions for the six properties that are listed as greater than $30 million. What markets are those in? And can you talk about the underwriting specifically on the larger end of the spectrum and whether it differs at all from what you list as the kind of averages there? And then the second part was the credit mark taken on acquired office portfolio, is that similar to the overall credit mark in the transaction, or did the deal allow you to put a greater kind of mark against the office book?
spk17: Yeah, with Frank, Chief Credit Officer, regarding the first part of your question, the majority of those in the larger tranche are really centered in the Puget Sound area, if you will, and the underwriting is is very similar but the the qualification criteria i would say is is much more steep uh so we we've got to know the sponsors uh extremely well they've they've got to uh sensitize uh extremely well we we we shock it for rate we shock it for uh vacancy, even to a greater degree of some of our smaller relationship deals that we evaluate. So they are all leased at this point, I will say, fully leased under lease agreements and are performing well.
spk13: Okay, and then on the credit mark on the office portfolios specifically, was it similar to just the overall mark, or was there a bifurcation? I guess did the deal allow you to put a larger credit mark on the office book?
spk16: We had the ability to if the data supports it, but again, we talked about the quality of this portfolio. I'd say it's ballpark and average in line with the overall CRE level.
spk13: Okay, thanks for taking the questions, and congrats on closing the deal.
spk08: You bet. Thank you. Thanks, Andrew.
spk11: Thank you. One moment, please. Our next question comes from the line of Brody Preston. Your line is open.
spk15: Hey, good evening everyone. Uh, or good afternoon for you all. Um, thank you for taking the questions. Um, just wanted to ask on the, on the securities that you sold, um, and then the securities that you purchased, um, in the, at the end of March.
spk16: um what was the duration uh of those securities and what was the rate on the 1.2 billion that you that you sold i guess more the effective rate you know uh for the for the marks yeah this is ron i'd say uh so again we sold off for entering cash flows so the duration on the purchases was probably about a half a year longer than the overall duration again we wanted to extend that so we would have probably around 5.5 ended up at 5.7 just with the effect of of the repurchases were longer dated, right? So, and again, with an eye towards when we did this, it was actually the first week of March, right? So, you had a top tick in the bond yield February 28th in that first week, and it wasn't for another week or week and a half or so following that you saw the rally in the bond markets and the yields decline. So, overall, the mark book was, you know, you talked about 4.5%. The ones sold were probably a bit below. The ones purchased were a bit above, just given the slight difference in duration.
spk15: Got it. Thank you for that. And then on the NIM guide, the core NIM guide that you have, I just wanted to ask, you outlined what your rate expectations are, but I wanted to ask what the interest-bearing beta and the NIB mix assumptions are that underpin that.
spk16: You bet. It'll be a continued, you know, what we talk about later in the industry sensitivity slides, working up closer to that model beta from our sensitivity standpoint. So higher than 28%, but probably, but not at the 53 level that we actually noted on that slide later on. Just a, you know, continued increase just because we're assuming, you know, there's a lag to deposit pricing increases.
spk15: Got it. And is there a static deposit mix assumption that underpins the NIM guidance?
spk16: Relatively static. Granted, we talked about earlier, for example, DDA are up here in April, but just in terms of the overall mix, not a significant change in the overall mix.
spk15: Got it. And then I guess on the margin waterfall chart that you have in there, the 43 basis point drag that you have for deposits, do you have a sense for how much of that was mix versus rate?
spk16: Well, I think in terms of this waterfall, you've also got the effect of the Q4 reported amount was standalone uncle holdings. The Q1 reported amount was combined company for one month and then standalone prior uncle holdings for the first two months of the quarter. So you've got that really driving a good chunk of that from an overall mixed standpoint.
spk15: Okay. Understood.
spk16: It'll make a lot more sense for your next quarter.
spk15: Yeah, I wanted to ask on the loans that are maturing in the less than six months bucket, the fixed, the $2.6 billion, do you have a sense for what the current yield is on those loans versus what current origination yields are?
spk03: I don't know. Yeah, I mean, those loans are going to be dated from prior to the...
