Thank you for standing by, and welcome to the Columbia Banking System's 1st quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentations, there'll be a question and answer session. To ask a question at that time, please press star one one on your telephone. As a reminder, today's conference call is being recorded. At this time, I'd like to introduce Jackie Bohlen, investor relations director for Columbia to begin the conference call.
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 release and 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 Merrywell and Tory 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.
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 an integration of Columbia and Umpqua. I'm very proud of what our team accomplished during the 1st 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 homeownership 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. Now I'll turn the call over to you, Ron.
Okay, thank you, Clint. 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 GAAP 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.
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 two spread since announcement, we ended with $16 billion in discount marks, with all but $130 million of that related to rate. These rate discounts will accrete to interest income, providing a significant and stable additional earning stream over time, which we'll highlight in a few minutes. 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 seven 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 million-$64 million in annualized cost savings by the end of the second quarter, or approximately $15 million-$16 million on a quarterly basis, achieving these synergies evenly throughout the quarter. Slide 8 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 cost to fair value, noting the difference between current par and amortized cost 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 Umpqua 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 earning stream with greater optionality. The overall book yield was 3.62% with an effective duration of 5.7 at quarter end.
Lastly, we only have $2.4 million in HTM bonds, which represents some CRA-related bonds with no unrealized loss. To better help investors given the combination 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 million-$270 million range in Q2 when CDI amortization and merger expenses are excluded.
We expect this level to trend down to $240 million-$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. I want to take you forward to slide 15. Here, we break out Q1 GAAP 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 GAAP results with a net loss of $14 million driven entirely by merger expense along with the initial ACL provision. 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 managed 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 to 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 two double count, then to adjusted operating income. Now in the merger related items column, we have $32 million of net discount accretion from the March 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. That takes us to the far right column, which presents the bank excluding the merger accounting marks. Again, the interest rate environment introduces significant amount of purchase accounting accretion and amortization into our reported earnings. 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 NIM 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 restructure 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 trending over the past few quarters where our rates down risk has been reduced significantly. 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 funds 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. With that, I will now turn the call over to Frank.
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 are 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 build 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 forecasts used in 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 add 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 a 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.
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, our broader footprint, expanded set of products and services, and our collaborative spirit across our teams support our expectations for continued success. Now back to you, Clint.
Thanks, Chris. Our regulatory capital position is outlined on slide 30. We remain above both well capitalized and internal threshold targets. 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. Valerie, please open the call for Q&A.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. One moment for our first question. Our first question comes from the line of Jeff Rulis of D.A. Davidson. Your line is open.
Thanks. Good afternoon.
Good afternoon.
I guess to start, I appreciate all the detail in the, 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 stairstep as you go through the, through Q3, and I guess you ended at $240 to $250 in Q4. Could you repeat that piece again?
I mean 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. We talked about that. Then on that slide 7, we show you the ramp for the additional $59 million-$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.
Perfect.
$59 million-$64 million additional in the second quarter. The balance in Q3 will end at $135 million 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.
Okay, great. Thank you. 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. 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, other ways of deploying that capital as that grows?
Hey, Jeff, this is Ron. On the first one, very much we have forecast on the, on the capital build, and it's gonna be in a 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 know, 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. Excited about that.
That 20 to 30 basis points will be a quarterly accretion in the capital ratios?
Yeah. Jeff, this is Clint. I'll just add that, you know, as you do the math in terms of just what the accretion adds and then factor in earnings and you can pretty quickly, you know, reconcile Ron's comments and mine about the capital generation and the capabilities of the company. With respect to a buyback, you know, I don't see anything this year. You know, I think that just all the volatility that's out there and the fact that, you know, we'll be building in the next couple of quarters to our, you know, long-stated long-term target capital ratios. We'll let that occur.
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, you know, make sure 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. Also, you know, not have too much capital sitting around that hurts our returns for our shareholders.
Okay. Thank you. 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. Second, you talked about expanding tools into Utah and I guess your expectations for the, you know, growth through the end of the year if you think you could scratch up from 331 levels. Thanks.
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 Tory'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 two, looking at opportunities they might have with funds that are held elsewhere.
Expanding into Utah, we should be up and going sometime during the quarter to attracting actual deposits 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're very, 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. 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. I don't know, Tory, did you want to add anything?
