Q4 2022 Columbia Banking System Inc Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Ladies and gentlemen, thank you for standing by welcome to Columbia banking systems fourth quarter and full year 2022 earnings conference call. At this time all participants are in a listen only mode. Later, we conduct a question and answer session.
<unk> will follow will be given at that time.
As a reminder, this conference is being recorded.
And now like to turn the call over to your host clean.
President and Chief Executive Officer of Columbia Banking system. Please go ahead.
Thank you Justin welcome and good morning. Thank you for joining us on today's call. We will review, our fourth quarter and full year 2022 results, which we released this morning before the market opened.
The earnings release and accompanying Investor presentation are available at Columbia Bank Dot com.
It was another exceptional year for Columbia, our bankers entered 2022 with tremendous momentum on the heels of a record 2021.
We were successful in capitalizing on opportunities with a new business and providing the necessary capital to allow our customers to grow and expand.
We extended our footprint into Utah, and Arizona during the year, all the while nurturing our existing client base and an interest rate environment.
Seen in well over a decade.
That marina teams across the bank, we're simultaneously involved in integration effort for our merger with <unk>.
During the first quarter of 2022, we completed the core conversion Burbank Congress Holdings acquisition.
Notwithstanding these competing priorities our bankers delivered outstanding full year results annual net income exceeded $250 million for the first time in our history.
Full year EPS expanded by 15% to a new high.
Volumes rose by 11% during the year after adjusting for PPP runoff in our operating efficiency ratio fell below 50% in the fourth quarter.
Although it took longer than initially expected on January 9th we announced we have received approval from the FDIC clearing the last regulatory hurdle for our merger with <unk>.
I'm happy to report that we completed the first of the branch divestiture sale this past weekend.
The second scheduled in February .
Consequently, we expect the merger to close February 28, and we are still planning for the systems conversion in March.
It's an understatement to say I'm proud to lead such a talented and committed team associates across the company had done an outstanding job over the past 15 months remaining externally focused.
On all of our stakeholders in addition to preparing for our merger with encore.
Our bankers focused on sustaining and growing our normal business activities, while simultaneously supporting integration efforts and conversion planning.
I want to thank them for their commitment to <unk>.
Risen to the challenge as we work toward creating one of the premier banking franchises in the Western U S.
On the call with me today are Eric <unk>, our Chief Financial Officer, and Chris Mary well, our Chief operating officer.
Following our prepared remarks, we will be happy to answer your questions.
I need to remind you that we may make forward looking statements during the call.
Other information on forward looking comments, please refer to either our earnings release or website or SEC filings.
At this point I'll turn the call over to Aaron.
Good morning, everyone. As Quint noted full year net income of $250 million and EPS of $3 24, new annual record.
Our performance was a reflection of strong loan growth and rising interest rates combined with solid fee income, while controlling spending and thoughtfully managed credit.
Excluding costs related to the Umpqua combination and merchants acquisition of $19 1 million pretax pre provision income was a record $326 million exceeding the prior record set in 2021 by $58 million or 22%.
Fourth quarter earnings of $68 9 million and EPS of <unk> 88 represented a linked quarter increase of $4 million and five respectively.
Quarterly pre tax pre provision earnings increased by $1 9 million to $90 $90 million due to continued expansion of net interest income.
<unk> increase was actually larger, but we had higher sequential merger costs and recall that we had a nonrecurring gain of $3 7 million on a building sale in the third quarter.
The balance sheet funding mix shifted during the quarter and was supported by an increase of $986 million in short term borrowings as deposits declined by $1 2 billion to $16 7 billion.
The overall mix of deposits remains superb and our liquidity position remains very strong providing us with continued deposit pricing flexibility.
The loan to deposit ratio at year end was 69%, which remains at the low end of the five year average preceding the pandemic.
Total loans were essentially flat linked quarter after accounting for $76 million of loans moved to held for sale and preparations for the divestiture of 10 branches as a condition of the Umpqua merger.
Excluding this new loan production exceeding $400 million was essentially offset by contractual prepayments.
