Q3 2023 Columbia Banking System Inc Earnings Call
Okay.
Okay.
Yeah.
Thank you for standing by and welcome to the Columbia Banking systems third quarter 2023 earnings Conference call. At this time, all participants are in listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one on your telephone.
As a reminder, today's call is being recorded.
At this time I'd like to introduce Jackie Bohlen Investor relation director for Colombia to begin the call.
Yeah.
Thank you Valerie and good afternoon, everyone. Thank you for joining us as we review our third quarter of 2023 results, which we released shortly after the market close today.
The earnings release, and corresponding presentation, which we'll refer to during our remarks. This afternoon are available on our website at Columbia banking system.
This afternoon, our Clint Stein, President and CEO of Columbia banking system.
Mary Ellen Tory Nixon, President said uncle 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 provision of federal Securities law for a list of.
Factors that may cause actual results to differ materially from expectations. Please refer to slide two of our earnings presentation as well as the disclosures contained within our SEC filings.
Also reference non-GAAP financial measures alongside our discussion and we encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release and throughout the earnings presentation.
I'll turn the call over to Blake.
Thanks, Jackie and good afternoon, everyone.
Colombia third quarter results reflect our associates emphasis on activities that generate business and drive efficiencies for our franchise.
Our focus on balanced growth resulted in relationship driven expansion in our loan portfolio and higher noninterest income despite industry headwinds, we continue to see stabilizing deposit trends.
Integration activities are winding down as we are now in our eighth month since the merger closed I'm pleased to report, we achieved $140 million in annualized cost savings through quarter end, surpassing our originally announced target of 135 million.
These savings are net of franchise reinvestment, which includes it included investments in talent products technology and strategic locations in de Novo markets.
While our formalized cost savings objectives related to the merger of coming to an end our focus on efficient growth does not.
We will continue to seek out offset store investments driving our business forward in an efficient manner, while enhancing shareholder value.
Our talented associates expanded footprint and customer focused business model provide us with the resources and opportunities to profitably grow market share throughout the west.
Our future is bright and I look forward to providing updates on these objectives in subsequent quarters I'll now turn the call over to Ron Okay. Thank you Colin and for those on the call I want to follow along I will be referring to certain page numbers from the earnings presentation.
Slide four lays out our Q3 performance ratios letting stability in the NIM, our operating efficiency ratio at 52%.
Our return on tangible common equity of just over 20%.
These are five quarter of user recall, we closed the combination at the end of February of this year.
Slide five shows our summary balance sheet.
Veterinary <unk> 8 billion.
The growth exceeded and that loan growth, resulting in a loan to deposit ratio falling back to 89%.
We also reduced our short term federal home loan bank borrowings this quarter by $2 3 billion.
Which lowered our own balance sheet and spring cash position to $1 9 billion.
On slide six we highlight the income statement trends.
GAAP earnings were <unk> 65 per share impacted by declining merger expense as we complete the integration along with fair value changes due to higher interest rates.
On an operating basis, we earned <unk> 79 per share in Q3.
Flat Q2 is the increase in provision for loan loss was offset by declining noninterest expense as we realized cost synergies.
Operating <unk> was up six 5% to $259 million in Q3.
Turning to slide seven we break out.
Q3, GAAP earnings to help investors understand the nonoperating and merger related impacts on results.
First of all and represents our Q3 GAAP fully combined results with net income of $136 million or <unk> 65 per diluted share and return on tangible common equity of 17%.
The second column includes our nonoperating designation for income statement changes again, mostly related to fair value swings along with $23 million of <unk>.
<unk> and exit and disposal costs included in our suspense.
Which are further detailed out in the appendix.
These net to a $28 million reduction in Q3 earnings resulting in the third column for operating income.
And again, our operating income for Q3 was $164 3 million or <unk> 79 per diluted share.
With a return on assets at one 2% and return on tangible common equity at 25%.
We added pages to the appendix with trending on each of these calls.
The discount accretion will be a steady and reliable source of interest income overtime as the majority is driven by rate not credit.
Providing us with a steady build of capital over time.
And recall the CDI amortization does not impact tangible book value.
So the <unk> 17 per share for merger accounting was the equivalent of 28 per share added to tangible book value in Q3.
We will continue to highlight and trend here to aid investors in valley and all earnings streams.
And our tangible book value, excluding <unk> increased 45 during the quarter to $17 48 per share.
Moving to the next slide on section nine.
We highlight net interest income and margin.
Our NIM was steady from Q2 at 391%.
<unk> and $481 million of net interest income.
The NIM, excluding merger accounting for $3 two 8%.
We reduced excess liquidity in cash late in Q3, which should have a positive effect on our NIM in Q4.
Both measures were at the upper end of our prior guidance driven by the increase in customer deposits this quarter.
Slide 10 breaks out the repricing and maturity characteristics of the loan portfolio.
As noted 42% of effects.
9% is floating and 29% are adjustable.
Slide 11 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 future declining rate environment.
You can see here the training over the past year, where our rates down risk has been reduced significantly.
And notably 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 third quarter.
Our interest bearing deposit portfolio as price and 37% of the fed funds rate increases.
Notable here is the customer and spring deposits, which was 2.0% to 1% for Q3 and.
And two 8% for the month of September .
And again the lift this quarter was influenced primarily by the additional broker deposits, which were used to pay off maturing federal home bank advances for a relatively neutral impact on our funding costs.
The customer spread liabilities was 277% for the month of September .
And 278% at September 30, relatively in line with the $2, 72% for the entire quarter.
Slide 12 breaks out noninterest income items noted we had continued growth in service charges and card based fees due to higher revenue from customer related products.
The change in loans held at fair value at the bottom with a direct result of the increasing long term yields this quarter.
Next up on Slide 13, we're happy to report we've exceeded our original cost synergy target of 12% or $135 million.
As of quarter end, we've achieved $140 million annualized go forward cost synergies as we finalize the integration.
We expect that will lift of $143 million by year end.
And again these amounts are net of Reinvestments made in various areas.
Normalizing the month of September expense ex CDI with $81 3 million.
It should be $245 million for the quarter in the middle of our prior Q4 guidance range, which we reiterate at 240 $250 million.
Yeah.
Noted on the right side of the waterfall from the prior quarter with reductions driven by lower comp occupancy and contract costs.
To better help investors given the combination accounting and moving part is on slide 14, we provide an updated outlook for 2023.
Several key financial statement items, our current outlook is consistent with last quarter's update with a tighter band around the margin at third quarter results came in at the upper end of guidance given favorable customer deposit flows.
Moving ahead to the next section on the balance sheet on slide 16, we detail out the investment portfolio.
The table takes you from current card amortized cost or fair value.
The difference between current par in amortized cost combined net discount which will be accretive to interest income over time.
The decline in market value of this quarter of course resulted from higher market yields across the curve.
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 361% with an effective duration of five seven as a quarter.
Slide 17 covers our liquidity, including deposit flows during the quarter.
For comparability, we presented the table on the left.
Were combined for all periods presented.
Total deposits increased <unk> 8 billion or one 9% in the third quarter and customer accounts increased $89 million and again, we use the brokered along with excess cash to fund a portion of the home loan bank borrowing reduction.
The upper right table details our off balance sheet liquidity with $12 $2 billion available as of quarter end.
And below that we had cash and excess bond collateral not pledged their lives.
<unk> total available liquidity of $19 1 billion.
This represents 142% of uninsured deposits as of quarter end.
<unk>.
Slide 18.
Provides the loan roll forwards, noting we sold $159 million of Mark non-religious chip recognized in Q3.
Our loan portfolio increased 3% on an annualized basis from the sale of it.
Turning now to slide 19, we.
We present, the remaining balance of discount marks as compared to the prior quarter and at closing.
For the <unk> portfolio, the acquired discount was reduced $23 million via accretion to interest income.
Our earnings release detail. We include this $23 million, along with $19 million of higher bond interest income from the portfolio of restructure completed post close.
To arrive at the $42 million total accretion per box.
On the loan side, we had $29 million of rate accretion and $6 $4 million for credit.
The total market declined $93 million in Q3, if you are a combination of accretion to interest income and the loan sale.
And finally in the back on slide 26.
We highlight our regulatory capital position.
Our risk based capital ratios increased roughly 25 basis points as expected.
Q3.
We expect to quickly approach our long term capital targets of 12% October space capital, which will provide for enhanced flexibility to return excess capital to shareholders.
And with that I'll now turn the call over to Frank.
Thank you Ron.
<unk> 'twenty through 'twenty, two provides select characteristics of our loan portfolio, including the composition of our commercial books and an overview of our office loans that highlights CIS diversified granular portfolio, primarily supported by properties located in suburban markets.
Moving on slide 23 displays our reserve coverage by loan category. Additionally, the remaining credit discount on loans provides a further 23 basis points of loss absorbing capacity.
The $37 million provision expense recorded in the quarter accounts for several factors, including shifts in our loan portfolio mix and trends and credit migration.
The slight uptick in nonperforming loans during the quarter suggests a move toward a more standard credit environment. Following a phase of exceptionally high quality.