No, Jeff, this is Tory Nixon. 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. To Chris's point, a lot of activity inside the commercial bank on new relationships, prospecting, funds, deposit funds from for our customers from other institutions. A lot of really, really good activity.
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?
Yeah no, I think there's a really great opportunity for us to grow the balances of the company and, you know, we 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, I mean all those things that drive value for the company.
Jeff, I'll just add, you know, there's a bit of a wild card in there. You know, that's, you know, it appears that we've returned to kind of seasonal patterns that we haven't had since pre-COVID. 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. You know, in addition to the activities that Tory mentioned and Chris, there's that seasonal pattern.
I would expect that that will return and behave as, you know, we've seen in the past. The Fed's still removing liquidity from the system. I think there's still just from an industry perspective, there's still some of that activity and that's yet to occur. That's why it's hard to just tell you know, yeah, it's up X%. I think I share the team's optimism on our ability to take market share and the conversations that we're having, you know, 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. I think those activities, no matter what happens at a macro level you'll see the positive benefit to our balance sheet.
Okay. Appreciate it.
Thank you. One moment please. Our next question comes from the line of David Feaster of Raymond James. Your line is open.
Hey, good afternoon, everybody.
Good afternoon, Dave.
Hey, David.
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 talked about a lot of it's really a function of the declining balances of 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-boarding rate debt, migration, you know, into the wealth or versus turmoil from the banking failures or even the conversion?
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. On page 8, we did lay out the changes in deposits from that upper left table as if we were, you know, pooled or combined on a basis for comparability purposes. When we look at the, you know, ex broker or 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's feels like a similar continuation of the inflation story we talked about last quarter for looking at Q4 results on the commercial side similar. Just the kind of effects of QT at the customer level utilizing cash from that standpoint.
Okay.
Yeah. David, you asked in 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. We saw a very similar, I'd say it's probably a little bit of a larger activity than historical averages on that. The really nice thing about this combination now is we have even more options that are available. So all of the clients aren't looking to immediately move into a treasury bill or something of that nature with the Insured Cash Sweep and the deposit promos that we have. Our bankers have multiple tools available for them based on what the client's needs are, and I think that just gives us maximum flexibility to solve the issue that they have.
That makes sense. maybe touching on the growth, the loan growth side. You know, obviously, the market's pretty volatile right now. I'm curious how demand's trending from your standpoint, you know, how new loan yields are, what segments you're still seeing good risk-adjusted return. Maybe just, you know, 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.
David, this is Tory Nixon. I think you kind of summarized a lot of things in that, 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 will be very, is being very well received by our C&I customers that typically wasn't available in the Legacy Columbia portfolio or customer. Great opportunity to kind of see us, have a lot of financial strength and to be very active in all the markets that we are in. 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. There still is demand.
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.
Okay. 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-adjusted returns?
Yeah, I think it certainly depends on the asset class. I think you know, they're near the 6% range on yields, maybe a little higher. I mean just we've got a lot of dry powder and a lot of opportunity and able to serve our customers and bring in new ones into the company.
Okay. You guys have done a great job continuing to expand at both Columbia and Umpqua with new hires and new markets. You 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 talent just given the volatility? Are you looking at new hires? 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?
This is Tory again. I'll talk about commercial, let Chris talk about consumer a bit. We're doing all of those things. We're looking to hire in, you know, 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. Infill in the rest of the company, I mean, we continue to look at talented people and, you know, have a philosophy that we're gonna bring talent into this company when we find it. We've got a great story to tell that like, you know, you can obviously tell we're very excited about the future of this company.
When we think about the opportunity that we have and the opportunity that bankers in our markets have working here, they get very excited. We continue to tell the story. We continue to hire people in the Pacific Northwest, in Northern California, in Southern California, in Idaho. I mean, you name it, we're continuing to broaden, expand, and push the bank forward.
Yeah. David, what I'd add to that is, you know, 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. What I would say is that we're also, though, looking at the wealth side of it and bringing that into the 8 states and the areas that we're, that we're expanding as well. I think both companies have always been opportunistic, that when good bankers raise their hands, we're ready for them. So I would say that's still out there. I echo Tory's comments about people are excited.
