Columbia Banking System, Inc. (COLB) Q1 2024 Earnings Report, Transcript and Summary

Welcome to the Columbia Banking Systems First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. At this time, I would like to introduce Clint Stein, President and CEO of Columbia to begin the conference call.

Thank you, Didi. Good afternoon, everyone. Thank you for joining us as we review our first quarter results. The earnings release and corresponding presentation are available on our website at columbiabankingsystem.com. 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 the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures and encourage you to review the non-GAAP reconciliations provided in our earnings materials. With that, March 1 marked the 1-year anniversary of the closing of our merger. Was a notable milestone for our company for many reasons. Importantly, provided us with a full year of data points for what was working well within the combined organization and allowed us to identify redundancies and inefficiencies and that are a natural byproduct of large mergers. Our 1-year anniversary marked the conclusion of our merger integration phase and enabled us to start our operational effectiveness work. Armed with the observations and learnings over the first year, we made significant progress on identifying opportunities for improving our expense profile. During the first quarter, we reduced our head count by 91 FTE with additional reductions communicated internally of 142 for the month of April. The FTE reductions, combined with other expense savings enacted in the first quarter represent annualized reductions of $18 million. These savings are reflected as of quarter end, not in the first quarter's normalized operating run rate of $286 million. The actions taken to date for the second quarter add an additional $25 million of savings annualized to the first quarter number. You've heard me say many times over the years that we target a top quartile level of performance across all financial metrics and a lower cost structure moves us toward our goal and away from what has been up to this point, average at best. The meaningful reductions to our associate base were done in a thoughtful manner, eliminated positions and retirement spanned all departments and levels of management, including the executive team, which is now 15% smaller. Over the past year, our leaders gained an in-depth knowledge of their teams, processes and other factors, allowing them to identify areas for operational improvement. This full-scale review resulted in consolidated positions, simplified reporting and organizational structures and an improved profitability outlook. We believe these changes will enable us to operate more efficiently, while preserving the premier levels of service we provide to our customers. Associated cost savings will continue to be realized during the second and third quarters, with the full benefit of our actions reflected in the fourth quarter expense run rate we outlined in our March update. We expect to incur roughly $13 million in related restructuring expense in the second quarter, which will be fully mitigated by the associated expense reductions within the current year. Our organizational review resulted in a swift elimination of redundancies, but our work is not complete. Our process identified many longer-term initiatives to enhance operational efficiency and further drive franchise value. Many of you know, Columbia has always operated in a cost-conscious manner, and we will continue to seek out additional opportunities to optimize our performance from a revenue expense and profitability standpoint. I hope our actions year-to-date demonstrate that we are laser-focused on regaining our placement as a top quartile bank as we drive towards long-term consistent and repeatable performance. Upon completion of this initiative, our ability to reinvest in our people, our franchise and our suite of products and services will remain intact. We believe these investments, along with a lower expense base, will continue to drive additional long-term shareholder value. And now I'll turn the call over to Ron.

Okay. Thank you, Clint. We reported first quarter EPS of $0.59 and operating EPS of $0.65 per share, and our operating return on average tangible equity was 16%, while the operating PPNR was $201 million. Please refer to non-GAAP reconciliations provided at the end of our earnings release and presentation for details related to our calculation of operating metrics. On the balance sheet, we had $200 million of loan growth and $100 million of deposit growth. For deposits, we had a decline in unsparing demand that occurred in January, but we're encouraged to see those balances flat for both February and March. Our net interest margin of 3.52% and was within our estimated range of 3.45% to 3.60%, and the expected reduction from the prior quarter was driven primarily by the deposit shifts that occurred in Q4 and January. Our NIM increased to 3.55% in the month of March due to pricing reductions on wholesale and promotional fund. Our cost of inspiring deposits was 2.88% for the quarter. Within the quarter, this cost was 2.90% for both February and March, but ticked down to 2.89% at the very end of March. Our projected interest rate sensitivity under both ramp and shock scenarios remains in a liability-sensitive position, and we expect our rates down deposit betas to approximate those experienced on the way out. Our provision for credit loss was $17 million for the quarter. We updated our commercial CECL models this quarter to better reflect historical and expected future losses. In 2023, the methodology for our combined company was structured to the historical Umpqua portfolio composition. The outcome was increased volatility in our provision expense that wasn't characteristic of the granularity and quality of our combined commercial portfolio. Our recalibrated commercial models, which now integrate additional data and operating knowledge, have effectively reduced our commercial allowance for credit losses. It's important to note that the increase in our CRE and multifamily ACL is a response to the transient market conditions in Western downtown cores, where we maintain a minimal presence in our portfolio. Despite these adjustments, our overall allowance for credit loss remains robust, closing the quarter at 1.16% of total loans or 1.36% when including the remaining credit discount. Total GAAP expenses for the quarter were $288 million, while operating expenses were $277 million. We've reflected the FDIC special assessment as a nonoperating item in the press release. Of note, we had a number of one-off items in the quarter that benefited our expense level. Absent these, [indiscernible] our normalized level of operating expense at $286 million. As a reminder, on the expense front, we expect to record a restructuring charge of approximately $13 million related to the efficiency initiatives that Clint discussed as nonoperating expense in Q2. And with respect to our regulatory capital position, our risk-based capital ratio has increased as expected in Q1. We expect to build capital above all long-term targets, which will provide for enhanced future flexibility. I'll close with our outlook for 2024 on several key financial statement items. These are consistent with those included in our early March investor presentation. Average earning assets are expected to remain in the $48 billion to $49 billion range. Our NIM is expected to remain in the 3.45% to 3.60% range, which includes stability in deposit balances. For discount accretion, we continue to expect $130 million to $140 million of securities rate-related accretion, $90 million to $100 million of loan rate related accretion and $15 million to $20 million of loan credit related accretion. We expect full year operating expense, including CDI amortization and the $975 million to $1.025 billion range. With the cost savings that Clint discussed earlier, we expect our Q4 operating expense, excluding CDI amortization to be in the $965 million to $985 million range on an annualized basis. We expect CDI amortization of $120 million for the year, with about $29 million in each of the remaining quarters of 2024. Merger-related expense of $10 million to $15 million and our effective income tax rate at 26.5%. With that, I will now turn the call over to Frank.