Slide 24 provides an overview of our consolidated credit trends in general our credit performance is and has remained positive excluding the anticipated trend in impact charge offs.
Fintech charge offs remained elevated during the third quarter still centered in the trucking sector of the portfolio. However.
The plateau and related early stage delinquency trends, we discussed on last quarter's call resulted in a reduction in fintech net charge offs, which react on a lag to delinquencies.
Excluding the impact charge off activity at the bank remains at a very low level.
I'll now turn the call over to Chris Thank.
Thank you Frank turning to deposits slide 25 highlights the quality of our granular deposit base.
As Ron noted customer deposit balances increased during the quarter. Despite the continued effects of market liquidity tightening and inflation. Our teams remain active in their markets and our focus on customer acquisition and retention resulted in net deposit increases throughout many of our business lines.
Strategic expansion also supports our business generation activities, we opened our first retail branch in Utah during the third quarter supporting our intention to make businesses their owners and their employees and any others in the communities we serve throughout our eight state western footprint, where.
Also selectively added to our talented associate base, including the addition of two key bankers in Northern California.
One commercial and one in wealth management.
We continue to capitalize on opportunities our expanded customer base provides and our commitment to our relationship focused model I am pleased to announce our wealth management team had the best quarter in our company's history we.
We are positioned well throughout our markets to win business and drive balanced growth.
I will now turn the call back over to Clint.
Thanks, Chris our regulatory capital position as outlined on slide 26.
We remain above both well capitalized and our internal threshold targets and as Ron discussed we expect capital to continue to accrete quickly in the coming quarters, providing us with ample flexibility for future shareholder return.
This concludes our prepared comments the team is now available to answer your questions. Valerie. Please open the call for Q&A.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one why don't you touch tone telephone again to ask a question. Please press star 111.
One moment for our first question.
Our first question comes from the line of Jeff <unk> with D. A Davidson your line is open.
Thanks, Good afternoon.
Hi, Jeff.
Unknown Executive: Thank you for standing by and welcome to the Columbia Banking System's Thursday, quarter 2023 earnings conference call. At this time, all participants are listening only mode. After the speakers presentations, there'll be a question and answer session. That's the question at that time. Please press star 11 on your telephone. As a reminder, today's call has been recorded.
I wanted to kind of look at that margin guidance, you've got for the full year.
It looks like you hit the low end of the $3 85 for the full year you have got to be good.
It looks like it's got to kind of really.
Jacquelynne Bohlen: At this time, I'll let you introduce Jackie Bowlen, Investor Relations Director for Columbia to begin the call. Thank you, Valerie. Good afternoon, everyone. Thank you for joining us. We review our third quarter 2023 results, which we release shortly after the market closed today. The earnings release and corresponding presentation, which we'll refer to during our remarks this afternoon are available on our website at Columbia Banking System dot com.
In the fourth quarter in terms of margin.
What would I guess, if you could kind of frame up the environment or how do you hit the low end of the guidance for the full year on margin.
Jeff This is Ron Hey, good morning, or good afternoon, that'd be similar to what we saw last quarter right. So it depends on customer deposit flows. If we're on the effort. We are positive on that front will be on the upper end of May.
Hey, good on that front would be on the bottom and feel pretty good about the quarter.
Jacquelynne Bohlen: With me this afternoon, our Clint Stein, President and CEO of Columbia Banking System, Chris Marywell and Torran Nixon, the President of Uncle Banks, 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 provision of Federal Security's law. For a list of factors that may cause actual results to differ materially from expectations, please refer to slide two of our earnings presentation, as well as the Disclosures contained within our SEC filing. We will offer also reference non-gap financial measures alongside our discussion of gap regal. We encourage you to review the gap to non-gap reconciliation, providing our earnings release and throughout the earnings presentation.
Okay.
Again alright.
Seems pretty well.
Well I'll be born.
On the credit side.
Okay, just on that the increase in non performers.
Could we kind of break out what.
What type.
That was in and perhaps where within.
The footprint.
It was really it was really centered in two commercial commercial accounts with the bank.
Both of them had been struggling for quite some time and one of them just.
Decided to cease operations.
And so.
That one migrated into into nonperforming.
Clint Stein: We will now turn the call over to Clint. Thanks, Jackie. Good afternoon, everyone.
The balance of it is really associated with in terms of nonperforming assets is that slight escalation in the 90 day plus and residential construction.
Clint Stein: Columbia's third quarter results reflect our associates' emphasis on activities that generate business and drive efficiencies for our franchise. Our focus on balanced growth resulted in relationship-driven expansion in our loan portfolio and higher non-interest income. Despite industry headwinds, we continue to see stabilizing deposit trends. Integration activities are winding down, as we are now in our eighth month since the merger closed.
They were.
In terms of geography, they relocate one of them was located in.
In Portland.
Kind of the Pearl District of Portland, and another one was was located in California.
Okay.
Got it got it.
Clint Stein: I'm pleased to report we achieved $140 million in annualized cost savings through quarter-end, surpassing our originally announced target of $135 million. These savings are net of franchise reinvestment, which includes included investments in talent, products, technology, and strategic locations in the global markets. While our formalized cost savings objectives related to the merger are coming to an end, our focus on efficient growth is not. We will continue to seek out offsets to our investments, driving our business forward in an efficient manner while enhancing shareholder value. Our talented associates, expanded footprint, and customer-focused business model provide us with the resources and opportunities to properly grow market share throughout the West.
I guess the expectation, if we kind of track impact losses.
Like you said kind of a lagging.
Indicator on.
Hi, Tim.
Bankruptcies is that still the case that we've seen that plateau would be if we follow delinquencies continue to come down on that.
It is still the case.
I'll say that things.
The third quarter.
A few holidays in it.
That impacts collection activity any impacts of collection activity really hampers.
Obviously, reducing those past dues and we have that in the third quarter had we not had that in the third quarter, we would've seen some some further improvement but that trend should continue obviously into the fourth quarter fourth quarter is usually another another difficult one for collection activity.
Clint Stein: Our future is bright, and I look forward to providing updates on these objectives in subsequent quarters.
Ronald Farnsworth: I'll now turn the call over to Ron. Okay, thank you, Clint. And for those on the call who want to fall along, I will be referring to certain page numbers from the earnings presentation. Slide four lays out our Q3 performance ratios, noting stability in the NEM, or operating efficiency ratio at 52%, and our return on tans will come in at least just over 20%. 1% These are five quarter views in recall we closed the combination at the end of February this year.
But we make sure that we're staffed up to handle it.
So so we feel we're continue to be on track.
Okay.
One last one on the expense, Brian I don't know if its possible to launch.
For expense growth expectation.
Big Big year of cleaning up and you've got a little extra on that.
Cost savings on the deal in the fourth quarter, but.
Ronald Farnsworth: Slide five shows our summary balance sheet, noting there is $0.8 billion of deposit growth exceeded in that long growth resulting in the five-sixth, we got out of the income statement trims. Gap earnings were $0.65 per share impacted by declining merger expenses as we complete the integration along with fair value changes due to higher interest rates. On an operating basis, we earned $0.79 per share in Q3, about flat Q2 as the increase in provision for loan loss was offset by declining non-interest expense as we realized cost synergies.
Maybe not if you can't go into a figure just talk about kind of big picture I think you kind of spoke to claim.
Sort of continuing to optimize as sort of the message, but any big picture sort of.
Branch.
Consolidation of our larger investments that may come in in 'twenty four.
Yes.
We're always looking at how can we become more efficient and I do think that there's opportunities for us to do that as we've already we've already started.
Well into our 2020 for planning process.
So that's what I was alluding to there we're going to continue to invest especially in our de Novo markets.
Chris and Tori.
Ronald Farnsworth: Operating in KPR was at $6.5% to $259 million in Q3. During the slide seven, we break out Q3 gap earnings to help investors understand the non-operating and merger related impacts on results. First call represents our Q3 gap fully combined results with net income of $1.36 million or 65 cents per dilute share and return on tangible common equity of 17%. The second call includes our non-operating destination for income statement changes, again mostly related to fair value swings along with $23 million of merger and exit and disposal costs included in our suspense, which are further detailed out of the appendix.
<unk> made some strategic hires in existing markets.
Chris's prepared remarks, he mentioned the.
California, Northern California, So we're going to continue to be opportunistic within legacy markets, but also in <unk>.
Best in.
In those newer markets in those high growth markets, but we're going to challenge ourselves to do that by finding offsets and efficiencies in other parts of our organization as opposed to just simply letting expenses ramp up.
In terms of kind of a launch point for modeling purposes.
I'm going to I'm going to defer to Ron on that.
Jeff will talk about that with an updated guide in January as we look into 'twenty four.
Ronald Farnsworth: These net to a $28 million reduction in Q3 earnings resulting in the third call for operating income. Again, our operating income for Q3 was $164.3 million or 79 cents per dilute share with our return on assets at 1.2% and return on tangible common equity at 20.5%. We added pages to the appendix with trending on each of these columns. The discounted creation will be a steady and reliable source of interest income over time, as the majority is driven by rate, not credit, providing us with a steady bill of capital over time. And recall the CDI immunization does not impact tangible book value. So the 17 cents per share from merger accounting was the equivalent of 28 cents per share added to tangible book value in Q3.
