Q4 2023 Heartland Financial USA Inc Earnings Call
Okay.
Greetings and welcome to the H E. L F 'twenty to 'twenty three fourth quarter Conference call. This afternoon H E. L F announced its annual earnings our fourth quarter financial results.
And hopefully you've had a chance to review the earnings release that is available when ACL NAFTA website at ACR last dotcom.
Speaker Change: With us today from management are Bruce Lee, President and CEO, Kevin Thompson, Chief Financial Officer.
Speaker Change: Brian Mckay and Nathan Jones, Chief Credit Officer management will provide a summary of the quarter and then we'll open the call to your questions before we begin the presentation I would like to remind everyone that some of the information provided today falls under the guidelines of forward looking statements as defined by Securities and Exchange Commission.
Speaker Change: As part of these guidelines and statements made during this presentation concerning the company's hopes beliefs expectations and predictions of the future.
Speaker Change: And forward looking statements and actual results could differ materially from those projected. Additionally information on those factors is included from time to time in the company's 10-K, and 10-Q filings, which may be obtained on the companys or the Sec's website.
Speaker Change: Now I'll turn the call over to Mr. Bruce Lee.
Bruce K. Lee: H E L F President and CEO. Please go ahead Mr. Li.
Bruce K. Lee: Thank you Valerie and good afternoon, everyone. This is Bruce Lee President and CEO well.
Bruce K. Lee: Welcome to H T O F 2023 fourth quarter earnings Conference call I. Appreciate you joining us as we discuss our results and the strategic initiatives, we've undertaken to drive performance and position <unk> as a top performing bank for the.
Bruce K. Lee: The next few minutes I'll discuss our highlights for the fourth quarter and the year I'll, then turn the call over to Kevin Thompson, our new CFO for more on our results.
Bruce K. Lee: Also joining us today as Nathan Jones, Chief Credit Officer, who can answer questions regarding the stable credit quality across our portfolios.
Bruce K. Lee: Bryan Mckeag, our retiring CFO he's also on the call.
Bruce K. Lee: I want to personally thank Brian for his numerous contributions to H T O F over the past decade.
Expertise and stewardship have helped guide our significant growth during his tenure and we wish him well.
Bruce K. Lee: During his retirement.
Bruce K. Lee: The <unk> board of Directors has approved a quarterly cash dividend of 30 cents per share on the company's common stock payable on February 27 2024.
Board also approved a dividend of $175 four series E preferred stock, which results in a dividend of $43.75 per depository share payable on April 15th 2024.
Bruce K. Lee: For more than 40 years H T O F has increased or maintained our common stock dividend every quarter.
This reflects our strength stability and confidence in our strategies and performance.
Stockholders also benefited from a significant increase in tangible book value per common share ending the year at $28, 77% to 19% increase from 2022.
Bruce K. Lee: 2023 was a year of significant progress and successful execution of our strategic plans.
Bruce K. Lee: We completed charter consolidation strategically and structurally positioning the company to focus on our next phase H T. O F 3.0, our connected set of initiatives that will drive efficiency enhance EPS growth deliver.
Bruce K. Lee: Higher return on assets.
Bruce K. Lee: And more efficient use of capital.
Bruce K. Lee: One component of <unk> 3.0 was.
Positioning our balance sheet in the fourth quarter <unk> sold investments securities with proceeds totaling $865 million and a pre tax loss of $140 million.
Bruce K. Lee: The proceeds of the sale were used to repay high cost wholesale deposits and short term borrowings.
Bruce K. Lee: By selling low yielding investments and reducing high cost wholesale funding, we increased our net interest margin improve.
Bruce K. Lee: We improved our balance sheet efficiency and flexibility.
Bruce K. Lee: And significantly strengthened our capital position.
This in part resulted in a $72.4 million loss for the quarter to common stockholders and EPS of negative $1 69.
Bruce K. Lee: For the year net income available to common stockholders was $71 $9 million and EPS of $1 68.