Thank you, Ron. The loan portfolio's credit performance continues to demonstrate the strength of our through-the-cycle underwriting process and discipline, together with the quality of our borrowers and sponsors. The trends we are observing in delinquency and nonperforming loans are consistent with the shift towards a more standard credit environment, which follows an extended period of outstanding credit quality. The $30 million increase in nonperforming assets this quarter, primarily attributed to our SBA portfolio and a single C&I-related property is within expected parameters and reflects the dynamic nature of the credit landscape. After accounting for the government guaranteed portion, the rise in nonperforming loans remains modest. Our vigilant and ongoing monitoring of the portfolio is augmented by focused reviews of specific asset classes, such as our multifamily and office portfolios. These detailed analysis have consistently shown no systemic issues across different industries, sectors or regions. We have no delinquent loans in our multifamily portfolio and our office portfolio delinquencies remain extremely low at less than 50 basis points of the total office portfolio. Neither portfolio have had any charge-off activity. Net charge-offs for the consolidated company were 47 basis points annualized for the quarter, with 22 basis points attributable to the bank and 25 basis points to FinPac. We remain very satisfied with the quality of our granular and diversified loan portfolio, which is highlighted in greater detail in our investor presentation. I'll now turn the call over to Chris.

Thank you, Frank. For obvious reasons, deposits remain a key focal area for our teams this quarter. We adjusted how we evaluate and improved deposit pricing during the first quarter. A comprehensive review of exception and other pricing authorities resulted in tighter controls and a renewed discipline around deposit pricing. These changes directly contributed to the stability of our interest-bearing core deposit rates late into the quarter. We also reduced our promotional rates on money market and CD accounts. and the CD repricing impact in the first quarter was significantly lower than it was in the fourth quarter. Beyond our actions related to deposit pricing, the teams are also focused on bringing new relationships to the bank. Our branches are wrapping up a 3-month small business campaign launched in early February, which contributed $225 million in deposit generation to our first quarter results and an additional $75 million to date in the second quarter. The campaign includes bundled solutions for customers without promotional pricing for special products. Additionally, 25% of the balances are noninterest-bearing. Total cost of funds for these deposits was 1.95%. And in addition, we have seen an increase in our commercial card and merchant card activity from the increased referrals. These actions all contributed to a significantly slower pace of increase in our cost of interest-bearing deposits, which was 2.89% as of March 31. Compared to 2.75% as of December 31 and 2.27% as of September 30. So the first quarter's increase was a less impactful 14 basis points, compared to the 48 basis point increase during the fourth quarter. While these recent pricing and balance trends are encouraging, we expect continued declines in noninterest-bearing deposit balances during the second quarter due to seasonal pressures that include customer tax payments. Noninterest-bearing balances were down 3% on an end-of-period basis in the first quarter, but they were down 7% on an average basis due to seasonal declines late in the fourth quarter. The higher rate environment and inflationary pressures have contributed to noninterest-bearing balance migration over the past 2 years. With the Fed funds rate seemingly stabilized and given our proactive pricing discussions, we expect deposit pricing pressures to remain moderated when compared to 2023. But persistent inflation continues to draw down customers' account balances which may exacerbate the tough seasonal deposit flows we typically experience in the second quarter. That said, our teams are focused on generating new business to offset these headwinds and their success will be key to continuing our deposit costs regardless of where we see any rate cuts from the Fed this year. Turning to the loan portfolio. Relationship-driven growth remains our primary focus. Loan balances increased 2% on an annualized basis during the quarter. Commercial lines of credit and owner-occupied commercial real estate drove half of the quarter's expansion and were the primary drivers of the new originations. Lastly, on the loan book. I'll note that our customers had a number of projects in process, which resulted in construction drawdowns and the transition from construction financing to permanent financing during the quarter. This activity accounted for the remaining portfolio growth. Our bankers remain focused on the activities that drive balanced growth in customer deposits, core fee income and relationship-based loans. And with that, I'll now turn the call back over to Clint.