Okay, and just curious on that.
You said that cost savings are net of investments is there a ballpark number that you had.
Pass along in terms of what you think you invested against the cost saves of $140 million.
Hey, Jeff This is Ron again, yes, it's actually a specific number $21 million. So we've got gross of 164 down to 143.
Okay, great. Thank you.
Jeff This is Chris and to answer your question you asked about branch consolidations.
We have five leftover.
The original ones that we did and when we look at our go forward are very pleased with our footprint. We think we're in a good spot with those and don't anticipate anything further.
Thanks, Chris.
Ronald Farnsworth: We'll continue to highlight and trend here to aid investors in valuing all earning streams. And our tangible book value, excluding AOCI, increased 45 cents during the quarter to $17.48 per share.
Thank you one moment please.
Our next question comes from the line of David Feaster of Raymond James Your line is open.
Ronald Farnsworth: Moving to the next slide on Section 9, we highlight net interest income in March. Our name was steady from Q2 at 3.91%. Resulting in $4.81 million of net interest income.
Hi, good afternoon everybody.
Hi, David.
I was hoping maybe we could just touch on the funding side and specifically focusing on on the core funding side exclusive of the brokered deposit increases.
Ronald Farnsworth: The name excluding merger accounting was 3.28%. We reduced access liquidity in cash rate in Q3, which should have a positive effect on our name in Q4. Both measures were at the upper end of our prior guidance driven by the increase in customer deposits of the score.
Talked about earlier.
I'm just curious what youre seeing there is we will again it sounds like core trends are stabilizing months, you're actually having some success attracting new clients.
Which may be difficult for us and seeing some regards just given clients utilizing excess liquidity I'm just.
Ronald Farnsworth: Slide 10 breaks out the repricing and maturity characteristics of the loan. Bordeaux, noting 42% of the fixed, 29% of the floating, and 29% are adjustable.
Some of the underlying trends that you see there within your core deposit franchise, where youre seeing the most opportunity to drive core deposit growth in attractive new deposit clients on how new core deposit pricing is trending.
Ronald Farnsworth: Spline 11 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 future declining rate environment. You can see here the training over the past year where our rate down risk has been reduced significantly. And note a below, we calculate our cycle-to-date funding betas, which are calculated on a combined company basis over the period it's presented for comparability.
David Hi, This is Tory Nixon I'll talk a little bit on the commercial side of the house and let Chris kind of.
Chime in on the consumer side of the house.
For commercial.
Banking I mean, youre seeing just a few different things one folks are using.
Excess cash to invest in their companies, when and where appropriate rather than then borrow so the borrowing side is less robust than it was a year ago.
Ronald Farnsworth: As of the third quarter, our over-sparing deposit portfolio has priced from 37% of the Fed funds rate increases. Notable here is the cost-finished frame deposits, which was 2.01% for Q3, and 2.18% for the month of September. And again, the lift this quarter was influenced primarily by the additional broker deposits, which were used to pay off ensuring federal and bank advances for relatively neutral impact on our funding costs. The cost-finished frame liabilities was 2.77% for the month of September, and 2.78% at September 30th, relatively in line with 2.72% for the entire quarter.
Folks are also kind of looking for yield where they can with any excess deposits.
We have done I think a really nice job.
Connecting with our existing customer base, and just looking holistically at their relationship and with with that in mind kind of focusing on where they may have funds at other places.
Talking about bringing those funds to to Umpqua bank and a lot of success with that that will continue without a doubt.
We've had we have a lot of success this quarter with it and we've got a really I think a really nice pipeline as we move into Q4, so Chris.
Ronald Farnsworth: Slide 12 breaks out non-interest income items, noting we had continued growth in service charges and card-based fees due to higher revenue from customer-related products.
Yes pretty much the same piece on that David I would add that.
On the new side, our rates are very competitive in the market, but where we're really seeing the opportunities to deepen relationships is in talking with the customers taking them through our relationship model asking questions about what else. They have out there and we continue to source deposits from.
Other institutions.
As well the teams have really kind of move towards.
It's still some.
Minor integration, but not technology types of things and our teams are out jointly calling together and all of our markets and winning new business just with their outward bound efforts.
Hey, David Sorry, again, I thought I'd, just add one more thing on there.
One of the things kind of going on our marketplaces tremendous disruption.
From other financial institutions.
We're looking we've got.
It gives us a lot of opportunity and so we're.
We're working hard in the markets.
Our footprint to talk to anybody and everybody that we think fits the bank and having some success with that.
Okay, that's great.
Maybe stepping back a bit it seems like we're going to be in a higher per longer environment for some time I'm just curious maybe and look I know, it's still early but I'm. Just curious how you think about maybe the margin trajectory and the business performance more broadly in a higher for longer environment and how you are looking to manage the <unk>.
Balance sheet in the business for that kind of environment.
Hey, Dave This is Ron again, I'll come back to comments, we talked about earlier or do we see continued customer deposit growth and I feel really good about where we're at.
At a higher for longer environment, I think maybe in terms of 'twenty 'twenty four specifically, we will definitely give you an update on that in January .
Ronald Farnsworth: The change in loans held at fair value at the bottom was the direct result of the increasing long-term yields this quarter.
Ronald Farnsworth: Next up on slide 13, we're happy to report we exceeded our original cost-energy target of $12 or $135 million.
As we look into the year, but it's going to be the basic blocking and tackling.
Christen Tory talked about continued customer deposit growth, we'll we'll look there on that front.
Ronald Farnsworth: As of quarter-and we've achieved $140 million and annualized go-forward cost-energies as we finalize our integration. We expect that will lift to $143 million by year-end, and again, these amounts are net-of-reinvestments made in various areas.
Okay.
And then last one from me you guys have been accretive capital.
Ronald Farnsworth: Normalizing the month of September expense X to the I was $81.3 million, which would be $245 million to the quarter, in the middle of our prior Q4 guidance range, which reiterates at $240 to $250 million. Note on the right side of the waterfall from the prior quarter, with reductions driven by lower comp, occupancy, and contract cost.
Rapid pace Youre getting close to your 12% total risk based target I'm just curious as you approach those targets, how you're thinking about capital management is there any interest in potentially returning capital maybe early next year at this point in the cycle would you primarily be focused on capital preservation.
Ronald Farnsworth: To better help investors give them accommodation, accounting, and moving partners on slide 14, we provide an updated outlook for 2023 on several key financial saving items. Our current outlook is consistent with last quarters update, with the tighter band around the margin as the third quarters result came in at the upper end of guidance given favorable customer deposit flows.
Well.
Okay.
Our focus is we always want to be good stewards of capital and.
We have our long term targets and we've spoken about those.
<unk> been very consistent with those even on a standalone pre merger basis are our thoughts around capital levels were pretty consistent and so.
Essentially at 150 basis points to whatever the criteria is to be considered well capitalized and thats our long term target.
No.
Total risk based capital has been the constraint you mentioned the 12%.
Absolutely we're going to look at all.
Ronald Farnsworth: Moving ahead to the next section on the balance sheet. On slide 16, we detail out the investment portfolio. The table takes you from current part to amortized cost to fair value. Noting the difference between current part and amortized cost is the combined net discount, which will be accreted to interesting ones.
Capital deployment opportunities.
I don't think that as soon as we hit by 12.01 or something that we're going to look at at.
Ronald Farnsworth: The client and market value of this quarter of course resulted from higher market yields across the curve, as you can tell I'm excited about this portfolio that gives us a significantly higher and stable earning stream with creator optionality. The overall book yield was 3.61% with an effective duration of 5.7 as a quarter rate.
A major shift, but we're creating 25 30 bps of capital.
Quarter.
It happens pretty quickly, we're then suddenly or.
50 to 7500 basis points over that over that target and.
Still growing capital.
We've mentioned that that with our forecast and expectations and the earnings power of this company that there is not a level of what we think would be.
Prudent organic growth that would absorb all of that capital. So so by default, yes, we will be looking at at capital return and how we do that as we as we manage to those ratios now I don't think you should expect it next quarter necessarily but I do.
That it will be a nice problem that will have is 2024 progresses.
Absolutely thanks for the call everybody. Thanks.
Thank you.
Thank you.
One moment for our next question.
Our next question comes from the line of Tamir Brasilia of Wells Fargo. Your line is open.
Hi, good afternoon.
For the broker deposits that were added during the quarter can you just talk through kind of the timing during the quarter. They were added their costs and then the expected duration.
Yes. This is Ron good afternoon that was later in the quarter roughly two to four months and tenor Thats, how we manage all of this from a wholesale standpoint, including the home loan bank advances and you call them tuck in probably mid fives in terms of costs.
Okay.
Then I guess as you look at your borrowing position where is that today relative to where you want it to be and as that continues to mature and maybe just give us a schedule of how that matures and if the expectation is.
Place that with additional brokered.
Yes, and again the Homo <unk> advances are also met two to format center.