Bruce K. Lee: Adjusted earnings for the quarter were $45 $6 million available to common stockholders and EPS of $1, six which excludes losses related to the balance sheet repositioning losses on sale or write down of asset.
FDIC special assessment expense and restructuring costs.
Bruce K. Lee: Adjusted earnings for the year were $193 $9 million available to common stockholders and EPS of $4 53.
Bruce K. Lee: We're already seeing benefits from our balance sheet repositioning.
Bruce K. Lee: In the fourth quarter net interest income was $156 million, an increase of $10 million or 7% from the linked quarter.
Bruce K. Lee: For the year net interest income was $601 million, an increase of $3 million or 1% from the previous year.
We saw notable expansion of our net interest margin on a tax equivalent basis, rising 34 basis points from the linked quarter to 352%.
Bruce K. Lee: And total assets were $19 4 billion, a decrease of $718 million or 4% from the linked quarter.
Bruce K. Lee: The decrease was largely due to the securities sold to repay wholesale funding and short term borrowings.
Bruce K. Lee: H T O F maintained strong momentum in commercial loans, and we continue to see growth in customer deposits, let's start with loan growth highlights.
Bruce K. Lee: In the fourth quarter, we saw strength in our commercial and AG portfolios in total commercial and AG loans grew $224 million or 2% from the linked quarter in line with our guidance for the year commercial and AG loans grew 700.
Bruce K. Lee: $19 million or 7%.
Bruce K. Lee: In the fourth quarter, we added 234, new commercial relationships, representing $196 million in funded loans and $54 million of new deposits.
Bruce K. Lee: Our commercial pipeline remains strong at over $1 billion, it's distributed across our regions with strength in the mountain West and southwest.
Bruce K. Lee: While we added more than 2200 consumer relationships in the quarter, our consumer loan portfolio.
Bruce K. Lee: Decreased $12 million or 2% from the linked quarter.
Bruce K. Lee: And residential mortgage loans decreased $16 million or 2%.
Bruce K. Lee: For the year consumer loans decreased $14 million or 3%.
Bruce K. Lee: Residential mortgage loans decreased $56 million or 7%.
Bruce K. Lee: Turning to deposits.
Bruce K. Lee: <unk> deposits decreased $958 million from the linked quarter as the proceeds from the balance sheet repositioning were used to pay down high cost wholesale funding.
Bruce K. Lee: Our deposit base continues to be diverse and granular customer deposits are diversified by geography and industry with no industry concentration higher than 10% across our portfolios.
Bruce K. Lee: Customer deposits increased $59 million from the linked quarter, the second consecutive quarter of customer deposit growth.
Bruce K. Lee: Average customer deposits were up substantially from the linked quarter, increasing $271 million or 2%.
Bruce K. Lee: While we maintain a favorable deposit mix customer demand accounts decreased to 30% of customer balances, reflecting the ongoing transition to interest bearing accounts.
Okay.
Bruce K. Lee: Total deposits for the quarter decreased to $16 $2 billion largely due to the pay down of wholesale deposits 60.
61% of total balances are insured or collateralized totaled.
Bruce K. Lee: Total deposits for the year decreased $1.3 billion with customer deposits declining only $367 million or 2%.
Importantly, we saw momentum in the second half of the year with customer deposits, increasing $295 million combined in the third and fourth quarters, four 4% annualized growth.
Bruce K. Lee: Turning to key credit metrics.
Bruce K. Lee: Our disciplined approach continues to enable strong credit performance.
Bruce K. Lee: Delinquency ratio increased decreased I'm, sorry to nine basis points of total loans and our lowest ratio of 2023.
Bruce K. Lee: Net charge offs declined to $392000 or one basis point of total average loans.
Nonperforming assets increased to 57 basis points.
Bruce K. Lee: Primarily driven by the downgrade of a well collateralized long term Midwest manufacturing customer who is experiencing cash flow challenges due to our recent acquisition.