Thanks, Chris. We're committed to optimizing our financial performance to drive long-term shareholder value. In line with our expectations, our total capital ratio has increased more than 100 basis points over the past year since we closed our merger with Umpqua. At 12% for the parent company, we are now at our long-term target. The bank remains modestly below at 11.7%. So we are on the cusp of all regulatory ratios exceeding our long-term targets. However, our TCE ratio was 6.6% at quarter end and we would like to see that ratio grow closer to 8% before considering meaningful options for deploying excess capital. We still expect to organically generate capital well above what is required to support prudent growth and our regular dividend, providing us longer-term flexibility for additional returns to shareholders. This concludes our prepared comments. Tory, Chris, Ron, Frank and I are happy to take your questions now. Didi, please open the call for Q&A.

[Operator Instructions] And our first question comes from David Feaster of Raymond James.

You guys have been extremely busy since announcing the cost saving initiatives, the cost saves have come through a lot earlier than I think we had expected. I was hoping maybe you could help us think through some of the initiatives that are in place and where you're reinvesting some of those savings? You talked about opening a few de novo branches. I know you're always looking for new talent and have had several announcements. And then just kind of how you think about that expense line trending over the course of the year? Would you expect to be fairly steady improvement or more heavily weighted towards the fourth quarter to get to kind of those targets? I mean you're already in the -- at the top end of the range right now.

Well, David, as we've come to expect from you, you pack a lot into a question, and there are several of us here at the table that can provide insights. So I'll kick it off, and then you'll probably hear from Tory, Chris and Ron as well. I'll start with -- in my prepared comments, we had a year of running the company. We set the original organizational design in place in January of '22. So almost 14 months before we could actually start operating the company on a combined basis. And what we didn't want to do at that point in time was cut too deeply, do things -- make cuts that would have a direct impact on customer-facing areas of the company. And we also kept some redundancy in place, because as you know, when you go through any type of merger, let alone one of this size and where we blended the teams, some people self-select out. And -- so we just felt like it was prudent to take the first year continually evaluate what was working well, more importantly, what we could do better and then make an assessment as to -- if it's in a leadership role, which leaders are going to be able to help push us forward to the level and degree that we expect. And then if we have processes that didn't work, and that I kind of alluded to that in my prepared remarks, there's the opportunity, I think, longer term, to reengineer some processes and enhance and improve some automation. That's going to be to a much lesser degree, just kind of a continuous improvement, get better every day type of mentality like what you've expected from Columbia over the years. The real, what I'll call, rightsizing the expense base work, some of it was done in the first quarter before we even started talking about it. Some of the -- we did some branch consolidations. We had some miscellaneous contracts that we were able to renegotiate at their maturity. And then we had the FTE initiative, which came towards the end. And then really, the big number, I mentioned $25 million of annualized savings that have been announced just this month. And that work started the 1st of the month. And associates were notified, and then we started that process. So I would say that it's going to trickle through the third quarter, but the bulk of the effort will happen and be concluded in the second quarter. But by the time you get a full clean run rate of the entire scope of this initiative, it will be the fourth quarter. So that's why we put that number out there.

And David, this is Ron. Just one thing because you mentioned we've already achieved it today. I would just reiterate the -- as we look back at Q1, we did have some one-off credits in the operating expense number that ended at $277 million, we paid the normalized number at $286 million. When you think about go-forward quarters, part of the saves kicking in. And then that will end in -- at expected range of $965 million to $985 million of Q4 2024 operating expense, excluding CDI amortization.

Yes. So sitting here today with the numbers I threw out, it's $43 million annualized that's done. So if that helps you as you're kind of thinking about how to tune your model going forward.

Terrific. That's helpful. And then maybe just as we think about the margin, I think Chris alluded to it. I mean, obviously, one of the primary keys to the margin is going to be core deposit trends. So I guess I'm curious maybe your thoughts on core deposits and some of the initiatives you've got in place. It sounds like there were some really encouraging trends from that targeted deposit campaign, $300 million of core deposit growth. I'm curious what else are you working on and maybe some other campaigns or initiatives that you're considering to help support core deposit growth, especially on the NIB front?

Yes, David, I can't -- this is Chris. I won't give you a complete playbook, but I can give you some color to it. And the retail campaign, it shows what can be done with a little over 300 branches and the focus and really going out and looking at that small business market. We'll see -- there's a lot of work involved in that. There's a lot of referrals to follow up on and giving customers onboarded. The teams worked extremely hard during that time. So we'll look to take a little breather and I'd say, look into the second quarter, later into the quarter, and we'll announce probably another focus maybe something very similar. So that's one piece as far as the gathering of new names and pretty excited about the noninterest-bearing balances that are coming in on that specific customer segment to date, or I said in the prepared remarks, actually, as of last night, worked about 5,300 accounts and $314 million in deposits. And those accounts are maintaining their balances or higher than our average balance that we currently have and they continue to come in at a nice pace. We got another 5 days or so to run. The other pieces are really around -- we talked in the fourth quarter and we talked to the -- in the first quarter about those results about CDs and things of that nature. Really looking at the role on all of those, where they're coming in. There's a lot less coming due in the second quarter as we had previously talked about. The delta on that toward today's rates are -- is nowhere near as great, which is good news. And then on the other side, as we move throughout the year, there are some opportunities, all things being equal with rates as they are today. We have some opportunities to begin to lower a lot of those rates as well. So I don't have the specifics that I can share with you right this second, but as I said, as we go throughout the year, we'll start to see that CD base change and start to bring those rates down as well.

