Andrew Terrell

Andrew Terrell sought clarification on the $385 million fixed cash flows, confirming it was a quarterly figure. He also asked about spread competition for new assets, the marginal pickup expected from securities cash flow versus loan repricing, and the anticipated quarterly trajectory of the 3%-4% full-year loan growth guide, particularly regarding potential lower growth in the first half.

Answer

James Moses, Vice Chair and CFO, First Hawaiian Bank, confirmed the $385 million fixed cash flow was for the fourth quarter. He noted spread competition, estimating 180-200 basis points pickup on securities ($600 million for next year) and 80-100 basis points on loans ($1 billion on loan portfolio). Robert Harrison, Chairman, President, and CEO, First Hawaiian Bank, clarified that the loan growth outlook anticipates normal payoff activity and fewer new loans funding from 1.5-2 years ago in the first half, leading to lower growth in H1 and a pickup in H2.

Andrew Terrell sought clarification on the $385 million fixed cash flows, confirming it was a quarterly figure. He then asked about spread competition for new assets, the marginal pickup expected from securities cash flow versus loan runoff, and how new loan growth is repriced given current market competition. He also inquired about the expected trajectory of the 3-4% full-year loan growth guide, specifically if it would start lower in the first half and pick up later in the year.

Answer

Vice Chair and CFO James Moses confirmed the $385 million was a Q4 figure. He acknowledged spread competition but estimated a 180-200 basis point pickup on the securities portfolio ($600 million for the next year) and 80-100 basis points on the loan portfolio ($1 billion). Chairman, President, and CEO Robert Harrison agreed that loan growth is likely to be lower in the first half of the year, picking up in the second half as new production from the multifamily portfolio begins to fund more significantly.

Andrew Terrell from Stephens Inc. asked about the bank's perspective on M&A given its strong capital position, the factors that impacted loan yields and the net interest margin in Q2, and for clarification on the core run-rate for fee income.

Answer

CEO Robert Harrison stated that while the bank is always open to considering M&A, there are no current plans, and capital is being preserved for organic loan growth. CFO James Moses explained that a loan mix shift, with higher-yielding construction loans paying off, temporarily muted loan yield improvement but the outlook for NIM expansion remains positive. Moses also clarified that core noninterest income is expected to be around $51 million per quarter, with Q2 benefiting from some minor, non-recurring market-related items.

Andrew Terrell requested the spot deposit cost at the end of the quarter and the net interest margin for the month of March. He also asked about the company's strategy and expectations for its share buyback program, particularly given recent market volatility.

Answer

CFO James Moses provided the figures: a 1.41% spot deposit cost and a 3.10% NIM for March. He clarified that the Q2 NIM guidance of 3.10% already incorporates a forecasted June rate cut. Regarding the buyback, Moses stated the approach is to be programmatic, targeting around $25 million per quarter, rather than attempting to time the market, although accelerating repurchases remains a possibility.

Andrew Terrell from Stephens inquired about the bank's appetite for further securities portfolio restructuring compared to share buybacks and asked for more detail on the timing of expected loan payoffs.

Answer

CFO Jamie Moses indicated that while further repositioning is always a consideration, it's unlikely in the short term and is evaluated differently than buybacks. CEO Bob Harrison clarified that loan payoff pressure, particularly from construction loans, is expected to be more concentrated in the first half of 2025, suggesting loan growth would likely be stronger in the back half of the year.

Andrew Terrell from Stephens asked about the impact of interest reversal from non-accrual migration on Q4 loan yields, Avidbank's near-term net interest margin expectations after normalizing for this impact, and the bank's initial outlook on loan and deposit pipelines and overall growth targets for 2026.

Answer

Chairman and CEO Mark Mordell confirmed that a $726,000 interest reversal from three non-accrual loans impacted the Q4 margin by 12 basis points, suggesting it would have been closer to 4.25% otherwise. He outlined margin headwinds, including potentially higher rates for new deposits and $254 million in loans at floors, with 60% maturing in 2026. Mordell expressed optimism for 2026, targeting double-digit loan and deposit growth (10-15% asset growth) driven by strong pipelines across divisions, despite historical Q1 softness and portfolio churn.

Andrew Terrell asked if interest reversal headwinds impacted Q4 loan yields due to non-accrual migration, sought clarity on near-term margin expectations, and inquired about initial thoughts on loan and deposit pipelines and growth expectations for 2026.

Answer

Mark Mordell (Chairman and CEO) and Patrick Oakes (CFO) confirmed a $726,000 interest reversal impacted the margin by 12 basis points, suggesting it would have been closer to 4.25% otherwise. Patrick Oakes outlined margin headwinds, including higher rates on new deposits and maturing loan floors in 2026, aiming for around 4.25% or slightly higher but not significant increases. Mark Mordell indicated good momentum and pipelines across divisions, targeting double-digit loan and deposit growth (10-15% asset growth) for 2026, despite typical Q1 softness.

Andrew Terrell asked about Avidbank Holdings Inc.'s fully loaded net interest margin (NIM) post-securities restructuring and high-cost funding paydown, seeking insight into its Q4 2025 trend and potential to exceed 4%. He also inquired about the bank's asset sensitivity given potential rate cuts and the sustainability of a 4%+ margin, as well as how the percentage of floating-rate loans at floor rates would increase with further rate reductions.

Answer

CEO Mark Mordell indicated that the core margin, excluding IPO-related activities, was estimated at $3.70, and with the full impact of the bond portfolio restructuring, it should be well over 4%, potentially $4.10 plus. He confirmed increased asset sensitivity due to cash holdings and DDA balances, noting that a 100 basis point rate drop would lead to a manageable 4% net interest income decline, suggesting the margin would remain at a good, reasonable level. Mordell explained that an additional 25 basis point rate cut would bring another $40 million in loans to their floors, and a further 25 basis points would impact close to $100 million, acknowledging that while floors help, the benefit might not be one-to-one as rates decrease further.

Andrew Terrell with Stephens inquired about Avidbank Holdings, Inc.'s fully loaded net interest margin post-securities restructuring and high-cost funding paydown, seeking insight into its Q4 2025 trend and potential to exceed 4%. He also asked about the bank's increased asset sensitivity following the restructure, the achievability of a 4%+ margin amidst anticipated rate cuts, and the impact of further rate reductions on the materiality of loan floors.

Answer

CEO and Chairman Mark Mordell indicated that the net interest margin is expected to rise well above 4%, potentially reaching $4.10 or higher, after accounting for IPO-related activities and the bond portfolio restructuring. He confirmed increased asset sensitivity, attributing it to cash holdings and DDA, and stated that a 100 basis point rate drop would result in an approximate 4% decrease in net interest income, which is deemed manageable, with the margin expected to remain robust. Regarding loan floors, Mr. Mordell detailed that an additional 25 basis point rate cut would cause $40 million more in loans to hit floors, potentially reaching $100 million with further reductions, though he cautioned that the benefit might not be a direct one-to-one correlation as rates decline.

Andrew Terrell inquired whether the anticipated $10 million watchlist loan migration in Q1 2026 would require incremental provision expense or if it was covered by the Q4 SBA cleanup. He also asked about the outlook for overall net balance sheet growth, specifically if the SBA book would stabilize or decline, and sought clarification on the profitability of the credit-enhanced business given the increase in related expenses. Finally, he asked about the pace of core expense growth, excluding guarantee and servicing expenses.

Answer

Bank CEO Jim Noone explained that credit trends are stable, and the Q4 increase in NCOs was due to a proactive change in servicing procedures for stressed borrowers, which is not expected to recur at that level. He reiterated that the $10 million migration is lumpy and doesn't necessarily translate to actual NPLs. CFO Bob Wahlman stated that the net balance sheet is expected to grow, with SBA loan sales roughly equaling originations, leading to a stable SBA level, and most growth coming from the credit-enhanced portfolio. Bob Wahlman clarified that the profitability of the credit-enhanced portfolio remained constant, and the primary drag in Q4 was the $1.5 million charge to the core portfolio provision. For core expenses, Bob Wahlman suggested $16 million as a quarterly run rate for 2026, expecting revenues to grow approximately twice as fast as expenses.

Andrew Terrell asked about the provision expense implications for the $10 million in watch list loans potentially migrating to nonperforming status in Q1 2026, the outlook for overall net balance sheet growth, the profitability of the credit-enhanced business relative to net interest income and expenses, and the expected pace of core operating expense growth.

Answer

Jim Noone, Bank CEO, clarified that the $10 million NPL migration is lumpy and the $3.5 million NCO estimate for non-credit enhanced loans is appropriate, viewing the Q4 increase as a one-time event. Bob Wahlman, CFO, stated that the net balance sheet will continue to grow, with SBA levels remaining flat and most growth from the credit-enhanced portfolio. Bob Wahlman also confirmed consistent profitability from the credit-enhanced portfolio and provided a $16 million quarterly run rate for non-credit enhanced operating expenses, projecting positive operating leverage.

Andrew Terrell from Stephens Inc. asked about the potential pace of credit enhanced loan additions, the sustainability of current average held-for-sale balances, the rationale behind the 2027 ROA and ROE targets given current performance, and the expense outlook for the second half of the year.

Answer

Bank CEO James Noone confirmed the $50-$100 million year-end target for credit enhanced loans is appropriate for modeling. CFO Robert Wahlman stated the current average held-for-sale balance is a fair representation for future quarters and that the 2027 targets are based on a fully leveraged balance sheet at target capital levels, acknowledging potential for upside. He also noted no significant new investments are planned and expects continued positive operating leverage.

Andrew Terrell asked for details on the Net Interest Margin (NIM), specifically the drivers of the decline in held-for-sale (HFS) yields and their expected recovery. He also questioned the source of the strong commercial real estate (CRE) growth, its yield relative to credit-enhanced loans, and the company's capital goals and willingness to increase leverage.

Answer

CFO Robert Wahlman explained that the seasonal drop in high-yield HFS originations should largely reverse in Q2 and Q3. He attributed other NIM pressures to the repricing of variable-rate SBA loans and the addition of lower-yielding CRE and extended HFS loans. Bank CEO James Noone clarified the CRE growth is in low-risk, owner-occupied properties sourced via Business Lending Group (BFG). Wahlman estimated owner-occupied CRE yields are about 300-350 bps below credit-enhanced loans and reiterated a capital floor of around a 14% leverage ratio, which provides significant room for growth.