So there are all of your pricing in that call. It mid five area as well and that just gives us the most flexibility right back to your second question. We're obviously sitting on more borrowings assumed would be lag. It's in response to of course, what's happened with just liquidity drain in the overall system over the past year ideally over time deposit growth continues to exceed loan growth.
Customer deposit growth exceeds customer loan growth and were able to pay those down with your plan.
Okay. That's helpful.
So the first question it seems like the low end of the margin guide seems fairly conservative and I'm just wondering as we look at NII.
Ronald Farnsworth: So like 17, covers our liquidity and clean deposit flows during the quarter.
Is that also kind of 50 50 for an inflection point next quarter or even though there is some stability in the NIM, we could see another quarter of NII compression prior to that higher for longer really kicking in and benefiting the top line in 'twenty four.
Ronald Farnsworth: For comparability, we presented the table on the left as we were combined for all periods presented. Code deposits increased 0.8 billion dollars or 1.9% in the third quarter. And customer accounts increased $89 million, and again, we used the broker at home with excess cash to fund a portion of the home loan bank borrowing reduction. The upper right table details are off-family sheet liquidity, with $12.2 billion available as with quarter rate. And below that, we had cash and excess bond collateral not pledged for lines to run a total available liquidity of 19.1 billion dollars. This represents 142% of uninsured deposits as a quarter rate.
Specific to that question in Q4 and the guide.
If we're talking about material move is going to come down to get to the customer deposit growth and I feel good about youre.
Ronald Farnsworth: But 18 provides the loan world forwards, noting we sold $159 million of marked non-relationship wealthy loans in Q3.
Youre not going to see significant.
Ronald Farnsworth: Our loan portfolio increased 3% on annualized basis when the sale was excluded.
You should not see a significant change in the net interest income dollars.
Continued customer deposit growth in the portfolio.
Okay.
Ronald Farnsworth: Turning now to slide 19, we present the remaining balance of discount marks as compared to the prior quarter and that closing. For the FS portfolio, the acquired discount was reduced $23 million via creation to interest income. In our age-related detail, we include this $23 million, along with $19 million of higher bond interest income from the portfolio restructure, we completed post-close to arrive at the $42 million total accretion for months.
Yes.
Okay and then.
Ronald Farnsworth: On the loan side, we had $29 million of rate accretion and $6.4 million for credit. The total marks declined $93 million in Q3 through a combination of accretion to interest income and the loan sale.
The 10 pack.
Early stage plateauing last quarter charge offs still somewhat elevated this quarter, so focused on trucking I guess.
Is that more of a cliff event, where that pretty much subsides going forward or is that going to be more of a tail, where this lingers for a couple of additional quarters prior to signing.
It's going to be a slow it's going to be a slow reduction overtime over.
<unk>.
Yes, multiple quarters to my best estimation.
Ronald Farnsworth: And finally, in the back, on slide 26, we highlight our regulatory capital position, moving our risk-based capital ratios increased roughly 25 basis points as expected in Q3.
Okay, Great and then just last for me the resin loans that were sold about $159 million.
What was the discount they were sold out if you can provide that.
Ronald Farnsworth: We expect to quickly approach our long-term capital targets to 12% on total risk-based capital, which will provide for enhanced flexibility to return excess capital to shareholders. And with that, how about from the Harvard bank?
Yes.
Our value is in the 185% to 90 range so discount within the ballpark.
35.
Frank Namdar: Thank you, Ron. Slide 20 through 22 provides select characteristics of our loan portfolio, including the composition of our commercial books and an overview of our office loans that highlights this diversified granular portfolio, primarily supported by properties located in suburban markets. Moving on, slide 23 displays are reserved coverage by loan category. Additionally, the remaining credit discount on loans provides a further 23 basis points of loss absorbing capacity. The $37 million provision expense recorded in the quarter accounts for several factors, including shifts in the loan portfolio mix and trends in credit migration.
Got it.
Great. Thank you for the questions.
Great. Thank you.
Thank you one moment please.
Our next question comes from the line of Brody Preston of UBS. Your line is open.
Hey, good evening, everyone how are you.
Afternoon.
Hey, I just wanted to follow up.
Just on the loan waterfall chart, Ron I, just wanted to make sure I understand that.
The $3 43 from pay offs or sales.
The single family side, I think it was the $1 59 thats in there and then the remainder of that is just payoffs correct.
That's correct.
Okay, and then the $5 15 of prepayments.
Just wanted to ask kind of like.
What was the success rate and kind of.
Maybe converting those into new originations this quarter.
Yes. This is this is Tory burch suddenly just real quick on that I think the success rate is very very high and that's what we wanted to do we've had we had growth in the commercial side of.
And our C&I teams in about $40 million to $50 million and then growth in the CRE teams and about 180, so a lot of success in the rollover of that.
Okay great.
And then could I ask just a generic question on the loan portfolio what portion of it is shared national credits and then of that.
Frank Namdar: The slide-up tick in non-performing loans during the quarter suggests a move toward a more standard credit environment following a phase of exceptionally high quality. Slide 24 provides an overview of our consolidated credit trends. In general, our credit performance is and has remained positive, excluding the anticipated trend and Fimpact charge-offs. Fimpact charge-offs remain elevated during the third quarter, still centered in the trucking sector of the portfolio. However, the plateau and related early-stage delinquency trends we discussed on last quarter's call resulted in a reduction in Fimpact net charge-offs which react on a lag to delinquencies. Excluding Fimpact charge-off activity at the bank remains at a very low level.
What are you the lead on.
Frank Namdar: I'll now turn the call over to Chris. Thank you, Frank.
So we our total commitments in the snip portfolio is around $3 billion.
Our outstandings are roughly $1 8 billion.
Torran Nixon: Turn it into deposits. Slide 25 highlights the quality of our granular deposit base. As Ron noted, customer deposit balances increased during the quarter despite the continued effects of market liquidity tightening and inflation. Our teams remain active in their markets and their focus on customer acquisition and retention resulted in net deposit increases throughout many of our business lines. Strategic expansion also supports our business generation activities.
Lead a couple deals today, but most of them are just a participation with ancillary business and then there is not a part of the organization that we are growing.
Torran Nixon: We opened our first retail branching Utah during the third quarter, supporting our intention to make businesses, their owners, their employees, and any others in the communities we serve. Throughout our eight state western footprint. We also selectively added to our talented associate base, including the addition of two key bankers in Northern California, one in commercial and one in wealth management. We continue to capitalize on opportunities are expanded customer base provides and our commitment to our relationship focused model and pleased to announce our wealth management team had the best quarter in our company's history.
Torran Nixon: We are positioned well throughout our markets to in business and drive balanced growth.
Really at all.
Clint Stein: I will now turn the call back over to Clint. Thanks, Chris.
We have really strict guidelines of what we wanted to be and what we're going to do and obviously you've got to have significant ancillary business, including deposits to even consider.
Clint Stein: Our regulatory capital position is outlined on slide 26. We remain above both well capitalized and our internal threshold targets. And as Ron discussed, we expect capital to continue to creep quickly in the coming quarters, providing us with ample flexibility for future shareholder return.
Got it okay. Thank you for that.
Maybe just on the office portfolio, you gave great detail there, but I was wondering if you happen to have what the.
Clint Stein: This concludes our prepared comments. The team is now available to answer your questions.
Unknown Executive: Valerie, please open the call for Q&A. Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. One moment for our first question.
Hey, Triple Al for the office portfolio was.
Jeffrey Rulis: Our first question comes on the line of Jeff rule of the day, Davidson. The line is open. Thanks. Good afternoon. Jeff, I wanted to kind of look at that margin guidance you got for the full year. It's like, you know, to hit the low end of the 385 for the full year, you've got to be It's like it's got a kind of really tank in the fourth quarter in terms of margin.
Yes.
Thanks for the question Brody, we choose not to provide that much detail surrounding ACL on that portfolio, we feel that theres enough detailed information provided elsewhere for.
For the group to really ascertain the quality of our loan portfolios, which is high.
Very good quality.
Okay cool.
And then I did want to ask.
This was more for.
Of interest for me just on the multifamily originations this quarter.
Jeffrey Rulis: What would I guess if you could kind of frame up the environment of how you hit the low end of the guidance for the full year on margin? Jeff is wrong. Hey, good morning. Good afternoon. That'd be similar to what we saw last quarter, right? So it depends on customer deposits flows. If we're on the upper, if we're positive on that front, we'll be on the upper end of first. Then again, on that front, we'll be on the bottom end.
Jeffrey Rulis: Feel pretty good about that. And then the quarter. Okay, so again, all right, seems pretty well on the bond on the credit side. Just on the increase in non performers. Could we kind of break out what type that was in and perhaps where within the footprint? It was really centered in two commercial, commercial accounts with the bank. Both of them had been struggling for quite some time. And one of them just decided to cease operations.
I just noticed that there is like a big difference I think between the debt service coverage ratios that you had.