David, this is Tory. I want to just add a couple of things to it on the commercial side. We've identified a couple of big places in the commercial side of the house, where we've got a lot of opportunity for some deposit growth. I think most notably, our FinPac portfolio and our multifamily portfolio, which traditionally have been more transactional and kind of put a plan in place to go after and make them full-fledged customers and relationships for the company. So we feel very good about just kicking that off and hoping to see some really strong results as the year progresses.

Okay. Great. And then maybe just touching on credit more broadly. You talked about recalibrating the CECL model. Could you maybe touch a little bit about what went into that and kind of the methodology there? It looks like we increased reserves on CRE and maybe reduce a little bit to commercial. And then -- but more broadly, it seems like FinPac has kind of stabilized a bit. Curious what happened to that one commercial credit, which was the larger driver of losses? And then just, again, broader commentary on what you're seeing on the credit front?

Yes, David, this is Ron. I'll start off on that front just in terms of the CECL models themselves. I'd characterize it as just a better reflection of the combined company's historical loss experience within the commercial and the recalibration of those models to drive towards that later reduction. But you're right, it was a bit of a shift, right? A little bit lower in commercial, just given lower historical loss rates. And a little bit higher in the commercial real estate categories. Again -- and those are based off of not loan level items, those are based off economic forecasts for rents and vacancies in Western downtown cores, slightly deteriorating quarter-over-quarter. So not something we're seeing on the ground with our customers is given the composition of the portfolio. But it is one of the drivers of the CECL models. And Frank, I'll turn over to you for the second half of that about credit [indiscernible] of FinPac.

Yes. FinPac we're -- continues to perform as we expected it to. To your point, I mean, it is -- the losses have peaked. They are leveling out, and we'll have a period of leveling out before we see it notably drop. And we expect that drop somewhere around the third quarter continuing on through the year-end as we migrate back down to that 3.5%-ish run rate in charge-offs. We consistently do a deep dive within that portfolio and slice and dice it every -- which way, looking for patterns of any other systemic type activity developing within the portfolio, and we see that it's really not. What we are seeing is in particular, in the 61- to 90-day delinquency bucket, which is a key delinquency range that a great deal of those feed into nonperforming and eventually the loss, we're seeing that decrease. So those levels are at lowest levels that we've seen in several quarters. So that's very encouraging that a lot of the work we did many quarters ago to tighten up underwriting standards and the model are indeed working. So that is encouraging. And with regards to the CRE, in particular, multifamily office, I continue to be just extremely impressed at the resiliency of the portfolio, especially in those 2 verticals that are under the watchful eye of so many right now. Really nothing exciting going on within either one of those portfolios. It's really quite boring, which somebody like me loves to see. And so I'm very pleased. And let's -- we continue to watch all these portfolios extremely closely for changes. And for us, it's important to stay ahead of it, and that's what we're doing.

And our next question comes from Jared Shaw of Barclays.

Maybe looking at first at capital, you've been able to grow capital really nicely and as you said, get your long-term targets. Does this provide opportunity to maybe look at accelerating or seeing better growth on the loan side earlier than expected? Or is the outlook for earning asset growth really more market-driven than capital driven at this point?

Yes. It's -- from my perspective, it's more market driven. We continue to see even -- it's a psychological phenomenon with our customers and some of them were rather than borrow money at high 8s, low 9s, even though they're getting 4s and 5s in terms of their cash. So from a net spread standpoint, it's really not much different than before the Fed started tightening. But psychologically, they haven't for over a decade seems borrowed money at those rates. And so they're just using their own cash. Some are just kind of sitting on the sidelines, waiting for opportunities to see if maybe some of their competitors struggle and they're able to do some things there. So there's a little bit of people keeping some dry powder using their own cash and then just more of a demand side. I would say it's the funding side more than anything. We're -- we saw an influx of deposits, then we might look at ways of growing earning assets. But right now, our focus is the loan-to-deposit ratios at a level that we're comfortable with. We could see that go a little higher. We'd be comfortable with that. But we're not really actively looking to grow the balance sheet. It's more along the lines of the expense initiative and everything else, it's about driving improved profitability for the company. I don't know if Tory or Chris or Ron have a different perspective or an additional perspective?

No. Same thing, obviously. This is Tory. I just think that talk a little bit about the pipeline, because the pipeline has been pretty steady over the last 2 or 3 quarters, but the shift, the mix has changed. And it's kind of shifted where we've got some nice growth on the C&I front in the pipeline and then a reduction in real estate, which is absolutely in line with everything we've been talking about for a while and it really fits the strategic direction for the company. So I feel positive about the opportunity throughout the franchise to grow the C&I book.

Okay. And actually, I guess, sort of a corollary to that. Your -- looks like the CRE capital concentration is below sort of that 300% threshold now. Would you like to see that continue to trend lower? Or do you feel comfortable with where the mix of the loan portfolio is here and future growth will just more be dependent on the market? Or should you -- should we expect you to continue to bring that concentration lower?