Bruce K. Lee: Npa's have already improved in the first quarter of 2024 with the sale of our real estate owned property decreasing the amount by $10 million with no additional loss associated.
Bruce K. Lee: Market conditions continue applying additional pressure on commercial real estate across the country and the office market specifically.
Bruce K. Lee: Our office exposure is low at three 2% of our total loan portfolio.
Bruce K. Lee: We're conducting targeted reviews of our portfolios, where we see stress or additional potential weakness.
Bruce K. Lee: We continue to enhance our ongoing portfolio management and surveillance and refine how we screen new opportunities for underwriting.
Bruce K. Lee: In 2023, <unk> continued executing our strategies despite industry challenges.
Bruce K. Lee: We completed charter consolidation and introduced <unk> three point out the next phase of our strategic plan, which includes repositioning the balance sheet.
Bruce K. Lee: Reducing our retail delivery cost by centralizing our retail structure.
Bruce K. Lee: Decreasing the number of retail leaders and increasing their span of control.
Bruce K. Lee: And reducing real estate expenses through branch rationalization.
Bruce K. Lee: Size and location.
Bruce K. Lee: Our current footprint is also under review.
Bruce K. Lee: As we look to maximize our return on capital.
Bruce K. Lee: We're investing in growth by expanding middle market banking and adding talent in California's Central Valley.
Bruce K. Lee: Denver.
Bruce K. Lee: Kansas City, Milwaukee, Minneapolis and Phoenix.
Expanding treasury management products and capabilities.
Bruce K. Lee: And creating a digital platform to serve consumers and small business.
Bruce K. Lee: Each of these components are underway and at various stages.
Bruce K. Lee: But all will help us better serve our customers and.
Bruce K. Lee: And drive efficiency enhance EPS growth.
Bruce K. Lee: Deliver a higher return on assets and more efficient use of capital.
Bruce K. Lee: On H <unk> 3.0, please refer to pages five through 12 in the investor deck.
<unk> is moving forward together in 2024.
Bruce K. Lee: We're executing our 3.0 strategies investing in quality revenue growth.
Bruce K. Lee: Using our operating cost.
Improving EPS growth return on assets and efficient use of capital.
Bruce K. Lee: And most importantly, serving our customers and communities.
Bruce K. Lee: This is all due to the hard work and dedication of <unk> employees I want to recognize and thank them for their continued commitment to delivering strength insight and growth to our customers communities.
Investors and each other.
Bruce K. Lee: I'll now turn the call over to Kevin Thompson, Chief Financial Officer for more details on our performance and financials.
Kevin Thompson: Thank you Bruce I first want to say, how thrilled I am part of the <unk> team I've long admired Hcl left from positions and peer banks and I'm very excited to be part of a talented team. That's just in the beginning of the <unk> three point of our strategic transformation.
Kevin Thompson: The unusual items in the quarter. The Bruce described are detailed in our earnings release and on page 13 of our earnings presentation. Most of these items are related to actions that will improve the profitability of the bank going forward.
Kevin Thompson: We had a pre tax loss of $140 million related to our self securities. The proceeds from this repositioning were used to pay down high cost wholesale deposits and borrowings. This both improves our liquidity profile and will result in approximately $6 million and improved net interest income per quarter going forward.
Kevin Thompson: We had $4 4 million of restructuring expenses, $2 1 million related to cells and valuations of facilities and $1 3 million of expenses as we consolidated our final bank charter in the quarter, we executed on projects to centralize our retail management and to consolidate our footprint. These are just the beginning of the plans.
On <unk> three point now to increase our operational leverage optimize our efficiency and to serve our customers more effectively.
Refer to our earnings deck for more details on our strategic transformation.
Kevin Thompson: Finally, we had an FDIC insurance special assessment as many banks did this quarter of $8 1 million.
Kevin Thompson: We continue to see good economic trends in our business loan growth totaled $196 million and customer deposits grew 59 million with average customer deposits, increasing $271 million compared to the prior quarter loans to deposits increased to 74% as we decreased our wholesale deposits.