When you think about the capabilities that we have and the balance sheet construction, as Ron described, I think there's gonna be plenty of opportunity for that.
Yep. Thank you. Appreciate it and congrats on closing the deal.
Thanks, David.
Thanks.
Thank you. One moment, please. Our next question comes from the line of Chris McGratty of KBW. Your line is open. Pardon, Mr. McGratty, your line is open. One moment, please. Okay, one moment. Our next question comes from the line of Jared Shaw of Wells Fargo. Your line is open.
Hey, good afternoon.
Good afternoon, Jared.
Hey, maybe just, you know, staying on the track of opportunity. You know, clearly there's been a lot of disruption with Silicon Valley and First Republic, and just in general, you know, some banks that are seeing more weakness. Maybe more specifically, do you see specific opportunities into some of those business areas, some of those markets to step in and I'm not sure when you talk about new commercial customers coming to approach you, any of that from, you know, some of those specialty business lines that some of those banks focus on, that could be an opportunity for you?
Yeah, Jared, this is Clint. I'll kick it off and then see if Tory and Chris wanna add anything to it. The short answer is yes. We have seen opportunities. You know, we saw that actually in the days and hours leading up to, you know, Silicon Valley's failure. We've got a pretty diverse offering. 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. We won't do something if we don't have expertise in it.
There is some crossover. To the extent that there's crossover, there's, you know, we'll compete for the business, and I think we compete very well and it will create opportunities. In terms of going, you know, all in and shifting our focus, that's not necessarily the plan. You know, we love the diversification that we have. We think that's, you know, a foundational element of strength for our company. Certainly we'll be opportunistic when and where we can be. Tory, anything to add?
No, I think you summarized it really well. I mean, there's, you know, I think there's that the opportunity exists in all of our markets and, you know, we're gonna 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 who want to be a part of the bank or people who want to be a part of the bank.
Okay. Good. Thanks. You know, maybe shifting a little bit on capital, you highlight getting back to that CET1 target of 9%. Is that sufficient going forward? Is 9% high enough or, do you think that, you know, maybe you end up needing to bring that floor up a little bit before really exploring other capital deployment opportunities?
Yeah, Chris, this is Ron. I'd say, you know, our long-term target on CET1 is nine, and we're at 8.9. We'll be there, heck next month. I'd say on the total risk-based capital ratio, long term, again, target 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 diligence coming off the financial benefit of both companies coming together, cutting the costs and having the accretion. That's really, you got to look across all 4 ratios, both at the parent and the bank. Yeah, by default then that CET1 would be above nine, but long-term target-wise, not significantly.
Okay. 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?
In terms of the long-term targets, no. There are times where you might want to be below or above, depending on which way the wind's blowing. Like I said, we're going to have quite a bit of capital generation over time. Again, you know, so much of the mark, I mean, $1.6 billion 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 or government agencies. You know, it's interesting for you to think about, you know, the impact of the merger accounting on this, reducing our capital ratio state, 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. 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.
I think the history of, you know, pre-merger both companies, that was always a challenge trying to get walk it back down to those long-term targets. You add in the accretion in-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. You can pick any ratio, they're all going to grow pretty rapidly.
Okay. just finally for me, when we look at the average earning asset guide, where do you see cash going back down, you know, to a, you know, I guess, where do you see cash going as a percentage of the balance sheet after we get through, you know, the end of March here, back down to 5%, below 5%?
Yeah. On that guide we make in the note column there, we assume we maintain an elevated level of cash. Of course, you know, a lot of that is going to be subject to what happens from a macro standpoint with overall deposit flows, et cetera. But, you know, I'd say all else being equal, if we brought on $2 billion of additional off-balance sheet liquidity on balance sheet just to have that on balance sheet and we're sitting at $3 billion, we'd be somewhere in the $1 billion-$1.5 billion range, if we had not done that. That's probably a better representation of, you know, where I'd expect that in-spring cash level to floor at.
Yeah, I'd say same. 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 near term.
Yep. Totally understand. Okay. Thank you.
You bet.
Thank you. One moment please. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open.
Hey, good afternoon.
Good afternoon.
The first one, for me, just around the borrowings, the $6 billion of borrowings, I know two of it was for to fund cash. 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 to pay them down?
