Q4 2024 Columbia Banking System Inc Earnings Call
Thanks for watching!
Thank you for watching!
Speaker Change: Welcome to the Columbia Banking System's fourth quarter 2024 earnings conference call. At this time, all participants are on a listen mode only.
Speaker Change: and others. I'm Chris Chappell. Thanks for watching. We'll see you next time.
Speaker Change: After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: If you would like to remove yourself from the queue, please press star 1 again.
Please be advised that today's conference is being recorded.
Speaker Change: At this time, I would like to introduce Jacqueline Bohlen, Investor Relations Director, to begin the conference. Please go ahead.
Jacqueline Bohlen: Thank you, Lisa. Good afternoon, everyone. Thank you for joining us.
Jacqueline Bohlen: As we review our fourth quarter results, the earnings release and corresponding presentation are available on our website at ColumbiaBankingSystem.com.
Jacqueline Bohlen: 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 the disclosures contained within our SEC filings.
Jacqueline Bohlen: We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliations provided in our earnings materials.
Jacqueline Bohlen: I will now hand the call over to Columbia's President and CEO, Clint Stein. Thanks, Jackie. Good afternoon, everyone. Our fourth quarter results round out a year of financial and organizational performance improvement.
Jacqueline Bohlen: Our optimized expense base, fine-tuned pricing strategies, and targeted franchise investments showcase our commitment to continued progress toward regaining long-term top quartile performance.
Jacqueline Bohlen: Our normalized core expense base, which Ron will discuss in his remarks, is down 8% from the fourth quarter of 2023 because of organizational initiatives undertaken in early 2024.
Jacqueline Bohlen: While our net interest margin is down 14 basis points from the year-ago quarter, it has increased 12 basis points since its low point in the first quarter.
Jacqueline Bohlen: The favorable change reflects balance sheet mix, improvement, and proactive pricing actions ahead of and following interest rate actions by the Fed.
Jacqueline Bohlen: We have also closely aligned our loan growth priorities around our business bank of choice strategy.
Jacqueline Bohlen: which focuses on balanced growth in relationship-driven loans, deposits, and core fee income products as we allow transactional balances to exit our balance sheet.
Jacqueline Bohlen: These actions combine to an 8% increase in pre-provisioned net revenue and a 29% increase in net income on an operating basis in the fourth quarter relative to the fourth quarter of 2023.
Jacqueline Bohlen: I want to thank our associates for their hard work and dedication during our first full year as a combined organization. Their accomplishments contribute to the building momentum that supports my enthusiasm for the future.
Jacqueline Bohlen: We continue to seek out ways to grow our customer base throughout our eight-state Western footprint. We currently have five branches slated to open in 2025 as we redeploy the savings achieved through four net consolidations in 2024 and other offsetting cost reductions.
We're also continuing to bring talented bankers into the organization.
Jacqueline Bohlen: Our investments in technology are ongoing, and we place customer satisfaction at the core of these initiatives. We look to innovation to help enhance processes that drive operational efficiency.
Jacqueline Bohlen: Because as we fine-tune our ability to be the easiest bank to do business within, it supports our efforts to be the easiest bank for customers to do business with.
Jacqueline Bohlen: Key investments in 2024 include the introduction of a new streamlined business online banking platform.
Jacqueline Bohlen: Banking is not one-size-fits-all and we noticed a gap in usage between our small business and commercial customers.
Jacqueline Bohlen: Our proactive development of the new platform highlights our focus on technology that enhances the customer experience.
Jacqueline Bohlen: Planned 2025 investments include the expansion of our real-time payments offerings, the introduction of new digital solutions, and further development of data analytic tools to drive sustainable core fee income higher as we offer needed solutions to our customers.
Speaker Change: I want to take a moment to address the wildfires that have devastated parts of Los Angeles.
Jacqueline Bohlen: Our hearts go out to those affected by the fires, and we are keeping the entire community in our thoughts.
Jacqueline Bohlen: We have few businesses and associates impacted directly by the damage, but the response from our teams across the organization has been inspiring.
Jacqueline Bohlen: I am proud of the volunteerism, financial contributions, and overall empathy I have witnessed over the past few weeks.
Jacqueline Bohlen: We are a company that cares for its communities, customers, and associates, and the call to action is a stark reminder of the strong culture that binds us together.
Jacqueline Bohlen: We are pleased with our accomplishments in 2024, but the slate wiped clean 23 days ago.
Jacqueline Bohlen: Across the organization, we remain focused on driving balanced growth with new and existing customers as we add to our franchise value through relationship banking.
Jacqueline Bohlen: I'm proud of the consistency we have reported to you over the past year, and our actions are focused on long-term, repeatable results.
Jacqueline Bohlen: I'll now turn the call over to Ron. Okay, thank you, Clint.
Ron: We reported fourth quarter EPS of 68 cents and operating EPS of 71 cents.
Jacqueline Bohlen: And our operating return on average tangible equity was 16%, while the operating PPNR was $229 million.
