Q4 2023 Columbia Banking System Inc Earnings Call
Welcome to the Columbia banking system fourth quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
And a question at that time, Please press star one I'm wondering your telephone.
He's been bouts of today's call is being recorded.
Just how much you introduce Jackie Bohlen Investor Relations directed to begin the call. Please go ahead.
Thank you Valerie and good afternoon, everyone. Thank you for joining us as we review our fourth quarter 2023 results, which we released shortly after the market close today.
The 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 with me. This afternoon are claimed Stein president and CEO of Columbia banking system, Chris Mary well and Tory Nixon President of Umpqua Bank, Ron Farnsworth, Chief Financial Officer, and Frank Namdar, Our 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 provisions 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.
We'll also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release and throughout the earnings presentation I will now turn the call over to Clint. Thank you Jackie and good afternoon, everyone 2023 was a tremendous year for Columbia, we closed and integrated our transformation.
Merger with Umpqua bank, expanding our footprint to encompass eight western states.
And creating one of the largest banks headquartered in the west.
We achieved targeted net cost savings ahead of schedule and six 6% above our original projections.
Even after taking franchise reinvestment into account.
With the integration behind us our priorities in 2024 and beyond have shifted to focus more fully on optimizing performance and driving shareholder value.
Fourth quarter was noisy and our results reflect that the FDIC special assessment and other elevated expense items brought our quarterly expense run rate above prior guidance.
Our cost of funds reflects the rate environment and the associated impacts of repricing Cds and higher priced funding sources like public deposits and brokered funds.
Relationship banking drives our franchise value and it's the value proposition, we bring to new and existing customers.
Our fourth quarter results do not reflect this value and we're focused on improving controllable variables to offset macro driven headwinds.
Looking to the year ahead, the competitive environment for deposits and the impact of higher rates is likely to persist in.
And the macro credit environment will likely normalize at minimum.
We were well situated to benefit during times of stress should they emerge our talented associates scaled franchise and offerings and customer focused business model provide us with the resources to win business and long term drive consistent repeatable performance I'll now turn the call over to Ron.
Okay. Thank you Quinn and so those on the call who want to follow along I will be referring to certain page numbers from our earnings presentation.
Provision for credit loss based on slightly worsening economic forecasts and higher expense, including the FDIC special assessment.
These are five quarter views and recall, we closed the combination at the end of February.
Slide five shows our summary balance sheet knowing their deposits in total were flat from Q3, given the seasonal inflows primarily on public deposits, mostly offset customers' use of cash.
Our tangible book value is up 13% as our accumulated other comprehensive loss was halved during the quarter as bond market has rallied.
Now on slide six we highlight the income statement trends.
GAAP earnings were 45 cents per share impacted by declining merger expenses, we completed the integration along with fair value changes due to market yield changes.
On an operating basis, we earned <unk> 44 per share in Q4 lower than expectations again, driven again, given noninterest bearing deposit flows higher cost on interest bearing deposits.
And an increased provision was slightly worse economic forecasts and higher expense given driven primarily by the FDIC special assessment.
Which at $33 million reduced GAAP and operating EPS by <unk> 12 per share.
Turning to slide seven we break out Q4, GAAP earnings to help investors understand the nonoperating and merger related impacts on results.
The first column represents our Q4 GAAP results with net income of $94 million or <unk> 45 cents per diluted share and return on tangible common equity of 12%.
The second column includes our nonoperating designation for income statement changes, mostly related to fair value swings along with merger and exit disposal costs included in noninterest expense, which are detailed out in the appendix.
Isn't that the $2 million of income in Q4 earnings, resulting in a third column for operating income.
Our operating income for Q4 was $91 million or <unk> 44 per share.
And results were impacted by the FDIC a special assessment in reserve build given again slightly worsening economic forecasts.
The appendix shows training on each of these columns in the fourth column includes discount accretion and CDI amortization.
This discount accretion will be a steady and reliable source of interest income overtime as the majority is driven by rate not credit.
Riding us with a steady build of capital over time.
And recall the CDI amortization does not impact tangible book value. So the 13th cents per share net for merger accounting was the equivalent of 25 per share added the tangible book value in Q4.
We'll continue to highlight and trend adhere to investors and value in all earnings streams.
Our tangible book value, excluding <unk> increased 27 cents during the quarter of.
$17 75 per share.
Moving to the next section on slide nine.
Highlights net interest income and margin.
Our NIM declined to 378% for the quarter, driven primarily by a higher cost of interest bearing deposits more than offsetting the increased loan yields and lower costs from term debt.
Slide 10 breaks out the repricing and maturity characteristics of the loan portfolio.
Noting 41% is fixed 30.
30% is floating and 29% are adjustable.
On Slide 11 provides an updated view of our 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 noted below 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 fourth quarter, our interest bearing deposit portfolio has price and 47% of the fed funds rate increases.
Notable here is the cost of interest bearing deposits, which was 254% for Q4 and $2, 71% for the month of December.
The lift this quarter was influenced by several factors.
The decision in Q3 to replace maturing federal home loan bank advances with broker deposits.
Was essentially neutral to the cost of in spring liabilities.
But it drove nearly 30% of the increase in the spring deposit costs between Q3 and Q4.
Approximately 15% of the quarter's increase relates to an increase in the average balance and rate paid on public deposits.