I think over the long term, you will see that drift down, and that's back to Tory's comment regarding C&I pipeline, the relationship aspect. Our C&I customers, they own real estate. We have relationships, some of our wealth management customers are in the real estate business. We're always going to be active in the CRE space. But I think that the focus on, as a combined company, the things that we're able to do now that individually, maybe we couldn't or we couldn't fully do. I think you're going to see that level at concentration level we'll stay under that 300% over the long run. That doesn't mean there won't be variability from quarter-to-quarter. We have commitments out there that are funding right now and driving some balances on the CRE side. But if we're fast-forwarding 12, 24, 36, 60 months, I would fully expect to see that under $300 million.

And our next question comes from Jeff Rulis of D.A. Davidson.

I wanted to try to chase down the loan and deposit growth expectations for this year. I think you've talked about relationship-driven loans and the moves you've made on the deposit side. But I'm just trying to get a good direction of -- is that kind of low single-digit growth for both?

Jeff, this is Tory. I'll start and then Chris can chime in. I think that's well said, low single digits for both with the mix on the loan growth side as best as we can to make that C&I focused. As Clint said, there is some growth this quarter that is just construction projects in draws of construction. But the lending side that the primary focus is going to be C&I and its full banking relationship. So what comes with it is as much on the deposit front as possible. A lot of operating accounts and noninterest-bearing balances. And then I think, a really strong, robust core fee income pipeline. So Chris, anything you want to add to that?

Not on the loan side, but on the deposit side, that's a good target. I would look at there's a lot of variables that could come into that. How long does inflation remain where it's at, Jeff, and how much money keeps coming out of the system. Those are obviously going to impact it. So we're focused on if we can drive the new relationships across the bank, both retail, wealth and into commercial as well and drive relationship deposit growth. And it's really focusing much more on what that mix is and keeping the cost as low as possible. If we were to go out and run a promotion and put a big rate out there, we could certainly drive deposits, but those wouldn't be necessarily the right type of deposits for the long-term strategic plan of the company. But again, a good place to start. I think there's a lot of variables, but the teams are going to roll up their sleeves and work really hard to keep driving relationships.

And one quick one on the margin. I think in the deck, you've kind of caution that maybe haven't seen the cycle floor yet, and that would be reflective of your guide. The range is right in the middle of the 3.45%, 3.60%. I want to just -- if we were to pick that apart, it sounds like second quarter given seasonality that maybe you'd caution maybe on the -- if you were to be in that range, you'd be on the lower side and be sort of exiting the year potentially trending towards the higher end. Is that correct in terms of thinking more pressure upfront in the year and easing, especially given sort of deposit rates and what's occurring in the first quarter?

Jeff, this is Ron. Yes, that's close. And again, the bigger driver over the course of the year where we end up in that range is going to be based off those core deposit flows even more so than if the Fed cuts 3 times or doesn't move, right? That's given how neutral we are -- relatively neutral, slightly likely sensitive, it's going to be more so based off of deposit flows. So seasonally, we usually see tax time, DDA outflows and then they rebuild into Q3. So you could see that fluctuation within the range driven by that, we'll see.

And our next question comes from Ben Gerlinger of Citi.

I know that you guys gave quite a bit of color on the margin already, but the repricing of deposits is clearly the biggest hit for this 1Q. I know you gave guidance that the kind of pigging the pipeline here is much less than it was in deposit pricing. I was just curious, can you quantify like the next, I don't know, 6 months or so in terms of what the yield might be and any sort of specials that are running on right now or just on pricing in general over the next 6 months?

So Ben, this is Chris. I'll start with the pricing aspect of it, that, yes, there's no plan for promotional types of -- true promotional special types of pricing. It's really -- it's the pricing that we have out there. We continue to monitor it to the market and where we want to be within that range. Some of it obviously depends on what competitors do and what's out there. We have the ability to exception price if we need to match a competitor or something like that. I think that if you look at some of the other things and you look at the peak of the rates, money markets were around 5%. They're down to 4.15% to 4.3%. CDs peaked at about 5.25%. Those are down to 3.9% to 4.55%. And that includes a lot of factors that are in there, and those are really just kind of the posted rates. I think over the course of the year, we've talked previously about second quarter. We have a lot lower repricing of CDs and then it will build back into the third quarter and into the fourth quarter. Now when it builds into the third and the fourth quarter, those are on at rates that are, I'll call them higher than they are today. And so all things being equal, we should have a nice reduction from where they're currently at to where they would renew and continue to move forward. So hopefully, that answers your question.

Yes. That was helpful color. And then I saw -- the page is -- Slide 6. We have broadening presence across the Phoenix, Denver, [indiscernible]. How the major kind of West Coast cities that you don't have a huge presence? Is that more just kind of -- not to use the term aspirational, but it's not like the next 12 months to really kind of dig in, will there just be the next target states to think about it? I'm just trying to how to frame it relative to today.