Jacqueline Bohlen: Please refer to the non-GAAP reconciliations provided at the end of our image release and presentation for details related to our calculation of operating metrics.
Jacqueline Bohlen: On the balance sheet, we maintained our target interest-bearing cash levels of approximately $1.4 billion while continuing to de-lever wholesale funding.
Jacqueline Bohlen: As for the movements, the decline in AFS securities was mostly market value driven.
Loans in total increased $178 million in the quarter.
Jacqueline Bohlen: And within this, we had stronger commercial relationship lending with commercial loans of $228 million or 9% on an annualized basis.
More than offsetting the $50 million decline in CRE loans.
Jacqueline Bohlen: On the right side of the balance sheet, deposits in total were up $200 million while borrowings declined $550 million.
Jacqueline Bohlen: Within deposits, we saw the typical year-end decrease in non-interest bearing DDA more than offset by an increase in money market and time balances.
Jacqueline Bohlen: We brought in half a billion in brokered deposits at lower cost to fund the reduction in borrowings.
Knowing the Fed, BTFP was paid off in full.
Jacqueline Bohlen: The net effect of this was reducing the wholesale funding costs from roughly 5% at the start of the quarter.
to four and a half percent a year ahead.
Jacqueline Bohlen: This wholesale funding shift, combined with active promotional deposit cost reductions, drove the improvement in our net interest margin.
Jacqueline Bohlen: The name increased 8 basis points to 3.64% for the quarter.
Jacqueline Bohlen: Our interest bearing deposit cost declined to 2.66% for Q4. Given the Fed's additional 50 basis points of cuts in the second half of Q4, it may help to compare the month of December to the month of June.
Our month of December, interest-bearing deposit costs was 2.59%.
Jacqueline Bohlen: down 41 basis points from the high of 3% in June.
Jacqueline Bohlen: More importantly, the spot cost as of December 31st was 2.51%.
down 49 base points from the month of June.
Jacqueline Bohlen: This approximately 50% data is impressive in a short period of time and demonstrates the slightly liability-sensitive positioning we've worked to maintain.
Jacqueline Bohlen: I want to thank all of our bankers and support professionals for their timely work with customers on reducing deposit rates.
Jacqueline Bohlen: It was great to see the speed with which they worked, and it is reflective of a relationship banking strategy, where our customers bank with us for the value our bankers provide, not the rate.
Jacqueline Bohlen: As we look ahead to 2025, we seasonally see a decline in customer deposits in Q1, while at the same time, we may see continued net commercial loan growth depending on seasonal line utilization.
Jacqueline Bohlen: We expect this to result in a net increase of wholesale funding of up to half a billion dollars.
Jacqueline Bohlen: which today is in the 4.4 to 4.5 percent cost range.
Jacqueline Bohlen: All else equal, this will have a negative effect on the NIM compared to Q4.
Jacqueline Bohlen: and she'll leave it in the lower half of the range over the last few quarters.
Jacqueline Bohlen: Customer deposits historically seasonally decline further into Q2 before bottoming late in the quarter. Then we usually see growth in Q3 and less so in Q4.
Jacqueline Bohlen: As for the NIM or the remainder of 2025, it will depend much more on customer deposit flows and the non-inspiring deposit balance than if the Fed cuts one, two, or three times.
Jacqueline Bohlen: Our projected interest rate sensitivity under both ramp and shock scenarios remains in a liability-sensitive position.
Jacqueline Bohlen: and we expect our rates down to positive betas to approximate those experienced on the way up.
Jacqueline Bohlen: Our slide deck includes enhanced repricing and maturity disclosure, including details on over $8 billion in customer CDs and wholesale funding that matures over the next six months.
Jacqueline Bohlen: Our provision for credit loss was $28 million to the quarter.
Jacqueline Bohlen: The portion related to our leasing portfolio declined again, as expected, this quarter to $14 million.
Jacqueline Bohlen: Our overall announcement for credit loss remains robust at 1.17% of total loans.
or 1.33% when including the remaining credit discount.
Thank you.
Jacqueline Bohlen: Non-interest income was $50 million for the quarter, with the change from Q3 mostly related to fair value swings.
Jacqueline Bohlen: Given the bond market rallied in Q3, we had gains in Q3.
Jacqueline Bohlen: The opposite occurred in Q4 as the bond market sold off, leading to fair value losses.
Jacqueline Bohlen: On page 21 of the release, we detail out the non-operating fair value changes.
Jacqueline Bohlen: Excluding those items are operating non-interest income of 55.3 million dollars for Q4 compared to 59.6 million dollars for Q3.
Jacqueline Bohlen: This reduction on an operating basis resulted from $1.7 million in loss on sale of loans and another income item which was offset by light change in comp expense.
Jacqueline Bohlen: Total GAAP expense for the quarter was $267 million, while operating expenses were $263 million.
Jacqueline Bohlen: The $5.3 million reduction in compensation from Q3 related to non-recurring credits and other adjustments.