And for other contractual payments along with an uptick in early prepayments and seasonally lower line utilization.
Early repayments were $190 million in the fourth quarter versus $157 million in the third as more borrowers are choosing to use their liquidity to pay down debt that is repriced to current market rates.
The investment portfolio decreased 156 billion to $6 6 billion as Paydowns and maturities were partly offset by fair value movement related to the available for sale book.
The portfolio was split 31% held to maturity and 69% of available for sale as of year end.
The overall investment securities yield was essentially unchanged at two 5% for the duration decreased slightly to five two years.
Our net interest margin continues to benefit from rising rates, increasing 17 basis points linked quarter to 364%.
<unk> driven by higher average loan rates and a stronger earning asset mix.
Partly offsetting this our cost of deposits rose relatively modest eight bps to 18 basis points.
Our overall cost of interest bearing liabilities rose 36 basis points to 58 basis points due mostly to higher FHL borrowings.
Our exceptional deposit base continues to support a favorable overall cost of funds.
New loan coupons in the fourth quarter were at an average rate of six 6%, which compares to $3 five 7% in the fourth quarter of 2021.
Notably the vast majority of our loans moved above their floors in the latter half of 2022.
Noninterest income decreased $3 3 million linked quarter to $23 3 million after adjusting for the property Gail property sale gain I noted earlier, however, noninterest income increased by approximately 400000, mostly due to boldly gains of 354000.
We continue to see solid deposit account and Treasury management fees with strength in financial services and trust revenue offsetting lower loan revenue due to weakness in mortgage banking activity.
Excluding merger related expenses in the third and fourth quarter noninterest expense decreased $2 6 million sequentially to $95 6 million, primarily due to lower compensation and benefits expense that we had good cost control across the board.
With our strong revenue operating efficiency dropped to 48% for the quarter.
Meanwhile, the effective tax rate remained level at 21%.
Lastly, credit metrics improved during the quarter, reflecting continued industry, leading asset quality nonperforming assets decreased slightly with MTA as of year end, representing just seven basis points of total assets and we reported net recoveries of $1 2 million. Despite.
Despite these favorable trends, we recorded a $2 4 million provision, reflecting a less optimistic economic forecast.
As a result, the allowance as a percentage of total loans rose to $1 43, 6% at year end compared to 143, 2%.
Remember earlier.
I'll turn it over to Chris.
Thank you Erin and good morning, everyone.
As Eric mentioned solid loan production of $402 million was in line with previous fourth quarters and drove full year production to a new post PPP record of $2 2 billion.
While quarterly loan growth was tempered by a normal seasonal reduction in line utilization loan balances grew to $11 6 billion, representing an increase of 9% during the year and 11% when adjusted for PPP Paydowns.
Production during the quarter was predominantly split between CRE and C&I.
Overall line utilization fell two basis points during the quarter to 47, 5% was up from 43, 3% a year ago.
CRE remains well diversified across multiple industries and is well balanced with 54% income properties and 46% owner occupied.
We're very proud of our bankers and our C&I portfolio continues to reflect our disciplined relationship based approach.
The quarterly production mix was 49% fixed and 41% floating and 10% variable.
The overall portfolio now stands at 54% fixed.
32% floating and 13% variable.
PPP loans are no longer a measurable part of the portfolio at only $10 million as of year end.
The geographic distribution of our loan portfolio stands at 48%, Washington, 29% for again, 10%, California.
5%, Idaho with the remaining 7% and other states.
Deposits fell by $1 2 million excuse me $1 billion during the quarter and the outflows were due to a variety of factors, including normal normal seasonal activity and a reversion of excess client liquidity back towards historical levels clients use funds for a variety of purposes to include year end bonuses.
And distributions paying down debt.
Making investments and moving cash to higher paying alternatives, including approximately $200 million CB financial services during the quarter and almost $800 million during the full year with the majority of that coming in the second half of the year.
The deposit mix shifted slightly during the quarter was 59% of our deposit source for businesses and 41% on consumers as of yearend.
And the ratio of noninterest bearing demand deposits improved from 49, 1% at the end.