Kevin Thompson: Investments decreased $832 million due to bond sales of $865 million and normal amortization offset by improvements in fair value with a decline in interest rates.
Kevin Thompson: We are very pleased that our revenue growth exceeded analyst and even our own expectations in the quarter.
Kevin Thompson: Net revenues increased 6% or 10 million when adjusting for the securities loss. This is driven mostly by our expanding net interest margin, which increased to 352%.
Kevin Thompson: Loan yields increased 28 basis points to 649%.
Kevin Thompson: While interest bearing liabilities only increased 10 basis points to three 1%.
The total cost of deposits decreased one basis point to two points of ROE of 9%.
Kevin Thompson: Noninterest expense was up in the quarter and adjusting for the $15 million of unusual items.
Kevin Thompson: <unk> were up $4 8 million.
Professional fees were higher than usual and we expect them to normalize going forward.
Also we made additional investments in tax credit projects, which are offset with benefits and tax expense.
Kevin Thompson: These two items account for $6 million of additional expenses in the quarter and excluding them expenses would have been down around $1 million.
The adjusted efficiency ratio was 59% for both the quarter and full year.
Kevin Thompson: Noninterest income when adjusting for securities losses was flat to the prior quarter. This included a decrease of 600000 and consumer NSF and overdraft fees in the month of December as we instituted new fee policies across our single charter customer base.
Kevin Thompson: This is a permanent change to our consumer fee structure that will impact our fee income going forward, but we expect to offset this with growth in treasury management card fees and other strategic fee initiatives.
Kevin Thompson: The provision for loan losses was $11 7 million in the quarter with an allowance for lending related credit losses of 1.15% of total loans.
Kevin Thompson: The provision was driven by loan growth and one credit that moved to non accrual status that required a specific reserve.
Kevin Thompson: Net loan charge offs remained low at one basis point for the quarter and 11 basis points for the full year and delinquencies were also low at nine basis points to total loans.
Capital ratios are strong with the CET one ratio of 11% even after the securities loss and other restructuring expenses.
Kevin Thompson: That will improve our profitability going forward.
Kevin Thompson: The tangible common equity ratio increased 80 basis points to six 3%, which benefited from the increase in market value of our investments and the reduction in assets as part of our balance sheet repositioning.
Kevin Thompson: If you refer to page 28 of our earnings deck, we provide our management outlook for 2024 compared to our 2023 results assuming no change in economic the economic environment.
Kevin Thompson: We expect loan growth of 6% to 8% principally in our commercial portfolio in the year we.
Kevin Thompson: We anticipate a 5% to 7% increase in deposits to fund loan growth with strong commercial and some consumer growth.
Kevin Thompson: We plan to let our securities portfolio amortize down with the cash flow is used to pay off wholesale funding.
We expect a stable net interest margin of around three 5%, assuming a stable interest rate environment.
Kevin Thompson: We expect our full year provision for credit losses to increase modestly.
We expect core noninterest income to be flat with growth in Treasury management and card fees offset by lower consumer and small business NSF and overdraft fees as well as lower mortgage fees with our exit of the mortgage business in 2023.
Kevin Thompson: Core expenses should be down around 2% with lower occupancy marketing legal and operational expenses.
Kevin Thompson: Set by performance.
Kevin Thompson: Pages, 10 and technology investments.
Our effective tax rate should be around 24%, excluding discrete items, such as new tax credits and finally earnings accretion and securities amortization are expected to increase all capital ratios with CET, one approaching 11, 5% to 12% by year end.
Kevin Thompson: I will now turn the time back over to Bruce.
Bruce K. Lee: Thanks, Kevin.
Sure.
2023 was a year of significant progress and successful execution of our strategic plans, we completed charter consolidation on time under budget.
Bruce K. Lee: Estimated net savings.
Bruce K. Lee: We then initiated <unk> three point out.
Bruce K. Lee: We've repositioned the balance sheet.