And approximately $900 million in customer Cds with largely 12, and 13 month terms matured during the quarter with many repricing upwards of 200 basis points higher.
The cost of interest bearing liabilities normalizes for balance sheet management decisions and the quarter's 30 basis point increase was significantly lower than the increase in spring deposit Gus.
Customer sprint liabilities was 3.0% to 2% in Q4.
Compared to $3, one 5% for the month of December of $3, one 9% as of December 31.
Yeah.
Slide 12 breaks out noninterest income items.
The largest changes in Q4 related to interest rate driven line items.
The changes in loans held at fair value at the bottom was a direct result of decreasing long term yields this quarter.
Next up on slide 13.
We note we achieved the $143 million in cost synergies guided last quarter exceeding our original target of $135 million by 6%.
This amount is net of Reinvestments made in various areas.
While we will continue to target efficiency improvements with integration now largely complete.
We no longer consider future cost saving opportunities <unk> merger related.
Q4 expense was above our previously guided range due to several elevated expense items.
As noted on the right side of the waterfall from the prior quarter with increases driven by higher repairs and maintenance equipment purchases, a branding campaign and most notably the $33 million FDIC special assessment.
On slide 14, we introduce our outlook for 2024 on several key financial statement items.
Our net interest margin remains sensitive to customer deposit balances with.
With growth driving margin stability and perhaps expansion as we replace wholesale funding.
And outflows driving contraction.
Our interest rate outlook, which incorporates three rate cuts in the back half of the year.
Does not meaningfully impact prepayment assumptions related to purchase accounting.
Our expense outlook incorporates a low single digit level of growth from Q4's adjusted run rate.
We see areas for efficiency improvement to offset the costs associated with franchise reinvestment and inflation.
To that end, we consolidated five branches this month.
Moving ahead to the next section on the balance sheet on slide 16, we.
We detail out the investment portfolio.
The table takes you from current par to amortized cost to fair value.
None of the difference between current par and amortized cost has combined net discount which will be accretive to interest income over time.
The increase in market value. This quarter of course resulted from lower market yields given the bond market rally.
Again with the unrealized loss having.
Just over half of the portfolio is now sitting with an unrealized gain at year end.
It gives us significant flexibility to manage the balance sheet moving forward.
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 359% with an effective duration of $5 four at quarter end.
Slide 17 covers our liquidity, including deposit flows during the quarter.
Total deposits were essentially flat in the fourth quarter.
Seasonal and targeted increases in public deposits nearly offset contraction in small business balances as other categories were relatively unchanged.
The upper right table details our off balance sheet liquidity.
With 11 7 billion available as of quarter end.
Below that we add cash and excess bond collateral not pledged for lines to arrive at total available liquidity of $18 7 billion.
Slide 18 provides the driver a 3% annualized loan growth in Q4.
Speaker Change: Turning now to slide 19.
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 $21 million via accretion to interest income.
Our earnings release detail. We include this $21 million, along with $16 million of higher bond interest income from the portfolio restructure we completed post close.
Speaker Change: To arrive at the $37 million of total accretion for bonds.
On the loan side, we had $27 million of rate accretion $5 $4 million for credit.
The total marks declined $69 million in Q4 through accretion to interest income.
And finally in the back on Slide 26, we highlight our regulatory capital position.
And in a risk based capital ratios increased 20 basis points as expected in Q4.
We do expect to quickly approach, our long term capital target of 12% total risk based capital.
Which will provide for enhanced flexibility to return excess capital to shareholders.
With that I'll now turn the call over to Frank.
Thank you Ron slides 20 through 22 provides select characteristics of our loan portfolio, including composition of our commercial book and an overview of our office portfolio, which continues to perform well.
Moving on slide 23 highlights our reserve coverage by loan category.
So the remaining credit discount on loans provides for an additional 21 basis points of loss absorbing capacity.
Frank: The $55 million provision expense recorded in the quarter was primarily driven by a slight worsening in the economic forecast used in the credit models, along with credit migration.
Delinquency and nonperforming loan movements over the past two quarters suggest to move toward a more standard credit environment. Following a phase of exceptional 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 pin pack.
Impact charge offs remained elevated during the fourth quarter still centered in the trucking portion of the portfolio.
We continue to expect a slow recovery timeline over multiple quarters for this portfolio.
Excluding the impact charge off activity at the bank remains at a low level I will now I will now turn the call over to Torry.
Thank you Frank turning to deposits slide 25 highlights the quality of our granular deposit base as Ron noted small businesses use of cash drove a reduction in customer deposits during.
During the fourth quarter as other commercial balances and consumer accounts were relatively stable and in aggregate. The fourth quarter included normal course of business use of cash.
Like distributions dividends and year end tax payments, while public balances experienced a relative related increase.
Public deposits were positively impacted by targeted efforts by our teams to grow public relationships in local communities as we work to reduce wholesale funding balances.
Frank: Our teams remain focused on driving balanced growth in deposits loans and core fee income as they work to expand existing relationships throughout the bank, bringing new prospects into the bank.
We see tremendous opportunity with our existing customer base to grow fee income.
We launched smart leads in 2020 as a way to capture additional business with our existing customer base through predictive analytics, we generated an additional $11 million in revenue since 2020 with.
With $5 million generated in 2023 alone highlighting increased traction with our teams and the benefits of our scaled organization. We will continue to selectively invest in talent technology and locations that enable us to profitably expand our business as the efficiency opportunity as Ron noted maintain our dedication.