Jacqueline Bohlen: XVs, IPEG, are normalized operating expense at $269 million for Q4.
which, when excluding CDI amortization, annualizes at $960 million.
Thank you.
Speaker Change: Clint mentioned our reinvestment plans earlier, which will increase our quarterly operating expense in Q1 forward.
Speaker Change: With a starting point expected to be in the middle of our annualized range of 965 to 985 million dollars
Speaker Change: On top of this, for 2025, we expect continued annual inflation of approximately 3 to 3.5%.
Speaker Change: Inclusive of items such as the typical Q1 payroll tax increase.
Speaker Change: A 7% increase in health insurance costs and the annual merit cycle for the end-of-Q1.
Speaker Change: We'll always work to find additional efficiencies to help offset these pressures and enable continued franchise reinvestment.
Speaker Change: So at CDI, our operating expense should be in the 1 to 1.01 billion dollar range for 2025.
Speaker Change: and our CD advertisation should decline slightly in Q1, then settle at approximately $26 million for Q2 forward.
with the full year 2025 amount expected at $105 million.
Speaker Change: And lastly, our tax rate was 25.7% for the full year, which should serve as a good rate to use for 2025.
Speaker Change: I'll close with commentary about our regulatory capital position. Our risk-based capital ratios increased, as expected, in Q4, with our CET1 at 10.5%.
and total risk-based capital at 12.6%.
Speaker Change: We expect capital ratios to continue to build, which will provide enhanced future allocation flexibility.
Frank: And with that, I'll now turn the call over to Frank.
Frank: Thank you, Ron. The stable performance of our loan portfolio continues to highlight the strength of our through-the-cycle underwriting process, portfolio management, and the quality of our borrowers and sponsors.
as I have mentioned over several quarters.
Frank: We have transitioned to a more typical credit environment after a period of exceptional quality. Classified loans declined in the quarter due to risk rating upgrades, which contributed to an increase in criticized loans along with the normal dynamic migration of risk ratings.
Frank: Our proactive and detailed monitoring of the portfolio continues to reveal no systemic issues across various industries, sectors, or geographic regions.
Frank: Overall, net charge-offs for the company stood at an annualized rate of 27 basis points for the quarter, with the bank contributing 7 basis points and FinPak 20.
Frank: As expected, improvement continues within the transportation sector of the FinPAC leasing portfolio.
Delinquencies are decreasing.
Frank: resulting in reduced net non-performing leases and ultimately lower net charge-offs.
Frank: We are pleased with the ongoing and predictable progress we are observing.
Frank: Overall, we remain very satisfied with the quality and directionality of our granular
Frank: and Diversified Loan and Lease Portfolio, which is detailed further in our investor presentation. I'll now turn it over to Tori.
Tori: Thank you, Frank. Momentum from the third quarter strong customer deposit growth carried into the fourth quarter as balance has continued to expand into December.
Tori: Non-interest bearing deposit balances were up 50 basis points on average in the fourth quarter But they were down 1.7 percent at quarter end with downward movement mostly in the last couple weeks
Tori: This late quarter decline was due to normal customer uses of cash like tax payments, business distributions, and holiday spending.
Tori: We believe we have returned to traditional seasonal patterns, given our deposit flows during 2024, and we expect customer account contraction to continue through the first quarter as a result of normal business trends and seasonality.
Tori: Our bankers continue to focus on the activities that drive business
Tori: and our successful small business campaigns, which generated approximately $700 million in new balance to the bank in 2024, are an example of this achievement.
Tori: Further, the deposit repricing information Ron provided highlights our bankers' ability to convey the value we provide to our customers beyond rate.
Tori: Commercial loan growth drove overall portfolio growth during the quarter as total loans were up 2% on an annualized basis. Commercial loans expanded by 2% during the fourth quarter and by 3% for the year.
Tori: bringing strong companies with outstanding management teams to the bank is a long sales cycle and we are pleased to see the momentum we have been discussing over the past year materialize on our balance sheet.
Tori: Commercial balance expansion was partially offset by contraction in transactional real estate loans, a trend we expect to continue through 2025 and beyond.
Tori: We continue to see expansion in core fee income, and our pipelines for these products remain very strong. Treasury management and commercial card income increased by 11% and 8% in 2024, respectively.
Tori: Financial services and trust revenue were also key contributors to core fee income growth, rising 4% from the third quarter and 50% from 2023 as these services were added through the merger and enhanced by our conversion to a new broker platform a year ago.
Tori: We are pleased with the favorable trends in our collective product and service income as we target a more diversified revenue stream to contribute to our top quartile performance. I will now turn the call back over to Clint. Thanks, Tory.
Clint Stein: Our focus remains on optimizing our financial performance to drive long-term shareholder value.
Clint Stein: Our capital position continues to build, and our regulatory ratios are expanding in line with our expectations.
Clint Stein: Our TCE ratio was 7.2% at quarter end. That's down from 7.4% at September 30th, but up from 6.7% at year end 2023, despite a higher accumulated other comprehensive loss between the periods.