End of 2021% to 51% at the end of 2022.
On the fee income from our wealth management group had yet another record year with over $17 million in revenue.
Our retail commercial and wealth management teams continue to work together in an effort to banks the entire relationship across our clients life cycles.
And with that I'll turn the call back over to Clint Thanks, Chris our regular quarterly dividend of <unk> 30 was announced this morning. This quarter's dividend will be paid on February 21 to shareholders of record as of the close of business on February six.
This concludes our prepared comments.
As a reminder, Chris and Aaron are with me to answer your questions and now Justin we'll open the call for Q&A.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question Press Star. One again, please standby will be compile the Q&A roster.
And one moment for our first question.
And our first question comes from David Feaster from Raymond James Your line is now open.
Hi, good morning, everybody.
Good morning, David.
Kind of like to follow up maybe on the on the deposit front and maybe you touched on some of the competitive dynamics. There I was wondering if you could maybe help quantify maybe some of the surge deposit outflows versus seasonal dynamics.
And versus clients utilizing cash to pay down higher cost debt.
And then I guess from a competitive standpoint are you seeing certain geographies may be more competitive and do you think we're through the surge deposits.
Just curious on some comments on that Brian .
Sure. This is Eric I'll start and let Chris cleanup for me, but.
We certainly have seen some revision of excess client funding.
Kind of revert back toward toward normal levels, I think there's probably still a little bit more of that to be seen given some of the analysis, we've done on that front, but.
If you look overall.
Through the third through the pandemic, we saw outsized influence relative to a lot of our competitors.
Even after the.
The outflows that we saw this quarter, we continued to run ahead of.
As most of our peers and so we're still feeling very good about the.
What the deposit flows have been in the mix and we're just continuing and I think a lot of that just reflects our continued discipline in terms of pricing and I can Mike.
Chris talked a little bit more about that.
Thank you.
David You mentioned the part about is it more competitive in certain markets and I would tell you is.
All markets are competitive.
It's different.
Competitors in certain markets, but you're seeing lots of deposit specials things of that nature.
Really happy with the team and how they're working with our clients find out what the purpose of the funds, we're trying not to be calm inter.
Interest rate sensitive.
A rate sensitive when we don't have to and utilizing the tools that are available through wealth management and such but the reality is there are there are some pretty significant specials that are out there we've used our exception pricing and.
And the discipline around that to keep our costs from from going up on that but there are some folks that haven't.
Chosen to pivot into treasury, bill or a CD specials or money market special and another bank.
But we're not seeing that we're losing the relationships, we're just seeing a pivot for some.
Some.
Put it more into the hot money category.
We're really comfortable with the relationships, we still have with those clients.
Okay and David.
If you look at the composition of noninterest bearing as a percentage of the total.
To be very stable in fact, it actually ticked up just a little bit sequentially and just in terms of the loan deposit ratio. If you look back to where that stood as I mentioned in my opening comments over the five years preceding the pandemic. It basically range between 70, and 85% and were still down at the very bottom end of that so if we sell a lot.
Flexibility.
Absolutely and if you do see some more of those surge deposits outflow.
There'll be advances the primary way of funding those versus security sales or or Cds or anything like that.
Yes at this point that would be our preferred source of funding.
Okay.
And maybe question on the growth side.
And somewhat of a seasonal slowdown in originations just curious.
How much of that is your appetite for credit diminishing somewhat just given the economic backdrop versus demand for credit in the market slowing.
Or competitive dynamics, maybe we even fewer attractive deals coming across the desk and just curious.
What segments are still attractive to you and you're still permanent bringing.
Bringing good risk adjusted returns at this point in the cycle.
Well, David as always you packed a lot into into it.
So.
Feel free to.
Circle back if we don't fully address.
Aspect of that I guess.
I'll start off and then hand, it over to Chris.
No.
From an appetite standpoint.
We're very comfortable with.
All the all the different verticals that we've historically been in.
We are committed to remaining throughout the cycles to our to our clients into our bankers.
Within those verticals and then when we look at our pending merger with Umpqua.
There is.
Theres not any.
