COLB - NASDAQ

Thank you for standing by, and welcome to the Columbia Banking System's First Quarter 2023 Earnings Conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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 2 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 28, 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 long-time bankers, continue to win new business and expand existing relationships. This activity has thrived despite the ongoing preparation for the integration of Columbia and Umpqua. I'm very proud of what our team accomplished during the first quarter. In addition to closing the merger, we also completed two branch divestiture projects and successfully converted our core systems. Careful planning and the dedication of our exceptionally talented team enabled us to achieve these accomplishments. I want to thank our associates for their commitment and diligence throughout this busy period. It has enabled us to remain on track to realize our targeted cost savings by the end of the third quarter. In addition to the heightened activities 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. And now, I'll turn the call over to you Ron.

Okay. Thank you, Clint. And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation. Starting on Slide 4. 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 through 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. Next on Slide 5, we present updated fair value marks at closing as compared to announcement. Given the increase in treasury yields and inversion of 10 versus 2 spreads since announcement, we ended with $1.76 billion in discount marks with all but $130 million of that related to rate. Again, these rate discounts will accrete to interest income, providing a significant and stable additional earnings stream over time, which I'll highlight in a few minutes. Also noted lower in the page is the larger core deposit intangible balance, which will be amortized to expense over time. On Slide 6, we carry forward the discount marks in CDI at closing and also present the current balances as of quarter-end. For the AFS securities discount, the decline from closing to quarter-end resulted from writing-off existing premiums at close of roughly $200 million, along with removing the discounts of $165 million on the $1.2 billion of bonds sold as part of a restructuring. The remaining decline of approximately $15 million was accreted to interest income. Slide 7 projects our cost synergy realization estimate at quarter-end through the year. On an annualized basis, we estimate we 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 to $64 million in annualized cost savings by the end of the second quarter, or approximately $15 million to $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 had 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 9, 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 costs is the combined net discount, which will be accretive 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 related 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 a significantly higher and stable earnings stream with greater optionality. The overall book yield was 3.62% with an effective duration of 5.7% at quarter-end. And lastly, we only have $2.4 million in HTM bonds, which represents some CRE-related bonds with no unrealized loss. Now to better help investors given the combination accounting and moving parts, on Slide 10, we provided 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 provided an updated outlook for our quarterly expense run rate, which we expect to be in the $260 million to $270 million range in Q2, when CDI amortization and merger expenses are excluded. We expect this level to trend down to $240 million to $250 million in Q4, reflecting the expected achievement of all communicated expense synergies by the end of the third quarter. Slides 12 through 14 provides summary financials for Q1, but 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 non-interest expense, which are detailed out in the appendix. These led to an $86 million reduction in Q1 earnings, resulting in the third column for operating income. This is the key page the bridge from GAAP reported earnings isolating non-operating fair value changes, then the merger related items of discount accretion, CDI amortization and the CECL day 2 double count then to adjusted operating income. Now in the merger related items column, we have $32 million of net discount accretion from the marks discussed earlier for one month, along with $88 million initial ACL provision, commonly referred to as the CECL day 2 double count. Also included is $13 million of CDI amortization for the one month. The value in this column will be a clear view of the net earnings impact from the merger accounting, which will be substantial and again build capital over time. And that takes us to the far right column, which presents the bank excluding the merger accounting marks. Again, the interest rate environment introduced a significant amount of purchase accounting accretion and amortization into our reported earnings, and Slide 15 breaks out the components. This will enable investors to view the earnings power of Columbia outside purchase accounting adjustments, while also seeing the meaningful net capital generation we expect these adjustments to produce over time. Okay, with that moving ahead for a couple more items. Slide 17 breaks out accretion from net interest income, and Slide 18 does the same for the margins. 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 restructuring discussed earlier, along with using short-term wholesale borrowings. Combined with more locked out bond cash flows, this acts like a swap for rates down environments. You can see here the trend over the past few quarters where our rates down risk has been reduced significantly. And noted below, we calculate our cycle-to-date funding betas, which are calculated on a combined company basis over the periods presented for comparability. As of the first quarter, our interest-bearing deposit portfolio has priced in 28% of the Fed funds rate increases. Notably, here is cost of interest-bearing deposits, which was 1.33% for the month of March compared to the quarter-end spot rate of 1.43%, highlighting stability. And with that, I will now turn the call over to Frank.