Jeffrey Rulis: And so, you know, that that one migrated into into non performing. And, you know, the balance of it is really associated with in terms of non forming assets is that slight escalation in the 90 day plus in residential construction. They were in terms of geography. They were located. One of them was located in in Portland, kind of a parole district of Portland. And another one was was located in California. And I guess the expectation if we kind of track impact losses, like you said, kind of a lagging indicator on tied to the link with season that still the case that we've seen that plateau and we if we follow the link with season continues to come down on that end.
You had originated last quarter I think there are like one seven in this quarter. There were 132 and like that's still healthy but it was just a big difference. So sorry, I just wanted to know if there's anything specific that kind of cause of that.
Jeffrey Rulis: It is still the case. I mean, I will say that, you know, things, the third quarter, you know, has a few holidays in it. That impacts collection activity, any impact to collection activity really hampers. Obviously, reducing those past dues. And we had that in the third quarter. Had we not had that in the third quarter, we would have seen some some further improvement. But that trend should continue. Obviously, into the fourth quarter, fourth quarter is usually another another difficult one for for collection activity, but we make sure that we're staffed up to to handle it. So so we feel we're continue to be on track. Okay.
Yes.
No nothing.
Nothing specific Brody.
Alright.
Without without having that detail in front of me, it's hard for me to say, but what I would why would intimate from this is that we had extremely strong sponsorship on those on those deals when they are relationship based.
Opportunities. So we have the banking relationship and knew the client.
Jeffrey Rulis: One last one on the expense front.
Jeffrey Rulis: I don't know if it's possible to launch a 24 expense growth expectation. I, you know, it's a big big year of cleaning up and you got a little extra on the cost savings on the deal in the fourth quarter. But if maybe not, if you can't go into a figure, just talk about kind of big picture. I think you have kind of spoke to Clint, you know, sort of continuing to optimize is sort of the message.
Got it and then I just had a couple last quick ones for you just on the.
The non accruals.
Good to understand was there was any of that included in the delinquencies just because when I looked at the buckets.
<unk> disclosed on page 20.
Notice that the DQ rates, so it kind of moved higher for owner occupied and C&I and mortgage and then impact as well I just wanted to make sure was there any kind of overlap between the nonaccrual moves in the DQ moves.
Jeffrey Rulis: But any big picture sort of branch consolidation or larger investments that may come in in 24. Yeah, you know, we're always looking at how can we become more efficient and I do think that there's opportunities for us to do that as we've already, you know, we've already started well into our 2024 planning process. So that's that's what I was alluding to there. You know, we're going to continue to invest, especially in our, our renewable markets and, you know, Chris and, and, and, and Torri have, have, made some strategic hires and in existing markets and, you know, Chris has prepared remarks, he mentioned California, Northern California.
Explain DQ moves the delinquency. So the mortgage went from four three to $5 nine the C&I went from <unk> three to <unk> six on the total delinquencies.
Owner occupied from <unk> three to <unk> five one.
Yes that was primarily centered in a in a couple of loans Brody.
Okay.
The ones that you talked about earlier.
Correct.
Okay and then this is my last one on the one that you talked about earlier, where they just decided or I guess, you said, David that had been struggling for a bit and then they ceased operations what was the collateral that was backing.
Jeffrey Rulis: So we're going to continue to be opportunistic within legacy markets, but also invest in, in, in. In those newer markets and in those high growth markets, but we're going to challenge ourselves to do that by finding offsets and efficiencies in other parts of our organization as opposed to just simply letting expenses ramp up. In terms of kind of a launch point for modeling purposes, I'm going to, I'm going to defer to Ron on that.
That specific loan and I guess like how does the workout process evolves here from when a business just decides to shut down kind of what are the steps look like.
That was an owner occupied commercial real estate piece of collateral.
What we do initially obviously as we downgraded we we then get the property reappraise, which did come in.
And I've said on these calls historically about our lending discipline in our aversion to leverage well played out in this case, because we got the property to reappraise, we still have equity in the property.
Jeffrey Rulis: Yeah, and Jeff, we'll, we'll talk about that. That's enough data guy in January, we're looking at 24. Okay, and just curious on the, you said that cost aids are net investment, is there a ballpark number that, that you'd pass along in terms of what you think you invested against the cost saves of 140 million. Hey Jeff, this is Ron again. It's actually a specific number 21 million. So we've got growth at 164, then down to 143. Okay. Great. Thank you.
And we we continue to work work with the borrower on trying to structure in an orderly way out of this.
We will not take a loss on this piece of property.
Awesome, that's fantastic to hear I appreciate the detail. Thank you very much everyone.
Torran Nixon: Hey Jeff, this is Chris and to answer your question, you asked about branch consolidations. We have five left over from the original ones that we did. And when we look at our go forward, we're very pleased with our footprint.
Thank you one moment please.
Our next question comes from the line of Chris Mcgratty of <unk>. Your line is open.
Alright. Thanks.
Ron I'm, starting on slide 10.
Unknown Executive: We think we're in a good spot with those and don't anticipate anything further. Thanks Chris. Thank you. One moment please.
Great disclosures.
So I think somebody asked before about the higher for longer.
You do have a I guess a back book narrative.
I guess im interested in a little bit more color in a higher for longer environment.
David Feaster: Our next question comes from the line of David Feister of Raymond James, you're a lot of open. Hi, good afternoon everybody. Hi David. I was hoping maybe we could just touch on the funding side and specifically focusing on on the core funding side, exclusive of the broker deposit increases that we talked about earlier. I'm just curious what you're seeing there as we dig in, it sounds like core trends are stabilizing that you're actually having some success attracting new clients.
Your views in terms of the opportunity to defend margin I guess is the first question and the second question is on you provided the spot deposit rate do you have the September Martin.
Thanks.
Yes September margin was within a couple of bits of the Q3 margin.
And just back to the first part of the question again I think.
It was around the loan refresh and maturity schedule higher rate environment for longer et cetera, again with empathy and benefit can we continue to be successful at growing customer deposit balances that is going to be.
David Feaster: You know, which may be difficult for us to see in some regard, just given clients utilizing the exit liquidity. I'm just curious, some of the underlying trends that you see there within your core deposit franchise, where you're seeing the most opportunity to drive core deposit growth and attract those new deposit clients. And how, you know, new core deposit pricing is trending. David, hi. This is Tory Nixon.
One of the single biggest drivers in terms of where our margin higher margin performs if rates stay at these levels overtime, because <unk> continued to reduce higher cost wholesale funding.
Sure.
Yes.
Okay, and then what's the what's the approximate difference between roll off yield.
Torran Nixon: I'll talk a little bit on the commercial side of the house and let Chris kind of chime in on the consumer side of the house, you know, for commercial. Banking. You're seeing just a few different things. One, folks are using excess cash to invest in their companies when and where appropriate rather than then borrow. So the borrowing side is just less robust than it was a year ago. Folks are also kind of looking for yield where they can with any excess deposits.
And new production yields.
Prolonged.
This story I don't know I don't know top my head I don't know roll off yield, but I can tell you I can tell your production on the commercial side.
For the quarter range anywhere from 725 at the low end to nine in the highest average weighted average that acreage just over 8%.
Okay.
And then last one on the tax rate any help on kind of go forward tax rate.
Yes ballpark, 25% still to go forward revenues alright, great. Thanks, a lot.
Torran Nixon: We have done I think a really nice job. Connecting with our existing customer base and just looking holistically at their relationship and with with that in mind kind of focusing on where they may have funds at other places and you know talking about bringing those funds to to Uncle Bank and have a lot of success with that. That will continue without a doubt.
Yes.
Thank you one moment please.
Our next question comes from the line of John F strong.
<unk>.
RBC capital markets. Your line is open.
Good afternoon, everyone.
Hi, John .
Question for you on.
Just the deposit flows during the quarter.
Torran Nixon: We've had a lot of success this quarter with it and we've got a really I think a really nice pipeline as we kind of move into queue for so Chris. Yeah, pretty much the same piece on that day, but I would add that on the news side are rates are very competitive in the market, but where we're really seeing the opportunities to deepen relationships is in talking with the customers. Taking them through our relationship model, asking questions about what else they have out there and we continue to source deposits from other institutions as well.
It seems like deposit growth was back end, so Ron I'll take the over on customer deposit growth, but.
What was the difference between Q3 and Q2 I think some of US were disappointed with Q2 deposit growth and this is obviously rebounded, but what's driving these increases the rate driven or something else.
I think theres a little bit.
Both in there.
As far as the market has calmed down somewhat as far as the rapid increase in rates, we didn't see as much of that in the third quarter.
We're farther past.
Our initial conversion and things of that nature, where ill just say it again that our teams are out in the markets winning new business using the expanded capabilities that we have and when you put those things together the value proposition really comes to play we've got great bankers that are externally oriented.
Torran Nixon: So the teams have really kind of moved towards there's still some minor integration but not technology types of things and our teams are out jointly calling together in all of our markets and waiting new business just with their outward bound efforts.
And theyre doing it in a collaborative manner and that allows us to keep our deposit costs down, but we're also been winning business and when you win operating accounts that helps keep it down as well.
Torran Nixon: Let's take David story get I thought I'd just add one more thing on there did we know one of things kind of going on our marketplaces tremendous disruption from other financial institutions and we're you know we're looking and we've got. It gives us a lot of opportunity and so we you know we're working hard in the markets that in our footprint to talk to anybody and everybody do we think fits the bank and having some success with that.