Bruce K. Lee: Centralized our retail structure and increased retail leaderships span of control.
Bruce K. Lee: We're reviewing our current footprint to maximize return on capital reducing.
Reducing real estate expenses through branch rationalization size and location.
Bruce K. Lee: Investing in middle market banking, and adding talent in key growth markets expanding.
Bruce K. Lee: Expanding treasury management products and capabilities.
Bruce K. Lee: And creating a digital platform to serve consumers and small business customers.
Bruce K. Lee: We remain focused on continuing to achieve organic growth.
Bruce K. Lee: Yeah.
While reducing expenses enhancing EPS growth delivering a higher return on assets and efficiently using our capital.
Bruce K. Lee: Okay.
Speaker Change: So I think now we can turn it over to Q&A.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone again to ask a question. Please press star 111 moment. Please.
Our first question comes from the line of Jeff <unk>.
Jeff: Of D. A Davidson your line is open.
Okay.
Jeff: Hi, Jeff.
Jeff: Hi, good afternoon.
Jeff: A couple of questions I guess on the outlook.
Speaker Change: The first on the margin.
Speaker Change: Pretty stable here I guess in line with kind of Q4.
Speaker Change: Wanted to kind of check in on.
Speaker Change: Sensitivity with with.
Speaker Change: With rate cuts in the second half if there were to be some generally speaking.
Speaker Change: Well first question is.
Speaker Change: The surprise, maybe no tail of benefit from.
The restructuring maybe thats chewed up by deposit costs in the first part of the year, but then if you could just kind of.
Speaker Change: Positioning us for where the balance sheet is should you see some rate cuts in the in the second half.
Speaker Change: I'll respond that.
Speaker Change: It really depends on how the yield curve plays out this year were inverted now we do hope that the yield curve normalizes over time, and Thats that really will impact.
Speaker Change: Thanks.
Speaker Change: Cross the country I'll say that we are asset sensitive so on a raw basis unadjusted any 25 basis points.
Speaker Change: Decreased rates.
Impacts us about five to seven basis points in our NIM. That's on a raw basis, we do have the opportunity to react and strategically.
Speaker Change: Create some opportunities to buoy that up among many other things that we're talking about right now we can put some hedging floors in place with our loans, we have some opportunities too.
Speaker Change: To reposition some of our wholesale funding we have a lot of deposit programs going on that should benefit us and we have some hedges in place that make us more asset sensitive, but those roll off over time and so this is the topic of the year, obviously and we are all over it and have some strategic initiatives right.
Speaker Change: Now to be able to be prepared.
Speaker Change: For our rate down scenario Jeff.
Speaker Change: Jeff This is Bruce I might add a couple of things it's really.
Bruce K. Lee: Very dependent upon what the deposit betas are and if we're able to overachieve, what we've modeled that helps the margin also if as we expect we're able to grow deposits.
Bruce K. Lee: We used the cash flow off the investment portfolio to repay wholesale funding.
Bruce K. Lee: And in essence shrinks, our balance sheet, but that is an accretive trade to our margin and to our revenue.
So it really depends on our ability to execute on those couple of things on whether or not we will be able to improve on the decrease in margin that Kevin discussed with each quarter percent move.
Okay. Thank you for that.
Bruce K. Lee: And a quick one on the on the expense guide what would you put the base of the core expense in 'twenty three to kind of.
Based off of the down 2%.
Bruce K. Lee: I think the easiest way to look at it as the fourth quarter. So expenses came in at about $130 million you take out $15 million of those unusual items and then I also called out another $6 million of run rate that was higher than normal. So that puts you at about 109 $110 million quarterly that seems like car.
Our run rate going forward and that includes merit increases performance increases so underlying there are a lot of benefits we're seeing from the.
Bruce K. Lee: The initiatives, we've been doing over the past few years.
Bruce K. Lee: So Kevin if I take that one <unk> 110.
Kevin Thompson: Again, and then you're going to.