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 details 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. 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 using credit models. Slide 28 provides an overview for our consolidated credit trends and notes the additional 28 basis points, the remaining credit discount on loans adds to our loss absorbing capacity. Overall, our credit trends are benign, outside the anticipated trend and FinPac charge-offs. Delinquency and charge-off activity in the FinPac portfolio remains 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 comprised 41% of our base with the average account balance at $20,000. Commercial balances make up the remaining 49% of our deposit portfolio with the average account balance at $108,000. The company offers multiple deposit solutions like our insured cash sweep service, the ability to collateralize select accounts and opportunities for enhanced returns through Columbia Wealth Management. These products provide our customers with the flexibility they seek and improve the stability of our granular deposit base. At quarter-end, just 36% of our deposit portfolio was uninsured, screening on the lower end of peer averages. Net contraction in our deposit balances, on an organic basis, during the quarter reflects normal customer uses of cash, the impact of inflation on spending and market liquidity tightening. Offsetting these headwinds to net expansion was continued growth in new account balances as customers transferred funds into recently opened accounts throughout the quarter. We also continued the development of our franchise throughout the West. With the merger closed, we now have deposit and other capabilities in Utah, which further enables us to bring full banking relationships to the company. We will continue to invest in this market and throughout our other geographies. We believe this will lead to enhanced, long-term, organic growth opportunities. With the core systems conversion now complete, our teams have an invigorated focus on generating balanced growth for our franchise. Relationship banking within our communities drives our purpose. And our broader footprint, expanded set of products and services, and our collaborative spirit across our teams support our expectations for continued success. And now, back to you Clint.

Thanks, Chris. Our regulatory capital position is outlined on Slide 30. We remain above both well capitalized and internal threshold targets. And as Ron outlined, we expect capital to accrete quickly in the coming quarters. As a result of the merger, we have adjusted our dividend declaration timeline, so that it is similar to the one previously utilized by Umpqua Holdings. This concludes our prepared comments. The team is now available to answer your questions. So, Valerie, please open the call for Q&A.

Thank you. [Operator Instructions] 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 deck, maybe I'll go first to the cost, the expense run rate. Ron, you kind of rattled through that, I missed kind of those air step as you go through the -- through Q3 and I guess you ended at $240 million to $250 million in Q4, but could you repeat that piece again?

Yeah, 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. So, we talked about that. And then on that Slide 7, we show you the ramp for additional $59 million to $64 million we expect to achieve an annualized basis in Q3, which will put us at the $135 million level by the end of Q3. $59 million to $64 million additional in second quarter, and then the balance in Q3 will end at $135 million annualized again at the end of Q3 looking forward. And 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. And then, I guess, if I were to jump to capital, your comment about expect to accrete that quickly and I just -- I don't know if you've got projections on kind of year-end or expectations for those capital levels, and I guess that's question one. Question two would be, other tools, with the deal closed now, do you look at the buyback, the other ways of deploying that capital as that grows?

Hey, Jeff, it's Ron. On the first one, very much. We have forecast on the capital build and it's going be in a range of 20 to 30 bps on the risk-based measures across the various separations over the course of the year and into the following year and the year after, that's got a long life. This will be a long life level of accretion in that. Also interestingly enough, just given the nature of how rates have moved up over the last year, you'd have to go significantly below where rates were prior to last year in order to see a real acceleration in prepay on a lot of those instruments. So, excited about that. That 20 to 30 bps would be a quarterly accretion in the capital ratios.

And Jeff, this is Clint. I'll just add that as you do the math in terms of just what the accretion adds and then factor in earnings and you can pretty quickly reconcile Ron's comments and mine about the capital generation and the capabilities of the company. With respect to buyback, I don't see anything this year. I think that just all the volatility that's out there and the fact that we'll be building in the next couple of quarters to our long stated, long-term target capital ratios. We'll let that occur. And then, if market conditions are favorable, by all means, it would be something that Ron and myself would have a discussion with our Board and 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, but also not have too much capital sitting around that hurts our returns for our shareholders.

