Jeff Rulis

Jeff Rulis inquired about the specific workout process and expected resolution timelines for non-performing assets, including the Southern California commercial real estate loans and the life insurance premium finance loan. He also asked about the company's exposure to Non-Depository Financial Institutions (NDFIs), particularly private lenders, and sought clarification on the net interest margin outlook, asset sensitivity, and how the recent rate cut and branch acquisition would impact future margin performance.

Answer

Douglas Bauche (Chief Banking Officer) explained that the Southern California real estate loans' resolution timeline is uncertain due to a secondary bankruptcy filing, but the company is pursuing both non-judicial and judicial foreclosure. For the life insurance premium finance loan, he noted a co-trustee lawsuit is delaying resolution, but full principal collection is certain due to cash surrender value. Bauche clarified NDFI exposure, stating it includes $260-$270 million in balances across 18-20 relationships with private lenders primarily focused on first mortgage secured loans for residential real estate investors. Keene Turner (CFO and COO) addressed the margin, stating that while the company is slightly asset sensitive to parallel shifts, the short end of the curve coming down has been favorable. He anticipates the recent rate cut's impact will largely be mitigated by the branch acquisition, expecting the net interest margin to remain around 4.20% through most of 2026, assuming mid-single-digit loan and deposit growth.

Jeff Rulis from D.A. Davidson Companies inquired about the outlook for fee income and expenses for the remainder of the year, as well as the company's capital priorities and how the upcoming branch acquisition will impact capital levels.

Answer

CFO Keene Turner explained that Q1 serves as a good proxy for fee income, with potential for more SBA loan sales and recurring BOLI income. On expenses, Turner indicated the current level is a new base to grow from, citing merit increases, new hire bonuses, and growing deposit vertical costs. CEO James Lally outlined capital priorities as supporting growth, evaluating the dividend, and completing the branch acquisition. Turner added the acquisition would use about 100 basis points of capital, bringing the TCE ratio to a target of 8.5%.

Jeff Rulis inquired about the pro forma capital levels following the branch acquisition, the potential impact on share buybacks and future M&A appetite, and whether the acquired loan portfolio included any specific industry concentrations like dairy.

Answer

CFO and COO Keene Turner stated that pro forma capital will be right at the company's targets, allowing for continued, modestly offensive share repurchases. He noted the deal's low risk-weighted asset profile provides flexibility. Executive James Lally confirmed that the company was selective in the assets it acquired and is not taking on any dairy exposure from the transaction.

Jeff Rulis of D.A. Davidson & Co. asked for clarification on the net interest margin (NIM) outlook, specifically whether the 4.10% forecast includes rate cuts, and inquired about the potential for the core margin to remain above 4%. He also requested an outlook on core operating expenses following the completion of the core system conversion.

Answer

Keene Turner, CFO & COO, explained that the 4.10% NIM forecast includes the reset of the SBA portfolio but does not assume any Fed rate cuts. He noted that with effective deposit cost management and a favorable yield curve, the margin could hold above 4% even with a couple of rate cuts. Regarding expenses, Turner stated that core conversion costs are now complete and projected that quarterly noninterest expenses would be roughly level to modestly growing throughout 2025, potentially remaining flat depending on the rate environment's impact on deposit-related costs.

Jeff Rulis questioned whether de-risking activities have acted as a headwind to loan growth in 2025 and sought clarification on the expense outlook for 2026, particularly considering investments in wealth management.

Answer

Chairman and CEO Peter Ho confirmed that de-risking has not been a headwind to growth for some time and is not expected to impede future growth, expressing satisfaction with current portfolios. CFO Brad Satenberg projected a 3+% increase in 2026 expenses, with the first quarter potentially higher due to seasonal payroll charges, and estimated the 2025 projection closer to 3.5%.

Jeff Rulis from D.A. Davidson asked if Bank of Hawaii's de-risking activities, as outlined on Slide 12, had contributed to muted loan growth in 2025 and if they would impact future net growth. He also sought guidance on the projected noninterest expense growth rate for 2026, considering ongoing wealth management investments and the 2025 forecast.

Answer

Chairman and CEO Peter Ho clarified that de-risking has not been a headwind for loan growth recently and is not anticipated to impede future growth, expressing confidence in the current portfolios. CFO Brad Satenberg projected a 3+% increase in noninterest expenses for 2026, with a slightly higher Q1 due to seasonal payroll, and updated the 2025 expense growth forecast to approximately 3.5%.

Jeff Rulis of D.A. Davidson Companies inquired about the path of the net interest margin (NIM) toward the 2.50% year-end target, the stalling cost of funds, and the outlook for balance sheet growth, particularly in the securities portfolio.