Kevin Thompson: Hope to improve expenses by 2% over the course of the year off that.
Quarterly run rate.
Kevin Thompson: It should be a little more clear that would be our run rate 109 to 110 quarter on average.
Speaker Change: Okay for the balance of the year.
Kevin Thompson: That's right.
Kevin Thompson: Okay.
Speaker Change: Okay, one last one if I could.
Speaker Change: Wanted to kind of Bruce.
Bruce K. Lee: Not that you have laid out a pretty good plan here with three <unk>.
Bruce K. Lee: First question would be kind of the timeline to that I haven't had a chance to look through all the slides of the.
Bruce K. Lee: I guess in 'twenty for the tangible what do you think you complete this year and then second part of that question is.
I guess.
M&A were to present itself in terms of <unk>.
Bruce K. Lee: Bankers are markets that <unk> targeted that you'd want to grow and Jude yes.
Bruce K. Lee: Not abandoned the plan, but you're pivoting to say well we can we can acquire this for cheaper.
Bruce K. Lee: Yes.
Speaker Change: Clarify that question, what part does M&A come up.
Speaker Change: We're attractive and an accelerated kind of what youre doing with with three point out in terms of some of the growth in <unk>.
<unk> acquisition.
Speaker Change: Yes. Thank you.
Thanks, Jeff.
Speaker Change: Let me maybe first talk about what we'll achieve in 2024 and beyond if you look on page 12 of the earnings deck kind of lays out what our targets are for three years.
Speaker Change: And we would expect to make progress in every single area during 2024, but it really starts to ramp up in 2025, and 2026, because a lot of the investments, particularly in people and in our Treasury management investments are really being made.
Speaker Change: In 2024.
Speaker Change: So I think that that's probably at the moment the best I can do but we would expect again to make progress, but the significant progress happens in 2025, and 2026, and we feel very confident to be able to achieve these targets over that that period of time.
Speaker Change: And if we look at M&A so first.
We're very far along in the talent acquisition in those specific markets.
Speaker Change: And we would look at M&A if it was the right culture provided the accretion.
Speaker Change: They were focused as a commercial bank and they were in market, particularly in those growth markets that I mentioned, so we're not opposed at all to M&A.
Speaker Change: <unk>.
Speaker Change: <unk>.
Ongoing dialog with some institutions in those markets, but our focus right now is.
Is on talent acquisition as opposed to M&A.
Speaker Change: But we would pivot if we needed to or if the opportunity presented itself.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks, Jeff.
Speaker Change: One moment please.
Speaker Change: Sure.
Our next question comes from the line of Terry Mcevoy.
Terry Mcevoy: Stephens Inc. Your line is open.
Hi, Good afternoon, everybody, Eric Kevin Kevin welcome to the call in.
Terry Mcevoy: Brian Best of luck to you in the future.
Terry Mcevoy: Maybe if I could start when I was looking through slides eight through nine I just kept seeing dollar signs just a significant investment in a lot of important areas. So I guess my question is.
Terry Mcevoy: How are you paying for <unk> three point out is it all footprint and facilities optimization and I guess, how do you alleviate any concerns that there'll be some expense creep as we move through 2024 and into 2025.
Speaker Change: Yes, so maybe let's talk first about facilities for a moment.
Speaker Change: I think it's pretty obvious as we look at all of our facilities and how we've grown over the years that our facilities are 20 to 30 years old.
Speaker Change: There are two large.
Speaker Change: They were built at a time where branches were utilized by consumers.
Speaker Change: And it's a whole different world. So this we're now going to attack our attack our cost structure.
Speaker Change: We believe that.
Speaker Change: Not only the real estate, but also the people.
Speaker Change: We will all will all come down so I'm not really worried about.
<unk> expense.
Speaker Change: Expense creep because while we're doing it we're also investing in additional technology, particularly.
Speaker Change: The digital bank for the consumers and small business. So we're really we feel very confident that our delivery system will actually decrease pretty significantly over this three year period of time.