Okay, thank you. And then, maybe one last one for Chris. Just on the deposit side, could you comment on flows in April so far? It's kind of the first part of that. And then, second, you talked about expanding tools into Utah. And I guess your expectations for the growth through the end of the year if you think you can [stretch up] (ph) from 3/31 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 of weeks. More though, I'm starting to see, and I know Tory is seeing 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. And then, we will look into the other states where we have loan production offices as well, and I would say, more to come on that, but we're certainly looking to be full-service across all eight states. And I don't know, Tory, do you want to add anything?

Jeff, this is Tory Nixon. I think the only thing I would add is that for the first three weeks of April, deposit balances are down just a little bit, mostly in retail and consumer banking, and that's typical tax payments and just kind of traditional outflow, not significant at all. And to Chris' point, a lot of activity inside the commercial bank on new relationships prospecting, funds, deposit funds from -- for our customers from other institutions. So, a lot of really, really good activity.

I guess, putting it another way, I guess by year-end, are you looking at, in your budget, from the 3/31 deposit balances, are you in a stable down or up type mindset?

Yeah. No, I think there a really great opportunity for us to grow the balances of the company and 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.

And Jeff, I'll just add. There's a bit of a wildcard in there and that -- it appears that we've returned to kind of seasonal patterns that we haven't had for since pre-COVID. And if you go back prior to 2020 and throughout the history of the company, a lot of the positive deposit flows occur in the second half of the year, and they start to build late second quarter. So, in addition to the activities that Tory mentioned and Chris, there is that seasonal pattern. And I would expect that will return and behave as we've seen in the past. But then the Fed still removing liquidity from the system. And so, I think there's still -- just from an industry perspective, there still some of that activity that's yet to occur. So that's why it's hard to just tell you, "Yes, it's up X percent." But I think I shared the team's optimism on our ability to take market share and the conversations that we're having. And it gets back to my prepared remarks, along the lines of not only the new teams, but our seasoned bankers, they are continuing to win new business and deepen those existing relationships. And so, I think those activities, no matter what happens at a macro level, you'll see the positive benefit to our balance sheet.

Okay. I 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, David.

Maybe just kind of staying on the deposit side, I'm just curious, maybe some of the flows that you saw in the quarter, if you could just talk a bit about -- you talked about a lot of, it's really a function of the declining balances at 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 floating rate debt, migration 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 traditionally seasonally it's like a bell curve over the course of the year, right? Stronger Q2, Q3, little bit more pressure Q4, Q1, depending on the segment, et cetera. On Page 8, we did lay out the changes in deposits in that upper-left table as if we were pool or combined on a basis for comparability purposes. And when we look ex broker to the divestitures or the public deposit change on the customer count 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 -- it feels like a similar continuation of the inflation story. We talked about last quarter for -- we're looking at Q4 results on the commercial side similar, so just kind of effects of QT at the customer level utilizing cash from that standpoint.

And David you asked, and there was a lot packed into that. And you mentioned investments and things moving away because we've talked about that in the past. And we saw a very similar I'd say it's probably a little bit of a larger activity than historical averages on that. But the really nice thing about this combination now is we have even more options that are available. And so, all of the clients aren't looking to immediately move into the treasury bill or something of that nature. With the insured cash sweeps and the deposit promos that we have, we've got -- our bankers have multiple tools available for them, based on what the clients' needs are. And I think that's just gives us maximum flexibility to solve the issue that they have.

That makes sense. Maybe touching on the growth -- the loan growth side, obviously the market is pretty volatile right now. But I'm curious how demand is trending from your standpoint? How new loan yields are? What segments you are still seeing good risk adjusted return? And maybe just -- 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 organic loan growth opportunities.

