Saturday, April 4, 2020

A Current AIM Small Cap Equity Holding: Colombia Banking System, Inc. (COLB, $39.45): “Colombia is Cost Conscious & Digitally Expansive”

Colombia Banking System, Inc. (COLB, $39.45): “Colombia is Cost Conscious & Digitally Expansive”
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.
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. 
COLB RSI (12/31/2018 - 12/31/2019)

COLB Price (12/31/2018 - 12/31/2019)

COLB Price (08/30/2019 - 12/04/2019)