Speaker Change: Did I answer that your question there Terry.
Terry Mcevoy: Yes, yes, and just as a follow up when you are in your prepared remarks can you say kind of take a look at your footprint do you mean individual locations within a region or state or are you, implying looking at a state or something larger than just one branch. If my question makes sense.
Speaker Change: Yes, Terry in my comments.
I was really talking about much more than.
Terry Mcevoy: Our branch or potentially even a region. We are really taking a deep dive into each of our markets and looking at the capital that we have invested the returns that we're getting.
Terry Mcevoy: And where.
Terry Mcevoy: We look out a couple of years to see whether or not the growth will be there.
Terry Mcevoy: In those markets. So we're.
Terry Mcevoy: We're taking a very heavy look at that which honestly, we've never really done in the past.
Terry Mcevoy: Okay, and then maybe just a quick question for Nathan that the increase in nonaccrual or nonperforming loans.
Terry Mcevoy: It was company specific not connected to any broader weakness in your manufacturing customer base is that a fair statement.
Nathan Race: That's a very fair statement and again, it's well collateralized. So it's something we're actively working and have a hopeful as we look forward on it but we'll continue to work through it.
Speaker Change: Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: A moment please.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of Andrew Lee of Piper Sandler Your line is open.
Andrew Lee: Hi, Andrew Thanks for taking the questions Hi.
Andrew Lee: The provision now it looks like it was a company that voluntarily is shutting down is that tied to this manufacturing credit just kind of curious on the specifics around that.
I'm going to let Nathan take that one Andrew I'll take that one Andrew.
Nathan: That's a different company.
Nathan: It's one of the ones that we just decided to take a very conservative posture as you start to get into accounts receivable and a lot of there is we're working through that one we decided to go ahead and just just taking assertive posture. So we'd have to keep coming back we can just deal with it upfront and then move through it.
Speaker Change: Got it alright.
Speaker Change: And then the expense guidance here does not include any.
Speaker Change: Tax tax credit amortization.
I guess you've had those now for several quarters, so it's kind of kind.
Kind of forecast that without some way or another.
Speaker Change: I guess, what's your expectation on that going forward.
Speaker Change: Yes, Youre right. The tax credits, we have been doing recently, our solar tax credits that are more short term in nature and they do impact expenses, but they also benefit the tax line and so we don't currently anticipate any for this year, but we will be opportunistic if anything interesting comes up.
Got it okay. So it should be a pretty clean year for the tax rate and pretty expense base right.
Speaker Change: That's what we expect at this point.
Got it alright, you've covered all my other questions I'll step back. Thank you.
Thank you.
Speaker Change: Thanks, Andrew.
One moment please.
Our next question comes from the line of Damon Delmonte.
Damon Delmonte: <unk> Your line is open.
Hey, good afternoon, everybody, however is doing well.
Damon Delmonte: Kevin Welcome and Brian Best of luck in your new endeavors.
Damon Delmonte: Just wanted to follow up on the outlook for provision I think you noted that it would be up slightly over the 2023 year does that include the elevated amount here in the fourth quarter.
Or are you talking about if it was a normalized level.
That mostly includes loan growth and it does carry forward, our current credit outlook and the credits that.
Damon Delmonte: That Nathan mentioned earlier, which we think are well controlled but we do we are being conservative in case, the economy softens, a little bit and we're providing a little bit for loan growth there.
Speaker Change: Got it.
The one credit that drove the provision higher it was that that loan included in the NPL increase this quarter as well.
Yes, it was.
Speaker Change: A smaller piece of it and honestly.
If those two loans weren't there would've been a recovery. So the other one the major driver was the other one that was a manufacturing company that was primarily driving the increase.
Speaker Change: Got it okay.
Speaker Change: Then lastly, just on fee income.
Speaker Change: Do you kind of expect it to remain flattish, but a little bit of pressure I think you said on the.
Speaker Change: Service fee line kind of offset by growth in some other areas that I hear that correctly.