Clint Stein: Our operational performance continues to demonstrate our ability to organically generate capital well above what is required to support prudent growth and our regular dividend, providing us flexibility for considering additional returns to shareholders.
This concludes our prepared comments.
Clint Stein: Tori, Chris, Ron, Frank and I are happy to take your questions now. Lisa, please open the call for Q&A.
Speaker Change: Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. We also ask that you please wait for your name and company to be announced before you proceed with your question. One moment while we compile the Q&A roster.
Speaker Change: Our first question today will come from Jeff Willis of D.A. Davison. Your line is open.
Speaker Change: Thanks, good afternoon. Maybe just following up with Clint on that.
Speaker Change: My line cut out a little bit on the capital use as that builds, just the priority of
Speaker Change: Now you've hit some of your targets, what do you expect to see in 2025 in terms of deployment?
Sure.
Speaker Change: I didn't really specify that in the prepared remarks, but I think it's really just reiterating and reinforcing what we've said all along, which is that we continue to generate
Speaker Change: a fair amount of capital and capital in excess of what
Speaker Change: typical operations and or prudent growth would require, as well as outstrips our
Speaker Change: level of regular dividend payments. And so we still feel really optimistic that we have that capital flexibility. We're above our long-term targets from a regulatory standpoint.
which, if you recall, are basically take the...
Speaker Change: regulatory requirements to be considered well-capitalized at 150 basis points and those are our longer-term goals. We'd like to see TCE a little higher still but you know it's in as Ron likes to say it's within grenade range of
Speaker Change: of where we want to be if you back out the AOCI component of it. And so we're just going to be opportunistic as we get deeper into 2025 with what that might look like in terms of capital actions.
Thanks, Clint. And Tori, I wanted to...
Speaker Change: the transactional business that you expect to kind of be a net to core growth. Where do we sit in terms, is Q4 growth or the balance of 24 growth a good proxy for 25, or do you see there's an uptick on net?
Tori: Well, thanks Jeff. I think it depends on a few different things but I would say this we, you know, we feel we're in the
Tori: very low single digits in total portfolio growth after any kind of contraction in Transactional real estate and we feel that the CNI Side of the house, you know is a still kind of low to mid
Tori: single-digit. A lot of good momentum. Pipelines are pretty steady. They haven't in aggregate increased a bunch, but the mix continues to move more towards heavier-weighted on the C&I front rather than the real estate front. So we're seeing
all the right behaviors and all the right momentum.
Speaker Change: And, Tori, more of a specific question. I know that you just said C&I and
Speaker Change: relationship business is where you're headed. There is an exit of a...
Speaker Change: appear out of the mortgage business in your in your footprint wanting to see if the single-family mortgage or residential is is an area that you think that's an opportunity can you can you work that into the strategy or not not necessarily a focus for you
Speaker Change: If a business owner, another customer comes in and needs something that belongs and resides in the portfolio, we have the capacity and will look to do that.
Speaker Change: We'll do saleable product, of course, but as far as looking to expand it, build upon it, I would say it's a more steady state. We're really happy with where it's at, and barring any drastic decrease in interest rates, I think we've kind of settled into a really nice spot.
Jeff Willis: I'm going to give you a little more on that, Jeff. I can't help myself.
Jeff Willis: You know, for Chris and Jay and the home lending team, my direction is...
Jeff Willis: originate all you want that's sellable to the secondary market but I think that where we sit today in terms of the percentage of the portfolio that's in single-family resi I'd like to see that over time actually go to about half of where it's at today so
Jeff Willis: I'm a big believer in home lending, I think, especially where we're in a lot of rural communities. I always maintain that somebody goes to see their banker they don't differentiate in those communities between they need an operating line if they need a home loan or if they need, you know, an equipment loan. So, so it's something we're committed to, but it's it's definitely going to be very similar to what we've been doing the last two years which is a more
Speaker Change: We're each division of a bank serving the needs of our customers, but then utilizing the secondary market to push those off our balance sheet.
Thank you.
Got it. Appreciate the detail there. Thanks.
Thank you. One moment for the next question.
Thank you.
Thank you.
Speaker Change: And our next question will be coming from the line of John Ostrom.
Good afternoon.
Hi John. Hi.
Speaker Change: Ron, I'm wondering if you can go over your margin thinking again. I was running quickly, but I think you said, given some deposit flows in the first quarter and second quarter, it's
Speaker Change: appropriate to go back to maybe the q2 or q3 levels is that is that what you want us to take away from that?
Speaker Change: That was the message. We do expect an increase in wholesale funds, which would be the primary driver of that, just given seasonal customer outflows.
Clint Stein: Clint mentioned that it recurred in the first quarter. So with that, wholesale funding costs today is in the 4.4 to 4.5 range in terms of percentage cost.
Speaker Change: I think there could be up to half a billion dollars of additional wholesale funds put on the balance sheet, which you know, if you look back at Q2-Q3, I consider that bouncing along the bottom. Q4, we were up eight bips.