Yeah. You know, ideally we're going to see our deposit activities strengthen over the course of the next couple quarters post-consolidation, as you heard post-conversion, as you heard Chris and Clint talk about earlier. 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. Plan on, you know, maintaining the wholesale borrowings, that'll fluctuate just as the opposite of what, you know, we see with the net loan and deposit flows. Near term, relatively static.
Okay, great. You've had a lot of time with how long the merger took to close to, you know, identify the cost saves, make sure you can get the $135 million out. They're coming out sooner than, you know, previously thought. You know, are there, and I know it may not necessarily be the focus, you know, in the near term, but have you been able to quantify some additional cost saves above and beyond that $135 million? Whether or not, if so, how much? You know, could that hit the bottom line?
Yeah. Matt, this is Clint. Yeah, we have spoken over the past year that our internal target is actually above the $135 million. You know, if we seem overly confident in, you know, delivering on the $135 million by the end of the 3rd 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. There's a couple of reasons. One, you know, 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.
The other, the other component of that is the investment in growing our franchise that Chris and Tory spoke about. We wanted to make sure that we're still gonna do those things, you know, we're still going to make the appropriate investments. Net-net, we wanna make sure that that doesn't dilute the $135 million or 12.5% cost saves that we promised to investors. There is a higher internal target. It's identified. It'll trickle in, you know, fourth quarter and beyond. It could be diluted somewhat by other investments that we may elect to make.
We'll talk about those, you know, at the time that they occur. 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. 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. I think that's a longer-term process of just fine-tuning and making our company the best and most efficient it can be. That's the type of activities that you'll see in 2024, 2025, and then ongoing as we go through the years.
Just around the deposit pricing outlook, it sounds like you're doing some promotional activities in some of your newer markets. Can you talk through, you know, the deposit pricing philosophy now that you guys are together? I mean, Legacy Columbia 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 your view on pricing, you know, maybe going forward. Just any comments around deposit pricing outlook in particular when the Fed stops raising rates?
Sure, Matt. Great question. 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 as some promo rates that are out there. That's not just new markets, it's existing markets. It's all across the footprint. That sets a marker for us. We're still negotiating rates with clients and looking at options, looking at where, what's the real need, what are they really trying to do with the money. 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 gonna. Maybe you'll see some lag.
I think deposit rates tend to lag that, and that's historically for both companies as well. As it approaches the slowing, I think that, yeah, you start maybe getting near the peak of it. I'll always throw in the caveat of, we don't know what competitors are gonna do. We just have to maintain our discipline. We have to stay in touch with our clients and understand what's going on on the market. Tory, if you want to add anything?
Yeah. Matt, the only I would add is that, you know, 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. I mean, certainly there's some price in the conversation, but a lot of it's around security and safety and, you know, explaining the balance sheet of the company and our earning stream and our deposit base, et cetera, is, like, very valuable to the customer, our customer base. 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 CDARS.
We've done that on a lot the last, you know, couple months. I think we probably increased the ICS balances about $400 million-$500 million, which is just reciprocal, you know, insurance for deposits in especially on the commercial side. I mean we've got a lot of options for customers and had a lot of conversations. Again, it's a little less about price and more about a relationship and about safety and security.
Okay, thanks. Last one from me, just housekeeping. Tax rate, what do you suggest we use going forward?
25%.
Okay. Thank you.
You bet.
Thank you. One moment, please. Our next question comes from the line of Andrew Terrell of Stephens. Your line is open.
Hey, good afternoon.
Good afternoon.
Clarification on the margin guidance. I think you noted the margin was 4.31% on a GAAP basis in March. I think the borrowings were about the excess cash and borrowings were about 10 basis points to that. In your full year margin guidance, that 4.15%-4.25%, what do you assume for borrowings and cash? Do you assume it stays at a relatively similar level?
Yeah, we assume a consistent level and also recognize that full year number will also reflect the effect of averages with, you know, the combination fully included for 10 of those 12 months, but not the full 12. Maintaining consistent cash balances. Then I'd clarify 1 item. When we talked about the impact of the excess liquidity, it was really referring to the month of March at the 355 would've been ballpark 365 had we not brought on that excess borrowing. Y ou know, a significant impact in terms of net interest income, but 10 basis points on the margin.