To growing in a cost effective manner, and lastly, our loan deposit and core fee income pipelines remain robust I will now turn the call back over to Clint Thanks, Tory our regulatory capital position as outlined on slide 26, and as Ron discussed we expect capital to continue to accrete quickly in the coming quarter.
<unk>.
Riding us with ample flexibility for future shareholder return.
This concludes our prepared comments and our team is available to answer your questions. So Valerie Please open the call for Q&A.
Thank you again, ladies and gentlemen, I'd like to ask a question. Please press star one one on your telephone again to ask a question. Please press star one one.
One moment for your first question.
Our first question comes from the line of David Feaster, Raymond James Your line is open.
Hey, good afternoon everybody.
Hey, David.
I appreciate all the guidance and maybe just talking about.
Starting on the margin and digging into some of the impacts of rate cuts.
I'm curious how you think about the NIM trajectory. Obviously you guys include three cuts in your forecast.
How do you think about the impact from cuts do you guys have done a great job managing the downside and the rate sensitivity scenarios I'm just curious how you think about the trajectory.
And the margin and how quickly you will be able to reprice some of those core deposits on the way down.
Yeah, David Hey, this is Ryan great question.
As I look into 'twenty four I mean, if that were to come through and we see three rate cuts in the back half of the year or X number of rate changes and as the market is predicting.
Really key with that is I mean, what happens to the deposit betas and then those rates down scenarios I think we're pretty conservative in these numbers with betas in the low to mid 30% range.
Whereas on the race upside, we're now at 47% and remodel 53% to 4% room rates up so something tells me you're going to see most banks probably be north of their model results from the rates downside just given.
Frank: Nature.
The fact that the deposit moved up so quickly so with that I would suggest that there could be potential upside on it but again.
Under all of it is going to be.
What's going on with underlying customer deposit flows right. So thats still the main driver versus betas I would suggest.
Hey, David This is Chris I'll add to the right part of that discussion that.
Between Tori and myself and our teams we've already looking at the competitive market, we're looking at where rates are trending.
I think youll start to see us start moving potentially ahead of any sort of rate cut scenario.
And putting in place the long term kind of more plan of if we get a rate cut.
Pick your month, what are we planning to do so all of that's been laid out right now and we should be launching that relatively soon here.
Yes, just trying to get ahead of that aspect of it.
And I think you'll see the market is already kind of moving in that direction. So it'll just be a matter of historically can we follow are can we lead as we've done in the past.
That would be the ideal situation.
Okay. That's helpful.
And maybe kind of just a follow up to some of the sustained on the deposit side.
Paired remarks.
It was alluded to some of the declines being attributed to small business declines I'm curious maybe what are some of the drivers of that from your standpoint, obviously, there's some seasonality but how.
How much of it's activating deposits versus paying down debt using cash to fund growth are just less profitability at this point for some of the small businesses.
Just curious.
Early in the first quarter just curious how are.
Are you seeing things stabilize.
How do you think about core deposit growth going forward.
Yes, you've got a lot in there David I would say to.
Users.
Uses that you mentioned.
Absolutely youre seeing that completely across the board you are seeing some <unk>.
Small businesses that good operators have the ability to increase their prices and things of that nature, but for many of them.
<unk> has certainly taken a big impact and that goes across all items from products service to the <unk>.
Employment inputs and things of that nature.
We move into really kind of more of a seasonality type of situation in the first quarter as well.
I would say we're in contact with the small business customers through our local presence mainly through the branches.
People are positive, but Theyre also let's say looking down the road for when something is going to take place that's going to provide them some relief and we haven't seen that quite yet.
And I think Tory can speak to a little bit more on to the commercial side there, yes, David it's tori on it on the.
The commercial side.
Pretty typical with the end of the year in Q4.
One differences you saw people they took they take excess cash that they have in their operating accounts.
Want to reposition that into some interest bearing account just it's kind of good.
Course of business on their on their point from their standpoint, but.
It's a trip it's a typical use of cash dividends distributions tax payments those types of things investments at some customers are making investments and doing it with cash instead of borrowing for it so kind of some typical stuff.
We've seen in the last year or so in India.
And David I'd say, Tory and I talk quite a bit about the momentum that's building and our teams getting excited about being out in the market integrations behind them and we're seeing new business start to come on with some of the other things that are going on out there now.
Coming on it.
A higher cost than we've seen in the past, but we're driving those operating accounts, we're getting the full relationships with the focus.
And we say Tory myself see stories, almost every day about somebody somewhere in the footprint, bringing in a new lean into the bank.
That's great.
That's great.
And I guess to that point Im curious on the C&I growth.
Where are you having success driving growth.
How much of it's from client acquisition versus increased utilization or deeper relationships or even the new hires that you've made and just curious your appetite for growth and whether you would expect C&I to be the key driver of loan growth going forward.
Very consistently.
We're in eight Western states, great markets, you've got great people.
They have very strong pipelines, we saw C&I growth kind of a mixture between new client acquisition as Chris was talking about.
Yes.
Lending to existing customers.
Doing their normal course of business so.
It was spread throughout the footprint. So there is not one place where I can say, we got most of our growth it was kind of spread throughout.
Our footprint and.
As Chris said, I mean feel very good about.