David, this is Tory Nixon. I think you kind of summarized a lot of things in that question. I think there's great opportunity for the company to go forward and to do a lot of what you just described or just asked. I mean, I think there is 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 and 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 on the legacy Columbia portfolio -- customer. So great opportunity to kind of see us -- we have a lot of financial strength and to be very active in all the markets that we are in. And I'm excited about the ability to grow loans. Pipeline looks strong. It's actually just up a little bit from last quarter, which is nice to see. Demand in the marketplace is certainly not the same as it was six to nine months ago, but there is still is demand. And I think to Clint's point earlier, we've got a great opportunity to take market share in all the markets that we're in.

Okay. And then, just kind of in that question too, how are new loan yields? And what segments are you still expecting to kind of drive that growth and give good risk-adjusted returns?

Yes, I think it certainly depends on the asset class. But I think they are near the 6% range on yields, maybe a little higher. And we just -- we've got a lot of dry powder and lot of opportunity and able to serve our customers and bring in new ones into the company.

Okay. And then, you guys have done a great job continuing to expand at both Columbia and Umpqua, with new hires and new markets, and we've already 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 and pick off new talent just given the volatility? Are you looking at new hires? And if you are, is it primarily deepening existing footprints? And you talked about continuing to invest in the franchise, but are you considering further market expansion?

So, this is Tory, again. I'll talk about commercial, I'll let Chris talked about consumer a bit. We're doing all of those things. So, we're looking to hire in the markets -- the new markets that we've expanded into Arizona, Colorado and Utah recently. We're looking to hire some really talented folks in those markets. We have hired talent. We have recently hired talent in those markets. We will continue to do that. And then infill and the rest of the company, I mean, we continue to look at talented people and have a philosophy that we're going to bring talent into this company when we find it. And we've got a great story to tell. You can obviously tell we're very excited about the future of this company. And when we think about the opportunity that we have and the opportunity to add bankers in our markets have working here, they get very excited. So, we continue to tell the story. We continue to hire people in the Pacific Northwest, in Northern California, and Southern California, in Idaho, I mean you name it, we're continuing to broaden and expand and push the bank forward.

Yeah. And David, what I'd add to that is the states where we have the commercial presence, we're certainly looking at bringing on the retail. As I mentioned, we'll bring on small business to fill in where those loan production offices have historically been. And what I would say is that we're also looking at the wealth side of it and bringing that into the eight states and the areas that we're expanding as well. And I think we've -- both companies have always been opportunistic that when good bankers raise their hands, we're ready for them. And so, I would say that's still out there. I echo Tory's comments about people are excited and when you think about the capabilities that we have and the balance sheet construction, as Ron described, I think there's going to be plenty of opportunity for that.

Yeah. Thank you. Appreciate it. Congrats on closing the deal.

Thanks, David.

Thank you. One moment please. Our next question comes from the line of Chris McGratty of KBW. Your line is open. Mr. McGratty, your line is open. One moment please. 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 staying on the track of opportunity, clearly, there's been a lot of disruption with Silicon Valley and First Republic and just in general some banks said they are seeing more weakness. Maybe more specifically, do you see specific opportunities in some of those business areas, some of those markets to step in? And I'm not sure when you talk about new commercial customers coming to approach you, any of that from some of those specialty business lines that some of those banks focus on that could be an opportunity for you?

Yeah, Jared, this is Clint. I'll kick it off, and then see if Tory and Chris want to add anything to it. The short answer is yes. We have seen opportunities. We saw that actually in the days and hours leading up to Silicon Valley's failure. We've got a pretty diverse offering and we talk about our portfolio and you look in the slide deck and you can see both sides of the balance sheet, there is a lot of granularity and diversification. And so with that, we have a lot of very experienced bankers and we won't do something if we don't have expertise in it. But there is some crossover. And to the extent that there's crossover, we'll compete for the business, and I think we compete very well and it will create opportunities. But in terms of going all in and shifting our focus, that's not necessarily the plan. We love the diversification that we have. We think that's foundational element of strength for our company. But certainly, we'll be opportunistic when and where we can be. Tory, anything to add?

No, I think you've summarized it really well. I mean there's -- I think that the opportunity exists in all of our markets and we're going to stay in to do what we do, what we've historically done and do exceptionally well, and continue to find customers or people -- customers who want to be part of the bank or people who want to be part of the bank.