Portfolio concentration issues that get created as a result of that in fact at.
It actually gives.
On a combined basis gives us more room to run within those verticals that we do have expertise in.
I think the key part of your question, though is is.
I'll paraphrase.
Can we quantify what we stepped away from because of either underwriting.
Don't really call I guess, you could say its competitive dynamics I think I just call it people that.
Are still very much.
Focused on putting up loan growth number.
As opposed to really looking at where we might be heading for a minute.
<unk> economic standpoint, and then.
Realizing that alright, the risk return is there.
And so from our perspective, we would rather pass and protect shareholder value.
I'll, let somebody else take that deal. There was there was quite a bit of that carry in the quarter and I'll, let I'll, let Chris give you the specifics okay. Thanks.
Yes, David.
Sure on the <unk> dynamics during the quarter of what we were tracking as we saw.
<unk> coming in and what the requests where.
It approaches a couple of hundred million dollars.
Deals that we simply looked at and said it is not in the shareholders' best interest to put that on the book.
Yes.
And we were seeing rates that frankly, we are below the 10 year treasury.
At this time now if there was something that was all.
A relationship or something like that as we've mentioned in the past, we certainly will be flexible with that type of pricing, but when you look at some of the new business that we would normally attracts throughout the year.
That's what we chose to walk away from those types of deals.
That makes sense.
And then last one maybe for me you guys talked about having.
First mark conversion in a readiness review.
Upcoming systems conversion.
Just curious how that went.
And maybe what you learned from that and then as we think about this whole conversion process kind of a unique opportunity.
For me the integration management office standpoint, they've been looking at this for a long time is there any.
While we're going through this opportunities or other investments or upgrades as we go through the conversion and integration.
That maybe we can.
Accelerated just just curious from from the conversion standpoint, your thoughts around that.
Hey, David This is Aaron.
Yes, the mock conversions.
Very well of course, there's always some some lessons learned in FIC.
Figure out ways that we can make sure we do things better, but we're having a tremendous amount of client communication right now thats going out too.
Make sure that when we do get to the to the actual conversion that iqos is absolutely smoothly as possible and we want it to be a seamless experience for the customer and for our associates as possible. So we're spending a lot of time there obviously.
Obviously this is leading that effort.
And as we've gone through this we've had a principle.
Of not introducing new risks to tornados process, So we haven't necessarily been.
Actively looking to build in new products as part of this process, but certainly we're continuously looking at the competitive.
Environment and speaking to our clients about what their needs are and making sure that we are.
Staying ahead of that and anticipating that and so there are things that we.
We will be looking to do in the year ahead to make sure that all of our Treasury management capabilities continue to be a leading edge, but but there is nothing that we're trying to implement through the integration process.
One thing I'll add to that.
We've spent a lot of time over the past 15 months talking about the complementary nature of Columbia's business activities in oncology business activities.
So we think that.
There is a lot of opportunity for upside with existing capabilities between the two organizations. So for example.
Our healthcare book leveraging impacts capabilities.
Some of those those types of things.
Sure.
Umpqua has got.
A more sophisticated and broader product set on the treasury management side that <unk>.
Existing Columbia customers will.
Instantly get the benefit of those expanded offerings. So I do think that there is there is plenty of opportunities.
Already existing and then to Aaron's point.
Try to minimize the number of moving parts as to the extent, we can add at these critical moments of conversion and integration but.
The conversion scheduled shortly after the close.
I think we will be able to quickly pivot in the back half of the year towards looking at are there things that have emerged that neither bank has.
We think long term.
Give us an advantage.
And so I think it'll be a quick turn but I think.
Set up very very well.
One two.
To.
To meet not only meet the needs and exceed the needs of most of our customers and continue to grow with them.
That's great color, thanks look exciting to see.
What 2023 has gotten historically all thanks.
And thank you.
And one moment our next question.
And our next question comes from Jeff <unk> from D. A Davidson your line is now open.
Hi, good morning.
I just wanted to zero in on the <unk>.
Maybe if I could the core noninterest expense and fee income lines.
Got it around 96 and call it $23 24, so I wanted to first.