But some of it is just say it's.
The stability of the rate environment and that it.
Scott C and increases during the quarter and move past some of the some of the issues that happened in March as well and it's I won't say business as usual, but it's a whole lot calmer.
Ronald Farnsworth: You got that's great and maybe maybe stepping back a bit it seems like we're going to be in a higher for longer environment for for some time i'm just curious maybe and look I know it's so early but i'm just curious how you think about maybe the margin trajectory and in the business performance more broadly in a higher for longer environment and how you're looking to manage the balance sheet and the business for that kind of environment. Hey David this is Ron and again that was come back to comments we talked about earlier or do we see continued customer deposit growth and i'll feel really good about what we're at in a higher for longer environment I think maybe in terms of 20 to 24 specifically we'll we'll definitely giving that data on that January as we look into the year but it's going to be the basic block and tackling your prison story talk about a continued customer deposit growth will we'll look down that front.
And Tory I don't know I think thats very well said I think it's all of those things and it's a.
It's a real outbound focus by all of our teams to connect with our customers and connect with prospects and bring business into the bank and realizing that the most important business. We bring in the bank is on the deposit front, yes. The other thing I'll add to that is there is an element of seasonality.
And it's a little it's a little murky.
More so than what it has been historically in terms of isolating the seasonality, but I do believe there is some seasonality.
Sure.
And it's pretty easy for us to track.
New relationships that were bringing in in particular on the commercial side.
But.
But the seasonality aspect I think also played a role.
Ronald Farnsworth: Okay and then last one for me you guys have been a greeting capital at a rapid pace you're getting close to your 12% total wrist face target i'm just curious as you approach those targets how do you think about capital management is there any interest in potentially returning capital maybe early next year or.
And.
Then kind.
Kind of continue.
A continued headwind as consumers are still pressured and.
The impact of.
Inflation in them.
I'm not sure.
You don't necessarily.
What what.
This translates to where youre at John but.
Ronald Farnsworth: At this point in the cycle would you primarily be focused on on capital preservation. Well, I think, you know, our focus is we always want to be good stewards of capital and we have our long-term targets and we've spoken about those and been very consistent with those, you know, even on a stand-alone, pre-merger basis, our thoughts around capital levels were pretty consistent. And so, you know, essentially, at 150 basis points to whatever they're doing.
I feel that car up the other day and it was $6 50 a gallon.
<unk>.
Phil.
If you think about $175 to failure SUV up.
That takes a bite out of out of a lot of consumers and so I think we're still seeing.
The impact of of inflation on that aspect Fortunately, we lead a lot.
With the commercial and the operating account side.
We're seeing great success in winning new business and bringing in.
Ronald Farnsworth: So, criteria is to be considered well-capitalized and that's our long-term target. You know, total risk-based capital has been the constraint. You mentioned the 12 percent. You know, absolutely we're going to look at all capital and deployment opportunities. I don't think that as soon as we hit like 12.01 or something that we're going to look at at, you know, a major shift. But, you know, if we're creating 25, 30 bips of capital of a quarter, it happens pretty quickly where then suddenly you're, you know, 50, 75, 100 basis points over that target and still growing capital.
Additional aspects of existing relationships on that front.
Okay got it that's very helpful.
I don't know if this is <unk>.
Hunter Tory, but can you comment on the overall lending pipeline are they changing at all and what what's a comfortable pace of loan growth for the company.
Yes the story.
The loan pipeline is down just to just a touch from last quarter.
But it's actually.
Pretty strong still and fairly robust so I feel good about the mix.
And the pipeline and actually the size of the pipeline throughout the footprint.
Clinton mentioned earlier, our de Novo offices of Utah, Colorado, and Arizona, We've got some really nice pipelines there.
Ronald Farnsworth: You know, we've mentioned that with our forecasts and expectations and the earnings power of this company that there's not a level of what we think would be prudent organic growth that would absorb all of that capital. So, by default, yes, we will be looking at capital return and how we do that as we manage those ratios. Now, I don't think you should expect it, you know, next quarter necessarily, but I do expect that it will be a nice problem that we'll have as 2024 progresses.
Which is great to see and I feel good about it I think we're still probably a low to mid single digit in loan growth for the bank.
Unknown Executive: Absolutely.
Pipelines for deposits are nice and the fee income pipeline is really strong which is kind of the connection to the conversation that Chris and I, both said about <unk>.
Connection with clients and prospects and looking at <unk>.
Bunch of different solutions to solve to help customers drive yeah. The one thing I don't think that the.
Unknown Executive: Thanks for the call, everybody.
Unknown Executive: Thanks.
The pipeline the absolute level of the pipeline tells the whole story because.
Unknown Executive: Thank you.
Timur Braziler: One moment for our next question. Our next question comes from the line of Tamir, Brazillier of Love Fargo. Your line is open. All right. Good afternoon.
We're being very.
Disciplined and focused on the types of loans and the types of relationships that we're pursuing.
And so we're.
Maybe in.
Ronald Farnsworth: For the broker deposits that were added during the quarter, can you just talk through kind of the timing during the quarter they were added their cost and then the expected duration? Yeah, this is Ron. Good afternoon. That was later in the quarter, roughly two to four months and tenor. That's how we managed all of this from a wholesale standpoint, including the home and bank advances. And you're called the tuck and probably midfives.
Outside of the quantitative tightening environment, we might have.
<unk> done more in terms of real estate and things like that.
So.
The types of.
Yes.
Jump in here, Chris or Tory, if you feel differently, but the types of loans that Ed.
We're really interested in the pipeline and the activity that our bankers are servicing.
Ronald Farnsworth: And then I guess as you look at your borrowing position, where is that today relative to where you want it to be? And as that continues to mature, maybe just give us the schedule of how that matures. And if the expectation is to replace that with additional brokerage. Yeah, and again, the home and bank advances are also in that two to four month center. So they're all repressing in that color mid five areas well.
Really really solid yes, 100% of immediate on the commercial side, it's a C&I pipeline to C&I growth.
Business orientation.
And it comes with to the point that the relationship comes with deposits and fee income and Thats critically important in the way that we will do business.
Okay. Okay.
Okay. Thank you very much.
Please go ahead.
Ronald Farnsworth: And that just gives us the most flexibility, right? And back to your second question, we're obviously sitting on more borrowers doing what we like. It's in response to the course what's happened with, you know, just we're putting the drain in the overall system over the past, this year. Ideally, over time, the positive growth continues to exceed lung growth. Christopher to positive growth, exceeds customer one growth, and we're able to pay those down. Okay, that's helpful.
Thank you one moment please.
Sure.
Our next question comes from the line of Andrew <unk> of Stephens. Your line is open.
Hey, good afternoon.
Afternoon.
Ron just a quick one on the cash balances should we expect any more normalization from this call. It 1 billion nine level or is this kind of the right level to think about the cash balance.
Ronald Farnsworth: And, you know, to the first question, it seems like the low end of the margin guy seems fairly conservative, and I'm just wondering as we look at NII, is that also kind of 50-50 for an inflection point next quarter, or even though there's some stability in the end, we could see another quarter of NII compression prior to that higher for longer, really kicking in, and benefiting the top line in 24. Yeah, I mean, specifically to that question in Q4 and the guide, if we're talking about material move, it's going to come down again to customer deposit growth. So, I feel good about, you're not going to see a significant change in the net interest income dollars if we do have continued customer deposit growth in the board board.
Again that will come down to the customer deposit flows that we talked about earlier, so ideally you're going to see us continue to.
More normalize that to a lower level, probably somewhere in the mid <unk> range, but I'm not sure if that will occur by Q4 or not but thats, ultimately where I would expect it to settle.
Okay, and then on the deposit flows specifically within the quarter.
On the noninterest bearing side.
Do you see most of the balance contraction occur earlier in the quarter or was it pretty ratable throughout the quarter and then just just to put a fine point on the margin.
Customer deposit balance discussion.
If we see <unk> deposit trends from a core perspective look similar to <unk> that would put you at the top end of the full year margin guidance correct.
Frank Namdar: Okay, and then the SINPAC early stage, plateauing last quarter, charge-off, somewhat elevated disc quarters, still focused on trucking. I guess, is that more of a closer event, where that pretty much subsides going forward, or is that going to be more of a tail, where this lingers for a couple additional quarters, prior to subsidence? It's going to be a slow reduction over time, over multiple quarters to my best estimation. Okay, great.
On the first question, yes that was ratable over the course of the quarter. There was no specific shock in and I think again back to your.
Colin talked about earlier on the consumer side driven by this continued inflation.
As the majority of that decline there.
In terms of Q4 and again you're spot on right. So if we do better on that front in Q4 of <unk> branded.
We're a little less than what the environment.
Feel good about where we're at ballpark going into it.
Okay.
And then on the fin pack portfolio it looks like the delinquencies and bug move from I think I recall, nearly 6% last quarter down to low <unk>.