Okay. Good, thanks. And then, maybe shifting a little bit on capital, you highlight getting back to that CET1 target of 9%. Do you think -- is that sufficient going forward? Is 9% high enough? Or do you think that maybe you end up needing to bring that floor up a little bit before really exploring other capital deployment opportunities?

Yeah, [Chris] (ph), this is Ron. I think our long-term target on CET1 is 9%, and we're 8.9%. So, 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 accretion -- the capital accretion build just coming off the financial benefit of both companies coming together cutting the cost and having the accretion. So that's really -- you got to look across all four ratios, both at the parent and the bank. And so, yes, by default then that CET1 would be above 9%. But long-term target wise, not significantly.

Okay. So, you don't feel a need to change that or raise that in light of sort of the turmoil that we've seen in the last month?

In terms of long-term targets, no. There are times where you might want to be below or above, depending on which way the wind is blowing. Like I said, we're going to have quite a bit of capital generation over time. And again, so much of the mark. I mean, $1.6 billion of the $1.7 billion in mark was rate related, like on the bonds. That's all -- the vast majority of that is backed by government-to-government agencies. So, it's interesting for you to think about 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 the measure I know a lot of analysts and investors focus on. We also got to look at the other ratios as well though. In total risk-based capital, generally between the bank and parent is where I'm targeting to be around 12% over time is a good sweet spot.

And I think the history of pre-merger both companies that was always a challenge, trying to get walk it back down to those long-term targets. And you add in the accretion income as well as the earnings power after we get the full cost synergies baked in. That's still -- I think the primary challenge for us is again in the coming years is how do we keep those capital ratios from getting too far north of those targets. And you can pick any ratio, they're all going to grow pretty rapidly.

Okay. And then just finally from me. When we look at the average earning asset guide, where -- do you see cash going back down to a -- I guess, where do you see cash flowing as a percentage of the balance sheet after we get through the end of March here, back down to 5% -- below 5%?

Yeah, on that guide, we're making the note column there that we assume we maintain elevated level of cash. Of course, a lot of that is going to be subject to what happens from a macro standpoint with overall deposit flows, et cetera. So -- but I'd say all else being equal if we brought on $2 billion of additional off-balance sheet liquidity to on-balance sheet just to have on balance sheet, and we're sitting at $3 billion, we'd be somewhere in the $1 billion to $1.5 billion range if we had not done that. So that's probably a better representation of where I'd expect that [indiscernible].

Yeah, we have 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.

Yeah, I 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 from me, just around the borrowings, the $6 billion of borrowings and $2 billion of it was to fund cash. But I guess what's your -- 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. Ideally, we're going to see our deposit activities strengthen over the course of the next couple of quarters post consolidation, as you heard -- sorry, post conversion, as you heard Chris and Clint talk about it earlier. So, no plans to reduce the investment portfolio. That's very well structured. That's going to provide a lot of value over time. And that discount will accrete if we keep those now discounted bonds on the books. So, plan on maintaining the wholesale borrowings, but then that'll fluctuate just as the opposite of what we see with the net loan and deposit flows. So, near term, relatively stag.

Okay. Great. And then, you've had a lot of time with how long the merger took to close to identify the cost saves and make sure you can get the $135 million out. They're coming out sooner than previously thought. But are there -- and it may not necessarily be the focus in the near term, but have you been able to quantify some additional cost saves above and beyond the $135 million? And whether or not -- if so, how much? And could that hit the bottom line?

