Last year wasn't easy for Columbia Banking System, which faced investor skepticism over a merger that was supposed to make it a Pacific Northwest powerhouse.
The merger with Umpqua Bank, once a major rival in the region, came at a tricky time. The deal closed just days before the collapse of Silicon Valley Bank, which spooked the market over the health of regional banks across the country.
Convincing investors to stick around during a transition year is never easy — particularly when they're as skittish about banks as they've been since SVB's failure. It didn't help that Columbia failed to put up great numbers last year, as higher deposit costs weighed on its profitability.
But now, with the combined company officially in its second year, CEO Clint Stein says he's "laser-focused" on returning Columbia to the "consistent, repeatable, top-tier performance" it once enjoyed. The makings of that effort are clear behind the scenes, Stein said, though he acknowledged that investors are "trying to figure out" how quickly the promised benefits will pan out.
"I have the benefit of knowing what we're doing, knowing where we've made pivots, seeing what our pipelines are, knowing our bankers personally, where we've turned off things that are transactional and don't add long-term value," Stein said. "They don't have that visibility, and that's why I think we have to prove it out over time."
Some of the pressures that have weighed on Columbia persisted last quarter, but analysts also saw signs of progress at the $52 billion-asset bank. Its stock price has risen in recent days, though it's still only worth about half its price before it announced the merger with Umpqua.
It may take months for Columbia's shares to leave the "penalty box," said Timur Braziler, a Wells Fargo analyst. Its merger with Umpqua "still makes sense," Braziler said, as the deal creates a strong regional bank that can better compete with megabanks for customers in the West. But investors will need to see proof that the math is as compelling as executives promised.
"Ultimately, I think we get financials to a point that it makes sense," Braziler said. "But we're going to need to see some of that actually start manifesting through the results before they start getting credit for it."
There are some early signs of a turnaround. After a year of being together, the merged company has just about wrapped up eliminating jobs that it deemed duplicative. It's slashing more than 230 jobs, a move that will save the bank some $43 million a year. The cuts are focused on middle and senior management.
The announcement of job cuts came "eight, nine months ahead of schedule" compared with typical bank mergers, Stein said. The cuts followed a careful analysis of data on inefficiencies and without hiring consultants, who often give advice "that we already know," Stein said.
"I generally don't like consultants because I feel like we should have the smartest people working for us, and if we don't, then we should go get them and hire them," Stein said.
The overlapping markets between Columbia and Umpqua Bank, whose name survived and is now on Columbia's branches, allowed executives to close 47 branches last year. It closed five others in January, but it did so to fund the opening of branches in new markets where it has a limited presence.
Columbia wants to become the "business bank of choice throughout the West," Stein said. It has a strong foothold of 230 branches in Washington, Oregon and western Idaho, and it has 60 branches in California, mostly in the northern part of the state.
Columbia sees room to grow in Los Angeles, San Diego, Phoenix, Las Vegas, Salt Lake City, Denver and surrounding markets. The bank has a small presence — with either a branch or teams of commercial lenders — in each of those areas.
But even as it expands its footprint, Columbia is sticking with its rural markets, Stein said. Eastern Oregon is far different from downtown Seattle or even Tacoma, Washington, where Columbia has its headquarters.
A lot of banks make decisions based off "whatever they see out their office window," Stein said, but Columbia's leaders travel constantly through its multistate footprint to "keep our finger on the pulse."
Business isn't growing all that fast, either at Columbia or at many other banks. Even some of the country's biggest banks, such as JPMorgan Chase and Wells Fargo, have recently said that commercial clients are still somewhat cautious about making big investments.
Total loans at Columbia grew to $37.6 billion at the end of March, up just 1% from a year earlier. With interest rates at 20-year highs, some businesses are using their cash instead of borrowing money. Others are "sitting on the sidelines, waiting for opportunities" if they pop up, Stein told analysts last month.
For its part, Columbia certainly welcomes its loans growing a bit faster, but it is not "actively looking to grow the balance sheet," Stein said on the company's first-quarter earnings call.
It is instead focused on improving its profitability by slashing expenses. And while staff reductions are helping to cut non-interest expenses, analysts hope to see that same momentum with the bank's interest costs.
Much like at other banks, higher interest rates have prompted Columbia's depositors to ask for more compensation. Higher interest payments have squeezed the bank's profit margin, since the interest it is charging on loans isn't rising as quickly.
Investors still feel stung by a surprising drop in Columbia's net interest margin at the end of last year. Some investors "were warming up to the stock" but since have stayed away due to continued NIM pressures, said Brandon King, an analyst at Truist Securities.
The bank's net interest margin fell again in the first quarter, slipping to 3.52%. That was down from 3.78% in the fourth quarter of 2023 and 3.91% in the third quarter. The metric started to tick back up in March, raising some hope that the pressures were peaking as the quarter ended.
The potential improvement in deposit costs is helping the bank regain some of the "goodwill that they lost" with a disappointing earnings report in January, King said. So are the cost-cutting efforts, since non-interest expenses are the "one thing that banks can really control," he said.
"It's just a function of time before investors really start to get more comfortable," King said.
It may help that Stein is openly confronting the bank's challenges rather than shying away from them.
"Management teams who try to gloss over everything and just try to be the cheerleader — a lot of times, it doesn't turn out too well," King said. "It's always good to be honest and always be watchful of different risks that are out there."
On one major risk — borrowers' ability to repay their loans — analysts say that both Columbia and Umpqua have long had a solid track record.
Net charge-offs did rise in the first quarter, but they remained extremely low, at 0.47% of average loans. The one part of the bank's portfolio that has shown more stress is an Umpqua equipment leasing business called FinPac, whose borrowers include trucking companies. That sector is in significant distress following a boom early in the pandemic, when consumers were spending a lot of money on furniture, appliances and other goods that needed to be shipped.
Losses from the FinPac portfolio have peaked, Frank Namdar, Columbia's chief credit officer, told analysts last month.
Meanwhile, Columbia appears to be well-positioned to handle stress in commercial real estate, a sector that investors and regulators remain worried about. The numbers there have been "really quite boring, which somebody like me loves to see," Namdar said.
Columbia has no delinquent loans in its multifamily loan portfolio, and very few borrowers that own office buildings are experiencing stress, he said.
Stein, the bank's CEO, said the multifamily portfolio consists of "garden-style apartments" rather than downtown high rises that may be under more strain. A housing shortage in the West is helping ensure the properties remain in high demand.
And the bank's office portfolio, which makes up 8% of total loans, also doesn't consist of high-rise buildings in downtown Seattle or Portland. Some of those buildings have struggled as the rise in remote and hybrid work curtails demand for office space.
The bank's office portfolio is predominantly made up of smaller buildings in the suburbs, where activity remains "as busy as it ever" was, Stein said. For years, Columbia has passed on "hundreds of millions in real estate deals" because it thought they were far too risky.
"Somebody did those deals, so I do think that there will be some pain to be had," Stein said. He added that he hopes banks are "judged based on their actual credit metrics" rather than an assumption that "we all did the same stupid stuff."