Speaker Change: just given the better deposit performance and some deal over wholesale. I think I would just look at it between those Q2, Q3 levels and Q4s being the range, and if it does play out to where the wholesale funds are upwards of close to half a billion dollars, I'm probably on the bottom end of that range.
Okay.
Speaker Change: What do you have coming up from a deposit repricing point of view? Can you maybe size that and let us know what you're getting on some of your deposit repricing?
Speaker Change: Yeah, and we do include some good data at the back of the deck, where we highlight over $8 billion of wholesale funds between CDs and borrowings along with the yields by time period. So $8 billion over the next six months.
It's going to be quite a bit of opportunity.
Speaker Change: I think that's on page 21 of our investor presentation, which covers our industry sensitivity.
Speaker Change: Okay, perfect. Thank you very much. Appreciate it, guys. Thank you. Thanks, John. Thank you. One moment, please.
Speaker Change: And our next question will come from the line of David Feaster of Raymond James. Your line is open.
Hey, good afternoon, everybody. Good afternoon.
Let's start on...
Speaker Change: The small business campaigns, you've had a lot of success with those. I'm curious, the opportunity for additional campaigns this year.
Speaker Change: and maybe what you've seen beyond just the immediate deposit growth. How effective have those new relationships been, you know, maybe cross-selling into other products, bringing over loan relationships, and how sticky have those new relationships been?
Speaker Change: Well, David, once again, this is Chris, but once again you pack a lot of things into one question, so if I miss something don't hesitate to call me out on it. You know, the three that were done last year, you heard about the numbers and the success. When we look at and track those through, we're retaining around the mid-80s.
Speaker Change: on all of those accounts and you know each tranche is a little bit different but overall it's in the mid 80% that we've that we put on that we've we've kept
Speaker Change: One of the interesting pieces is the average balance, even though while we're losing a few of the accounts up front, the average balance of the accounts is increasing.
So I would say it's been very effective.
Speaker Change: The balance increases leads us to customers are coming over, they're sticking with us, and then they're finding other opportunities.
Speaker Change: Most of the, in the three campaigns, I'll talk about the one we just launched here recently, recall there's no special pricing. There's no special products. It's bundling everything that we currently offer.
Speaker Change: and very much focused on making referrals. So, we've seen our merchant referrals go up, we've seen our corporate card referrals go up.
Speaker Change: You know, it's a little more difficult in that space to look at larger loans and things like that, but there have been some of those that have made their way into commercial banking, and that's really nice to see as well.
Thank you.
Speaker Change: It's granular across the footprint, everybody's participating and we couldn't be more proud of that team and what they do. So, two weeks ago they kicked off the latest campaign.
Speaker Change: Results are very similar, a real focus on the cross sales and the referrals of that.
Yeah, it's got a superhero theme this time.
Um...
Speaker Change: and maybe someday we'll get you in front of a sales meeting that they do.
Speaker Change: It's actually pretty energizing. So, again, I'm sure I missed something in there, but small business lending is certainly a piece of it as well. Heavy focus on that for kicking off this latest one, but it's always a piece of it, too.
I hope you got it. That was great.
Speaker Change: and maybe shifting gears to the loan growth side. I mean, you know.
Speaker Change: The loan growth was solid. I appreciate the commentary, but I think it was pretty impressive to see a notable increase in originations.
Speaker Change: Could you just touch on what drove that? Is that a function of?
Speaker Change: increasing demand, you gaining market share, your past investments and hires that you've made starting to bear fruit, and just any commentary on the competitive landscape and borrower sentiment from your perspective.
Speaker Change: Sure David, this is Tory. I would say yes, yes, and yes.
A little bit on the demand side.
Speaker Change: momentum around the company as just we continue to evolve and you know the sales culture of the organization continues to grow from a
Speaker Change: adding value perspective, hiring us some new bankers in existing markets, and then some of our de novo markets.
Um...
Speaker Change: Just good solid activity. I think very similar to what Chris said on the small business front There's just a lot of really talented people, you know hitting the streets and in and providing Some lending to existing customers bringing new names into the bank Just some good healthy momentum. So coming from a bunch of different places, you know I look at the footprint of where the growth is and
Speaker Change: For this quarter, in commercial, the biggest growth happened to be Southern California, but Pacific Northwest was second.
Speaker Change: L.A. was strong. You kind of see some different parts of the company. Colorado was pretty strong. So it's just it's kind of all over the map and it's it's a great thing to see. It's very diversified.
That's terrific.
Speaker Change: Terrific. And then just last one from me, you know, you touched on the deposit seasonality. Could you maybe quantify how much outflows you saw in December? It sounds like there might be another, you know, couple hundred million on the horizon.
Speaker Change: And then just, how do you think about, you know, continuing to reprice deposits lower? You guys have been very proactive.
Speaker Change: reaching out to clients. I'm curious just how reception's been. Have you gotten a lot of pushback? Has there been any attrition? And just, you know, the opportunity to continue to reprice deposits lower, even exclusive of Fed cuts.
