Why a once-acquisitive bank cooled on M&A
Columbia Banking System in Tacoma, Wash., has been idling as an acquirer.
The $13 billion-asset company, which bought three whole banks and five failed institutions after the financial crisis, last completed a bank acquisition in November 2017. The purchase of Pacific Continental was also the final acquisition orchestrated by Melanie Dressel, who died just weeks after the agreement was reached.
While Hadley Robbins, who succeeded Dressel as president and CEO, has yet to announce a deal, he is certainly open to the possibilities of M&A.
Several factors have tempered his enthusiasm.
Columbia has been able to grow organically, and the ranks of potential acquisition targets fell considerably after the financial crisis. Since the end of 2009, the number of banks based in Washington has been cut in half, to 42 institutions, according to data from the Federal Deposit Insurance Corp.
Deposit pricing has also remained in check in the Pacific Northwest. The cost of funding earning assets at banks in Idaho, Oregon and Washington was 32 basis points lower than the national rate, with an average of 0.43% on Dec. 31, according to FDIC data.
The looming question for Robbins, and other bankers in the region, is whether those trends will continue throughout the year. Another key topic will be scale, especially after a number of mergers between similarly sized banks were announced. Columbia is expected to report quarterly earnings on April 25.
"I think you have to remain open to any possibility and ... scale does make a difference," Robbins said in a recent interview. "Your ability to invest in technology and to attract the right people to be competitive certainly becomes more achievable with scale. So it’s important to keep your eyes open to how the industry is evolving."
The following is an edited transcript of the conversation with the CEO.
How is your appetite for M&A different from what the bank experienced under Melanie’s leadership?
HADLEY ROBBINS: The bank has historically been focused on growing organically, and acquisitions have been a way for us to upgrade the footprint. We still look at acquisitions as part of our strategy, but there have been a lot of deals within our footprint. And as we grow larger, we have to focus on acquisitions that create shareholder value. And so there are fewer opportunities, but we will continue to look at deals while we focus on growing organically.
Describe what an ideal M&A target would look like.
The model we apply to any acquisition is whether we can create meaningful accretion for the bank after cost saves have been achieved. Can we structure the deal in such a way as to have a tangible earn-back of three years or less? Can we generate an internal rate of return of at least 15%? We also look at whether the culture and skill set of the acquired bank fits with ours. We’re a [commercial lender], which has helped us create a strong deposit franchise.
So we’re going to look for expertise that can help us grow commercial loans. If that expertise isn’t there then it’s not a good fit for us. We want banks that know commercial real estate — that's what we do — but we’re also looking for people that know how to do C&I lending.
You mentioned that your markets have seen a lot of M&A. Are there still targets that fit your parameters?
There are fewer opportunities, but they’re there. The market has not been extremely excited about deals that have been priced with fairly significant premiums. There’s also been a fair amount of volatility in the stock market, and that translates into some uncertainties. We’re going to be disciplined and we’re not going to put ourselves in a position where we’ll overpay.
How willing would you be to enter new markets for the right deal?
Within the Northwest we have broad opportunities for organic growth, as well as opportunities for M&A. Looking outside our footprint, northern California is an obvious place to look because it’s contiguous. And we wouldn’t rule it out by any stretch. There's a natural barrier in some ways because it’s more difficult to leverage your infrastructure when you move a fair distance geographically. Your ability to pay a better price than a competitor in that new market might be a challenge because of the [other bidder's] potential cost saves. But, as with all challenges, there are ways to find solutions.
BB&T and SunTrust do not operate in your markets, but did seeing a deal of that size change how you look at big deals?
I think you have to remain open to any possibility, and the way the banking industry is moving is [to the view] that scale does make a difference. Your ability to invest in technology and to attract the right people to be competitive certainly becomes more achievable with scale. So it’s important to keep your eyes open to how the industry is evolving, and you can factor that into your thinking about potential combinations.
How is the Seattle banking market?
Seattle is an important market within our overall footprint, but we have significant positions in Portland, Tacoma, Boise and a number of other markets. But Seattle is vibrant and driven by in-migration. There’s a lot of competition for office space due to the growth of Amazon, Microsoft and Google. There’s just a lot of activity that’s taking place, and it’s creating opportunity. We’re not going to be the bank for Amazon, but we’re going to be serving the clients and feeder industries that work with these larger companies.
Our focus is serving small-to-midsize businesses, but those large companies create economic velocity for those smaller companies. That’s where we find our opportunity. That market is strong and looks strong through 2019. But because of the success Seattle has had, there’s a scarcity of people to fill open jobs. As a consequence, employers are challenged to attract and retain the people they need. And housing prices have increased to a point that it’s difficult to afford to purchase, or even rent, a home there.
You mentioned talent acquisition. How challenging is that for Columbia in Seattle?
We have a long-term reputation in the market of being a good employer and we’ve also been a very stable bank. Our ability to attract people has certainly been impacted by the success of the overall region, but we’ve always been able to bring people in and not be without the people we need to be successful. It’s a bit more of a challenge, but it’s one we’ve risen to.
Other than C&I, what other lending lines are you excited about?
Our portfolio is really diversified. We have manufacturing, health care, agriculture — and even within that we have a lot of diversity in the crops we get involved with. The economy overall is creating opportunities across many of the industrial segments. Most banks, including Columbia, get all the at bats that they need, and it’s going to be a function of the competitive landscape and your risk appetite as to where exactly that translates into loan growth.
Many economists are predicting a recession by 2021. Do you buy into that?
We’ve pondered that question. Our thinking is driven by what we hear from our clients, which is that there's still fairly strong optimism relative to the strength of the economy. It’s also driven by what we see in the fundamentals in the Northwest, and that shows that the economy is still pretty strong. That is clouded somewhat by the impact tariffs might have on the region, because 20% of the exports leaving the Northwest are headed to China.
We look for 2019 to be a reasonably positive year, but beyond that it gets pretty murky.