Andrew Terrell of Stephens Inc. asked about the net yield difference between credit enhanced loans and SBA loans, the timing of the Q4 brokered CD changes, and whether the 2-3 new partner target for 2025 includes BIN/payments programs. He also inquired about the onboarding time for mature fintechs, the drivers of the Q1 NPL forecast, and the company's comfort level with a lower capital ratio.

Answer

CFO Bob Wahlman stated that the net yields on credit enhanced and SBA loans are 'relatively similar' due to comparable low-risk profiles and that the full benefit of the Q4 CD actions will be seen in Q1. President Jim Noone clarified that the 2-3 partner target is for lending programs and that card/payment programs are additive. He also detailed the NPL forecast drivers. Finally, Mr. Wahlman confirmed the company is comfortable with the leverage ratio declining into the 'mid-teens level' as the balance sheet grows with low-risk assets.

Andrew Terrell asked for more detail on the timing of refinancing the remaining callable CDs. He also questioned the significant increase in average Held-for-Sale (HFS) loan balances, the persistent negative fair value adjustment on the BFG investment, and the potential for flat expense growth in Q4.

Answer

CEO Kent Landvatter indicated the remaining ~$80 million in currently callable CDs would likely be refinanced in two tranches in November and December. President Jim Noone clarified that the higher Held-for-Sale loan balance was tied to strong Q3 originations and will likely moderate in Q4. CFO Robert Wahlman attributed the negative BFG investment valuation to a slow SBA market but expects a turnaround as activity picks up. Finally, President Jim Noone stated that while expense growth is decelerating, modeling flat expenses for Q4 would be too aggressive.

Andrew Terrell followed up on criticized loans, questioning the 'refill' in the bucket despite payoffs and whether all issues have been worked through. He also sought to understand the basis for optimism regarding back-half loan production and net growth, given earlier comments on competition and slower production, and confirmed details of the expense guidance.

Answer

CEO James Reuter clarified that loans move from watch to criticized, and while there's movement, the overall trajectory is positive due to their proactive approach and a robust loan committee process. He attributed his confidence in back-half loan growth to the banking reorg and recalibration efforts in 2025, which position the company to 'go on the offense,' emphasizing disciplined, profitable credit growth despite competition. CFO David Della Camera confirmed that the expense guide of $630-$645 million for the year is an all-in figure, incorporating all actions from sold or closed branches, net of reinvestment, and assumes the Nebraska branch transaction closes early in Q2.

Andrew Terrell followed up on criticized loans, questioning the 'refill' in the bucket despite payoffs and asking if the company has worked through all issues. He also sought clarification on the optimism for back-half loan production growth, given ongoing competition and slower-than-expected production. Finally, he confirmed the all-in nature of the expense guidance for 2026.

Answer

CEO James Reuter clarified that criticized loans fluctuate as loans move from watch to criticized, emphasizing the proactive credit management approach that leads to good outcomes and a positive overall trajectory. He expressed confidence in back-half loan growth driven by the banking organization redesign, recalibration efforts in 2025, and a disciplined approach to profitable credits despite market competition. CFO David Della Camera confirmed that the 2026 expense guidance of $630-$645 million is all-inclusive, factoring in actions from sold/closed branches and reinvestment, assuming the Nebraska branch transaction closes early in Q2.

Andrew Terrell from Stephens Inc. asked for more detail on the significant increase in special mention loans, clarification on near-term expense guidance, the expected cost savings from the branch divestiture, and whether the 2026 NII growth forecast includes the impact of that transaction.

Answer

President & CEO James Reuter explained the increase in criticized loans was primarily driven by new information on multifamily projects where lease-up timelines are slower than originally underwritten, though he remains confident in the collateral and guarantors. EVP & CFO David Della Camera clarified that Q3 and Q4 expenses are expected to be higher than Q2 due to timing on items like medical insurance and tech spend. He confirmed the current guidance does not include savings from future branch consolidations and that the 2026 NII guidance excludes the branch divestiture, which is not expected to materially alter the outlook.

Andrew Terrell from Stephens Inc. followed up on the branch sale, asking for the targeted efficiency ratio of the divested branches. He also inquired about capital deployment, specifically if securities portfolio repositioning is being considered and the potential timing of such actions. On credit, he questioned why charge-off guidance remains unchanged despite the increase in nonperforming loans and asked for the dollar impact of NPL interest reversals on the first-quarter margin.

Answer

Deputy CFO David Della Camera declined to provide a specific efficiency ratio for the branch sale, reiterating that noninterest expense was in the 'mid-2s' as a percentage of deposits. CEO James Reuter confirmed that securities repositioning is an option considered alongside dividends and buybacks, but stated deployment decisions are made quarter-by-quarter. Reuter defended the charge-off guidance by pointing to the quality of collateral and guarantors. Della Camera quantified the NPL interest reversal impact as 'a little over $1 million' for the quarter.

Andrew Terrell sought to clarify the 'modest loan growth' guidance for 2025, asking if 'flattish' was a fair assumption after accounting for the indirect auto portfolio runoff. He also asked about the yield on the indirect portfolio, associated cost savings, deposit beta assumptions in a declining rate environment, and whether a recent nonaccrual interest recovery was elevated.

Answer

Deputy CFO David Redmon confirmed that 'flattish' overall loan growth for the year is the correct interpretation. CEO Jim Reuter noted the indirect portfolio has a mid-6% yield and that all impacts are in the guidance. Mr. Reuter also explained the deposit beta is expected to be in the high-30s, and the $1.8 million nonaccrual interest recovery was an elevated level not typically factored into forecasts.

Andrew Terrell of Stephens Inc. asked for the size of the agricultural credit nearing resolution, its impact on Q4 charge-off guidance, the strategy for $1.7 billion in borrowings repricing in Q1 2025, and the dynamics of the Q3 swap termination.

Answer

CFO Marcy Mutch confirmed the agricultural loan is approximately $20 million and its potential resolution is factored into the Q4 charge-off guidance. CEO Kevin Riley added that a significant loss is not expected on that credit. Regarding borrowings, Mutch emphasized maintaining flexibility as the repricing date approaches. She explained the $550 million swap termination was a proactive measure to reduce liability sensitivity heading into 2025.

Andrew Terrell sought clarification on National Bank Holdings Corporation's (NBH) December 2025 net interest margin, specifically whether the 3.97% figure represented a spot rate or the full month average. He also inquired about the spot or interest-bearing deposit costs at the end of December. Terrell then asked for an update on the 2UniFi partnership, questioning the perceived delay since October and the factors contributing to it. Finally, he asked about any 2UniFi revenue realized in Q4 2025 and the company's current appetite for share buybacks.

Answer

Nicole Van Denabeele, Chief Financial Officer, confirmed that the 3.97% margin was for the full month of December 2025. Aldis Berkans, President, stated that NBH's spot deposit cost at the end of December was 1.82%, with the spot margin around 4% after accounting for deposit bleed-through. Tim Laney, Chairman and CEO, addressed the 2UniFi partnership delay, acknowledging that his previous optimism might have been premature due to differing needs and expectations between parties, but reiterated an intense focus on securing the right partnership to potentially move expenses off the income statement. Ms. Van Denabeele noted that 2UniFi generated some revenue in Q4 2025, but it was not meaningful. Mr. Laney affirmed a strong interest in share buybacks, highlighting the recently announced $100 million authorization as a priority.

Andrew Terrell sought clarification on the December net interest margin, asking if the 3.97% figure was a spot rate or for the full month. He also inquired about the spot or interest-bearing deposit costs at the end of December. Terrell then asked for an update on the 2UniFi partnership, specifically what might be causing any delays given previous optimism. Lastly, he asked about 2UniFi revenue in Q4 and the bank's appetite for share buybacks.

Answer

Nicole Van Denabeele, CFO, confirmed that the 3.97% margin was for the full month of December. Aldis Birkans, President, stated that the spot deposit cost for NBH at the end of December was 1.82%. Tim Laney, Chairman and CEO, addressed the 2UniFi partnership, acknowledging that previous optimism might have been premature due to differing party expectations, but reiterated an intense focus on securing the right partnership. Nicole Van Denabeele confirmed some 2UniFi revenue in Q4, though not meaningful. Tim Laney expressed strong interest in share buybacks, noting a recently announced $100 million authorization as a priority.

Andrew Terrell asked about National Bank Holdings Corporation's 2UniFi initiative, specifically how long it might take to generate positive operating leverage and the near-to-medium-term visibility for this. He also inquired about the specific areas (geographically or by product type) where the company is experiencing competition from private credit lenders. Lastly, he asked about future capital deployment plans, including further stock buybacks, given the strong capital position and interest in M&A.

Answer

Tim Laney, Chairman and CEO, reiterated that detailed 2UniFi guidance, including operating leverage, would be provided during the Q4 earnings call, citing ongoing partnership discussions. He specified that private credit competition is primarily observed in the commercial real estate sectors. Aldis Birkans, President, confirmed the repurchase of $8.9 million in shares during the quarter, with $35 million-$36 million remaining authorization. He emphasized the 12% annualized tangible book value growth and strong excess capital, indicating an opportunistic approach to capital deployment in light of potential M&A.

Andrew Terrell asked about the company's capital deployment strategy, specifically if there is interest in further stock buybacks given the strong capital position and M&A interests.

Answer

Aldis Birkans, President, confirmed that the company repurchased $8 million in shares during the quarter and still has $35 million to $36 million remaining under its authorization. He stated that the company will be opportunistic with buybacks, considering ongoing M&A discussions, and highlighted the 12% annualized tangible book value growth and strong excess capital levels.

Andrew Terrell of Stephens Inc. questioned if the quarterly deposit decline was linked to the loan portfolio derisking and asked about funding expectations for the second half of the year. He also requested more color on the recent expense reduction initiatives.

Answer

President Aldis Birkans confirmed the deposit decline was tied to exiting full client relationships as part of the credit derisking. He noted the bank's low deposit beta of ~30% and expects to grow deposits in the second half of the year. EVP & CFO Nicole Van Denabeele explained the expense reduction was a proactive, bank-wide effort involving position eliminations and a heavy focus on process streamlining and automation.