Speaker Change: Hey Dave, this is Ron. Yeah, so late in the quarter it was $200 million, give or take, of outflows. Again, along the lines of what Tori talked about, nothing out of the ordinary other than, you know, urine distributions and or...
Speaker Change: In the first quarter, we expect up to half a billion dollars of wholesale funding. That would be a net result of customer deposit flows and or any increase in loan balances from that standpoint. So ideally it would be less than that, but we have seen historically upwards of that much.
Speaker Change: And with that, I'll kick it over to Chris to talk about the deposit repricing efforts by the teams.
Speaker Change: and I'll also refer you back to page 21 of the presentation that shows you...
Chris Chappell: wholesale funding over the coming six months that are still above where current rates are. Yeah, I'll start with that piece of it.
I don't know.
Chris Chappell: Different tranches, different opportunities there, but some of them are still priced in the mid-fours.
Chris Chappell: Posted rates are under four. So we've got some opportunity there and and that's really the bulk of that billion two There's probably about a billion dollars of it. That's Over 4% still so some room on that aspect of it as well when you start moving into money markets and things of that nature It's a little more fluid. It's a little bit more what's happening in the market. I think we've settled into a really good position
Chris Chappell: We watch the market each and every week. We're very fluid with being able to make that move.
Chris Chappell: when and if it needs to be done so it's pretty active there.
Chris Chappell: The other part I guess I would point to is we still have, you know, exception rates deposits, and that's something that will always be there, but we've got some opportunities in there as well.
Chris Chappell: All that said, I would put it into, even if there's not a fed rate cut, say, you know, later on here in March or something of that nature, we still have some opportunity. It won't be as great, but it's a daily discipline that our bankers have
Chris Chappell: got a hold of, adopted, they believe in it, and we're looking to drive them down each and every day.
Speaker Change: Hey, I'll just maybe just add one thing to this story. The customer conversations have gone extraordinarily well. I mean, we were very, very proactive, as Chris pointed out.
Speaker Change: and when you have a very good, strong relationship with folks, it's a fairly easy conversation to have and it's understandable and I think the teams have done an outstanding job working with customers and to Chris's point, I think there's more of that to come.
That's great. Thanks everybody for all the color.
Thank you.
Thank you. One moment for the next question.
Speaker Change: And our next question will be coming from the line of Matthew Clark of Piper Sandler. Your line is open.
Good afternoon everyone.
Good afternoon.
Speaker Change: Just drilling down a little more on the repricing on the funding side, the 3.85 billion at 431 within the next three months.
Speaker Change: It looks like your special is $375,000 for seven months. Is that kind of the rate you assume most of that's going to roll into? And then on the $2.6 billion of debt at $504,000 within the next three months, is mid-fours also kind of what you expect to roll to?
Chris Chappell: Yeah, Matt, this is Chris. I'll take the CD part. Yeah, you would expect that that's where a majority will drive into that seven-month product. It's a good proxy for it.
Chris Chappell: Yeah, and the broker piece of that is going to be in that 4.4 to 4.5 range. In terms of the term debt spot on, yeah, that's at 5.04%. We've kept the tender on these all really short for very specific reasons. Those should be repricing down to the mid-fours.
Speaker Change: Okay, and then it looked like you trimmed deposit rates up another 10 bips in January. Because how do you think about the overall beta, you know, already above 50%? I mean, do you feel like you can chip away still even if the Fed doesn't move and maybe we only get one one rate cut?
Speaker Change: Yes. What's your latest sense on the beta, I guess, through the cycle? Well, we assume within our sensitivity disclosures, 55% was the beta.
Speaker Change: As rates went up, we assumed the same in terms of on the down rate side in those disclosures. Ideally, over time, if there are additional cuts, it should be north of that. But that's just more about the level of it. So I feel very good about, you know, 55% on the way down over the course of the cycle.
Speaker Change: Okay, and then an update on the $6 billion of transactional loans that are funded with wholesale, you know, given rates being higher for longer, should we just assume that...
Speaker Change: kind of amortizes and pays down over time, or do you have any change in the way you think about that book and your willingness to maybe sell some loans?
Speaker Change: Matt, I'll start and then I'm sure Tori is going to want to want to weigh in on this as well. We haven't changed our our thoughts around
Speaker Change: 1. The desire to move that off our balance sheet. You know, it is nice that we're below 300% now on the CRE ratio, but that these transactional
portfolios. The way I look at it is
Speaker Change: With our loan-to-deposit ratio kind of right in the sweet spot of where we'd like to see it from a risk appetite standpoint, I don't want those transactional portfolios to take away from our ability to serve our relationship-centric customers.
Speaker Change: So right now there is some amortization. I'm sure Tory's got the number at the top of his mind in terms of what that looked like in the fourth quarter, but you know with the backup in rates...
Speaker Change: It still doesn't make sense to do a repositioning and hard code losses on a portion of that portfolio.
and the long-term...