The pipelines and the activity that's occurring out in the field. So.
Okay, that's great. Thanks, everybody.
Thank you David and thank you one moment please.
Our next question comes from the line Tomorrow, Brazil, or <unk> of Wells Fargo. Your line is open.
Hi, good afternoon.
Following up on.
Net interest income net interest margin commentary just with the expectation for deposits and funding to remain a source of pressure here in the near term and then the expectation for rate cuts in the back end of the year is there an outcome where NII in flex and grows in 'twenty four or is that more likely a 2025.
Sure.
Timur This is Ron good question and again, it's going to be.
It's really a function of the cost of that deposit growth I could definitely see a scenario where you see.
A little on the lower end and the front end, if we do continue to see pressure on non spurring demand specifically within that guide range, but but then once they start moving again I talked about earlier that deposit beta and I think that's pretty conservative and I would suggest.
Most of the regional banks I think the model betas on the way its downside theyre going to be closer to what they were on the upside. So you could see that scenario exactly where does it get some pick up in the second half.
Okay, and then I guess looking at the.
Frank: Deposit costs in some of the December 31 spot rates is that a good feeling here is that kind of where we expect the funding funding base to stall out or is there going to be some more mix shift in the first half of the year to some of these higher cost categories, which could keep that lag around that.
Costs were a little bit longer.
Obviously, it's an estimate but we would expect the lag to continue there and Thats, probably why we showed the 47% beta to date, but we model a 53 on the rates upsides. So you've got that additional piece. We also have in this past quarter, we had about $900 million of Cds repricing there.
And that 12 months to 13 months tenure, so they have been sitting there for a year and those all repriced step close to 200 basis points in the first quarter.
Let's say, it's around $650 million to $700 million of Cds.
Maturing, which will be price, but it'll be less than 200 out just given the timing of those compared to when the service raising rates earlier in 'twenty three.
Okay, and I guess, what's the what's the thought process of the rationale for maintaining all of those balances rather than being more aggressive with rates here and letting some of that money work.
Just overall liquidity levels, where we feel comfortable sitting with cash on the balance sheet and sprint cash at the fed and keep my two I mean, it's.
Incredible amount of Optionality again compared to the average regional bank with Uber.
A little over half of our bond portfolio setting that unrealized gain.
But then again to the goal will be to accrete that remaining discount up too.
Up to par over the life of that book because that's that's all government rate from that standpoint. So we've taken the approach of maintaining that flexibility. So we earn back that discount which reduced capital a.
A year back and that the combination closing and by utilizing that utilize overnight or wholesale funding them at two to form a tenor.
To maintain that overall level of liquidity, we have reduced the overall level of on balance sheet liquidity, where we were sitting up closer to $3 billion early mid 'twenty three are in spring cash we've now taken that down into the call. It one five to two range.
I can see that probably dropping a little bit more in the 25, but probably not too much more.
Our next question comes from the line of Brandon King a choice Youre line is open.
Hey, good afternoon.
Good afternoon.
So I wanted to talk about leaning into those public.
Deposit.
Could you just elaborate on the thought process behind that and if you are able to achieve that just based off of rate or primary relationships give us the puts and takes there.
Hey, Brandon this is Tory. So we have a we have a lot of existing customers and the bank debt or municipalities spread throughout the footprint most of them are.
Smaller rural communities.
<unk> says a lot about the capability of the teams both in the branches and in commercial banking to to have those relationships and to call on them to further deepen and strengthen those relationships.
And that was that was the effort.
It's that time of year as tax payments call me and so they have more money in distributed to us.
That was really good idea.
And Brandon I'll add to that.
As Torry mentioned that local presence and working together, it's not just existing customers and then maybe getting a little bit of a priced up on some of their reserve money.
That can lead you into we're talking about full relationships, we're talking to them about their operating accounts that sales cycle takes a little longer but we're already seeing positive momentum into new names.
It came on board.
And our money market type of account that are want to investigate my operating account with you. That's when that relationship really gets cemented and that as <unk> said thats due to people that they live they work in the communities. They know the individuals that are at the public.
Entities.
They are building relationships and they are asking for the business and with our capabilities.
With the new TM capabilities that came on board for a lot of our footprint as well.
Well, we're getting looks and were winning that we're going to win that business and that momentum is building.
And it's a great it's a great.
Funding alternative too.
<unk>.
Not on the operating you will get the operating account, but then in with their surplus liquidity that we provide an alternative to the local government pools, and and it's a way of providing bringing in deposit balances.
Without <unk>.
Cannibalizing, our core deposit base or repricing, the whole sector of of our deposit base and.
So it's kind of a kind.
A different lever that we can pull that will create some noise and in my prepared remarks I made.
Reference to.
The results of the quarter don't necessarily.
Reflect the quality of our.
Deposit base, but that's what I was really getting at is that this is just a lever we can pull in the fall and tax proceeds are coming in for municipalities is a great time to pull that lever.
Got it got it and just my follow up would be could you do you care to quantify the level of.
The amount of public funds deposits you have and would you consider these deposits.
Here beta relative to maybe some of your more core deposits.
I think you have to bifurcate it because we do have the operating relationship with.
Virtually all of these these public entities and so that's going to behave more like.
The traditional part of our portfolio and then you have the.
What I referenced as a alternative to the local government pools, and so I think ron's got the detail Youre looking for yes, we do.