Yep. Got it, understood. Okay. And on the core fee income side, it looks like when I adjust the items called out that the core operating fee income was around $47 million or so for the quarter. I guess given 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?
Yeah. We didn't provide a guide on that but I can tell you for the month of March, net interest income, excluding again the, you know, fair value change type stuff, was $22 million just for the month on a combined basis.
Okay. Imply, yeah. Okay. That makes sense.
You bet.
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? 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? 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?
Yeah. This is 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. The underwriting is very similar, but the qualification criteria, I would say, is much more steep. We've got to know the sponsors extremely well. They've got to sensitize extremely well. We shock it for rate, we shock it for vacancy, even to a greater degree of some of our smaller relationship deals that we evaluate. They are all leased at this point, I will say. Fully leased under lease agreements and are performing well.
Okay. On the credit mark on the office portfolio specifically, was it similar to just the overall mark, or was there a bifurcation that, I guess, did the deal allow you to put a larger credit mark on the office book?
We have the ability to do if the data supports it, but again, we talked about the quality of this portfolio. I'd say it's ballpark in average, in line with the overall CRE level.
Thanks for taking the questions and congrats on closing the deal.
You bet. Thank you.
Thanks, Andrew.
Thank you. One moment please. Our next question comes from the line of Brody Preston. Your line is open.
Hey, good evening everyone, or good afternoon for you all. Thank you for taking the questions. Just wanted to ask on the, on the securities that you sold, and then the securities that you purchased, in the, at the end of March, what was the duration of those securities, and what was the rate on the $1.2 billion that you sold? I guess more the effective rate, you know, for the marks.
Yeah. This is Ron. I'd say, again, we sold off front-end and cash flows. The duration on the purchases was probably about a half year longer than the overall duration. Again, we wanted to extend that. We would've been probably around 5.5, ended up at 5.7 just with the effect of the repurchases were longer dated, right? Again, with an eye towards when we did this, it was actually the first week of March, right? 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. Overall, the mark book was, you know, you talk 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.
Got it. Thank you for that. 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?
You bet. you know, what we talk about later in the interest sensitivity slides, working up closer to that model beta from our sensitivity standpoint. Higher than 28%, but probably not at the 53 level that we had footnoted on that slide later on. Just, you know, continued increase just because we're assuming, you know, there's a lag to deposit pricing increases.
Got it. Is there a static deposit mix assumption that underpins the NIM guidance?
Relatively static. Granted, we talked about earlier, for example, DDA are up, you know, here in April. Just in terms of the overall mix, not a significant change in the overall mix.
Got it. 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 versus rate?
Well, I think in terms of this waterfall, you've also got the effect of the Q4 reported amount was standalone Umpqua Holdings. The Q1 reported amount was combined company for 1 month and then standalone prior Umpqua Holdings for the first 2 months of the quarter. You've got that really driving a good chunk of that from an overall mix standpoint. I mean.
Okay. Understood.
It'll make a lot more sense for you next quarter.
Yeah. Yeah. I wanted to ask on the loans that are maturing in the less than 6 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?
I don't know. Less anyway.
Yeah.
You know, what current yield...
Yeah, I mean, you know, those loans are gonna be dated from prior to the, you know, the move up. It's gonna be in the, you know, call it mid fours to five range at the highest, which is gonna be, you know, well below what Tory talked about earlier for new loan yields.
Got it. Do y'all have any hedges in place on the loan portfolio that we need to think about for NII modeling?
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.
Got it. Then, just one last one for me. I'm sorry if you, if you mentioned this earlier and I missed it. 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. 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?
This is Tory. I'll talk about the growth side of it, then Frank can weigh in if he wants on the charge-off piece. I mean, first of all, the FinPac portfolio is three different businesses. It's the small ticket, which makes up about half of it, 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 million and $100 million over the course of 2023. That's evenly distributed within those three businesses. Moving up a little, but nothing significant at all. Frank, you want to talk about it?
Yeah. Generally what we find within the FinPac portfolio, we look at the non-accrual numbers and how those are tracking. Generally, of the preceding quarter, approximately 80% of those non-accruals typically roll the charge off. I think that the top of it will be north of 4%. I would be surprised if it peaks over 5%.
Got it. That's, that's very helpful. 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 equipment finance kind of space, do you view it as, you know, different from a, from a mix and the, 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?