Yeah. Matt, this is Clint. We have spoken over the past year that our internal target is actually above the $135 million. And if we seem overly confident in delivering on the $135 million by the end of the third quarter, it's because we have, in fact, identified up to that internal target. What we haven't done is we haven't disclosed what that internal number is. And there's a couple of reasons. One, with inflation and wage pressure that's happened over the past year and a half since we set that target, we wanted to maintain flexibility. And then, the other component of that is the investment in growing our franchise that Chris and Tory spoke about. So, we wanted to make sure that we're still going to do those things. We're still going to make the appropriate investments. But net-net, we want to make sure that, that doesn't dilute the $135 million or 12.5% cost saves that we promised to investors. So, there is a higher internal target. It's identified. It'll trickle in fourth quarter and beyond. It could be diluted somewhat by other investments that we may elect to make. We will talk about those at the time that they occur. But then the other aspect of -- we put two pretty large banks together. And I think we did a really good job as a team of setting the org structure for a $50-plus billion bank. But we also know that there's probably areas where -- well, not probably, we know there are areas where we're a little heavy in terms of people or redundancy. And I think that's a longer-term process of just fine-tuning and making our company the best and most efficient it can be. And so that's the type of activities that you'll see in '24, '25 and then ongoing as we go through the years.

Okay. And then, just around the deposit pricing outlook. It sounds like you're doing some promotional activities in some of your newer markets. But can you talk through the deposit pricing philosophy now that you guys are together? I mean legacy COLB wasn't very promotional when it came to deposits. But obviously, with the combined entity that may have changed a little bit and the turmoil in March may have also changed your view on pricing maybe going forward? Just any comments around deposit pricing outlook in particular when the Fed stops raising rates?

Sure, Matt. Great question. And I would say that separately, we actually were very similar in our approaches to exception pricing and doing things of that nature. Coming together, yes, we're still on the same track there. We do have some promo rates that are out there. That's not just new markets. It's existing markets. It's all across the footprint. And so that kind of sets the -- that sets a marker for us. But we're still negotiating rates with clients and looking at options, looking at where -- what's the real need, what are they really trying to do with the money. And so as I mentioned previously, lots of different ways to go about that. The Fed and the slowing, I think that's going to -- maybe you'll see some lag. And I think deposit rates tend to lag that, and that's historically for both companies as well. So as it approaches the slowing, I think that, yes, you start maybe getting near the peak of it, but then I'll always throw in the caveat of we don't know what competitors are going to do. And so, we just have to maintain our discipline. We have to stay in touch with our clients and understand what's going on in the market. And I don't know, Tory, if you want to add anything?

Matt, the only thing I would add is that with all the conversations that we're having with clients, which is a lot, which has been great, the conversation is less about price and more about security and safety. I mean, certainly, there's some price in the conversation, but a lot of it is around security and safety and explaining the balance sheet of the company in our earnings stream and our deposit base, et cetera, it's like very valuable to the customer -- our customer base. But then we -- as Chris, I think, talked about in his comments, we have a couple of products that are really valuable to kind of take money and create incredible safety and security around it through our ICS product or CDARS. And so we've done that on a lot the last couple of months. I think we probably increased the ICS balances about $400 million to $500 million, which is just reciprocal insurance for deposits, especially on the commercial side. So, I mean we've got a lot of options for customers and had a lot of conversations. And again, it's a little less about price and more about a relationship and about safety and security.

Okay. And last one for 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. You 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 borrowing is about 10 basis points to that. In your full year margin guidance, that 4.15% to 4.25%, what do you assume for borrowings and cash? Do you assume it stays at a relatively similar level?

Yes, we assume a consistent level and also recognize that, that full year number will also reflect the effect of averages with the combination fully included for 10 of those 12 months, but not the full 12. So, maintaining consistent cash balances. And then I'd clarify one item. So when we talked about the impact of the excess liquidity, I was really referring to the month of March, at the 3.55% would have been ballpark of 3.65% have we not brought on that excess borrowing, but insignificant impact in terms of the interest income, but 10 bps on the margin.

Yes. 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 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 noninterest income, excluding, again, the fair value change type stuff was $22 million, just for the month on a combined basis.

Okay. So imply -- yes, okay. That makes sense.

You bet.

And last one for me is just on the office. I appreciate all the color here on Page 26 of the presentation. A couple of questions. For the six properties that are listed as greater than $30 million, what markets are those in? And can you talk about the underwriting specifically on the larger end of the spectrum and whether it differs at all from what you list as the kind of averages there? And then, the second part was the credit mark taken on acquired office portfolio, is that similar to the overall credit mark in the transaction? Or did the deal allow you to put a greater kind of mark against the office book?