If those numbers.
Oh, Ryan with what your thoughts are on core and then if you have any thoughts.
Thoughts about how that transitions outside of seasonal influences, but looking for kind of growth rates.
For the year.
<unk>.
Yes.
Yes, Geoff those are those are pretty quiet.
If you want I can give you the specifics behind the underlying merger costs in terms of what line first head if thats helpful to you but.
I think I would echo the comments that.
Ron made on the earlier encore call in terms of expectations for.
First quarter, typically youre going to see an uptick in expenses related to <unk>.
And that sort of thing.
And then shortly after that and you'll get the.
The kind of annual Merit increase impact.
A lot of those seasonal costs that hit in the first quarter, then trail off through the year. So.
I don't think youre going to see anything outsized or abnormal related to that of course with the exception of our two institutions coming together so.
Erin.
Expectation of growth in the outside of that let's just exclude the cost saves but just.
Standalone Colombia.
And kind of about.
345% kind of growth for for 'twenty three.
Yes.
We're probably I would say.
Two to three is probably more in the range of what I'd be thinking.
Okay got.
Got you.
Okay and then.
Similarly.
Looking at growth loan growth that is Ed.
Understood on some of the puts and takes competitively and within customer.
But your own appetite.
Also if you layer in I don't know if <unk> got visibility on payoffs or paydowns, but kind of where your budget on a 23 growth expectation for the for.
For Columbia.
<unk> Standalone.
Yes, Jeff this is Chris.
I think visibility to it there's always payoffs paydowns, there's normal amortization et cetera.
Just put it into kind of a normal course of business right now with.
With the interest rate environment, where it is.
Youre unforeseen payoffs are less likely.
You may still see some business sales or some things like that but.
We're pretty comfortable where we are on it.
I would look at overall.
Low to mid single digit I don't know that I would go much over 5% on that as far as the mid <unk>.
You are in that space kind of with the market dynamics, where they're at and what we're looking at.
Again, our bankers are seeing lots of opportunities.
And it's just a matter of which ones make the most sense to put onto the balance sheet.
Low to mid single digits is I think a comfortable spot to be.
Thanks, Chris I'll step back.
And thank you and one moment our next question.
And our next question comes from John Armstrong from RBC Capital markets. Your line is now open.
Hi, Hello, everyone.
Hey, John Good morning.
I don't know if you'll answer this one but I'll give it a shot.
On slide 30 of your presentation.
The last bullet shows core expense run rate communicated.
If you go back to your original deck.
You talked about $135 million of full run rate savings with.
Two thirds of it in 'twenty three.
How do you want us to think about the timing of the cost saves.
Given that your systems conversion is going to occur at the same time.
Than you originally planned.
It's a great question.
Just given the passage of time with the protracted approval.
We've identified.
$435 million tip.
Typically the timing of when those are realized as.
Some immediately at close and then.
And usually there is another wave of those somewhere between 30 and 60 days.
Post.
Both systems conversion and integration so.
We're we're shooting for.
We're shooting for a clean run rate.
For fourth quarter of 'twenty three so.
Would expect that all $135 million is full.
Fully implemented.
Some time.
Within the third quarter.
Kind of how that flows between first quarter second quarter.
I don't have I don't.
Have that in front of me I don't know.
Aaron does specifically what I will say is that we've had.
We've had some of that has actually been been realized just as as some of the attrition that we've had.
Employee standpoint.
We're.
Centered in positions that.
We're not go forward and so so there's a little bit of that thats already in the run run rate I'd say.
I don't know if you want to add anything to that Eric.
I mean, the thing Thats changed at all.
Or the timing of when the when various saves our realized but in terms of the the end date of when we'd expect to hit a good run rate as Clint said.
That expectation of hitting that by yearend remains.
Okay.
It's actually very helpful.
I was looking for.
And then just to follow up on the margin question.
Actually it's kind of impressive when you see your earning asset yields.
Up like they were.
What's your interest bearing liability costs were up about the same amount.
That's that's outperformed most of the other banks that I've seen.