Andrew Terrell of Stephens Inc. questioned the drivers behind the sequential decline in deposits, asking if it was connected to the derisking in the loan portfolio. He also asked about expectations for core funding in the second half of the year. Furthermore, he requested more color on the recent expense reduction plan, particularly regarding which areas of the bank were most affected.

Answer

Chairman & CEO, Timothy Laney, and President, Aldis Birkans, confirmed the deposit decline was directly tied to the strategic credit derisking, as the bank moved entire client relationships. Mr. Birkans added that they expect to grow deposits in the second half of the year. EVP & CFO, Nicole Van Denabeele, explained that the expense reduction was a bank-wide effort that involved eliminating positions and streamlining processes through automation to proactively manage costs amid economic uncertainty.

Andrew Terrell of Stephens Inc. asked about the sequential decline in deposits, questioning if it was connected to the derisking in the loan portfolio and how the bank plans to fund expected loan growth. He also requested more detail on the second-quarter expense reduction plan.

Answer

Chairman & CEO Timothy Laney confirmed the deposit decline was linked to moving entire client relationships as part of the credit derisking. President Aldis Birkans added that the bank avoids buying expensive deposits and expects to grow deposits alongside loans in the second half of the year. EVP & CFO Nicole Van Denabeele explained the expense reduction was a proactive, bank-wide effort that eliminated positions and streamlined processes through automation.

Andrew Terrell asked for clarification on what management's 'risk-off posture' entails, requested the dollar amount of the Q1 payroll tax credit, and inquired about the relative interest in M&A versus share repurchases.

Answer

President Aldis Birkans and CEO Tim Laney explained that a 'risk-off' posture involves adding more rigor and scrutiny to underwriting new clients in the current environment. CFO Nicole Van Denabeele specified the payroll tax credit was $2 million. Tim Laney added that repurchasing the company's own shares is currently the most attractive use of capital, viewing the M&A market as difficult.

Andrew Terrell asked about the drivers of the strong originated loan yield this quarter, client reactions to proactive deposit rate cuts, and the repricing mechanics of Cambr-sourced deposits.

Answer

CFO Nicole Van Denabeele attributed the strong loan yields to pricing discipline, noting an 8.5% weighted average rate on new fundings, which President Aldis Birkans confirmed had no one-off items. Chairman and CEO Tim Laney stated there has been 'very little pushback' from clients on lower deposit rates. Birkans clarified that Cambr deposits are 'managed rate' deposits, not contractually tied to an index, and are part of the same proactive rate management strategy.

Andrew Terrell asked Heather Luck about the expected expense run rate for the first quarter of 2026 and the full year, specifically whether expense growth would moderate or remain elevated due to continued hiring and investments. He also questioned James Beckwith on competitive dynamics in loan rate competition, current origination yields, and the impact on spreads, particularly given the bank's repricing story. Finally, Terrell inquired about the bank's comfort level with its current capital position, specifically the CET1 ratio, and the outlook for funding future growth organically versus potential capital events.

Answer

Heather Luck, EVP and CFO, projected a Q1 2026 expense increase of about $300,000 and a full-year expense-to-average-assets target range of 1.48%-1.55% for 2026. James Beckwith, President and CEO, noted that while MHC and RV efforts allow for normal spreads (275-350 over five years), owner-occupied real estate and operating lines are highly competitive, with spreads as low as 200-205 over prime. He discussed upcoming 5-year resets from 2021 originations (four-handle rates) and the expectation of losing some loans to agency financing. Regarding capital, Beckwith stated that 10% growth is sustainable with current profitability, but 15% growth would necessitate a capital event in 2027 or 2028.

Andrew Terrell inquired about the expected expense run rate for the first quarter of 2026 and the outlook for overall expense growth throughout 2026, asking if it would moderate or remain elevated due to continued hiring and investments. He also sought clarification on competitive dynamics regarding loan rates, the yield on new originations, and the impact of competition on spreads, particularly in light of upcoming loan repricings. Finally, Mr. Terrell asked about the bank's comfort level with its current capital position (CT1 around 10.5-10.6%) and the ability of organic earnings to fund a 10% growth rate, along with broader capital expectations.

Answer

Heather Luck, EVP and CFO of Five Star Bancorp, projected a Q1 2026 expense increase of approximately $300,000 due to new hires. For the full year 2026, she targeted an expense-to-average-assets ratio between 148% and 155%, noting the bank ended 2025 at 150%. James Beckwith, President and CEO, added that this ratio is a constant guide. On loan rates, Mr. Beckwith confirmed a highly competitive environment across all regions, pressuring spreads. He noted that the bank's MHC and RB efforts offer a competitive advantage with normal spreads (275-350 over five years), but other loan types can see spreads as low as 200-205 over, or prime/prime minus a quarter. He also discussed significant loan refinancings in 2026 from 2021 originations (4-handle interest rates), anticipating many clients will seek agency loans, impacting retention. Regarding capital, Mr. Beckwith stated that while 2025's strong growth led to a decline in ratios, they expect to maintain capital positions with 10% growth in 2026, funded by profitability. Ms. Luck confirmed that 10% growth is sustainable through self-generation, even with the elevated dividend, but 15%-20% growth would accelerate capital needs, likely requiring a capital event in 2027 or 2028.

Jackson Laurent, on behalf of Andrew Terrell from Stephens Inc., asked for an update on the full-year loan growth guidance of 10-12% following the strong quarter and requested more details on the new food and agribusiness vertical, including its team and growth potential.

Answer

President and CEO James Beckwith confirmed that despite strong performance, the company is maintaining its 10-12% full-year growth guidance, factoring in potential payoffs of large construction loans. He described the new food and agribusiness vertical, led by Cliff Cooper, as a strategic initiative to target large, middle-market C&I credits (processors) on the West Coast, a market he views as underserved. Beckwith highlighted that this expansion offers a significant opportunity and could help balance the bank's loan portfolio by reducing CRE concentration over the long term.

Andrew Terrell asked about Five Star Bancorp's loan growth outlook for 2025, the strategy behind taking on higher-cost wholesale funding despite strong deposit growth, and the expected performance of the RV and manufactured housing portfolio amid potential tariff impacts and economic slowdowns.

Answer

James Beckwith, an executive, stated that the loan growth outlook has become more bullish, now projected at 10-12% for the year, driven by an aggressive sales force. He explained that wholesale funding is a short-term tactic for liquidity and to capitalize on falling rates, with the goal for core deposit growth to match loan growth. Executive Vice President & CFO Heather Luck added that wholesale maturities are kept short to lower costs as they roll over. Regarding credit risk, Beckwith expressed confidence in the RV and mobile home park portfolio, citing its resilience during the last recession, and emphasized the bank's primary focus is on commercial real estate.

Andrew Terrell inquired about potential seasonal impacts on Q4 non-wholesale deposit flows, whether the 8% growth target for 2025 implies wholesale deposit runoff, plans for BHG consumer loan purchases, and the expense growth outlook.

Answer

CEO James Beckwith explained that Q4 non-wholesale deposit flows were impacted by seasonal customer distributions for year-end bonuses, totaling over $50 million in the last two weeks of December. He clarified that the bank plans to maintain its current wholesale deposit book and its BHG consumer loan portfolio at around $300 million, meaning the 8% growth target applies to organic growth. CFO Heather Luck advised using Q4's expense level as a baseline for the first half of 2025, while Beckwith noted they remain opportunistic about hiring talent, which could affect future spending.

Andrew Terrell followed up on the net interest margin, asking for the cost of new CDs and the yield on purchased loans to understand the net spread. He also questioned the liquidity of the purchased loan portfolio and whether it could be sold if core loan growth accelerates. Finally, he asked about the talent acquisition environment and hiring pipeline in the Bay Area.

Answer

CFO Heather Luck stated that $275 million of brokered deposits at a 5.01% weighted average rate would reprice in December. Executive James Beckwith added that the purchased loans yielded a fixed 8.11%, implying the margin spread will widen as funding costs fall. Regarding liquidity, Beckwith expressed confidence that the Bankers Health Group (BHG) loans could be sold through their network if necessary, though the bank has never done so. He also noted the loans have a relatively short average life of 4-5 years. On hiring, Beckwith described the bank as a recognizable entity in the Bay Area, attracting high-quality talent and maintaining a strong hiring pipeline.

Andrew Terrell asked about Western Alliance's 2026 balance sheet growth guidance, questioning why loan and deposit growth projections weren't higher given positive momentum, and inquired about the expected timing and magnitude of charge-offs, particularly if they would be front-half loaded above the full-year guided range.

Answer

Ken Vecchione, President and CEO, explained that the projected loan and deposit growth leads the peer group, is entirely organic, and reflects a de-emphasis on residential loan growth. He noted they would adjust projections if they prove conservative. Regarding charge-offs, Mr. Vecchione advised modeling at the 30 basis point midpoint, with potential for higher levels in the first half as the bank proactively resolves non-accrual loans, aiming for a significant reduction by the end of Q2.

Andrew Terrell asked about Western Alliance's 2026 balance sheet growth guidance, specifically why loan growth of $6 billion and deposit growth of $8 billion were not higher given positive momentum, and if the guidance was conservative. He also inquired about the timing and magnitude of charge-offs, asking if first-half charge-offs could exceed the full-year guided range before normalizing.

Answer

President and CEO Ken Vecchione explained that the projected loan and deposit growth already leads the peer group and is entirely organic. He noted a de-emphasis on residential loan growth, which puts pressure on other areas. He also clarified that the $6 billion-$8 billion guidance is appropriate, with potential adjustments later in the year. Regarding charge-offs, Mr. Vecchione suggested modeling the midpoint of 30 basis points for the year, with the first half potentially seeing higher charge-offs as the bank proactively resolves non-accrual loans, aiming to reduce them significantly by the end of Q2.

Andrew Terrell asked about expectations for seasonal deposit flows in Q4, specifically the impact on ECR balances and how other verticals might offset this. He also questioned if direct securities and loan sales contributed to Q3 mortgage banking margin increases and if this is expected in Q4.

Answer

CFO Dale Gibbons explained that the Q3 ECR deposit growth was mortgage cycle-related, with payments expected in late November/December, leading to a Q4 drop. President and CEO Ken Vecchione stated that Q3 mortgage banking benefited from less volatility and holding securities longer to catch price rises, but this is not modeled for Q4, which is expected to see a seasonal decline.