Yes. 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. And the underwriting is very similar, but the qualification criteria, I would say, is much more steep. So, 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. So, they are all leased at this point, I will say, fully leased under lease agreements and are performing well.

Okay. And then, on the credit mark on the office portfolio, specifically, was it similar to just the overall mark, or was there a bifurcation? I guess, did the deal allow you to put a larger credit mark on the office book?

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 and average in line with the overall CRE level.

Okay. Thanks for taking the questions, and congrats on closing the deal.

You bet. Thank you.

Thank you. One moment please. Our next question comes from the line of Brody Preston. You 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 securities that you sold and then the securities that you purchased 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 for the marks?

Yes. This is Ron. I'd say -- so again, we sold off front-end cash flows. So the duration on the purchases was probably about a half a year longer than the overall duration. Again, we wanted to extend that. So, we would have been probably around 5.5, ended up at 5.7 just with the effect of -- the repurchases were longer dated, right? So -- and again, with an eye towards -- when we did this, it was actually the first week of March, right? So, you had a top tick in the bond yield February 28 in the first week, and it wasn't for another week, week and a half or so following that you saw the rally in the bond markets and the yields decline. So overall, the mark book was -- you talked about 4.5%. The ones sold were probably a bit below, the ones purchased were a bit above just given the slight difference in duration.

Got it. Thank you for that. And then on the NIM guide -- the core NIM guide that you have, I just wanted to ask -- you outlined what the -- 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. It'll be a continued -- we'll talk about later in the insensitivity slides, working out closer to that model beta from our sensitivity standpoint. So higher than 28%, but probably -- but not at the 53% level that we have footnoted on that slide later on. So continued increase just because we're assuming there's a lag to deposit pricing increases.

Got it. And is there a static deposit mix assumption that underpins the NIM guidance?

Relatively static, granted -- we talked about earlier, for example, DDA are up here in December -- sorry, here in April. But just in terms of the overall mix, not a significant change in the overall mix.

Got it. And then on the -- I guess on the margin waterfall chart that you have in there, the 43 basis point drag that you have for deposits, do you have a sense for how much of that was mix versus rate?

Well, I think in terms of this waterfall, you've also got the effect of -- the Q4 reported amount was stand-alone Umpqua Holdings. The Q1 reported amount was a combined company for one month and the stand-alone prior Umpqua Holdings for the first two months of the quarter. So you've got that really driving a good chunk of that from an overall mix standpoint.

Okay. Understood.

It'll make a lot more sense for you next quarter.

Yes. I wanted to ask on the loans that are maturing in the less than six months bucket, the fixed, the $2.6 billion. Do you have a sense for what the current yield is on those loans versus what current origination yields are?

[Multiple Speakers] Yeah. I mean, those loans are going to be dated from prior to the move up. So it's going to be in the, call it, mid-4s to 5 range at the highest, which is going to be well below what Tory talked about earlier for new loan yields.

Got it. And do you 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. And then just one last one for me. I'm sorry if you mentioned this earlier and I missed it. But just on the FinPac portfolio, I wanted to ask two questions. What is the growth outlook for that portfolio going forward? I know it's a much smaller piece of the overall loan portfolio now. And then the 3.89% annualized charge-off ratio, I know it's tough to say, but 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, and 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 a 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. And that's evenly distributed within those 3 businesses. So moving up a little but nothing significant at all. Frank, do you want to talk about...

Yes. Generally, what we find within the FinPac portfolio, we look at the nonaccrual numbers and how those are tracking. And generally, of the preceding quarter, approximately 80% of those nonaccruals typically roll the charge-off. I think that the top of it will be north of 4%. And I would be surprised if it peaks over 5%.

Got it. That's very helpful. And I guess just if I could sneak one follow-up 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 different from a mix and the type of stuff that you're underwriting relative to what other banks underwrite? Or do you think it's fairly similar to the equipment loans that other banks are also underwriting?