Just philosophically when you think about those the direction of those two interest, earning asset yields and interest bearing liability costs.
Is there more pressure on the liability side at this point.
Or do you feel like you can you can kind of keep pace with asset yield expansion.
That may be mattresses or exceeded liability cost expansion.
It's a good question because the.
You are seeing an acceleration here through the year on the on the liability side, but.
I think if you look at where the.
The new asset yields are coming on and and then continue to see a little bit of.
Mix shift as we utilize cash flows coming off the investment securities portfolio.
I think we should see at least be matched.
If we're not seeing continued expansion.
Overall between the two.
Yes.
Okay. That's helpful.
And then I guess, one more follow up you may have kind of answered it before Chris or Clint but.
Any of the Big picture themes that you laid out when the merger was announced.
Have they changed at all in your mind positive or negative.
And in terms of the revenue synergies I know you don't really want to lay them out at this point, but any other opportunities that you've found.
You've kind of play this waiting game for approval.
Okay.
Okay.
Yes.
Yes.
So big Big picture, the world's completely different than what it was when we announced this thing.
16 months ago, almost but.
But in terms of what our expectations were and what we thought that we would achieve on a combined basis or be able to achieve on combined basis.
Nothing is nothing has changed there in fact, just with the passage of time.
Probably more firmly entrenched in.
Our beliefs.
That that we're going to be able to capture those revenue synergies.
I think we did a fairly.
Robust analysis of some of these things through the diligence process.
But then as you start to truly understand the depth of talent that.
<unk>.
On call Bank has in some of these areas that that would be additive to.
Columbia Standalone revenue streams.
It is.
Hard not to get excited.
Waiting for March one so we can hit the ground running.
So theres nothing that that we expected that we know today are thinking that.
<unk> be able to accomplish together.
Ill step back and see if Chris has anything he wants to add.
Yes, I think that the key surround now having a firm date sticky.
Sticking with our conversion is John honestly it's.
What we've learned over all this time about the expanded capabilities.
What our bankers are going to be able to take to market. They now have that at that point in time, where they know what's coming in.
Back out there and and.
We didn't get to taking advantage of those capabilities. So big picture I don't think things have changed but I think theres been a.
A little bit more excitement created because of the length of time.
And only because we now have a finish line to it that.
We'll be off and working on that aspect of it but yes, the world has changed.
So obviously different mortgage market differences and things of that nature, but our bankers are scale.
Out there looking and prospecting and then now that that finish line in sight.
I think it's.
It's really exciting actually.
Okay.
Good luck over the next five weeks.
Thanks Joan.
Thank you.
And one moment our next question.
And our next question comes from Chris Mcgratty from K B W. Your line is now open.
Oh, great. Thanks.
Just a question on credit obviously you guys.
We have unbelievable credit numbers.
One of the conversations that <unk> taken a lot of our time at analyst recently this office.
So I was hoping you could.
Speak to kind of your thoughts on that portfolio it looks like its about 10 or 11%.
Maybe some characteristics the underwriting statistics.
Anything you're particularly.
Concerned about.
That would be that'd be great. Thank you.
Okay.
Good morning, Chris.
Start and we will take maybe a team approach to it.
To answer your question here.
I'll start by saying our metrics you saw on the release continue to fit.
<unk> remained.
Christine.
I think this is the first probably the first earnings call in.
18, plus years that Andy Mcdonald hasn't been on A&D.
Scheme someplace in Idaho, right now so I think that in itself is a testament to how we're thinking about credit.
Specific to the to the office space.
Some of the a lot of the.
Kind of.
Urban core downtown office.
Building.
That's not really that's not really the type of things that we have in our portfolio.
And so I think theres, a little bit of a significant difference.
Between what Youre seeing in let's say.
Downtown Seattle.
In Portland and.
Some of the other areas that we're in from a.
Occupancy standpoint.
But.
With that I'll.
Pass it over to Chris.
He can give you some more details.
Sure.
You mentioned in their underwriting things of that nature. It Hasnt changed I mean, we've always been fairly conservative.
By nature, we've talked about that in the past.