Andrew Terrell inquired about Western Alliance Bancorporation's seasonal deposit flows, specifically the expected impact on ECR balances in Q4 and offsetting growth in other verticals.

Answer

CFO Dale Gibbons explained that the Q3 ECR deposit growth was largely mortgage cycle-related, with payments expected to reduce balances around November/December, stabilizing into 2026. For a follow-up on mortgage banking, President and CEO Ken Vecchione noted less volatility in Q3, which benefited revenue, and that the company held securities longer. He does not model similar benefits for Q4 due to seasonal volume declines (expected to be at the lower end of 6-10%) but expressed optimism for 2026 mortgage revenue. Dale Gibbons added that there were MSR dispositions but no significant gains.

Andrew Terrell asked about the potential for further OREO increases and requested an update on the occupancy of the San Diego property previously moved to OREO.

Answer

An unnamed executive stated they expect the OREO balance to be flat to declining, as dispositions should outpace any new additions from the known office loan portfolio. CEO Ken Vecchione reported that the San Diego property's occupancy has improved to 71%, citing this success as a key reason for their confidence in managing the newly acquired OREO properties.

Andrew Terrell of Stephens Inc. asked about traction in the Corporate Trust business following a recent Moody's rating upgrade and inquired about the weighted average yield on new loan production.

Answer

President and CEO Kenneth Vecchione and CFO Dale Gibbons confirmed the rating upgrade helps reinforce client confidence and highlighted strong deposit growth in Corporate Trust and other digital platforms. Vecchione also stated that new loan production yields were coming in 3 basis points lower than the book yield, but this was more than offset by a 29 basis point drop in deposit costs.

Andrew Terrell asked if a fair value mark on held-for-sale loans boosted Q4 gain on sale income, whether securities gains were assumed in 2025 guidance, and for an update on the bank's appetite for the cryptocurrency space.

Answer

Interim CEO Dale Gibbons and Chief Banking Officer Stephen Curley clarified that stronger gain on sale income was driven by selling bespoke loan pools at a premium, not a fair value mark. Gibbons confirmed no securities gains are assumed in 2025 guidance. Regarding crypto, he stated the bank is working compliantly with regulators, has about 2% of deposits from the space, and sees future opportunity.

Andrew Terrell inquired about the primary drivers of margin expansion for 2026, including the role of fixed asset repricing and potential securities restructuring, and the longevity of the fixed asset repricing benefit. He also asked for the total net interest income (NII) impact of swaps in Q4 and the bank's capital comfort level regarding increased share repurchases.

Answer

CFO Brad Satenberg confirmed that fixed asset repricing will continue to benefit NIM for at least a couple more years, alongside securities repositioning and rate cuts. He stated the total NII impact of swaps in Q4, including amortization of termination costs, was just over $1 million. Chairman and CEO Peter Ho indicated that with tepid loan growth, the bank plans to increase share repurchases from $5 million in Q4 to an anticipated $15 million-$20 million per quarter, viewing the current stock price favorably.

Andrew Terrell inquired about the primary drivers of net interest margin (NIM) expansion, including the role of fixed asset repricing and potential securities restructuring, and the longevity of these benefits beyond 2026. He also asked for the total net interest income impact of swaps in Q4 and the company's capital comfort level regarding increased share repurchases.

Answer

Chairman and CEO Peter Ho and CFO Brad Satenberg confirmed that fixed asset repricing would continue to benefit NIM for at least a couple more years, alongside rate cuts and deposit mix shifts. Brad Satenberg specified the total NII impact of swaps in Q4 was just over $1 million, including amortization of termination costs. Peter Ho stated that with tepid loan growth, the company plans to increase share repurchases to $15 million-$20 million per quarter, finding the current stock price attractive.

Andrew Terrell of Stephens Inc. sought confirmation on the full-year expense growth guidance of 2-3% and asked for an update on capital allocation priorities, including share buybacks and potential securities portfolio restructuring.

Answer

CFO Bradley Satenberg confirmed the 2-3% expense growth guidance remains appropriate, implying a lower run rate in the second half of the year. CEO Peter Ho stated that the bank is maintaining its hold on share buybacks pending greater economic clarity. He added that while no significant securities restructuring is planned, the bank remains open to opportunistic repositioning to enhance the balance sheet.

Andrew Terrell of Stephens Inc. sought to confirm the full-year expense growth guidance of 2% to 3%, noting it implies a decrease in the second half of the year. He also asked for an update on capital priorities, specifically regarding share buybacks and potential securities portfolio restructuring.

Answer

Vice Chair & CFO Bradley Satenberg confirmed the 2% to 3% expense growth guidance is intact and that expenses should decline from first-half levels. Chairman & CEO Peter Ho stated that the bank is maintaining its hold on share buybacks pending greater economic clarity. He added that any securities repositioning would be opportunistic and funded by non-recurring income, with no significant restructuring planned.

Andrew Terrell from Stephens inquired about the allocation of the remaining active interest rate swaps, whether the net interest margin could reach 2.5% by the end of 2025, the current offering rates for CDs, and the specific dollar amount of the Q4 medical costs.

Answer

CFO Dean Shigemura detailed the swap allocation as approximately $700 million against securities and $1.3 billion against loans. CEO Peter Ho described a 2.5% NIM as a "trend possibility" but contingent on several factors. Management noted current CD offering rates are around 3% but declined to give specific pricing. CFO Dean Shigemura stated the increase in medical costs was about $1.5 million.

Andrew Terrell followed up on Glacier Bancorp's margin, asking for confirmation of the $2 billion-plus repricing assets in 2026 and a comparable figure for 2027. He also inquired about the timing of the remaining FHLB paydown and the planned uses for the generated excess cash flow, specifically if it would be reinvested in the bond book or used for other high-cost funding reductions.

Answer

Byron Pollan, SVP and Treasurer, confirmed the $2.5 billion repricing estimate for 2027, comparable to 2026. He stated that the FHLB advances are expected to be fully paid off by mid-March in Q1 2026, funded by securities cash flow. Ron Copher, CFO, added that once the remaining $440 million in FHLB is paid off, there will be minimal wholesale funding left, and strategies for redeploying the building excess cash into the bond book or other uses are being considered for later in the year.

Andrew Terrell followed up on the full-year 2026 expense guidance, seeking clarification on the expected moderation after Q1. He also asked about new loan origination yields and spreads, competitive impacts, and the pace of earning asset yield expansion. Additionally, he inquired about the final day-one tangible dilution for the Guaranty acquisition.

Answer

Ron Copher, CFO, clarified the full-year core operating expense guide for 2026 as $750-$766 million, with Q2-Q4 ranging from $187-$192 million per quarter, emphasizing efficiency improvements. Tom Dolan, Chief Credit Administrator, noted new loan production spreads around 300 basis points over index, with yields over 6.8% in Q4, showing an upward trend. Randy Chesler, President and CEO, confirmed the tangible book value payback period for Guaranty Bank & Trust remains at six months, with no change to the initial dilution expectations.

Andrew Terrell of Stephens Inc. sought clarification on the expected moderation of non-interest expenses in 2026 following the Guaranty conversion and cost saves, the specific drivers behind the anticipated slower pace of margin expansion next year, and Glacier Bancorp's broader M&A strategy, particularly regarding emphasis on Texas versus the Mountain West.

Answer

CFO Ron Copher confirmed expense moderation post-conversion, with 50% of the modeled 20% cost reduction from Guaranty expected in 2026. Treasurer Byron Pollan attributed slower margin expansion to the conclusion of FHLB leverage benefits by Q1 2026 and a softer repricing lift due to the five-year curve. CEO Randy Chesler emphasized optionality across the entire footprint for M&A, not prioritizing Texas over the Mountain West, with the immediate focus on successful Guaranty integration.

Andrew Terrell from Stephens Inc. asked for an update on loan payoffs and whether a mid-single-digit organic growth rate is sustainable. He also inquired about the expected pace of FHLB borrowing reductions for the rest of 2025 and its impact on the balance sheet.

Answer

Chief Credit Officer Tom Dolan confirmed that while payoff pressure existed in Q2, a low to mid-single-digit growth rate for the full year remains a comfortable target. SVP & Treasurer Byron Pollan detailed the FHLB borrowing paydown schedule, with over $300 million maturing in Q3 and approximately $440 million in Q4, noting the company expects to pay down most of these maturities.

Andrew Terrell from Stephens Inc. asked about the outlook for loan payoffs, the achievability of mid-single-digit organic loan growth, and the expected pace of reducing Federal Home Loan Bank (FHLB) borrowings through the rest of 2025.

Answer

Chief Credit Officer Tom Dolan stated that while payoff pressure was present in Q2, he expects it to abate, making the low-to-mid single-digit organic growth target for the year achievable. SVP & Treasurer Byron Pollan detailed the FHLB paydown schedule, with over $300 million in maturities in Q3 and approximately $440 million in Q4, which the company expects to pay down, thereby reducing funding costs.

Andrew Terrell of Stephens Inc. asked for details on FHLB borrowings maturing in 2025, the outlook for the balance sheet size, the integration date for the Bank of Idaho acquisition, and whether M&A strategy changes for new market entries.

Answer

Treasurer Byron Pollan detailed the quarterly FHLB maturities totaling over $1 billion for the remainder of the year and stated the base case is to use cash flow to pay them down, keeping the organic balance sheet stable. Executive Randall Chesler provided a target conversion date of early September for the Bank of Idaho and explained that while their M&A target size remains $1B-$5B, they would prefer a larger deal to enter a new market with scale.

Andrew Terrell of Stephens Inc. requested details on expected securities portfolio cash flow in 2025 and its impact on margin progression. He also asked for clarification on loan repricing dynamics and inquired about noninterest-bearing deposit flow trends in early January.

Answer

Treasurer Byron Pollan detailed the securities cash flow, expecting $275 million in Q1 and significant treasury maturities in Q4 2025 and into 2026, supporting margin expansion. He clarified that $2 billion in repricing loans are expected to see yields lift by 100-125 basis points. He also noted that recent deposit flows were consistent with historical seasonal patterns.

