By:
Andrew Diedrich, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Colombia Banking System, Inc. (NAS: COLB) is a bank holding
company, which engages in the provision of services. Its activities include
personal, business, and commercial banking and wealth management services. COLB
serves small and medium-sized businesses, professionals, and other individuals
through offices in the Tacoma metropolitan area and contiguous parts of the
Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. Commercial and multifamily residential
real estate loans make up about 45% of the company's loan portfolio, while
business loans make up another 40%.
• CEO Hadley Robbins retired at year end and will
be replaced by current COO Clint Stein.
• COLB’s cost focused approach
will provide flexibility for the bank in future periods of compressed margins.
• Investments in digital capabilities will result
in increased organic growth through the coming years.
Key
points:
COLB
is currently undergoing a management change. Hadley Robbins retired at year end
after 2.5 years as CEO. The board appointed COO Clint Stein as his successor.
Stein has been with COLB for 14 years moving up the ranks as its
controller/Chief Accounting Officer, CFO, COO & now CEO. Stein is well
regarded with the analysts he has interacted with from PiperJaffray and Sander
O’Neill. These firms believe he will be viewed favorably by the street because
of how engaged and visible he has been with investors, employees and customers
over the years.
In
this low rate environment, banks face compressed margins due to reduced income
from interest bearing assets. COLB has responded with a cost focused approach
that includes strategic closure of branches to eliminate excess overhead that can
provide a drag on gross margins. In the past 10 years, the bank has
consolidated 47 of their branches, including 3 of these in 2019 with another
scheduled for next year. This disciplined approach will give the bank
flexibility in future periods of compressed margins.
The
high competitiveness in the commercial banking space makes it difficult to grow
organically. Digital capabilities are one of the final places that banks can invest
in to grow their businesses from the inside. Colombia Bank launched 6 digital
banking initiatives to align itself with the digital trend in the industry. The
company is in the first year of investing in internal and external systems which
will reduce costs and improve efficiency. The internal systems include a new human
capital management platform that is improving operational and talent management
efficiencies across their employee base while the external systems include a
commercial banking online and treasury management system.
One
of the risks we continue to monitor with this stock is the shift to the Secured
Overnight Funding Rate (SOFR) from the London Interbank Offering Rate (LIBOR). The
LIBOR has been used for years by banks as the benchmark for determining variable
rate debt terms. The transition to SOFR could force banks to lend at low rates
when their borrowing costs are rising. SOFR can be averaged or compounded over a
period of as many as serval months, which can produce unpredictable results and
more volatility than the previously used LIBOR. These factors make the
predictability of regional bank costs more difficult.
What
has the stock done lately?
Over the past 3 months,
the stock price is up 12.54%. The three-month low was $35.06 on October 3rd
and the high was $40.87 on November 19th.
Past
Year Performance:
COLB
is up 6.12% this year because of the bank’s solid operating performance. Q3
was COLB’s second strongest production quarter with loan growth of 5% which was
in line with consensus. This was partially offset with core NIE that was below street
consensus due to leverage added to help defend NIM in the low rate environment.
My
Takeaway
I recommend increasing
our position in COLB because of the bank’s investment in digital capabilities and
cost centered approach. 2019 is the first year that COLB has invested heavily
in its digital capabilities. COLB has focused on foundational projects that
create capacity in the front and back offices and are on schedule to meet their
goals for their 3-year strategic roadmap. Colombia’s discipline to execute on
their digital capabilities in a tough interest rate environment will lead to gains
in efficiency into the future. In addition, the bank’s ability to execute on branch
closures will allow the firm to cut down on unnecessary overhead, causing expansion
in gross margins in future periods.