Speaker Change: The best long-term economic outcome is to stay the course and let those things reprice and amortize down and if we get a decline in rates that's meaningful enough
Speaker Change: where the math on the hard-coding the loss changes well then we'd reassess it at that time but Tori do you want to go in on some details? Yeah Matt I would just add on the multifamily division portfolio in particular we have somewhere between 40 and 50 million a quarter.
Speaker Change: that either amortizes out or runs out and leaves the company in 2024. 2025, it's kind of the same, roughly the same number. We have about 175 that's...
Thank you.
Speaker Change: fixed today that will roll over into floating and either it stays in the company and goes from, you know, 4% coupon to 7% or it exits the company and goes someplace else. So that's about $175 for 2025.
Speaker Change: We're, you know, we're not making obviously any new loans in multi-family division and we're just managing the portfolio from a credit quality perspective as best as we can.
Speaker Change: Great and then last one for me just on your expense guide for the year I think a billion to billion one I believe is what you mentioned.
Speaker Change: 1 to 1.01. Correct. Yeah, I just did the math, taken the 975 annualized starting point with a 3 to 3.5% expected inflation across
Speaker Change: various items between payroll taxes, merit, and or health insurance being bigger drivers of that inflation.
Speaker Change: Yeah, I would have loved to have left that hundred million dollar range in there, but Ron thought he should tighten it up a little bit. All right, never mind. I thought I was going to ask about what gets you to low and the high, but that's a tighter range than I expected. Thank you. You bet. Thank you.
Thank you. One moment for the next question.
Speaker Change: And our next question will be coming from the line of Anthony Illion of JP Morgan. Your line is open.
Speaker Change: Hi everyone. Ron, just following up on the expense guide of 1 to 1.01, should we think about that as 1Q sees a material bump up due to payroll and merit and what you mentioned, and then declines after 1 fourth quarter in 2025?
Speaker Change: There will be a bump in Q1 at least compared to Q4 just given we had non-recurring credits in Q4. The payroll tax is what you'll see in Q1 along with the group insurance.
Speaker Change: And then that payroll tax generally stays around that level into early Q2 and then starts to decline over the course of the year, you know, a couple million dollars between, you know, Q1, Q2 levels versus Q3, Q4 levels. Merit increase generally is going to be right around the end of Q1, so you'll see that Q2 forward.
Speaker Change: The other aspect that you'll see will be the timing of some of the reinvestments. In my prepared remarks, I mentioned we have
We have five retail branch locations that are...
Speaker Change: in some form of permitting construction ready to open. And so as we hire staff for those locations...
Speaker Change: And then also we continue to attract some really talented bankers on the commercial side.
Speaker Change: were being opportunistic in bringing those on board, and that was always part of our reinvestment plans as well. So I think you'll see a little bit of a build as we fully utilize that pool of $12 million that we set aside out of last year's expense initiative to reinvest in the company.
Speaker Change: Okay and then is the five branch build out and the hires and everything you just mentioned included in the expense range you provided?
Yes.
Speaker Change: Okay, and then my follow-up. You talked earlier in the prepared remarks about some investments you plan to make this year on real-time payments and data analytics to drive fee income higher. Could you just provide more color on on these and the revenue opportunity you see behind them? Thank you.
Speaker Change: You know, we've made investments into various products, some online banking for small business.
Speaker Change: some enhancement in some of the payment tools, automated payables and automated receivables.
Speaker Change: that we use through the Treasury Management Function for the various commercial and healthcare customers.
Speaker Change: to enhance and invest where we feel appropriate for our customer base.
and, you know...
Speaker Change: and the momentum within the company, whether it's on the consumer, small business side or in the commercial side. So all of these pieces are adding up to a very, very nice pipeline on the fee income side.
Speaker Change: And I'll just, I'll add some of it is, we're not going to get into specifics because we have a lot of various people that dial into these calls and would love to have our playbook, and we're not going to give that out but
but we do listen to our customers.
Speaker Change: And sometimes it's a matter of what one customer needs. We spend some time and we work through it, we develop it.
Speaker Change: and then we figure out how do we monetize it and create recurring revenue streams out of it. And so it's those types of things and we've got several examples of things that we did.
Speaker Change: in 2024, and that's where it gives us the optimism that we're going to be able to convert that into broad-based fee opportunities for existing and new customers.
Thank you.
Thank you.
Thank you. One moment for the next question.
Speaker Change: And our next question will be coming from the line of Sandra Varga of UBS. Your line is open.
Sandra Varga: Good afternoon. I just want to go back to the margin for one more question. You touched on the C&I growth that you expect. Can you give some colors around the new originations in those lines of business?
David Feaster, Timur Braziler
The End
Tori: This is Tori. I don't have new origination. I don't really look at it that way for this call. It's really just on the growth side. And I think we talked about
Tori: Low single digit for the entire balance sheet and low to mid single digit on the C&I front throughout the course of the year.