Andrew Terrell from Stephens Inc. asked about the impact of interest recoveries on loan yields during the quarter, the level of competition for new loan growth, and the expected amortization amount for 2026.

Answer

CFO Heng Chen confirmed that interest recoveries contributed five basis points to the net interest margin (NIM) in Q4, a slight increase from four basis points in Q3. CEO Chang Liu discussed lending competition, noting strong residential mortgage growth with stable to improved rates, while CRE saw competition leading to a 15-20 basis point decline in portfolio rates. He highlighted the C&I segment as experiencing the most significant competition, resulting in steeper rate declines. Mr. Chen also stated that long-term housing amortization is expected to be approximately $11 million per quarter in 2026.

Andrew Terrell inquired about the loan yield performance, specifically if there was any elevated interest recovery contributing to the strong Q4 results. He also asked about competition on the lending side for incremental loan growth and the overall market status. Finally, he asked for the expected amortization amount for low-income housing in 2026.

Answer

Heng Chen, EVP and CFO, clarified that interest recoveries added 5 basis points to the Net Interest Margin (NIM) in Q4, similar to 4 basis points in Q3. Chang Liu, President and CEO, noted strong residential mortgage growth with stable rates, strong competition for the 'right type of assets' in CRE leading to a 15-20 basis point decline in portfolio rates, and the steepest competition and rate decline on the C&I side. Mr. Chen also stated that low-income housing amortization is expected to be about $11 million per quarter.

Andrew Terrell from Stephens Inc. asked about the updated loan growth guidance, wondering why the top end wasn't raised after a strong Q2. He also questioned the significant quarter-end increase in FHLB borrowings, seeking details on their terms, rate, and the strategy for maintaining them.

Answer

President & CEO Chang Liu stated that while the loan pipeline is strong, the company remains cautious about the broader economic landscape, including tariff and inflation uncertainty, leading them to maintain the 4% top end of the guidance. EVP & CFO Heng Chen added that the FHLB borrowings were short-term (two weeks) at approximately 4.6% to fund a late-quarter surge in loan growth and are actively being replaced with lower-cost broker CDs.

Andrew Terrell of Stephens Inc. asked about the rationale for maintaining the upper end of the loan growth guidance despite a strong Q2, and sought details on the significant increase in FHLB borrowings, including their terms and future plans.

Answer

President & CEO Chang Liu stated that while the pipeline is strong, the company remains cautious about the broader economic landscape. EVP & CFO Heng Chen added that the FHLB borrowings were short-term (two weeks) at a rate of approximately 4.6% to fund a surge in loan growth in June and are actively being replaced with lower-cost broker CDs.

Andrew Terrell from Stephens Inc. asked for the rationale behind maintaining the upper end of the loan growth guidance despite a strong Q2, and sought details on the significant quarter-end increase in Federal Home Loan Bank (FHLB) borrowings.

Answer

President & CEO Chang Liu stated that while the pipeline is strong, the company remains cautious about the broader economic landscape, which is why the top end of the guidance was not raised. EVP, CFO & Treasurer Heng Chen added that the FHLB borrowings were short-term (two weeks) at a rate of 4.6% to fund a surge in loan growth in June and are actively being replaced with lower-cost broker CDs.

Andrew Terrell sought clarification on whether rate cuts would have a positive or negative impact on NIM, inquired about the provision for a specific C&I credit in relation to tariff impacts, and asked about the status of the share repurchase program.

Answer

EVP and CFO Heng Chen confirmed that rate cuts would be a positive for NIM. He clarified the large provision was for a domestic company unrelated to trade finance, but other reserve builds were tariff-related, bringing the allowance on the tariff-exposed loan pool to about 2%. He also stated the company is awaiting regulatory approval for a new buyback program.

Andrew Terrell from Stephens Inc. asked about capital deployment strategies, specifically the bank's interest in M&A for 2025 versus continuing its share buyback program. He also questioned the timing and future expectations for the runoff of brokered deposits observed in the quarter.

Answer

President & CEO Chang Liu confirmed the bank is always evaluating M&A opportunities within its niche market but noted that many potential targets have similar profiles, limiting strategic value. EVP & CFO Heng Chen explained that the brokered deposit runoff occurred mainly in November and December as core deposits increased, and the bank intends to maintain the current, smaller brokered portfolio as an incremental funding source.

Andrew Terrell asked for details on certificate of deposit (CD) repricing dynamics for Q4, including maturing volumes, back-book costs, and new pricing, and also sought clarification on the core expense outlook for Q4.

Answer

President and CEO Chang Liu stated that $3.49 billion in CDs with an average yield of 4.82% are maturing in Q4, with new rates expected in the low to mid-4% range. EVP and CFO Heng Chen added details on promotional CDs maturing in early 2025 that will reprice significantly lower. Regarding expenses, Mr. Chen indicated Q4 core expenses should be close to Q3 levels, benefiting from the completion of a major project.

Andrew Terrell sought further details on the competitive landscape for time deposits, asking about Preferred Bank's pricing strategy relative to the market. He also inquired about the recently downgraded $123 million loan relationship, specifically its pathway to resolution, expected timeline, and whether it represents the largest relationship at the bank.

Answer

Edward J. Czajka, CFO, explained the challenge of balancing deposit cost reduction with growth amidst stiff local and large money center bank competition. Li Yu, CEO, confirmed the $123 million relationship is one of the bank's largest, noting that customers are actively seeking alternative financing. He stated the bank would wait for resolution but would not hesitate to foreclose if necessary, emphasizing the current stable market conditions. Mr. Czajka added that it's too early to determine the exact workout options.

Andrew Terrell sought more detail on time deposit competition, asking about the bank's pricing strategy relative to the market and its competitors, including large money center banks. He also inquired about the $123 million downgraded loan relationship, specifically its pathway to resolution, timeline, and whether it represents the largest relationship at the bank.

Answer

CFO Edward J. Czajka explained the challenge of balancing deposit cost reduction with growth, noting stiff local competition and promotions from large money center banks. Chairman and CEO Li Yu confirmed it is one of the bank's largest relationships. He and Chief Risk Officer Nick Pi discussed resolution options, emphasizing the customer's efforts to refinance and the bank's readiness for foreclosure if necessary, expecting resolution within two quarters.

Andrew Terrell of Stephens Inc. questioned the competitive landscape for loan growth and current pricing for new loans. He also asked about the shift out of demand deposit accounts and the bank's expectations for overall deposit growth.

Answer

EVP & Deputy COO Johnny Hsu described the lending environment as having 'stiff' competition with some lenders offering low fixed rates, but emphasized Preferred Bank's relationship-driven model. Chairman & CEO Li Yu stated the goal is to grow deposits while controlling costs, a focus for the past several months, and noted that future aggressiveness on deposit gathering will depend on loan growth needs.

Andrew Terrell from Stephens Inc. inquired about the net interest margin (NIM) outlook for Q1, the volume and rates of time deposits repricing, and the company's capital return strategy for 2025, particularly regarding share buybacks.

Answer

Executive Li Yu anticipated a relatively stable NIM for Q1. CFO Edward Czajka provided the December spot margin of 3.98% and projected a NIM in the "very, very high 3s" for Q1. He noted that nearly $1.6 billion in time deposits at a 4.75% weighted average rate are maturing in Q1, with new offered rates ranging from the low 3s to mid-4s. Regarding capital, Li Yu stated that share buybacks are a consideration if the stock price remains depressed, balanced against loan growth prospects and capital levels.

Andrew Terrell asked for a breakdown of the floating-rate loan portfolio by index, clarification on the decline in interest-bearing demand deposits, and details on upcoming Q4 CD maturities and the near-term margin outlook.

Answer

Executives Li Yu and Edward Czajka estimated that 80-90% of floating-rate loans are tied to the prime rate. Czajka explained that the drop in interest-bearing demand deposits was a strategic shift from higher-cost brokered money market accounts to more favorably priced brokered CDs. He stated that $1.2 billion in CDs at an average rate of 5.07% will mature in Q4, with new CDs being priced between 3.45% and 4.5%, and projected a Q4 margin north of 3.85%.

Andrew Terrell asked for more detail on loan growth expectations amid economic uncertainty and requested an updated appraisal and loan-to-value (LTV) for the $37 million nonperforming loan currently in bankruptcy.

Answer

Chairman and CEO Li Yu explained that due to tariff-related uncertainty, both the bank and its customers are in a 'wait and see' mode, which could temper loan growth, though the bank is prepared to lend when conditions improve. Executive Nick Pi confirmed the $37 million loan has a recent appraisal supporting a 71% LTV. Li Yu added that a $49 million cash offer for the property exists, which is sufficient to cover the bank's exposure.

Andrew Terrell questioned Banner Corporation's capital position, appetite for share buybacks given current valuations, potential for increasing buyback authorization, and the current approach to M&A. He also sought clarification on the conservatism in the margin outlook, particularly regarding the impact of successive rate cuts.

Answer

Rob Butterfield, Chief Financial Officer, stated that Banner has about 1.2 million shares remaining on its repurchase authorization and considers repurchasing shares around the $63 level attractive, indicating continued monitoring of market conditions and stock price. Mark Grescovich, President and CEO, confirmed that Banner's M&A posture remains unchanged, with ongoing conversations with potential partners, leveraging the company's strong capital, core earnings, and market reputation. Rob Butterfield further clarified the margin outlook, explaining that while a December Fed cut isn't fully baked in, the backlog of adjustable rate loans repricing up is diminishing, and the gap between new loan yields and portfolio average yields is narrowing. He noted that 90% of the 30% floating rate book would reprice down with Fed cuts, influencing the conservative outlook.

Andrew Terrell asked about Banner's appetite for share buybacks, considering the remaining authorization and current valuations, and whether there's potential to increase the buyback program. He also requested an update on the company's approach to M&A. Additionally, he sought clarification on the conservatism in the margin outlook regarding successive rate cuts, given past performance.