We do highlight that and those trends on page 17 of the earnings presentation, but a total of $2 9 billion of total public deposits and that was up roughly half a billion dollars little under half a billion for the quarter.
That youre going to be probably in the 15%, 15% range would be the cooperating accounts, 20% probably tops.
But a good stable base.
Okay, Okay, and just lastly, Ron I know youre working to kind of reduce asset sensitivity just given the floor.
<unk> rate curve and the potential for rates come down.
Are there any actions that you are considering or looking at that would make sense at this point.
You bet.
Yes, great question, it's really difficult.
The derivative side, just given pricing and expectations, but we took that shot and we did that as you can see the trending there too on page 11 of the presentation with how we repositioned a portion of the bond portfolio and.
In that first week post close back in Q1, and then also utilization of shorter term.
Wholesale funding at the broker deposits or home loan bank advances to help offset that.
The deposit flows during the year those two items in and of themselves basically like.
Like a swap.
Benefits you'd write down because youre locked out cash flows on the on portfolio and you'll have fully floating down cash flows on the right side of the balance sheet. So that was really the majority of the change from a year back to now where in the past year back we had a more traditional asset sensitive profile and today, we're relatively neutral.
Got it.
My questions.
Yes. Thank you thanks.
Thank you one moment please.
Our.
Question comes from the line of Chris Mcgratty.
Okay VW your line is open.
Okay, great. Thanks for the question.
Ron maybe on your expense guide for a minute.
Frank: $1 billion of $1 billion one what.
I am interested in your comments on what the revenue environment would be at different points of that guide.
Okay.
Good question Chris.
Generally the.
Historically the movement on the expense side directly tied to revenue would've had to do with home lending back in a different much lower rate environment, right and you see seasonality over the course of the year.
Which will drive higher revenue in the second and third quarter lower seasonal in first and fourth.
Have a corresponding expense trends along the lines.
I would say our.
Our outlook here is not for significant rates down world, where homeland name is picking up significantly in volume so.
It's going to be it's going to be really range bound within that NIM is going to be the driver of the revenue side and I think over the course of the year.
Ex any legacy home lending seasonality you are generally going to see higher payroll tax type items in the first.
Two quarters of the year and then those tail off in the second two quarters of the year you also generally see annual.
Merit cycles, which basically approximates inflation rates at the start of the second quarter. So you see a little bit of a lift and then stabilization over the course of the year.
Okay. That's helpful. Thank you.
Maybe on on capital you noted in the release CET one of nine fixes about your nine target and your total is within 20 basis points is it.
Could you help us on when when the buyback would be more of a discussion of our announcement is that when you hit 12 do you have to build a buffer to 12.
How are you thinking about the buyback given gives.
Given the given the outlook.
Yes I.
I think that.
I mean 12.
12 is kind of like like.
Like the fed trying to stick the landing on.
On the economy.
Yes.
And so I think that we'd want a little bit of a buffer before we.
Implemented.
The buyback.
<unk>.
Probably not a huge a huge buffer but enough that.
That we could do a meaningful buyback and still be above 12%. After you took.
That into account.
So.
I know I'm, not giving you like hard and fast timeline or number but.
But we do see.
And you can see the trend over the last three quarters of how capital builds.
There are some things is the rate environment.
We do get three cuts.
I think that that gives us some additional optionality, even over over and above what we already have on our balance sheet and some flexibility.
That.
Can put us in a position to.
Do a buyback sooner than later over probably really talking is it one quarter or two quarters.
Before.
We would do it just naturally through steady state.
The 2025 bps of capital accretion each quarter.
Okay. That's helpful.
And then just a follow up.
That would be the top use of capital beyond growing your business that you've talked about.
Or is there an alternative use I know you have the dividend that's pretty competitive but inorganic.
Inorganic growth at all on the table.
The regular dividend, obviously is something that we talked about that we wanted to be consistent and.
And provide that in for some of our investors that's a very important component up there.
Investment in our company.
The organic growth component of it.
Tory mentioned in his in his prepared remarks.
The pipelines and.
I've had the opportunity to.
<unk>.
Meet with some of our market leaders over the past 30 days.
And when they talk about what their pipelines look like and the opportunities they have in front of them.
From a business perspective.
Many of you have seen Ron in person when he talks about the bond portfolio and he just gets giddy.
That's the same type of reaction that our bankers have.
With the opportunities that they are currently in the middle of.
Of pursuing but even with that said I think the capital generation.
<unk>.
So strong that any level of reasonable organic growth.
I don't think it outstrips the building of those ratios between the regular dividend.
Speaker Change: Organic growth and so that does leave us with buyback.
Speaker Change: Options.
Potentially depending on if buybacks were.
And it didn't make sense. Then then we can always look at it as a special dividend makes sense and then to your question.
Inorganic growth.
I think that were it feels like we're in a time period like we were in mid 2020.
Where the M&A markets are kind of frozen.
The math is very hard right now I know theres been a few things announced but those are.
Those arent healthy driving franchises that would be of interest too.
US we don't feel like that.
That would be additive to our long term value.
But that will change with the passage of time and so so I do think that theres going to be.
Some opportunities to at least look at things.
But as we've said before.
No.
The size size company, we are the eight states that we're in.
There's not a plethora of opportunities that move the needle for us so we'd be very selective and disciplined about looking at any type of inorganic opportunities.