Speaker Change: Good, steady, solid C&I growth expected for the company that will be a part of full banking relationship so the emphasis on that of you know, really core low-cost deposit growth and fee income growth as
combined with the loan partner.
Speaker Change: The one thing I'll add is, you know, we do track, we call it our wins and losses.
Speaker Change: And what we've seen, I think the number was approaching a quarter billion dollars of things that we stepped back from.
Speaker Change: deal that we elected not to match because it just didn't make sense. But you know different people are focused on different things these days as we go forward and I think that's the real key.
We're maintaining our discipline.
and we're seeing great origination volumes.
Speaker Change: We're seeing solid pipelines, as Tori talked about, but we're also still stepping away from what could look like meaningful growth, but would be either sub-earning and or not necessarily hold up to our credit underwriting guidelines.
Speaker Change: Understood. Thanks for that, Collar. And then just on credit, a real quick question. Looks like the allowance ratio for the commercial loans, the C&I part, moved up a little bit, whereas CRE moved down a tiny bit. Were there any sort of key drivers there? Nothing significant to call out, just normal fluctuations.
portfolio and or economic assumptions.
Anderson, thanks for taking my questions. Yeah, thank you.
Thank you. One moment for the next question.
Speaker Change: Our next question will be coming from the line of Jared Shaw of Barclays. Your line is open.
Hi, this is John Rowe. I'm for Jared.
Thank you.
Most of my questions have been answered, but...
Speaker Change: Just going back to the margin, understand there's some pressure in the first quarter, but
Speaker Change: Do we get back to that fourth quarter level by the end of 2025? It's just assuming that that low single-digit loan growth is funded by core customer deposits.
Clint Stein: Hey John, this is Clint. I'll start, then I'm going to kick it over to Ron for the details. You know, what we started talking about mid-year last year was that it felt like the NIM was bouncing along the bottom.
and I'll say we've bounced off the bottom.
Clint Stein: But it's still going to bounce and as Ron mentioned, you know, the seasonal deposit flows
Clint Stein: play the biggest role in how big that bounce is, or how far it goes back down before it bounces back up. And so our thoughts are still around that. We're encouraged by the fact that 2024, for the year it looked like, the seasonal, historical seasonal pre-COVID patterns that
Clint Stein: played back out throughout the entirety of the year. So we feel much better from that standpoint that we're going to be able to forecast these flows.
Clint Stein: But I'll step back and let Ron talk about the details as to what that may look like.
Clint Stein: as we get into the later half of the year. Yeah, and I talked a lot about just seasonal flows over the year. So, we fully expect customer deposit growth over the course of the year. A lot goes into where that NIM ends up, but if we do see that, which we expect,
Clint Stein: Over and above the net loan growth, we'll use those additional funds to de-lever the wholesale, which should respond favorably from that standpoint.
Clint Stein: I don't have a specific number for you other than to say it's not out of the realm of possibilities that we would see an increase. Again, that would be based off the number of deposit flows with our customers, much more so than if there's one, two, or three fed rate cuts.
Speaker Change: Okay, thanks, that makes a lot of sense. And then this last one for me, in the loan growth guide, is there any assumption for pickup in line utilization? It looks like commercial utilization rates picked up slightly over third quarter.
Let's find that.
Yeah, this is, this is Tory.
Speaker Change: Not not much. It's been relatively flat over the course of the
Speaker Change: Q3-24 to Q4-24, it's basically flat, so it's about 37.5% on the commercial side. So relatively low, but it's been that way.
Speaker Change: You know plus or minus one or two percent for quite a while
Thank you for watching!
Thank you. One moment for the next question.
Speaker Change: As a reminder, if you would like to ask a question, please press star 1-1 on your telephone.
Speaker Change: And our next question will be coming from the line of Chris McGrady.
of KBW. Your line is open.
Chris McGrady: Thanks. Just a quick one on the balance sheet optimization slide. I think I've asked in the past. Any updated thoughts here? Apologize if I missed any comments there.
Yeah. Hey, Chris.
Chris: Yeah, we did, we did talk a little bit about that earlier in the call. You know, it's our thoughts haven't changed. You know, it's still our focus is, is committed on long term on
full relationships and these portfolios we flagged
Chris: It's a pretty long run back, and so we think that still the best course of action is to
Chris: Keep our eye on them, watch rates, you know, test, get an understanding of kind of where market might be for portions of the portfolio from time to time. And then, you know, either wait for them to reprice and we have
Chris: Some repricing, modest repricing in 2025, a little bit more in 26, and then as we get into 27 through 29, there's pretty significant repricing of those portfolios.
Chris: but right now it's just let it amortize out and stay close to what market values are on them.
and the next episode.
Great. Thanks a lot.
You bet.
Thank you. Thank you.
Jacqueline Bohlen: Thank you. That does conclude today's Q&A portion. I would like to go ahead and turn the call back over to Jackie for closing remarks.
Thank you, Lisa.
Jacqueline Bohlen: Thank you for joining this afternoon's call. Please contact me if you have any questions and have a good rest of your day.
Thank you.