Answer

Rob Butterfield, Chief Financial Officer, stated that Banner repurchased approximately 250,000 shares in the last two quarters at around $63, with 1.2 million shares remaining authorized. He considers the current price attractive and will monitor market conditions in Q1, noting that capital levels are at the upper end of their target range, suggesting continued buybacks if conditions are right. Mark Grescovich, President and CEO, affirmed that Banner's M&A posture remains unchanged, with ongoing conversations with potential partners, highlighting Banner's strong capital, core earnings, and market reputation. Rob Butterfield further clarified the margin outlook, explaining that while December's Fed cut isn't fully baked in, the benefit from adjustable rate loan repricing is decreasing. He noted that 30% of the loan book is floating rate, with 90% of that repricing down with Fed cuts, contributing to the conservative outlook.

Andrew Terrell asked about Banner Corporation's approach to deposit costs following Fed rate cuts, specifically comparing the magnitude of reductions to previous cycles and the expected deposit beta. He also inquired about any changes in customer sensitivity to deposit rate adjustments. Furthermore, he questioned the market's 12-month NIM forecast for Banner Corporation, asking if the projected 6 basis points increase was conservative, and whether a medium-term margin range of 4.25%-4.5% remains achievable.

Answer

CFO Rob Butterfield explained that Banner Corporation models a 28% deposit beta and expects a similar beta to previous rate cut cycles, with reductions implemented shortly after Fed moves and a lagged impact on the CD book. He noted no unusual customer sensitivity, as commercial depositors often see loan rate reductions offsetting deposit rate changes. Regarding the margin forecast, Rob Butterfield stated that achieving 4.25%-4.5% would depend on aggressive Fed actions, considering the current 3.98% margin, and that the market's 6 basis points increase over 12 months seems more reasonable than reaching the higher range.

Andrew Terrell of Stephens Inc. asked for the cost of the recently redeemed subordinated debt, the outlook for the expense base given deferred origination costs, and the company's current perspective on the M&A environment.

Answer

EVP & CFO Robert Butterfield stated the all-in cost of the redeemed subordinated debt was approximately 5.50%. Regarding expenses, he noted that while Q2 benefited from higher capitalized loan costs, Q1 provides a better run-rate baseline, with future IT expense increases expected to be partially offset by back-office consolidation. Director, President & CEO Mark Grescovich reiterated that while M&A conversations have picked up, Banner remains focused on its successful organic growth model and does not feel compelled to do a deal, viewing potential M&A as opportunistic.

Andrew Terrell asked for the cost of the recently redeemed subordinated debt to gauge the impact on funding costs. He also inquired about the expense outlook for the second half of the year and sought an update on management's view of the M&A environment.

Answer

EVP & CFO Rob Butterfield stated the all-in cost of the redeemed debt was about 5.5%, and its replacement with FHLB advances at ~4.5% should be accretive. He guided that Q1's expense level is a better run-rate baseline, with H2 expenses expected to rise due to IT investments, partially offset by office consolidation. President & CEO Mark Grescovich affirmed that while M&A conversations have picked up, Banner remains focused on its successful organic growth strategy and does not feel compelled to do a deal.

Andrew Terrell of Stephens Inc. inquired about the cost of the recently redeemed subordinated debt, the expense run rate for the second half of the year, and the company's current perspective on M&A.

Answer

EVP & CFO, Robert Butterfield, stated the redeemed sub debt had an all-in cost of about 5.50% and advised using the Q1 expense run rate as a baseline for future quarters, noting expected IT cost increases. President & CEO, Mark Grescovich, affirmed that while M&A conversations have increased, Banner remains focused on its successful organic business model and does not feel compelled to pursue a deal.

Andrew Terrell asked for the all-in cost of the recently redeemed subordinated debt and sought clarity on the expense outlook for the second half of the year, considering deferred origination costs and IT investments. He also inquired about the current M&A environment and its role in Banner's strategy.

Answer

EVP & CFO, Robert Butterfield, stated the all-in cost of the redeemed sub-debt was approximately 5.50%. He guided that Q1 provided a decent baseline for the expense run rate, with upcoming IT expenses from a new system rollout partially offset by back-office consolidation. Director, President & CEO, Mark Grescovich, emphasized that while M&A conversations have picked up, Banner remains focused on its successful organic growth model and does not feel compelled to do a deal.

Andrew Terrell of Stephens sought to confirm the net interest margin outlook under different Fed rate scenarios, asked about the feasibility of reaching a 4% NIM in 2025, and requested an update on the expense run rate.

Answer

EVP & CFO Robert Butterfield confirmed the margin should trend higher with a Fed pause or gradual cuts, with compression only likely if the Fed cuts rates aggressively. While not providing a specific timeline for reaching a 4% NIM, he acknowledged it was feasible under the right conditions. He also suggested that the Q1 expense level is a decent run rate for the remainder of 2025.

Andrew Terrell asked for guidance on expense growth in 2025, including any specific investment plans. He also sought further clarification on the Q1 net interest margin dynamics, questioning why the margin might not increase given the positive momentum from Q4.

Answer

CFO Robert Butterfield advised using Q4 as a baseline for 2025 expenses, anticipating increases from inflation and wages, and highlighted the new loan and deposit origination system as a key investment. Butterfield and CEO Mark J. Grescovich explained that the Q1 margin outlook is tempered because the guaranteed downward repricing of variable-rate loans will likely offset the more uncertain benefits from deposit cost reductions.

Andrew Terrell asked about the expense run rate following a quarterly drop in compensation, the outlook for expense growth into 2025, spot deposit costs at the end of the period, and the bank's strategy for repricing deposits lower amid Fed rate cuts.

Answer

EVP and CFO Robert Butterfield explained that the Q3 expense drop was due to non-recurring items like a payroll tax refund and lower medical expenses, and he expects costs to normalize. For 2025, he anticipates normal inflationary increases plus potential spending on strategic investments. EVP and Chief Credit Officer Rich Arnold noted that September's cost of deposits was 162 basis points and that the bank has already lowered rates on CD specials and exception-priced deposits, with further reductions dependent on competitor actions.

Andrew Terrell inquired about the increase in compensation expenses, asking if it included year-end incentive accrual adjustments, and sought guidance on organic expense growth expectations for 2026. He also questioned why the bank's net interest margin remains 50-75 basis points below its 2019 peak, asking about structural changes and the timeline to reach a normalized margin level.

Answer

EVP and CFO E. Allen Nicholson confirmed that compensation expenses were elevated due to profit bonus share accruals and holiday season benefits, suggesting a Q4 to Q4 comparison (less than 2% growth) is more indicative, with technology being the primary growth area. President and CEO David A. Brager attributed the margin difference to lower yields in the securities and loan books compared to pre-pandemic levels, expecting it to take a couple of years to normalize, depending on the yield environment. Mr. Nicholson added that the bank has not engaged in large restructuring or loss-trade transactions, instead utilizing one-time gains for smaller loss trades.

Andrew Terrell inquired about the increase in compensation expenses, specifically if it included year-end incentive accrual adjustments, and sought guidance on organic expense growth expectations for 2026. He also asked why the bank's net interest margin remains significantly below 2019 peak levels, questioning if structural changes are a factor, and how long it might take to return to a normalized margin given the loan repricing schedule.

Answer

E. Allen Nicholson, EVP and CFO, confirmed that Q4 compensation expenses included adjustments for profit bonus share accruals and holiday season benefits. He indicated that organic expense growth, excluding technology investments, is expected to remain in the very low single digits. David A. Brager, President and CEO, attributed the lower margin compared to 2019 to the securities and loan books still repricing from lower pre-pandemic yields. He suggested it could take a couple of years to reach normalized levels, depending on market variables, and noted the bank's strategy of utilizing one-time gains for smaller loss-trade transactions.

Andrew Terrell inquired about the company's loan growth expectations for the near term, specifically if the mid-single-digit pace can continue, given strong originations and pipelines. He also asked if the bank is willing to be more competitive on loan pricing due to current market conditions and lower new origination yields.

Answer

President and CEO David Brager expressed confidence in achieving low single-digit loan growth for the year, noting strong pipelines and opportunities, even excluding seasonal dairy impacts. He confirmed the bank's willingness to compete on price for the right relationships, acknowledging aggressive competition from larger banks in the market.

Andrew Terrell asked for expectations on near-term loan growth, specifically if the mid-single-digit pace could be sustained, given strong originations and pipelines. He also questioned the bank's approach to loan pricing amidst increased market competition and declining new origination yields.

Answer

President and CEO David Brager reiterated a low single-digit loan growth expectation for the full year, citing strong pipelines and seasonal dairy loan impacts. He confirmed the bank's willingness to compete on price for quality relationships, acknowledging aggressive competition from larger banks.

Andrew Terrell of Stephens Inc. asked about the company's plans for its significant end-of-period cash balance, specifically whether it would be deployed into the bond portfolio. He also requested more detail on the competitive loan environment, its impact on new loan yields, and if it could offset anticipated fixed-rate repricing benefits.

Answer

CFO E. Allen Nicholson responded that the most likely use of excess cash would be to judiciously grow the investment book, as reducing wholesale funding is not planned due to interest rate risk management. CEO David Brager described the loan competition as 'intense,' with regional banks pricing deals at 130-170 basis points over treasuries. He noted that while CVBF remains disciplined, new loan origination yields might dip slightly to the 6.25%-6.50% range.

Andrew Terrell of Stephens Inc. inquired about the strategy for deploying the significant end-of-period cash balance, such as growing the bond portfolio or reducing FHLB advances. He also asked for details on the competitive environment for loan originations and its impact on new loan yields.

Answer

CFO E. Allen Nicholson stated that the most likely use of excess cash would be to judiciously grow the investment securities portfolio, rather than paying down wholesale funding, to manage interest rate risk. CEO David Brager described the loan competition as 'intense,' particularly from regional banks offering spreads as low as 130-170 basis points over treasuries. He affirmed CVBF's commitment to disciplined pricing and underwriting, noting that new loan origination yields might see a slight dip to the 6.25-6.50% range in Q3.

Andrew Terrell of Stephens Inc. asked about the company's strategy for its growing cash balance, particularly its interest in expanding the investment portfolio. He also requested more detail on the 'intense' competitive loan environment, its effect on new loan yields, and its potential to offset fixed-rate repricing benefits.

Answer

EVP & CFO E. Allen Nicholson confirmed that the most likely use of excess cash would be to judiciously grow the investment securities portfolio. President & CEO David Brager described the loan competition as intense, primarily from regional banks offering spreads as low as 130-170 basis points over treasuries. He noted that while CVBF remains disciplined, new origination yields might dip to the 6.25%-6.50% range in Q3. Brager emphasized that the bank prioritizes strong relationships and underwriting discipline over chasing aggressively priced deals.