spk16: So it's going to be in the, you know, call it mid-fours to five range at the highest, which is going to be, you know, well below what Tori talked about earlier for new loan yields.
spk15: Got it. And do you all have any hedges in place on the loan portfolio that we need to think about for NII modeling?
spk16: Not on the balance sheet. We do have customer swaps, but those are offsetting back-to-back on our balance sheet. We've taken the approach of using instruments within the portfolio. Specifically here in this case, we're talking about the bond portfolio. along with the use of the short-term borrowings to really help improve our interest rate sensitivity position we talked about earlier.
spk15: Got it. And then just one last one for me. I'm sorry if you mentioned this earlier and I missed it. But just on the FinPAC portfolio, I wanted to ask two questions. What is the growth outlook for that portfolio going forward? I know it's a much smaller piece of the overall loan portfolio now. And then the 3.89% annualized charge-off ratio, you know, I know it's tough to say, but, you know, could you help us think about what a peak net charge-off ratio kind of looks like through cycle for that loan book?
spk03: So this is Torrey. I'll talk about the growth side of it in a frank way, and if you want, on the charge-off piece. I mean, first of all, the FinPAC portfolio is three different. And then we have a vendor space and a traditional commercial bank leasing business for our customers. Each of those are about 25% of the portfolio. The growth outlook for the combined FinPAC portfolio is somewhere between $50 and $100 million over the course of 2023. And that's evenly distributed within those three businesses. So moving up a little, but nothing significant at all.
spk17: right you want to talk about yeah generally generally what we find is within the FinPAC portfolio we look at the non accrual numbers and how those are tracking and generally of the preceding quarter approximately 80% of those non accruals typically rolled the charge off I think that I think that the the top of it will be north of north of 4% And I would be surprised if it peaks over 5%.
spk15: Got it. That's very helpful. And I guess just if I could sneak one follow-up in on that. Do you view the FinPAC portfolio as, I guess, when you look across the rest of the the equipment finance kind of space, do you view it as different from a mix and the type of stuff that you're underwriting relative to what other banks underwrite? Or do you think it's fairly similar to the equipment loans that other banks are also underwriting?
spk17: It's different. With respect to the classic FinPAC, these are tiny ticket loans, they are high yielding, they are higher risk, specialized lending. So that's why you see the loss numbers where they're at, and that's why we're not surprised. Typically, when you say equipment finance company, most equipment finance companies do not have a tiny ticket small ticket leasing operation. They're typically middle market, which we also have. And those losses are extremely low if existent at all, but it's also extremely low yielding business as well. So it is more of a specialized leasing business.
spk15: Got it. That's very helpful. Thank you very much for taking my questions, everyone. I appreciate it.
spk11: Thank you. One moment, please. Our next question comes from the lot of Brandon King of choice. Your line is open.
spk06: Hey, good afternoon.
spk11: Good afternoon.
spk06: Just, just one question for me. Um, and I know a lot has changed since the merger was announced, but with the return on intangible common equity, uh, 15% was kind of the estimation then, but should we think about that as a longterm target for the company now?
spk16: Well, I'd say this. We did also include on page four this kind of our updated expectations as compared to the original announcement date. And with that, just in terms of return on tangible common equity, driven again by a lot of the accretion, 15 is now 20% plus. So I guess it depends on the long term and the definition of long term for that. For the next couple of years, we feel pretty good about that. Longer term beyond that, I think just going back over 27-year career, not specific to Columbia, but just for regional banks in general, somewhere in the mid-teens seem to make sense for low-income targets.
spk06: Okay. That is all I had. Thank you. That's my question.
spk11: Thank you. One moment, please. Our next question comes from the line of John Ofstrom of RBC. Your line is open.
spk12: Hey, good afternoon, everyone. just a few follow-ups just focusing out a bit on credit I understand the Moody's impact on the provision but you know credit seems clean you have high reserves and marks is it safe for us to assume just minimal provisions from here or what what would drive a provision from here this is wrong what I'd say well drive the provision of course will be changes in the economic forecasts right so as those change you'll see
spk16: from a CESA standpoint, provisions. But the real key is what's happening with charge-offs. And so we've seen elevated levels with FinPAC over the last couple quarters, specific to that small owner-operator transportation-type business. That'll continue here for a bit. And we're not seeing any migration for the rest of the portfolio, which is the vast majority of the portfolio. So I think specific to provisions, it's going to be solely based off of you know, what we see with Moody's baseline economic forecasts or consensus economic forecasts over time, now they change.