We're in all of those cities. All the dots you see on the map were there. We've been there. We put our first retail location in the Utah market last fall. We've had teams in Colorado. We actually have -- the next phase of that is to support those teams with retail banking capabilities and deposit-taking capabilities and we have projects in flight to do that in Colorado. Actually, this quarter, we will open 2 retail locations in the Phoenix metro market. It's really -- I think how to think about those markets is it's full banking services, but it's really leading with commercial banking. And so it's a branch-light type model. It's different than what we have in our legacy markets here in the Northwest where we've been for 70 years. And where we've built our market share by acquiring a lot of banks. So in this instance, we're able to specify exactly which locations, which communities we want to be in, which ones are conducive to our strategy and our business model. Some of the work that we're doing on the expense front is really to -- it's just a reallocation of resources. It's how do we free up resources so that we're not an outlier on an expense standpoint, but that we're able to also drive future shareholder value and franchise value by having the appropriate presence in these very, very robust, desirable western markets.

Ben, this is Tory. I just want to add something to Clint's comments. I think you're just spot on. This idea of expansion into markets like Utah and Colorado and in Arizona, are very comparable to what I think both banks have done over the course of time. Just find a really good commercial team and put them in market and then have a supporting cast around them, which eventually is a retail presence and some deposit-taking capabilities to support it. It's interesting. We've been in these markets, all of them for about 18 months or less. Maybe a couple of years at a very, very most. And all 3 are operating in the black and are very successful. So it's a great strategy. I think it's minimal investment out of the gate, and then we did build on it from there. So I think we're all really happy with the way those things are working out. And then I think Clint kind of alluded to Southern California, which is just a place where we've done that over the course of the year and have been very, very successful. And there's just so much opportunity with the density of a number of customers or companies that exist down in Southern California. That's just a logical further continued investment for us.

And our next question comes from Timur Braziler of Wells Fargo.

Looking again at the margin, I just want to see the 3.55% margin for the month of March. Is that fully baking and the price reductions on the wholesale and promotional fundings? Or does that actually trend higher maybe as that effect fully kicks in and then you get some of the more moderate pricing pressures off of that base?

This is Ron. It makes on a good chunk of it, just given the majority of that. Those adjustments were in February. So when you look at the month of March itself. There are still reductions throughout the month, but the majority occurred prior to.

Okay. Got it. And then on the inside, it looks like just the one-off items mentioned in the appendix nets core expense of $276 million. Ron, you had mentioned that normalizes at $286 million, but it kind of cut off as you mentioned what that driver was. Just what's the tieback from the $276 million that looks to be core versus the $286 million normalized we should be using?

Yes, $286 million is definitely the number to be using. And it's just a handful of one-off items that happen to be credit. So just various credit entries, whereas in the fourth quarter, they were mostly [ dividends ].

Okay. Got it. And then just last for me. The migration of credit on the SBA specifically, we saw another competitor today talk to similar trends. I know you guys are a big SBA lender in your geography. Could you just remind us the size of that portfolio and maybe some nuances about it, what portion of that is guaranteed and maybe some other characteristics of that portfolio?

It's about -- this is Frank. It's about $600 million. And they've historically done a lot of business acquisition-type financing. And that's really where the losses have been centered is in that specific space. And obviously, business acquisitions, smaller borrowers, those are the ones in a rates-up environment, in a higher rate environment, are going to be adversely impacted, and that's what you're seeing. I mean it's in no way indicative of more of a spread than that. And the guarantees on those credit obligations can run anywhere from 50% to 90%. So the escalation that you saw in the NPLs attributable to SBAs, I mean, should they go to loss, they will generally be guaranteed by some portion. On average, it's about 75%. And the balance of the increase, Timur, is really centered in a single credit in the C&I space, of which we are well collateralized, and there is significant interest in this particular property, and I expect this one would probably be gone within the next quarter or 2 at the latest.

Timur, this is Tory. I think it'd be good just to kind of highlight a strategic shift in our SBA business. We had historically been a more, I think, full fledged nationwide lender looking for gain on sale and kind of restructured through a strategic initiative to have it focus, the SBA group to focus exclusively on referrals from retail banking and commercial banking and customers of the bank and just kind of changing the business model a bit, which I think will bring us in footprint and have us focus quite nicely, like we do everywhere else in the company where it's about full relationship banking and its about our existing customers or new prospects that we bring into the company. So a shift for us, but I think a really good shift.

And our next question comes from Brandon King of Truist.

Could you please characterize the deposit -- noninterest-bearing deposit outlooks you're still seeing, I believe some of the commentary is around inflationary pressures, but I'm wondering if some of that is also attributed to mix shift?

Brandon, this is Ron. I think here early in the second quarter is going to be mostly tax-related seasonally where both things, we have seen that combined. In the first quarter, again, it was a continuation of the trends from Q4 in the month of January, but then initiatives underway helped in February and March, those balances were flat, which was great to see.

Yes. And this is Chris. I'll add to that. Yes, the mix, it continues to have some shifting in it. Higher for longer is going to continue that customers are going to continue to look at that, continue to make choices and decisions. We follow it on, does the money actually leave our balance sheet. And we're seeing it either be spent or we're seeing it shift into higher earning higher-earning products.

Okay. And what would you attribute, I guess, the portions of -- into higher earning products versus being spent?