It's different. With respect to the classic FinPac, you know, these are tiny ticket loans. They're high yielding. They are higher risk, specialized lending. 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. Those losses are extremely low, if existing at all, but it's also extremely low yielding business as well. It is more of a specialized leasing business.
Yeah.
Got it. That's very helpful. Thank you very much for taking my questions, everyone. I appreciate it.
Thank you. One moment please. Our next question comes from the line of Brandon King of Truist. Your line is open.
Hey, good afternoon.
Good afternoon.
Just one question from me. I know a lot has changed since the merger was announced. With the return on tangible common equity
Of 15% was kind of the estimation then. Should we think about that as a long-term target for the company now?
Well, I, you know, I say this, we did also include on page four of this kind of our updated expectations, as compared to the original announcement date. With that, just in terms of return on tangible common equity, driven again by a lot of the accretion, 15 is now 20%+. 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, you know, just going back over a 27-year career, not specific to Columbia, but just for regional banks in general, somewhere in the mid-teens seem to make sense for long-term targets.
Okay. No, that is all I had.
Yeah. Thank you.
That answered my questions.
Thank you. One moment, please. Our next question comes from the line of Jon Arfstrom of RBC. Your line is open.
Hey, good afternoon, everyone.
Hey, Jon.
John.
Just - hey, 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? What would drive a provision from here?
This is Ron. What I'd say will drive the provision, of course, will be changes in the economic forecasts, right? As those change, you'll see from a CECL standpoint, provisions. The real key is what's happening with charge-offs. We've seen elevated levels with FinPac over the last couple of quarters specific to that, you know, small owner/operator transportation type business. That'll continue here for a bit. We're not seeing any migration for the rest of the portfolio, which is the vast majority of the portfolio. I think specific to provisions, it's going to be solely based off of, you know, what we see with the Moody's baseline economic forecast or consensus economic forecast over time and how they change.
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?
No, they're not. Pretty typical as to what I would have expected to see.
Okay, good. 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, I just want to clarify that.
That is.
Yeah. Okay. Last one, Clint, for you. Are the name changes done? Just big picture, how did the conversion go? Thank you.
The name changes are done. You know, there's The reason I hesitate is so, like, if you drive by the like a legacy, you know, a former Columbia Bank branch, most of those signs are bagged right now because, you know, there's 150 locations that we have to re-sign. You know, even in markets, you know, 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, you know, the branding in that market and, you know, APIC or market matches. We don't want mismatched signs and things.
That's a summertime project. you know, 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, was done, I think the first week. you know, so that side of it, I think is gone very well. What 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. 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 that's how when I think about the team of that we've assembled with this combination. You know, I referenced it in my prepared remarks, and this has been a pretty lengthy call, so, you know, I don't know if anybody even remembers 1 hour and 10 minutes ago when I, when I made these comments. If you think about what we accomplished organizationally in the first quarter, you know, two separate divestiture projects. I mean, those are kind of mini M&A transactions in and of themselves. Closing a transformative merger mid-quarter, and then, you know, having this level of detail all ready to go.
Along the way, you know, 2.5 weeks after you close it, you convert the systems. I think about the talent that it took to pull that off, and we did it. I think about myself as an employee of the company. I'm utilizing all our current go-forward platforms. You know, it's working great. You know, it'd be disingenuous if I didn't say that, you know, the first day after my email converted that I wasn't, like, trying to figure out where the heck everything was. But by the third day, man, I was loving the enhanced functionality that we have.
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. More importantly, when I go home at night, my wife's not complaining about Zelle or the mobile banking app or anything like that. You know, just a couple of kind of high level points of view that, you know, we've monitored. 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. 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. That doesn't mean there still aren't just some things that, you know, are in flight. Overall, it went great. 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.
Okay. That's helpful. Thanks for the great deck. A lot of good detail in there. Appreciate it.
That's the fine work of Jackie Bohlen.
Thank you. I'm showing no further questions at this time. Let's turn the call back over to Jackie Bohlen for any closing remarks.
Thank you, Valerie. Thank you for joining us on today's call. Excuse me. Please contact me if you would like clarification on any of the items discussed today or provided in our earnings material. This will conclude our call. Goodbye.
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.