That's correct, yeah, a little bit of pressure that we already saw in the fourth quarter and you saw we were we were flat until the third quarter. So we've already started to overcome that and treasury management. Some of the other H <unk> III no initiatives that we're working on.
Speaker Change: Got it okay. That's all I had thank you.
Speaker Change: Thank you.
Speaker Change: Thank you one moment please.
Our next question comes from the line of David Long.
Of Raymond James Your line is open.
Speaker Change: Okay.
Good afternoon, everyone.
David Long: Hi, David.
I wanted to follow up on the footprint review question, maybe Terry was kind of going this route but as you're completing this footprint review.
Speaker Change: One of your subsidiary banks could that potentially be a sale candidate.
Speaker Change: Is that is that something that we can go that far.
Mentioned, Eric can you talk about that as an option.
Eric: Yes, I would say that everything's on the table when we look at one of our subsidiaries and again, we're very focused on the capital that we have allocated.
Eric: The growth of our subsidiaries as well as the expense structure of those same subsidiaries.
Speaker Change: And I'll just add as part of <unk> three point all part of that is bringing on talent and we brought on a really talented team to help us understand the underlying economics of our business and really help us understand capital allocations and funds transfer pricing what is truly contributing to the profitability of this company.
Going forward, so that we can really dynamically and strategically look at that and adapt to this interesting banking environment I believe we will see in the next several years.
Speaker Change: Yeah, and I would also say David the now that we have all of our charters consolidated and we're looking at everybody through the same lens. It does have.
David Long: A different approach to things where before when we had separate charters separate balance sheets.
They may have a different investment portfolio with a different yield which has which generates a different answer but now.
David Long: As we've consolidated everything and we're looking at everybody in a on a consistent basis. It comes up with different answers.
Speaker Change: Got it no that's great color. Thanks, guys and then the other question I had I think Kevin you had mentioned a $6 million in incremental NII from the sort of portfolio of restructuring with the security sale is that when you say $6 million incremental is that on top of what you reported here in the fall.
Speaker Change: Quarter, where does that $6 million incremental based on.
Kevin: We benefited from some of that in the fourth quarter. The securities repositioning happened on November 14th. So we saw about half of that benefit $3 million of that in the quarter and so there are obviously a lot of puts and takes in your net interest margin going forward. That's a benefit there are still headwinds in the economy.
Kevin: With banks still experiencing higher deposit costs. Thank goodness, we did not we were flat this quarter, which is a really good sign going forward, but a lot of good puts and takes going forward.
Kevin: We could do better than that on net interest margin if the again the yield curve cooperates.
Kevin: But we're not sure how the federal reserve is going to react or not sure. How what competition is going to look like this is kind of unchartered territory that we're making sure that we're prepared for.
Speaker Change: Excellent that's great. Thanks for that clarity and then just finally.
Speaker Change: <unk>.
Speaker Change: H tail off three point.
Speaker Change: Any you're expecting any non core expenses on top of that $109 million to $110 million run rate or do you think most of those have already been included.
Okay.
Speaker Change: Most of those are already included there could be some as we're going through we're just in the initial stages of <unk> 3.0, and we're evolving as we go so there could be areas, where additional expenses, but there would be from our view a very quick earn back of those expenses to buoy up our model.
Speaker Change: Awesome great. Thanks.
Speaker Change: You bet that includes real estate I'll add if there is something in our footprint that needs adjustments.
Speaker Change: Thank you.
Speaker Change: As there are no further question I'd like to turn the call back over to Mr. Li for any closing comments.
Li: Thank you Valerie again.
Li: I want to thank Bryan Mckeag for all that he has done.
Li: This will be the last time, he is going to be in the room with us.
So thank you Brian I really appreciate that.
And again welcome to Kevin.
Kevin: For his first earnings call with Us really appreciate that.
Kevin: And thank you all for joining US our next quarterly earnings call will be in late April have a good evening.
Speaker Change: Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].