spk12: Okay. That's good. That's helpful. Just one follow-up on office, that last bullet where you give some of the stats in terms of what you're seeing in that portfolio. Is any of that abnormal in your minds? The central business district and suburban office that you're talking about, are any of those stats different from what you'd normally see?
spk17: No, they're not. Pretty typical as to what I would have expected to see.
spk12: Okay, good. And then I guess the other one, slide 10, I want to make sure I have this right. The earning asset message, Ron, when I just do the math, it suggests that Q3 and Q4 average earning assets are going to look a lot like Q2. Is that the right way to read that? I know it sounds like a simple question, but I just want to clarify that.
spk16: That is.
spk12: Yeah. Okay. And then last one, Clint, for you, are the name changes done and just big picture, how did the conversion go? Thank you.
spk04: The name changes are done. You know, there's, there's, it the reason the reason I hesitate is is so like if you drive by the like a legacy you know a former Columbia Bank branch most of those are signs are bagged right now because you know there's a hundred and fifty locations that we have to to resign you know and then and then you know even in markets like the Puget Sound area where we both had, or Portland, where we both separately had a significant presence. Well, we want to make sure that the branding in that market and any particular market matches. We don't want mismatched signs and things. So that's a summertime project. But when you do drive by one of the locations that formerly said Columbia Bank, it now says Umpqua Bank, our branch that's in the first floor of our headquarters building here has been fully rebranded. It was done, I think, the first week. So that side of it, I think, has gone very well. Well, I'll say about the conversion, you know, when Ron was talking about the bond portfolio during his prepared remarks, he could hardly contain his excitement, and even right now, I just mentioned bond portfolio, and he's grinning ear to ear. That's kind of how, I'm not an excitable person, but But that's how, when I think about the team that we've assembled with this combination, and I referenced it in my prepared remarks, and this has been a pretty lengthy call, so I don't know if anybody even remembers an hour and 10 minutes ago when I made these comments, but if you think about what we accomplished organizationally in the first quarter, two separate divestiture projects i mean those are kind of many uh m a transactions in and of themselves uh closing a transformative merger mid-quarter um and and and then you know having this level of detail already uh to go and along the way um you know two and a half weeks after you after you close it you convert the systems And so I think about the talent that it took to pull that off, and we did it. And so I think about myself as an employee of the company. I'm utilizing all our current Go Forward platforms. It's working great. It'd be disingenuous if I didn't say the first day after my email converted that I wasn't trying to figure out where the heck everything was. But by the third day, man, I was loving the enhanced functionality that we have. And then if I step back and think of it from a customer's perspective, you know, on a personal level, utilizing all of our go-forward platforms, and they're working great. And more importantly, when I go home at night, my wife's not complaining about Zelle or the mobile banking app or anything like that. So, you know, just a couple of kind of high-level points of view that, you know, we've monitored. And then, you know, we've had a lot of conversations with some of our very complex, larger middle market clients and, you know, just a lot of success stories. So I think I was telling somebody this the other day. Our IMO team, they gave themselves an A minus. I give them a solid A, maybe even an A plus. Now, that doesn't mean there still aren't just some things that are in flight, but overall, it went great. And that's why there's the optimism around the pipelines building, the outlook for the rest of the year, the ability to go out, take market share, and all of those things that we've talked about for the last hour and 15 minutes.
spk12: Okay, that's helpful, and thanks for the great deck. A lot of good detail in there. I appreciate it.
spk04: That's the fine work of Jackie Boland.
spk11: Thank you. I'm showing no further questions at this time. I'll turn the call back over to Jackie Boland for any closing remarks.
spk01: Thank you, Valerie. Thank you for joining us on today's call. Please contact me if you would like clarification on any of the items discussed today or provided in our earnings materials. This will conclude our call. Goodbye.
spk11: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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