What's changed is when you look at the portfolio in your stress test it towards higher rates, we're very comfortable with what we're seeing there in the credit side and anything new that's coming on key and stress that at even higher rate. So when you look at the ability of the borrower to withstand potentially if rates were to go up further values were to come.
Down.
We're working on lower loan to values overall, certainly in the portfolio.
Never been IMAX proceeds lender on anything new.
And again stressing the portfolio to those higher rates, we're not seeing anything and as Clint mentioned, we're not really in the markets, where you're seeing the headlines.
Business is pulling out turning back office space and things of that nature, that's really not our niche.
Okay, great. Thanks for that.
Tom.
<unk>.
The wall of worry as high I guess broadly on the economy.
Would you be spending more time, just stress testing within your portfolio.
Well actually everything that stress test.
Ted.
No.
Seeing any and then theres not any early warning signs.
What we're seeing I think.
From conversations with Andy Theres, an IV and kept on it when we do our our provision with air and they're certainly looking at economic indicators.
The unemployment and things of that nature.
I guess you'd say, we're keeping an eye on what may happen with.
With some of these large companies and doing some downsizing and some layoffs, but again, we need here some of those numbers.
These are companies that are not only across many states both multinationals and so it doesn't mean, it's all affecting an area right down the street from us, but we're looking at those types of things Havent seen anything thats popped up yet in any any reviews or any of our testing.
The other thing I'll add is that it really comes down to our bankers being proactive in.
Managing their portfolios.
Talk a lot and a lot of banks, probably do this talk about relationships, but that's really the value of having a relationship instead.
There is ongoing two way communication so that.
Youre operating.
Under the premise of no surprises.
And.
And that's part of that is as if we through that process. It served us well for.
For 30 years that we've been in business.
You find a borrower that maybe isn't as for competitor isn't as community Katy there as you would think well then those are the types that we pruned now just on a on an ongoing basis.
Trying to make sure that we.
Have.
I have the best clients possible are the best portfolio within each vertical possible that we can and.
So one area all mentioned.
Specifically would be.
Our builder banking area.
It's something that is part of our ongoing management.
It was early 2021.
That debt.
They started.
Communicating.
With each of their clients about.
What's your plan.
Rates go up.
What does it look like how is your inventory going to holdup, what's your exit strategy for projects.
<unk>.
And as a result.
Those portfolios are performing very well.
Probably was a little bit of pruning that occurred in late 'twenty. One early 'twenty two as a result of those.
Those conversations.
But the vast majority of those relationships are intact and part of that.
Great metrics that you see.
It also leads into other things that you see in the balance sheet. Now these are smaller portions of that dynamic but for example, our builders are putting more of their own money into.
Into the project, so so that lowers their deposit balances lower line.
Utilization theres different different things kind of come into play that you could be at a macro level as you look at our financials.
Great. Thanks, Thank you for all the all the color.
And thank you.
And one moment our next question.
And our next question is Andrew Corral with Stephens. Your line is now open.
Hey, good morning.
Good morning, Andrew.
Maybe just to start.
Aaron on the FHFA borrowings this quarter, where all of the FHFA has added where they overnight funding or was there any term to the borrowings.
It's all very short term.
A fair bit of overnight, but it's.
Weeks not months or years.
Yes, okay.
And then maybe just bigger picture, if I think about the balance sheet on a pro forma basis throughout the year.
You will have mark the securities portfolio. After the deal close so thats reflected in our pro forma capital do you feel like that gives you maybe philosophically just greater flexibility to roll or sell a greater portion of the bond book either to fund loan growth or maybe reduce the borrowing position throughout the year.
Yes, I mean once mark obviously arguably gives you more flexibility that doesn't mean, that's going to be the decision.
And obviously those cash flows on those parks come back in and supports capital levels.
But I mean thats going to be.
Isn't dependent upon what the rate environment is and what the balance sheet trends are going forward. So.
So I'm not going to presume just what thats going to be just yet.
Andrew the one thing I'll add there.
And you were on the Umpqua call just before this and I think Ron fielded at similar question.
We're not going to give our playbook out because there's.