Brandon, I have just on the commercial side of the house, which is a little bit talked about it. It's really closer to 3/4 of what exits noninterest-bearing just gets repriced into an interest-bearing account, whether money market or whatever. And then the balance of that at this point of the last couple of quarters has been spent on either distributions, taxes, dividends, et cetera. So that's a rough ballpark of what we've seen.

Okay. Okay. Very helpful. And then with the changes in how you're pricing certain deposits. Could you talk about the retention of those same deposit categories? Has that been affected at all? And kind of, I guess, the goal is to kind of whatever you lose from a retention standpoint to kind of make up with these new initiatives.

Yes. Most of that comes in, Brandon, in the CD portfolio that -- and we track that to where pretty much on a given month, we renew approximately 87%, 88% of our CDs, either renew, move into a different term or they auto renewed. And so that number has been very consistent over time. It can vary. It can vary based on what our rates are at the time. But we can lay that out over the next 13 months and really kind of have a good idea of all things being equal where we want to be. And so we can control a bit of that renewal activity. But that's a pretty solid number for what rolls over each and every month.

[Operator Instructions] And our next question comes from Andrew Terrell of Stephens.

Clint, just quickly on the -- I think I heard in your prepared remarks, discussion around kind of the TCE ratio and targeting 8% there versus I think you're at 6.6% today. We've talked about kind of this total risk-based capital target of 12% for a few quarters now. I guess I just am curious what kind of drove the kind of change in the line of thinking and maybe more of a focus on the TCE ratio now, just given we've talked about the total risk base for a while?

No, it's a good clarifying question. I don't know, it's been probably 15 years since Columbia kind of set its long-term target capital ratios. And what we always said was 12% total risk-based or 8% TCE. Now where we've been focused on are those regulatory ratios, they're not really out of alignment. If you look at -- I think we're roughly 11.7% is what we expect to be total risk-based at the bank level, parent company, as I mentioned, is 12%. Next quarter, quarter and half, bank should move to that 12% level. At the same time, that's going to push TCE up. And then if you just look at where we're at with AOCI and you add that back in, you're pretty much in the ballpark of an 8% TCE ratio. So I don't think it's too far off, but I just think that it's something that we do monitor, we have monitored for a long period of time. I think it's artificially lowered, because of the capital impact of the rate marks with purchase accounting and then just where we're at right now with current rate levels. That doesn't mean that that's a hard floor. That doesn't mean that we won't look opportunistically. The market, I personally believe the market has our valuation wrong and has for the last couple of years. And so it doesn't mean that when there's volatility and there's opportunities that we won't take strategic advantage of when we feel like that, that's gotten even outsized from where it should be. But just broadly want to get that out there that anything that's very major or meaningful in terms of shifting numbers and calculations probably won't occur until we're within eyesight of that 8% TCE level.

Yes. Understood. Okay. I appreciate the clarification there. And then maybe just one, a lot of mine were asked and addressed already. The $14 million commercial loan that was charged off this quarter. Was that previously sitting in nonaccruals?

No. This is Frank. Yes, during the quarter, we had really an extraordinary situation developed pretty quickly, in which a C&I relationship self-discovered a pretty complex and significant internal fraud, which drove the company quickly into a bankruptcy situation. And so given the nature of the fraud, the uncertainty surrounding the true collateral, various pending investigations going on presently and really future potential litigation, we took the, I would say, decisive, quick and conservative move to charge off the outstanding balance now and really look to recover any proceeds as we move through the process. And given what's going on, I think there's probably really all I can talk about with regard to the subject right now. But that's really what drove that.

And our next question comes from Chris McGratty of KBW.

Clint, maybe on the disclosure in the deck about a couple of billion of loans that you don't view as long-term strategic, but the rate environment doesn't lend to moving them. I guess, what is it about these loans? And I guess what would it take for you to kind of put the switch on those and dispose of those or look to sell them?

Well, that kind of plays into the earlier question about CRE levels and where we see those over the long run. A checking account, a wealth management relationship, an operating account, anything of that nature would change how I view the segment of the portfolio that we've kind of highlighted there in the slide deck. Those are predominantly the multifamily division portfolio and Tory shuttered that about a year ago. So that's a wind down portfolio. The other one would be single-family resi loans that we don't have any other relationship with, and that's kind of a legacy product from -- when the home lending group was structured more like a mortgage company as opposed to how we have it structured today or how it was restructured just shortly before the merger closed, which is truly a mortgage division of the bank that supports our customers and their activities and needs. So that's some of the initiatives that I know Chris and Tory are working on is the rate environment buys them, affords them time to go out and we have loans with these individuals and organizations. And so can they convert them into a relationship. And if they can, then great, that helps us on the deposit front, and it would be something we would keep. But if they can't, then when market conditions are right, then we'll take a very hard look at exiting those out of the portfolio, which then would also lower that CRE concentration level.

Okay. Great. And then as a follow-up, Clint, the -- if we just zoom out like normalized charge-offs, right? You've got the FinPac book that's running higher, but normalizing, how do I think about normalized charge-offs in this environment for the bank on a consolidated basis?

Yes. I think that's one of the things we talk about even internally is that the normalized level for FinPac is about 3.5% roughly...