It's different. It's -- with respect to the classic FinPac, these are tiny ticket loans. They are high-yielding. They are higher risk, specialized lending. So that's why you see the loss numbers where they're at, and that's why we're not surprised. Typically, when you say equipment finance company, most equipment finance companies do not have a tiny ticket -- small-ticket leasing operation. They're typically middle market, which we also have. And those losses are extremely low, if existing at all, but it's also extremely low-yielding business as well. So it is more of a specialized leasing business.

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 for me. And I know a lot has changed since the merger was announced. But with the return on tangible common equity of 15% was kind of the estimation NIM, but should we think about that as a long-term target for the company now?

Well, I say this, we did also include on Page 4 of this kind of our updated expectations as compared to the original announcement date. And with that, just in terms of return on tangible common equity, driven again by a lot of the accretion, 15% is now 20% plus. So I guess it depends on the long term and the definition of long term for that -- for the next couple of years, we feel pretty good about that. Longer term beyond that, I think just going back over 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. That's all I had. Thank you for answering my questions.

Thank you.

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.

Hey. Just a few follow-ups. Just focusing out a bit on credit. I understand the Moody's impact on the provision, but credit seems clean. You have high reserves in marks. Is it safe for us to assume just minimal provisions from here? Or what would drive our provision from here?

This is Ron. What I'd say what will drive the provision, of course, will be changes in the economic forecast, right? So as those change, you'll see from a CECL standpoint of provisions. But the real key is what's happening with charge-offs. And so we've seen elevated levels with FinPac over the last couple of quarters specific to that small owner-operator transportation type business. That will continue here for a bit. And we're just -- we're not seeing any migration for the rest of the portfolio, which is the vast majority of the portfolio. So I think specific to provisions is going to be solely based off of what we see with the Moody's baseline economic forecast or consensus economic forecast over time, 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 normally see?

No, they're not. Pretty typical as to what I would have expected to see.

Okay. Good. And then I guess the other one, Slide 10, I want to make sure I have this right. The earning asset message, Ron, when I just do the math, it suggests that Q3 and Q4 average earning assets are going to look a lot like Q2. Is that the right way to read that? I know it sounds like a simple question, but I just want to clarify that.

That is. Yeah, okay. And then last one, Clint, for you. Are the name changes done? And just big picture, how did the conversion go? Thank you.

The name changes are done. There's -- the reason I hesitate is so -- like if you drive by the -- like a legacy -- a former Columbia Bank branch, most of those are -- signs are bagged right now because there's 150 locations that we have to re-sign. And then even in markets like the Puget Sound area where we both had -- or Portland, where we both separately had a significant presence -- well, we want to make sure that the branding in that market -- any particular market matches. We don't want mismatch signs and things. So that's a summertime project. But when you do drive by one of the locations that formerly said Columbia Bank, it now says Umpqua Bank. Our branch that's in the first floor of our headquarters building here has been fully rebranded, was done, I think, the first week. So that side of it, I think, has gone very well. What I'll say about the conversion, when Ron was talking about the bond portfolio during his prepared remarks, he could hardly contain his excitement. And even right now, I just mentioned bond portfolio, and he's really 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. And I referenced it in my prepared remarks, and this has been a pretty lengthy call, so I don't know if anybody even remembers an hour and 10 minutes ago when I made these comments. But if you think about what we accomplished organizationally in the first quarter, two separate divestiture projects, I mean, those are kind of many M&A transactions in and of themselves, closing a transformative merger mid-quarter and then having this level of detail already to go. And along the way, two and a half weeks after you close it, you convert the systems. And so I think about the talent that it took to pull that off, and we did it. And so I think about myself as an employee of the company. I'm utilizing all our current go-forward platforms. It's working great. I'd be disingenuous if I didn't say the first day after my e-mail 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. And then, if I step back and think of it from a customer's perspective, on a personal level, utilizing all of our go-forward platforms, and they're working great. And more importantly, when I go home at night, my wife is not complaining about

Okay. That's helpful. And thanks for the great deck. Lot of good detail on there. Appreciate it.

That's the fine work of Jackie Bohlen.

Thank you. I'm showing no further questions at this time. I turn the call back over to Jackie Bohlen for any closing remarks.

Thank you, Valerie. Thank you for joining us on today's call. Please -- 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.