Andrew Terrell of Stephens Inc. inquired about the bank's plans for its significant end-of-period cash balance, asking about potential deployment into the bond portfolio or for FHLB reductions. He also asked for more detail on the competitive loan environment and its impact on new loan origination yields.

Answer

EVP & CFO E. Allen Nicholson indicated that the most likely use of excess cash would be to judiciously grow the investment book, rather than reducing wholesale funding. President & CEO David Brager described the loan competition as "intense," with competitors offering spreads as low as 130-170 basis points over treasuries. He noted CVBF remains disciplined but expects new loan origination yields to be in the 6.25% to 6.5% range in the third quarter.

Andrew Terrell asked for the specific dollar impact of loan prepayment penalties on interest income and questioned the potential for further deposit cost reductions in the absence of Fed rate cuts.

Answer

Executive E. Nicholson quantified the quarter-over-quarter increase in prepayment penalties at approximately $300,000. President and CEO David Brager addressed deposit costs, suggesting there is 'a little room to go' for reductions, driven by new money market accounts being opened at lower rates and ongoing relationship-based pricing reviews.

Andrew Terrell of Stephens Inc. asked for details on the net interest margin, including the timing of Q4 deposit rate cuts and the potential for further reductions. He also inquired about the cost of remaining borrowings and the outlook for expense growth in 2025.

Answer

Executive E. Nicholson explained that nonmaturity deposit costs will likely continue to decline in the near term due to the lag effect from the December Fed cut. President and CEO David Brager added that money market rates were cut in line with the Fed, with the full impact yet to be seen. Nicholson estimated the cost of the remaining $500 million in borrowings is in the low 4% range. Regarding expenses, he projected controllable expense growth to be below the recent 4% trend, with continued investment in technology to improve efficiency.

Andrew Terrell followed up on the securities sold during the quarter, asking about the specific timing and yield. He also sought to clarify the near-term trajectory for non-maturity deposit costs and asked if any changes were made to the company's hedging strategy given the bond sales.

Answer

Executive E. Nicholson stated the security sales occurred throughout the quarter but were heavier in the last month, with a book yield close to 3%. CEO David Brager described the trend for non-maturity deposit costs as 'moderate,' expecting stabilization or a slight decline. E. Nicholson confirmed that no changes were made to the fair value hedges on the AFS portfolio, as there was excess capacity, but they may evaluate unwinding some hedges in the future as they shorten.

Andrew Terrell inquired about WaFd's near-term margin outlook, specifically the plan for $800 million in borrowings due or repricing soon, and sought clarification on the dollar amount of interest income reversals this quarter. He also asked for details on the two new C&I non-accruals, including business types and resolution plans, and questioned the outlook for overall operating expense growth, considering SBA platform build-out and potential C&I lender hiring. Additionally, Terrell sought clarification on whether the expected margin decline was from the reported amount or the spot rate, asked about the target mix for the balance sheet and bond book levels, and explored the drivers behind the strong transactional deposit growth, including the impact of 2025 changes and seasonality.

Answer

Brent Beardall (President and CEO) stated that the $800 million in borrowings would be replaced, potentially at lower rates if the Fed cuts. Kelli Holz (EVP and CFO) confirmed non-accrual interest amounted to just over $5 million for the quarter. Ryan Mauer (EVP and Chief Credit Officer) described the C&I non-accruals as a manufacturing business impacted by tariffs and labor costs, and a real estate-related entity, with active collaboration for resolution. Beardall noted annual merit increases in the March quarter and strategic tech investments, but no significant plans for large team hires, expecting a solid run rate otherwise. Beardall clarified that margin pressure refers to the spot rate and indicated flexibility to grow the bond portfolio, potentially up to 25-30% long-term. He attributed transactional deposit growth to momentum from the business shift towards C&I and treasury management, alongside calendar year-end seasonality.

Andrew Terrell sought clarification on whether the expected margin decline was from the reported amount or the spot rate of 2.77% at December 31. He also asked about WaFd's target mix for the balance sheet, specifically for securities, and at what level they would cease building the bond book. Additionally, Mr. Terrell inquired about the drivers behind the strong transactional deposit growth this quarter, including non-interest-bearing and interest-checking deposits, and if it reflected early momentum from 2025 changes or unusual seasonality.

Answer

President and CEO Brent Beardall confirmed that the margin expectation refers to the spot rate. He indicated that WaFd is still relatively light in its bond book compared to peers, with room to grow, potentially reaching 25%-30% over the longer term, but ratcheting up over the short term based on market opportunities. Mr. Beardall attributed the transactional deposit growth to both momentum from the business shift towards C&I and treasury management, and the cyclicality/seasonality towards calendar year-end, noting a significant runoff in CDs was offset by increased transaction counts.

Andrew Terrell asked for the equivalent interest-bearing deposit cost as of October 23rd, following the reported total spot cost of 1.24%. He also questioned how the pricing of incremental new money deposits might affect the 35% interest-bearing beta, and sought clarity on Bank of Marin Bancorp's future buyback activity given its strong capital position and potential alternative uses of capital. Lastly, he inquired if the company could quantify the change in its loan pipeline from Q3 to Q4.

Answer

Chief Financial Officer Dave Bonaccorso provided the interest-bearing non-maturity deposit figure. He and President and CEO Tim Myers explained that while new money from existing relationships might come at slightly higher rates, the bank is not chasing high-cost money, and a significant inflow of non-interest bearing deposits helps offset this, suggesting the beta estimate remains relevant. Tim Myers stated that future buyback activity depends on potential uses of capital, including further balance sheet restructurings, and the bank aims to make decisions beneficial to shareholders, especially when trading below tangible book value. He declined to quantify the pipeline but indicated expectations for a quarter similar to the one just experienced.

Andrew Terrell (Stephens) sought clarification on Bank of Marin Bancorp's interest-bearing deposit costs as of October 23rd and how incremental new money pricing might affect the interest-bearing beta. He also inquired about the bank's future share buyback activity given strong capital and potential balance sheet restructurings, and asked for quantification of the loan pipeline change.

Answer

CFO Dave Bonaccorso and President and CEO Tim Myers explained that while the specific interest-bearing deposit cost for October 23rd was not provided (a balance of $211 million for total non-maturity interest-bearing deposits was mentioned), overall spot deposit costs declined. They clarified that new money pricing, largely from existing relationships, is not expected to significantly alter the estimated interest-bearing beta due to the bank's strategy of not chasing high-cost funds and offsetting non-interest bearing inflows. Tim Myers indicated that future buyback activity would be weighed against potential capital uses, such as balance sheet restructurings. He declined to quantify the loan pipeline but anticipated a similar quarter.

Andrew Terrell of Stephens Inc. asked for details on the Q2 securities restructuring, including the reinvestment yield, sought clarification on recent deposit rate cuts, and inquired about the drivers for the optimistic net loan growth outlook for the second half of the year.

Answer

CFO Dave Bonaccorso confirmed the reinvestment yield on the repositioned securities was just over 5%. Regarding deposits, Bonaccorso and CEO Tim Myers detailed recent targeted rate cuts, including a ~15 basis point cut on about $185 million in early July. Myers added that while they are managing existing deposit costs down, they are also successfully attracting new, slightly higher-rate relationships. On loan growth, Myers expressed optimism based on a strong pipeline, the impact of new hires, and payoffs tracking at or below expectations, which should drive net growth in the latter half of the year.

Andrew Terrell of Stephens Inc. asked for details on the Q2 AFS securities restructuring, including the reinvestment yield, and sought more information on recent targeted deposit rate cuts. He also questioned the drivers behind the optimistic outlook for loan growth in the second half of the year.

Answer

EVP & CFO Dave Bonaccorso confirmed that the reinvestment yield on the securities repositioning was just over 5%. Regarding deposits, Bonaccorso and CEO Tim Myers explained the rate cuts were targeted, with the early July cuts affecting about $185 million at an average reduction of 15 basis points. Myers attributed the positive loan growth outlook to a strong pipeline, the impact of new hires, and commercial loan payoffs remaining below forecast, which should offset higher payoffs in the acquired mortgage portfolio.

Andrew Terrell from Stephens Inc. asked about Bank of Marin's capital allocation strategy, specifically regarding share buybacks, and requested more detail on the commercial loans that were moved to classified status. He also inquired about expectations for the expense run rate in upcoming quarters.

Answer

CEO Tim Myers explained that the share buyback program is being contemplated but is on hold pending discussions with regulators following a recent exam. He clarified that the increase in classified loans was primarily driven by two unrelated credits—a contractor and a multifamily property—each with unique operational issues, and he does not expect further deterioration. CFO Dave Bonaccorso addressed expenses, noting that the Q1 increase was due to seasonal factors and a pull-forward of charitable contributions. He suggested that the historical compound annual growth rate of about 4% is a reasonable baseline for modeling future expenses.

Andrew Terrell of Stephens Inc. asked for an update on Bank of Marin's capital strategy, specifically regarding share buybacks, the reasons behind the increase in classified loans, and expectations for the expense run rate going forward.

Answer

CEO Tim Myers stated that share repurchases are being contemplated but are on hold pending discussions with regulators following a recent exam. He clarified that the increase in classified loans was driven by two unique, unrelated relationships (a contractor and a multifamily property) and he does not expect further deterioration. CFO Dave Bonaccorso advised that the historical 4% annual expense growth rate is a reasonable baseline, noting Q1 was impacted by front-loaded charitable contributions and seasonal payroll expenses that will normalize.

Andrew Terrell inquired about the expense run rate for 2025, asking to quantify the impact of lower incentive accruals in Q4 and establish a clean baseline. He also sought clarification on a San Francisco office loan on nonaccrual, its current status, debt service coverage, and the path forward. Lastly, he asked about the purpose of the mixed shelf filing.

Answer

CFO Dave Bonaccorso suggested using an adjusted average of Q2 and Q3 expenses as a cleaner run rate, which would be slightly north of $20 million. President and CEO Tim Myers clarified there are two significant SF properties; the one now 100% occupied was an $8 million loan that is cash-flowing adequately and awaiting documentation changes to be moved off nonaccrual. He also explained the mixed shelf filing is a standard 'housekeeping' measure for preparedness and capital flexibility, akin to a share authorization, with no immediate plans for its use.