Ronald Farnsworth: And then just last for me, the resident loans that were sold about $159 million, what was the discount they were sold about if you can provide that? Yeah, the poor value was in the 185, 190 range, so discount was in ballpark 35. Great, thank you for the questions. Thank you. One moment, please.
4% this quarter.
Should we expect to see the commensurate kind of move lower end charge offs heading into the fourth quarter, I guess, just like magnitude wise or.
I guess do you think bill hanging around this 5% kind of charge off level for a while.
I think in the fourth quarter I think it is going to be pretty stagnant.
That's what I would I would say.
Again.
Fourth quarter is historically, the most difficult quarter to collect in that in that business.
Broderick Preston: Our next question comes from the line of, Rodi Preston of UBS, in line is open.
And that just coupled with the just the overall economic headwinds that truly impact. These these most susceptible.
Broderick Preston: Good evening, everyone. How are you? I just wanted to follow up just on the loan, waterfall, chart run. I just want to make sure I understand that the 343 from payoffs or sales, the single family sales, it was the 159 that's in there, and then the remainder of that is just payoffs, correct? That's correct. Okay, and then the the 515 of prepayments, I just want to ask kind of like, what was the success rate and kind of maybe converting those into new originations this quarter?
Companies.
I think it's going to be pretty stagnant in the fourth quarter, but I think I think the trucking will continue to gradually.
Decline.
It's just going to be so it's going to take a while it's going to take a few quarters.
To get to more normalized level in that space.
Okay.
Yes, Okay got it and then the last question I have is just following up on the SNCC discussion I think you said you've got one.
$1 billion outstanding and syndicated loans I realize some of the rationale there it sounded like it was.
Broderick Preston: Yeah, this is, this is Tory, Rodi, so I'll be just real quick on that. I think this success rate is very, very high. That's what we want to do. We had growth in the commercial side of our CNI teams of about 40 or 50 million, and then growth in the CRE teams at about 180. So a lot of success in the roll over of that.
The rationale for participation was deposit driven.
You have a.
A similar level or I guess is that $1 billion of snakes.
Fully funded with deposits generated by those relationships or is there is there a greater deposit sponsorship that comes with it or is it or is it less just any more color there would be helpful. Yes.
Torran Nixon: Okay, great. And then could I ask just a generic question with a loan portfolio, what portion of it is shared national credits, and then of that, what are you to lead on? So, we are total commitment in the SNCC portfolio is around $3 billion. Our outstanding are roughly $1.8 billion. We lead a couple deals today, but most of them are just a participation with ancillary business. And it is not a part of the organization that we are growing really at all. We have really strict guidelines of what we want to be in and what we are going to do. And obviously it has got to have significant ancillary business, including deposits, even consider.
Yes, no. This is Tory just by nature of that part of.
The borrowing apparatus that theres less deposits associated with that and then there is loan outstanding suggested byproduct of participating in a large credit so.
But.
With that in mind I mean, what we do have we've had for a long longer period of time and we.
We have a very strong connection to management and to the companies and we have.
Almost all cases ancillary business whether thats.
Some sort of fee income business <unk> deposits.
Okay. Thanks for taking the questions.
Thank you.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star 111 moment. Please.
Frank Namdar: Got it. Okay, thank you for that. And maybe just on the office portfolio, you give great detail there, but I was wondering if you happen to have what the A-Triple L for the office portfolio was. Yeah, we, thanks for the question, Broderick. We choose not to provide that much detail surrounding ACL on that portfolio. We feel that there's enough detailed information provided elsewhere for the group to really ascertain the quality of our loan portfolios, which is high, very good quality.
Our next question comes from the line of Matthew Clark of Piper Sandler Your line is open.
Hey, good afternoon all.
Just a couple of questions on credit.
Suffice it up 15 basis points, I think to one point to 8%.
And it looks like you built reserves C&I reserves by about $22 million.
Just wanted some additional color behind the increase in classified and then.
Torran Nixon: Okay, cool. And then I did want to ask, this was more of interest for me. Just on the multifamily, I'm originations this quarter. I just noticed that there was like a big difference, I think, between the debt service coverage ratios that you had initiated last quarter. I think they were like 1.7 and this quarter, they were 1.32 and like, you know, that's still healthy, but it was just a big difference. And so I was just wondering if there's anything specific that kind of caused that.
Not only that but just the increase in C&I related reserves.
Yes, Hey, Matt.
The increase in classifieds was really really driven by a migration from from <unk>.
Special mentioned into the end of the classified.
Loan status and it's really centered in the commercial book of business and again. These are the these are the two the two.
Two properties and our properties with the two commercial borrowers that I mentioned.
Torran Nixon: Yeah, nothing, nothing specific Brody, you know, I, you know, without without having that detail in front of me, it's hard for me to say, but what I would, why would intimate from this is that we had extremely strong sponsorship on those on those deals and their relationship based opportunities. So we had the banking relationship and knew the client.
That just.
Continued to struggle and we had to we had to downgrade them into classified status and Thats and thats the bulk of that of that change.
And as far as the building of.
The reserve I mean, you see the impact continues to have the elevated charge offs.
Frank Namdar: Got it. And then I just had a couple last quick ones for you, just on the, the non accruals that I wanted to understand was there was any of that included in the delinquencies just because when I looked at the buckets that you disclose on page 20. I noticed that the DQ rates had kind of moved higher for owner occupied and C and I and mortgage and then fin pack as well.
We've got the increase in classified loans in the Moody's baseline economic forecast continues to move in the direction that warrants build the building of the reserve.
Okay. Okay, Yeah, I was actually speaking to the 16th that $20 million to $60 million increase in C&I. Okay.
And then just on the overall reserve I think last quarter there was it.
Frank Namdar: I just wanted to make sure was there any kind of overlap between the non accrual moves and the DQ moves. Explain the DQ moves the delinquencies so the mortgage went from 0.43 to 0.59 the C and I went from 0.3 to 0.6 on the total delinquencies owner occupied from 0.23 to 0.51. Yeah, that was primarily centered in a couple of loans Brody. Okay, were those the ones that you talked about earlier?
An expectation that maybe.
Coverage kind of trends lower towards 1%, but.
Went the other way this quarter, just any updated thoughts I know obviously macro.
<unk>.
Assumptions change in the environment changes.
Any updated thoughts on the overall reserve coverage going forward.
I would just say you just said it yourself the macro environment changes in the economic forecast change they got a little bit worse. This quarter, we had a little bit of migration this quarter and so it went up three bps sort of downturn.
Okay fair enough. Thanks. Thanks.
Frank Namdar: Okay, and on and then it's my last one on the one that you talked about earlier where they just decided to or I guess you said they they've been struggling for a bit and then they ceased operations. What was the collateral that was backing? You know, that specific loan and I guess like, you know, how does the workout process evolve here? You know, from what a business just decides to shut down kind of what are the steps look like?
Thank you I'm showing no further questions at this time I'd like to turn the call back over to Jacky Baldwin for any closing remarks.
Thank you Valerie Thank you for joining us on this afternoon's call. Please contact me if you'd like clarification on any of the items discussed today are provided in our earnings materials. This concludes our call goodbye.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
Frank Namdar: That was an owner-occupied commercial real estate piece of collateral. What we do initially obviously is we downgrade it. We then get the property reappraised which did come in and I've said on these calls historically about our lending discipline and our aversion to leverage, well it played out in this case because we got the property reappraised. We still have equity in the property and we continue to work with the borrower on trying to structure an orderly way out of this. We will not take a loss on this piece of property.
Frank Namdar: Awesome, that's fantastic of here. I appreciate the detail.
Okay.
Okay.
Unknown Executive: Thank you very much everyone.
Okay.
Okay.
[music].
Okay.
Okay.
Unknown Executive: Thank you.
Yes.
[music].
Unknown Executive: One moment please.
Christopher McGratty: Our next question comes from the line of Chris McGratty of KBW. Your line is open. Great, thanks.
Ronald Farnsworth: Ron, I'm starting on slide can the rate disclosures. So I think somebody asked before about higher for longer. You do have a, I guess, a back book narrative. I guess I'm interested in a little bit more color in a higher for longer environment. You're viewed like in terms of the opportunity to defend margin. I guess the first question, the second question is, and you provided the spot deposit rate. Do you have the September margin.
Ronald Farnsworth: Yeah, September margin was within a couple of bests of the Q3 margin. And just back to the first part of the question again, I think was around the loan and repression maturity schedule, a higher rate environment for longer, etc. Again, the things that can be continued to be successful like growing customer deposit balances. That is going to be one of the single biggest drivers in terms of where our margin, our margin performance is pretty safe.
Ronald Farnsworth: These levels over time, because then it can continue to reduce higher cost wholesale funding right to help us out. Okay, and then what's the what's the approximate difference between roll off yields and new production yields for loans?
Torran Nixon: This is Tori. I don't know. I can tell you production on the commercial side for the quarter range anywhere from seven, 25 at the low end to nine and the highest average rate average that eight for just over eight percent. Okay. Great.
Ronald Farnsworth: And then last last one on the tax rate. Any help on kind of go forward tax rate? Yeah, the ballpark 25% still is going for a great. All right. Great. Thanks. Good. Thank you.