Alright, thanks for all the color I appreciate it.
Thank you one moment please.
Our next question comes from the line of Jeff <unk> of D. A Davidson your line is open.
Thanks, Good afternoon.
Wanted to clarify.
Safe to assume a loan growth expectation would mirror your balance sheet growth expectation of no growth to 3% our.
Possibly outstrip that.
Hey, Jeff. This is Ron good afternoon. Good good question and yes, ideally over time, you want that deposit growth to match the loan growth.
And that's our goal here over the course of 2024.
Okay, so loan growth.
Maybe no growth.
It kind of pair that up with with kind of the field and that getting this out there is there.
Where youre kind of tamping down.
Youre kind of loan officers on Hey, we got to true it up with with deposit growth.
Im just trying to get the assumptions underlying of a pretty limited growth.
Kind of meet that with kind of the team and you're going on the anniversary of the merger close just want to kind of get a sense for.
Feed under those folks in and starting to produce.
The significant net growth.
Yes, that's a great question it gets back to two.
<unk>.
The response I had on on.
Inorganic growth.
Speaker Change: When we think about.
We've talked for the last couple of quarters about bin relationship centric.
And in a in a Q T type environment.
We're we're we're holding back and being very restrained as on on transactional real estate type type things.
Our C&I teams.
Small business bankers.
I mean, they've got they've got a.
Green light and the ability to go out, but I don't think Theres a single banker in this company that doesn't understand that and I use the term banker.
Purposefully.
We don't have lenders, we have bankers and that they need to go get the full relationship needs to come with deposits.
And they're not going to fund fund dollar for dollar I mean, that's not the nature of it but that's why we have are robust.
300.
Strong retail network.
Help with the funding but.
That's.
That's where I think the optimism is the.
The integration is behind US we've shut down the integration management office.
And they are ready they are on their front foot and ready to go play offense and Tory I don't know if you have anything to add yes, Jeff its torry I would just add.
Maybe.
To reiterate a little bit of Quinn's comments around just the sales force and that the bankers in the footprint their strong desire to grow market share to really to manage what we have and keep what we have and continue to expand with what we have but to grow market share and that sometimes is a relationship that includes <unk>.
Loan and sometimes it's a relationship where theres no lending activity.
Deposit only.
Our deposit and core fee income relationship is very valuable and supports this local presence that Chris always talks about this this ability to grow their book of business.
Our focus is definitely on the C&I side of the house and as you can see in the growth in real estate, it's been it's flattened and on purpose.
We're pushing on the C&I front and so we've got a lot of great bankers in great markets that are out.
Pounding the pavement and looking to bring in new names into the bank.
I appreciate it.
Wanted to maybe hop over to the credit side of things and really kind of looking at that.
Kind of.
Crosshairs go to 10 pack thinking about I think mid last year, we were kind of pointing to.
Maybe it was hopeful or some signs forming that those trucking losses would would add lower it looks like we're bouncing back up in <unk>.
And I guess kind of over the course of 'twenty for if you think about losses in <unk> Pak is.
Is it safe to assume we could still be in that 5% to 6% for the full year.
Or do you see any trend that we could kind of.
Come off a cliff.
With that.
Hey, Jeff.
Yeah.
I do not expect.
That this trend goes all through 'twenty four.
If we if we look at the the loss curves and really the vintages.
That have caused this pain.
The vintages, where really the last half of 'twenty one.
In all of 2022 from a from a loss curve perspective, we're through all of 'twenty, one and where we're about halfway through 'twenty two so so I.
I believe.
We will see at the end of the second quarter those losses start to tail off at a more rapid.
Rapid way than.
Than they have historically and don't forget I mean, the fourth quarter is a tough barometer for.
For collecting because of all the holidays that are that are during that quarter and in this space I mean remember I mean fintech is.
It may be a subsidiary of the bank and provides a valuable.
Product set for the bank, but but at its core it's still a finance company and a finance company. This type of this type of activity and what we're seeing currently is not is not abnormal and if you go out there and survey our competitors. They are experiencing the exact same thing.
Even at even at a worse clip than we are.
What is it what is encouraging is that it is isolated to the trucking portfolio and we do see the light.
Speaker Change: Through the data that we have that there is.
There is an end in sight and I do believe it will be halfway through this year.
Got it used to kind of get into that vintage.
And I appreciate the commentary that the thought that.
As we moved into the back half of <unk>.
'twenty three and hopeful of a decline was it that you got into some of those 22 vintages that where they go Wow. This is this is also troublesome is that does that.
So to the extend it.
Yeah.
And we are coming out of 'twenty, one and we did see that 22 was also displaying some of the elevated loss characteristics and so kind of had a feeling that it would it would be a long.
Drag drug out process for.
Getting back to that three 5% clip.
But but we do see it in the early returns I will tell you for the 23.
Vintage.
They are very positive.
So that is encouraging.
The tweaks that we've made to the to the model and the and the criteria really in the portfolio as a whole but in particular the trucking portfolio is really seems to be paying off in the 'twenty three vintage.
Great. Thank you and then one last one Ron I'll take another crack I didn't really hear a response on the margin trajectory I know it resides with deposit success, but.
I guess.
Put it more clearly you expect more compression in the first half of.
24 versus the second half when you layer on potential rate cuts youre three basis points of cuts.