Andrew Terrell from Stephens Inc. requested the loan yield exit rate for the second quarter to help model future net interest margin. He also asked about the strategy for the large cash position, specifically whether it would be used to reduce brokered deposits or be invested in securities.

Answer

CFO James Britton provided the exit rate for total loan yields as just under 4.70%. Regarding the cash position, Mr. Britton stated that the current liquidity level is comfortable and is expected to remain relatively stable on average for the rest of the year. He indicated they will reassess the optimal cash level after the balance sheet transition is complete at year-end.

Andrew Terrell of Stephens Inc. asked about the growth outlook for commercial real estate, questioning if the bank is selectively slowing originations in that segment to manage concentrations or due to the competitive environment.

Answer

EVP & CFO Christopher Del Moral-Niles highlighted that the bank's strategy is to achieve a more balanced portfolio, with a particular emphasis on growing C&I and single-family loans. He pointed to recent year-over-year growth rates, which show CRE growing slower than other categories, aligning with the bank's medium-to-long-term goal of a 'third, a third, a third' balance.

Andrew Terrell of Stephens sought clarification on the 5-10 basis point drop in deposit costs observed in October. He also asked if the projected $10 million positive impact from maturing swaps already accounts for recent and anticipated rate cuts.

Answer

CFO Christopher Del Moral-Niles clarified the decline was closer to 5 basis points for total deposits and 10 basis points for interest-bearing deposits. He explained that the $10 million positive impact from swaps was an end-of-quarter figure and that each Fed rate cut would "chip away" at it slightly, but it would still largely be a net positive.

Andrew Terrell of Stephens Inc. requested more detail on the changes to the credit control process, whether it implies a broader portfolio review, and asked about the outlook for loan sales in the second half of the year, including the types of loans that might be sold.

Answer

EVP & CFO Lynn Hopkins clarified the enhanced credit control process was primarily focused on a smaller part of the portfolio—gap and bridge financing—and is reflected in the Q2 results. President & CEO Johnny Lee added it's a more conservative approach on loans that are still current and performing. Regarding loan sales, Lynn Hopkins noted opportunities exist with both the single-family mortgage and SBA loan portfolios, with the latter benefiting from newly added resources.

Andrew Terrell of Stephens Inc. questioned the bank's ability to fund expected loan growth organically, given the loan-to-deposit ratio. He also asked about the drivers behind the decline in noninterest-bearing deposits and the terms of new FHLB advances.

Answer

Lynn Hopkins expressed confidence in funding loan growth organically, citing a successful CD campaign and modest reliance on wholesale funding. She attributed the noninterest-bearing deposit decline to seasonality and some customer migration to higher-yielding products. She also detailed that the new FHLB advances have short-term put options, despite longer final maturities.

Speaking on behalf of Andrew Terrell, Jackson Laurent asked about the drivers behind the increase in noninterest-bearing deposits and inquired about the company's current M&A strategy.

Answer

President & CEO Johnny Lee attributed the deposit strength to new large commercial clients and expects further contributions from recently hired commercial lenders. CEO David Morris confirmed that the M&A strategy is unchanged, with a continued focus on acquiring other Asian American banks, particularly to expand into the San Francisco Bay Area.

Andrew Terrell sought to clarify the mechanics of the net interest margin, asking for more detail on the 3.53% deposit spot rate and how it reconciles with actions taken after the Fed rate cut. He also asked about the mix of floating-rate securities and whether margin guidance already assumes further rate cuts in the fourth quarter.

Answer

Executive Lynn Hopkins clarified that the 3.53% spot rate at quarter-end primarily reflects changes to non-maturity deposits, as the larger impact from repricing the bank's $2.1 billion CD portfolio will occur in Q4 and beyond. She explained that the bank's liability-sensitive position and CD ladder allow it to benefit from a declining rate environment. She also mentioned the opportunistic use of wholesale funds to lower costs, suggesting the bank is positioned to capture margin benefits regardless of the precise timing of future Fed moves.

Andrew Terrell asked for more detail on the multifamily loans set to reprice over the next two years, specifically questioning if the Q1 increase in classifieds was a one-time event or if more downgrades should be expected as the portfolio matures.

Answer

President and CEO Jared Wolff indicated that the bank has "gotten ahead of it" with the recent downgrades, which resulted from a specific portfolio review project. He does not expect a large, continued uptick in migration from this portfolio. Instead, he framed the upcoming repricing of these loans as a positive tailwind for net interest income.

Andrew Terrell asked about the potential for repositioning the held-to-maturity (HTM) securities portfolio, the size of the Q4 DTA benefit, the reason for the rise in nonaccrual loans, and the breakdown of recent charge-offs.

Answer

CEO Jared Wolff acknowledged that while the bank's intent to hold HTM securities hasn't changed, they are analyzing the implications of a potential repositioning. CFO Joseph Kauder quantified the DTA benefit at about $5 million. Wolff explained the nonaccrual increase was driven by a single $34 million relationship where the borrower passed away. He also specified that of the charge-offs, $14 million was from Life Sciences and the remainder was from the Civic portfolio.

Andrew Terrell of Stephens Inc. requested the spot interest-bearing deposit cost at the end of Q3 to better understand recent repricing actions. He also asked about the level of client pushback received when lowering deposit rates and the potential for the deposit beta to move beyond 50%.

Answer

CFO Joe Kauder declined to provide a specific spot rate due to volatility from restructuring actions but suggested it was slightly higher than the quarterly average. CEO Jared Wolff acknowledged receiving client pushback on rate cuts, which is why the beta was not 100%. He expressed confidence that the bank is retaining true client relationships while shedding rate-sensitive 'hot money,' and noted the repricing process is iterative and ongoing.

Andrew Terrell of Stephens Inc. asked whether the bank must reach its 11% CET1 target before repositioning its securities portfolio and sought clarification on the drivers behind the quarterly decline in interest-bearing checking deposits.

Answer

CEO Jared Wolff and CFO Joe Kauder clarified that they are prepared to reposition securities now, especially using capital from one-time events like the CIVIC sale, and that the 11% CET1 target is more of a threshold for other capital actions like buybacks. Regarding deposits, Wolff attributed the decline in interest checking to normal end-of-quarter client fund movements, while Kauder added that it also reflects the intentional runoff of higher-cost deposits as part of their optimization strategy.

Andrew Terrell asked for clarification on swap income, details on the loan purchase strategy including SNCs, and whether the 1.72% spot deposit rate has more room to decline absent further Fed rate cuts.

Answer

CFO Ronald Nicolas clarified that Q4 swap income was about $4 million, compared to a $2-3 million forecast for Q1. He also quantified loan purchases at ~$400 million in C&I and ~$115 million in single-family. CEO Steven Gardner confirmed some SNCs were included and stated there is still opportunity to lower deposit costs by growing low-cost transaction accounts, though CFO Nicolas noted their costs are already relatively low compared to peers.

Andrew Terrell sought clarification on swap income, details on Q4 loan purchases including SNCs, and whether there is further room to lower deposit costs absent future Fed rate cuts.

Answer

CFO Ronald Nicolas clarified that swap income was about $4 million in Q4, with $2-3 million expected in Q1. He specified loan purchases were approximately $400 million in C&I and $115 million in single-family residential. CEO Steven Gardner confirmed some SNCs were included and stated there is still opportunity to lower deposit costs by growing quality relationships with low-cost transaction accounts. He also noted intense pricing competition in the HOA deposit space.

Andrew Terrell asked how the outlook for declining interest rates influences balance sheet repositioning decisions, whether a high dividend payout ratio would preclude stock buybacks, and for clarification on securities portfolio yields.

Answer

CEO Steven Gardner explained that the rate outlook is one of many dynamic factors in considering a repositioning, alongside cost and payback period. He stated that a dividend payout ratio over 100% does not have regulatory restrictions on buybacks and that philosophically, the decision depends on the overall outlook. CFO Ronald Nicolas clarified that some 'noise' from specific dividends can affect the securities portfolio's spot yield versus its quarterly average.

Andrew Terrell from Stephens inquired about the bank's willingness to reduce its CET1 capital ratio back towards the 13% level seen in late 2022, considering its current position is substantially higher.

Answer

CEO Steven Gardner responded that while a 13% CET1 ratio is healthy, any decision on capital levels depends on the broader economic outlook and portfolio risks. He acknowledged that Pacific Premier is likely the highest capitalized bank in its peer group, which provides significant flexibility and optionality. He assured that the board and management are continuously evaluating how to best deploy this capital.

Andrew Terrell inquired about the cost of the remaining FHLB borrowings, the maturity schedule for swaps into 2025, the potential magnitude of seasonal deposit outflows in Q2, and what constitutes a normalized cash position.

Answer

CFO Ronald Nicolas specified the rate on the remaining $200 million FHLB tranche is 4.68% and confirmed swaps have a laddered maturity into 2025 and 2026. He also stated a normalized cash position would be around $500 million. Executive Steven Gardner explained that quantifying seasonal deposit outflows is difficult but noted upcoming client tax payments and HOA business seasonality as potential drivers.

Andrew Terrell asked for a comparison of the rate on maturing CDs to current new CD pricing and sought more specific details on the bank's M&A focus regarding target size and geography.

Answer

CFO Donald Hinson estimated that new CDs could reprice 20-25 basis points lower than the 4.56% rate on maturing certificates. CEO Jeff Deuel identified the M&A sweet spot as banks with $500 million to $1 billion in assets, with a geographic focus on augmenting their I-5 corridor footprint, particularly in Oregon, and opportunistically expanding in Idaho.

Andrew Terrell asked for details on loan yield repricing dynamics for fixed and adjustable-rate loans and questioned the trade-off between share buybacks and a potential early exit from discontinued loan portfolios.

Answer

CFO Ron Farnsworth directed the analyst to slide 20 for detailed repricing data. President Torran Nixon noted new commercial loan yields range from the mid-7s to mid-8s. CEO Clint Stein explained that an early exit of transactional loan portfolios is not currently attractive, as the payback period would be too long given the expectation of falling rates. He stated the best course is to let them amortize off organically, as there are no credit concerns.