Unknown Executive: One moment, please.
John Afstrom: Our next question comes from the line of John Afstrom of these RBC capital markets. Your line is open. Thanks. Good afternoon, everyone. Hi, John. The question for you on the just the deposit flows during the quarter, you know, it seems like deposit growth is back. And so, so Ron, I'll take the over on customer deposit growth. But what was the difference between Q3 and Q2? I think you know, some of us were disappointed the Q2 deposit growth. And this is obviously rebounded. But what's driving these increases? Is it rate driven or something?
Ronald Farnsworth: I think there's a little bit of both in there, as far as the market has calmed down somewhat, as far as the rapid increase in rates, we can see as much of that in the third quarter, we're farther past our initial conversion and things of that nature where I'll just say it again that our teams are out in the markets, winning new business using the expanded capabilities that we have. And when you put those things together, you know, the value proposition really comes to play of we've got great bankers that are externally oriented and they're doing it in a collaborative manner, and that allows us to keep our deposit costs down, but we're also been winning business and when you win operating accounts, it helps keep it down as well.
Ronald Farnsworth: But some of it is just say it's the stability of the rate environment and that it, you know, we stop seeing increases during the quarter and move past some of the some of the issues that happened in March as well, and it's, I won't say business as usual, but it's a whole lot calmer. And Tori, I'm not pointing at it. No, I think that's very well said. I think it's all those things and it's a real outbound focus by all of our teams to connect with our customers and connect with prospects and bring business into the bank and realizing that the most important business we bring in the bank is on the deposit front.
Ronald Farnsworth: The other thing I'll add to that is there is an element of seasonality and it's a little it's a little murky more so than what it what it has been historically in terms of isolating the seasonality, but I do believe there was some seasonality. You know, and it's pretty easy for us to track new relationships that we're bringing in in particular on the commercial side. But, but seasonality aspect, I think also played a role, you know, and, and then, you know, kind of as a continued Edwind is consumers are still pressured and, you know, the impact of inflation.
Ronald Farnsworth: And I'm not sure, you know, necessarily what this translates to to where you're at, John, but, you know, I feel caught up the other day and it was 650 a gallon. You know, so, you know, you think about 175 dollars to fill your SUV up that takes a bite out of out of a lot of consumers. And so I think we're still seeing the impact of inflation on that aspect. Fortunately, we, we lead a lot with, with the commercial and the operating account side and we're seeing great success in winning new business and bringing in additional aspects of existing relationships on that front. Okay, good. That's very helpful.
Clint Stein: I don't know if this is you, Clint or Tori, but can you come out on the overall lending pipelines? Are they changing at all and what's a comfortable pace of loan growth for the company? Yeah, the story, the loan pipeline is down just a touch from last quarter, but it's actually... He's a pretty strong still and fairly robust, so I feel good about the mix in the pipeline and actually the size of the pipeline throughout the footprint.
Clint Stein: Clint mentioned earlier our Denouvo offices of Utah, Colorado and Arizona. We've got some really nice pipelines there, which is great to see. And I feel good about it. I think we're still probably low to mid single digit in long growth for the bank. Pipelines for deposits are nice and the fee income pipeline is really strong, which is kind of the connection to the conversation that Chris and I have both said about connection with clients and prospects and looking at a bunch of different solutions to help customers thrive.
Clint Stein: The one thing I don't think that the pipeline, the absolute level of the pipeline tells the whole story because of, you know, we're being very disciplined and focused on the types of loans and the types of relationships that we're pursuing. You know, and so we're, you know, maybe in outside of a quantitative tightening environment, you know, we might have done more in terms of real estate and things like that. You know, so the types of jump in here, Chris or Tori, if you feel differently, but the types of loans that and that we're really interested in the pipeline and the activity that our bankers are surfacing is really, really solid.
Clint Stein: Yeah, I mean, on the commercial side, it's the CNI pipeline, the CNI growth and its business orientation, and it comes with the point that the relationship comes with the deposits and fee income. And that's critically important in a way that we will do business.
Unknown Executive: Okay, thank you very much.
Unknown Executive: Thank you.
Andrew Terrell: One moment, please. Our next question comes on the line of Andrew Terrell of Steven gelinas open. Hey, good afternoon. Definitely. Ron, just a quick one on the cash balances. Should we expect any more normalization from this call it a billion nine levelers is kind of the right level to think about the cash balance. Again, that will come down to the customer deposit flows. We talked about earlier, so ideally, you're going to see us continue to more normalize that to a lower level, probably some of the mid one range, but not sure if that will occur by keep or not.
Andrew Terrell: But that's that's ultimately where I expected so. Okay, and then on the deposit flows specifically within the quarter on the non interest bearing side. Do you see most of the balance contraction occur earlier in the quarter or was it pretty radical throughout the quarter and then just just to put a fine point on the margin and the customer deposit balance discussion. If we see 4Q deposit trends from a core perspective look similar to 3Q, that would put you at the top end of the full year margin guidance correct.
Andrew Terrell: On the first question, yeah, that was rateable over the course of the quarter. There was no specific shock in it. I think, again, back to hear Clint talk about it earlier on the consumer side, Jordan, by just continued inflation, the majority of it declined there. In terms of Q4 and the guy you're really spot on, right? So we did better on that front and Q4 over in the upper hand if we're a little less than within the bottom.
Andrew Terrell: Feel good about what we're at, ballpark going into it. Okay. And then on the spin pack portfolio, it looks like the delinquencies in that book move from, I think I recall nearly 6% last quarter down to low, low 4% this quarter. I guess should we expect to see the commensurate kind of move lower and charge off heading into the fourth quarter? I guess just like magnitude wise or I guess you think they'll hang around this 5% kind of charge off level for a while.
Andrew Terrell: Yeah, I think in the fourth quarter, I think it's going to be pretty stagnant. That's what I would, I would say. Again, I mean, fourth quarter is historically the most difficult quarter to collect in that in that business. And that just coupled with the overall economic headwinds that truly impact these most susceptible companies, I think it's going to be pretty stagnant in the fourth quarter, but I think the trucking will continue to gradually decline.
Andrew Terrell: It's just going to, it's just going to be, it's just going to take a while. It's going to take a few quarters to get to more normalized level in that space. Yeah, okay, got it. And then the last question I have was just following up on the snake discussion. I think you said you've got a billion eight outstanding and syndicated loans. I realized some of the rationale there. It sounded like was the rationale for participation was deposit driven.
Andrew Terrell: Do you have a similar level or I guess is that billion eight of snakes fully funded with with deposits generated by those relationships or is there is there a greater deposit sponsorship that comes with it or is it or the last just any more code there to be helpful. Yeah, no, this is Tori, you know, just by nature of that part of the borrowing apparatus that there's less deposits associated with that.
Andrew Terrell: Then, then there is a loan outstanding. It's just a byproduct of participating in a large credit. So, but with that in mind, I mean what we do have, we've had for a longer, longer period of time and we have a very strong connection to management and to the companies. And we have in almost all cases, ancillary business, whether that's some sort of fee income business and or possums. Okay, thanks for taking the questions. Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. One moment, please.
Ronald Farnsworth: Our next question comes from the line of Matthew Clark of Piper family. Okay. Hey, good afternoon, all. Just a couple questions on credit. Classified up 15 basis points, I think to 1.28% and it looks like you built reserves, a CNI reserves by about 22 million. Just want some additional color behind the increasing classified and then not only that, but just the increase in CNI related reserves. Yeah, hey, Matt. The increase in classifies is really, really driven by a migration from special mentioned into the classified loan status.
Ronald Farnsworth: And it's really centered in the commercial book of business. And again, these are the two properties that are not properties, but the two commercial borrowers that I mentioned that just continued to struggle and we had to downgrade them into classified status. And that's the bulk of that change. And as far as the building of the reserve, you see the FinTech continues to have elevated charge offs. We've got the increase in classified loans and the Moody's baseline economic forecast continues to move in the direction that warrants building of the reserve.
Ronald Farnsworth: Okay. Yeah. I was actually speaking to the 16, not 22, 16 million dollar increase in CNI. Okay. And then just on the overall reserve, I think last quarter there was an expectation that maybe reserve coverage kind of trends lower toward 1%, but went the other way this quarter, just any updated thoughts and obviously macro, you know, macro assumptions change in the environment changes. But any updated thoughts on the overall reserve coverage going forward?
Ronald Farnsworth: I would just say to yourself, the macro environment changes is the economic forecast change. They got a little worse this quarter. We had a little bit of migration this quarter. And so when I have three bits, so to down three. Okay. Fair enough. Thanks. Thank you.
Jacquelynne Bohlen: I'm showing no further questions at this time.
Jacquelynne Bohlen: I'd like to turn the call back over to Jackie Bolin for any closing remarks. Thank you, Valerie. Thank you for joining us on this afternoon's call.
Unknown Executive: Please contact me if you'd like clarification on any of the items discussed today or provided in our earnings material. Let's include their call. Goodbye. Thank you. Ladies and gentlemen, this does include serious conference. Thank you all participating. May now disconnect.
Have a great day.