That's correct just given the fact that we've got that conservative estimates in there for the deposit betas.
And that will really be a driver of it we do see the rates down environment I expect will outperform because I expect our betas will be above the 30% of them are down closer to like I said earlier to 50 on the App.
Overwriting all of that of course would be what's going on with just basic customer deposit flows.
You've heard enough conversation on that point to date, so we'll see how it plays out.
If we're talking $3 $53 60 for the full year, you may shoot to that mid year, and then kind of a.
Coming up is sort of how.
You would trend line that.
And that view over the course of the year you saw a couple of rate cuts in the second half of the year and we like most banks are expected to over perform on our deposit betas for the Raytheon side and yeah, that's true statement.
Okay. Thank you.
Okay. Thank you.
Thank you one moment please.
Our next question comes from the line of Brody Preston.
UBS Your line is open.
Hey, good evening everyone.
Okay.
Well I just wanted to.
Ask a few questions on NII.
$4 3 billion of loans that you have above Lars do you want to know where those flow rates.
Sure.
They are sitting more than three cuts down.
We will have that detail into the next quarters release, but they're definitely more than three cuts down.
Alright or would they be more than the foreign curve down the five maybe six depending on the day.
I don't have that in front of my hands, but again recall going back over the last two year and a half two years as rates are increasing it was easily more than six months. We were about 125 150 bps is easily more than 150 bps again.
Started to slow down and talking about loans or going above their floors.
Yes.
Okay.
I notice that you shifted some of the borrowing base of ETF.
This quarter I think it was maybe $200 million of utilization you still got a lot of FHL D lines, and if I remember and correct me those are.
Pretty short from a duration perspective.
I think there was like an 80 something basis points gap between the cost of your borrowings right now and what <unk> would you consider shifting.
The rest of the borrowings to Bts P to help with the margin and if so is that contemplated in your guidance at all.
We are looking at that its not the full amount of the home will make investors just given the capacity at the <unk>, but we are looking at that here over the course of the first quarter.
Okay great.
So if I took if I finally, if I look at the NII sensitivity.
Slide that you all provide.
It looks like in either are up 100 to 200 down 100, 200 kind of scenario.
It's negative for NII in all but a couple of them as of December 31st and then.
I don't think you have a lot in fixed asset repricing. So if we got no cuts maybe that kind of incremental deposit beta creep in lag that you've talked about would continue so I guess I'm just.
I'm struggling a little bit Ron let's think about holistically like what's the.
The best rate environment that you could foresee just kind of looking at those pieces of the puzzle.
Yes interesting question I would suggest this that in anyone's interest rate risk modeling and if we're looking at the difference between 0.7% and one 1% and saying, there's an exact precision and that they're not being truthful with you right. So many assumptions that go into that over the course of the year inclusive of customer deposit flows.
Beta is timing lags.
So I kind of look at all of those as relatively neutral with them there.
Within a point or two of each other just because I know thats generally the grenade range youre going to be.
Facing over the course of the year.
Got it and what is the Niv Max that's contemplated within your NII guidance I'm, sorry, if I missed that.
Within the traditional NII guidance, our interest rates sensitivity analysis, which is what this is generally assume a static.
Yes, generally assume a static balance sheet, and then things reprice into themselves. So again, that's where I got to earlier talking about within the range of the guide if we're better on the deposit side.
Then we're going to be on the upper end, if we're not we're going to have a lower end.
Okay, and then last one for me just if I if I take the pieces of your of your guidance of $48 $5 billion of.
Average, earning assets $3 55 in the margin.
And then factor in the expenses if I if I do something just like last three quarters' average fee income.
And I assume that's the run rate annualize it.
Growing by low to mid single digit economy implies like mid 700, eighty's on PPA in or am I far off the mark there.
Brady I don't have the calculator out in front of me to run through that math with you I'll just ask one.
We're not providing inputs and the guidance on EPS, we're not giving an EPS guide, but theres other yes.
Maybe specific questions that might help you on the modeling side highly suggest contact Jackie she has great so such a straight.
Got it. Thank you very much for taking my questions everyone.
You bet. Thank you one moment please.
Our next question comes from the line of Matthew Clark of Piper Sandler Your line is open.
Brody 780 sounds that's kind of where I am right now.
First question just on <unk>.
<unk> relative to the balance sheet size. If we ended up at the low end of that average.
Average, earning asset range the 48.
1 billion I believe is it fair to assume that noninterest expenses will be at the low end as well.
<unk> billion versus $1 one.
There is potential for that obviously, we have efficiency improvements that we're working through as well, but theres also just enough uncertainty when you look into the year inclusive of inflation rates to say our target is going be somewhere relatively in the middle of that and there is downside there is upside.
Which way it plays over the year, but we wanted to just make sure. We recognize that there is some level of uncertainty of the timing.
And flow over the course of the year, so not given a specific.
Got it on that by quarter or.
A trajectory.
I'm just trying to be consistent with the balance sheet size relative to the expenses should we be consistent or not.
There is a little bit of movement with the balance sheet size, but but again you also have changes in say for example, deferred loan costs, which are influenced by the balance sheet size.
Or we get leverage within.
Deposits per branch, which doesn't necessarily have an impact on on expenses other than incentive so it's difficult to say with precision at this point.
Excluding merger charges so call it.
I don't know 45, and change 45 46 million up from.