I would say, 3.5% to 4%.

And it was running, what 5...

5.5%.

5.5% or so. And so we see that kind of coming back, but then it skews the overall bank number. So as we move forward, we'll do a better job at trying to bifurcate, so you can see kind of where FinPac is at on a normalized level as well as where the bank is at. I think from an expectation standpoint, correct me if I'm wrong, but I mean, what we're seeing in terms of credit, what we're seeing in terms of the output of our CECL model probably look at that normalization in FinPac and then just carve out what the bank's experience has been over the last 3 or 4 quarters. If I was running a model, that's probably what I would model unfolded.

That's fair. I would say that's a fair representation of what you should do. Yes.

And our next question comes from Jon Arfstrom of RBC Capital Markets.

A question for you guys. Maybe the other thing that hasn't been touched on is fee income and your expectations there. I know it's a smaller revenue contribution, but I think maybe that's the only thing we haven't touched on from the P&L. What kind of expectations do you have there? And then I guess I'm somewhat interested in the wealth business and mortgage in particular.

Jon, this is Tory. I'll kick it off and then turn it over to Chris on the wealth side. I think when the 2 banks came together there were a few places where -- there were a lot of places we were excited about, but there's a few places we were really, really excited about. And one of them is the fee income side, because there were some products and some capabilities that I think Umpqua Bank brought in that the Columbia Bank customers had a need for and just not a product set to kind of serve it. So we -- our pipeline on the fee income side, it just continues to grow every single month. And it's a byproduct of a lot of hard work by all the folks in the bank, whether it's retail or commercial or anywhere else. And the growth has been, I think I'd probably point out 3 areas in particular: treasury management, commercial card and then international banking would be kind of the 3 that I would see follow probably closely by merchant. And again, the pipeline is $10 million, and it's moving up every day. And it's a really good thing for the company and for our customers. And so we feel pretty confident about where we are and where we're going with it.

Yes. John, it's Chris. Yes, I would say in the mortgage, where we're at, if you look back over the past couple of quarters is a really good spot. It's kind of settled into that range over the last couple of quarters, focused much more on held for sale and as Clint mentioned, taking care of our customer base. We still have portfolio product, and we will do that for customers. But the mix is definitely shifted on there. As we move into the summer season, when you're looking at, it's predominantly purchased business. There is a bit of refi in there still. But as you start moving into the summer a little bit, we may see a bit of an uptick in the overall production second quarter, third quarter and all things being equal with rates as they are today. The wealth business, if you recall, we did our platform conversion during the fourth quarter last year in October. And I'm pretty happy to say that that's settled in extremely well. The advisers understand the system, they're communicating with their customers. The customer experience has improved dramatically from the system we were -- the broker dealer we were with before. And so I think that shows some real signs of upward mobility as we continue to move beyond that conversion. And then on the trust side, we're getting more and more opportunities, working with our partners within the bank, especially within the commercial side where we've got business sales. We've got lots of owners. And that is really becoming a part of the teams working together and the pipeline there is better than it's been in the past. So pretty exciting there. We'll look to move into some of our newer markets in those spaces. It's a matter of finding the talent.

Good. And then maybe Clint, one last one for you. You seem pretty laser-focused on top quartile type performance. And I would just ask, what do you look at specifically for that? And I know you're frustrated with the valuation, but as analysts, we look at return on tangible and how that -- how your price to tangible book looks and if you can continue to put up these kinds of ROATCE, your stock price should clearly go up. But what are you looking at? How do you measure that success? And how do you think that stuff looks by the end of the year when this efficiency program is fully kicked in?

Yes. Well, we certainly do look at our return on tangible and that has been on a pure comparison level that has been favorable, but we also have a lower ratio. Our view is -- and I think in my prepared remarks, I said across all financial metrics. Our view is pick a metric because from time to time, things will look different. There's things that are in focus at different times, as you know. But wherever our peer set is that we want to screen in the top quartile. And if it's on return on tangible, it's ROAA that somebody is looking at, if it's deposit mix, composition. Pretty much anything along those lines. And so that's, I guess, where we're focused is the franchise that we thought we could create with this merger is here. It's in front of us. We've been running it for a year. And now what we're doing is internally, we talk about its operational excellence. And what are the things that we can do to improve those operations and rightsizing the expense base, we were an outlier. If we looked at the expense ratio, we were an outlier. We knew that. We had year 1, which was keep our people, keep our customers and drive value across the organization. Now we're in year 2, the IMO has shut down we're focused on now delivering the full capabilities and the full financial performance and earnings power of this company. It's a difficult environment. It's difficult for everybody, but that's okay. That's one of the reasons that we did this merger was to give ourselves additional scale and resiliency to navigate through any type of business cycle. So probably more than what you wanted on this, but I would say, pick a metric, and if we're not there, we're looking at how do we get our company into that top quartile.

I'd now like to turn it back to Clint Stein for closing remarks.

Thank you, Didi, and thanks for joining us on this afternoon's call. We hope you have a good rest of your afternoon or evening depending on where you're at. Goodbye.

This concludes today's conference call. Thank you for participating, and you may now disconnect.