A lot of.
Folks besides just our investors listen to this call or listen to the playback of it but.
But it does present, an opportunity for us to start thinking about just how we manage downside risk.
The falling rate.
Over the intermediate term.
Sure.
Ron in.
Myself and the rest of the go forward executive team have started having those conversations and so.
We're not we're not going to say anything about what exactly the details are.
But we do have flexibility and I think more flexibility than.
Most of the base in our <unk>.
For group will have.
Two.
To put some protection on.
On the balance sheet for for falling rates and that will be part of that component of that strategy.
Okay.
Very good I appreciate the color on the rest of mine were asked and addressed already so thanks.
Thanks, Andrew.
Thank you.
And one moment our next question.
And our next question comes from Matthew Clark from Piper Sandler Your line is now open.
Hey, good morning, Thanks for the questions.
First one just on the your updated thoughts around your pro forma.
Deposit beta through the cycle I think in the deck you guys show, 28% it seemed to be your base case is that does that kind of what you're managing to.
As <unk> comes on board and with only.
A couple of more rate hikes.
Allegedly from the fed.
No.
It's.
I wouldn't say, we're managing to a deposit data per se.
Obviously seeing our deposit cost start to come up here in the last quarter of the year, but.
Sure.
But to date through the through the cycle our deposit beta on interest bearing is only nine basis points overall.
About half of that.
99%, so that's going to continue to rise.
Whether or not that exceeds what we saw in the last cycle.
Is to be determined.
There's a decent expectation.
A bit higher than that just given that the rate rising pace has been more aggressive and longer lasting so there's there's going to be more forward than what we saw during the last cycle, but.
But what that ultimately is going to depend on what we see in terms of.
<unk>.
Just deposit flows loan demand.
And as Clint kind of alluded to in the prior question about what we might do with the balance sheet overall.
Yes, okay.
And then if you had at the spot rate on interest bearing deposits. Our total deposits at the end of the year and the average name them monthly.
December .
I don't know if ive got the margin, but core body dips.
Deposits were.
44 basis points for interest bearing deposits.
Okay.
But you only on the monthly maybe.
Maybe just last one around M&A I know you guys have a lot on your plate with the integration with Umpqua, but.
What are your general thoughts around.
Additional kind of M&A to the extent something.
It comes available that's high quality in northern California.
Okay.
Our highest priority is.
Getting getting to February 28th in getting our merger closed and then.
Assimilating the two companies.
And.
Okay.
Both very experienced at that end and I think the work that we've done.
We haven't let the protracted closing process go to waste.
We've got a clearly defined combined culture.
But.
A few thousand of our associates from both companies through.
Through training on that.
So.
I think that the process.
Of.
What I'll say the systems piece, that's all scheduled I think social aspect of integrating.
Two large companies.
Well underway and has been for quite some time and so as we emerge from.
The back half or into the back half of <unk>.
Approach the end of the three.
That's where we will refine our combined strategy.
And.
Strategic plan in terms of what we will be our primary focus over the next.
Two to five years.
M&A.
Vision.
We'll be a part of that.
The challenge frankly that we'll have as is.
At 50 plus billion.
The growth.
Growth capabilities organic growth capabilities.
That we have.
Today I mean, if you look at what the the two banks have done.
In the midst of all this uncertainty around when the closing will be.
The expansion into de Novo markets to production with those teams to pad.
<unk>.
No.
I would say a short list of quality franchises that would meet our hurdle from an M&A perspective, but.
We have more work to do on that we have to get.
Get the work at hand.
First and then and then we will turn our focus to.
What.
Targets might be.
Might be a good fit for us and make a meaningful difference in terms of Av.
The size of the combined organization.
Okay. Thank you.
Yes.
And thank you.
And I'm showing no further questions I would now like to turn the call back over to Clint Stein for closing remarks.
Great. Thanks, Jeff. Thank you again for joining our call. This morning have a good day everyone.
Yes.
The conference will begin shortly.
Lower Johan during Q&A, you can dial star one one.
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Okay.
Yes.
Okay.
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Okay.
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