$38 million last quarter.
Anything unusual in there that we should strip out going forward, just trying to get guidance for yes.
Good question I would take a look at slide 13, again, Jackie did a great job showing the movement in the bridge and a good chunk of those items inclusive of the FDIC special assessment, but good chunk of those items are.
Elevated not expected to continue at those levels.
Yes, I noticed the FDIC that's obvious but.
But I'm talking about and the merger we're stripping all that out I'm, just talking about anything else beyond FDIC in merger charges.
Yes, I mean as you look through again on that bridge on slide 13, Youll see some items were in small equipment repairs and maintenance those even more in the occupancy and equipment area, but then you've got legal title. Another those are in the other area. So try to call those out on the bridge.
Okay got it okay fair enough.
And then.
Back on the deposit beta.
Outlook for.
The remainder of the cycle did I hear you correctly that youre expecting the cumulative interest bearing deposit beta would get to 53% at the peak is that what I heard.
That is what our models would suggest but then again recognize that those are models.
Understood, Okay, so to make sure that.
And then just on the provision.
Obviously, a moving target in any given quarter.
But it looks like a decent step up in reserve build here and I understand classified.
<unk>, a little bit, but not meaningfully I think most macro model has actually improved this quarter some little surprise in the step up in reserve build.
Relative to the migration.
In the macro.
But.
How should we think about provisioning going forward and is this somewhat outsized you think or.
We're not even we're going to assume higher charge offs, just with normalization, but I'm trying to get a sense for kind of reserve coverage and whether or not this provision might be a little elevated.
Yeah. Good question I guess in terms of the models and the slightly worsening economic forecast I mean, there is there are dozens of variables that go into a system levels and that simply just GDP or.
CPI rates you also have things along the lines of vacancy rates or rent changes within various markets that we operate in.
Factoring those so I would characterize it as just in total.
Across again, those dozens of variables there were just a little bit worse, but that just means there is a little bit better a quarter ago and they're all a guest right theyre all projections.
Which we factor in the models from that standpoint, so underlying trends, though I'd refer back to Frank's comments earlier right. We do expect we'll see some abatement on the Fintech side and then the rest is going to be what's going on with the overall economy.
Two or three quarters from now and then more interesting to have those forecasts looking ahead.
Over the life of the portfolios at those points in time.
Oh, sorry, not more specifics for you on that but that's what we're dealing with.
Understood, Okay and then.
Okay.
Sounds good I'll leave it there thank you.
Great. Thank you.
Thank you one moment please.
Our next question comes from the line of John Armstrong.
RBC capital markets. Your line is open.
Thanks, Good afternoon.
Good afternoon.
Hey.
Just most of my questions have been asked and answered but on slide nine.
The red bar on deposit pricing.
Kind of looking at that over the last couple of quarters.
What do you think that bar it looks like.
In the first and second quarter I know, there's a lot that goes into it but.
I guess, it's this.
Really the change in deposit pricing and I'm, just if you could take a stab at what you think that looks like over the next couple of quarters that might help.
Yes.
Good question.
Back to we do disclose in here the spot rates as of year end, so use that as your starting point for when you look into Q1.
But I also say that this 36 bps change.
And then the on the walk on page nine was really a good chunk of that was related to this issue maybe back in late in Q3, where we brought on broker deposits to help with this.
Bank advances maturing borrowings category right. So I wouldn't expect as big of a move but but again it depends on what we do with those balances over the course of the year, but that was really a good chunk of the driver there.
Speaker Change: 36 bps in Q4.
Okay.
That's specific to interest bearing deposits.
You talked about though we saw it in spring liabilities it wasn't as big of a change and that's just because of a shift from.
Little bit higher cost borrowings into similar costs in broker deposits.
Okay. Okay.
Yes that was kind of my next question I wanted to ask about funding cost, peaking.
And I think.
You may be saying youre reasonably close on that is that fair.
Yes.
Again models right.
So assume you generally a two quarter lag on the back end of that yes. John This is Chris as I mentioned earlier in the call.
Hey, John This is Chris as I mentioned earlier on the call.
We're starting to see the market pull back a little bit. So I think towards are we at the peak we can't tell you that I don't know it appears that we're somewhere there I would expect it to start slowing down from.
From what we experienced in the previous quarters.
Some of the things that are coming due on the CD side, there's not as big of a lift between their current rate and where we project we might be in a month or two so all that being said I think the pace is going to certainly slow down and we'll see what everybody does out there.
It's a fluid market as well, so but patient slowdown.
Okay.
Ron one more crack at the most annoying question of the call, but the gross margin trajectory because it is it safe to assume the way. It sits right now with your guide you shape J shape type margin for 'twenty four with kind of a mid year trough is that fair.
I think again assumptions around that are going to be around timing and number of cuts and where the betas are but underlying all of it is going to be where we're core customer deposit flows. So.
I'm just not prepared to give a guide in terms of what that looks like by quarter, We're giving you and that's where we feel it could be for the full year from our target standpoint.
Fair enough.
Okay. Thank you.
Yeah.
Thank you I'm showing no further questions at this time I will turn the call back over to Jackie Bohlen for any closing remarks.
Thank you Valerie. Thank you for joining this afternoon's call. Please contact me if you would like clarification on any of the items discussed today are provided in our earnings material.
Thank you.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
Okay.
[music].
Okay.