Answer

CFO Bradley Satenberg affirmed that a 2.50% NIM is an achievable target, supported by continued expansion. He noted the cost of deposits spot rate was 1.58% and expects the deposit beta to rise above 30% toward 35% after upcoming CD repricing. Satenberg also confirmed that the bank anticipates continued growth in the securities portfolio, utilizing any excess liquidity to invest in a balanced mix of fixed and floating-rate assets.

Jeff Rulis of D.A. Davidson Companies inquired about the trajectory of Bank of Hawaii's net interest margin (NIM), asking if a 2.50% level by year-end is still a reasonable expectation. He also asked about the outlook for the cost of funds and plans for balance sheet growth, particularly within the securities portfolio.

Answer

Vice Chair & CFO Bradley Satenberg affirmed that a 2.50% NIM is an achievable target, supported by five consecutive quarters of expansion. He noted the cost of deposits spot rate was 1.58% and expects the deposit beta to move towards 35% after upcoming CD repricing. Satenberg also confirmed that the bank will continue to grow its securities portfolio with excess liquidity, balancing purchases between fixed and floating-rate assets.

Jeff Rulis asked for an update on the Hawaiian economy, specifically the real-time impact of tariffs on tourism. He also questioned the outlook for loan growth and pipelines, and sought clarification on the slight increase in net charge-offs.

Answer

Chairman and CEO Peter Ho noted that while tourism is stable, there are early signs of tariff sentiment affecting Canadian visitor traffic, leading to a potentially flattish outlook. President and Chief Banking Officer Jim Polk reaffirmed the low single-digit loan growth guidance, citing a solid commercial pipeline. Chief Risk Officer Bradley Shairson clarified that the rise in net charge-offs was due to a single $1.1 million loan that was previously a nonperforming asset, not a negative trend.

Jeff Rulis from D.A. Davidson & Co. asked if the December net interest margin (NIM) of 2.26% is a clean starting point for Q1 2025 and inquired about the loan growth pipeline, including any potential effects from recent M&A activity in the Hawaiian market.

Answer

CFO Dean Shigemura confirmed the 2.26% December NIM is a "good jumping off point" for Q1 and noted the bank was actively lowering deposit rates. CEO Peter Ho added that loan growth was solid, led by commercial, and he expects a similar performance ahead. He stated it was too early to see any competitive impact from market M&A.

Jeff Rulis of D.A. Davidson & Co. inquired about any one-time interest recoveries in the Q3 net interest margin (NIM), the average margin for September, the near-term NIM outlook considering potential Fed rate cuts, and the specific sectors contributing to the rise in non-accrual loans.

Answer

CFO Dean Shigemura confirmed there were no material one-time items in the margin, noting the September margin was 2.17%. He stated that while an initial rate cut would be a slight negative, the overall net interest income and margin are expected to gently increase due to asset repricing and balance sheet management. Chief Risk Officer Bradley Shairson added that the increase in non-accruals was not from a specific sector but from older, non-core lending activities and that the portfolio shows no systemic weakness.

Jeffrey Rulis asked for clarification on Bank of Marin Bancorp's deposit cost progress and core net interest margin (NIM) expectations, particularly in light of the company's asset sensitivity indicated on slide five. He also questioned the drivers behind recent credit upgrades, such as rate relief, improved occupancy, or overall commercial real estate (CRE) market improvements, and sought details on the increase in the 30 to 89-day past due loan bucket.

Answer

Chief Financial Officer Dave Bonaccorso provided a comprehensive three-part explanation on NIM, detailing ALM sensitivity, floating rate asset/liability betas, and instrument-by-instrument balance sheet dynamics, suggesting NIM expansion in a falling rate environment. President and CEO Tim Myers attributed credit upgrades to idiosyncratic factors like improved multifamily leasing in San Francisco and construction progress on a fire-damaged property, noting improved valuations in San Francisco. He clarified that the increase in the 30 to 89-day bucket was procedural, related to negotiating loan extensions rather than non-payment.

Jeffrey Rulis (D.A. Davidson) sought clarification on Bank of Marin Bancorp's deposit cost progress, core margin expectations, and asset sensitivity, then inquired about the drivers behind credit quality upgrades and the trend of improving valuations in San Francisco. He also asked about the increase in the 30 to 89-day delinquency bucket.

Answer

CFO Dave Bonaccorso detailed the bank's asset sensitivity, explaining ALM model nuances, liability beta, and instrument-specific impacts, indicating potential for NIM expansion. President and CEO Tim Myers attributed credit upgrades to idiosyncratic factors like improved San Francisco multifamily leasing and specific project progress, confirming an upward trend in San Francisco valuations. He clarified the 30 to 89-day bucket increase was procedural, related to loan extensions.

Jeff Rulis of D.A. Davidson & Co. sought clarification on whether the bank expects net loan growth for the full year, asked about the net interest margin (NIM) trajectory including the restructuring benefit, and requested details on anticipated credit upgrades in Q3.

Answer

CEO Tim Myers affirmed the bank is still targeting net loan growth for the year, aiming for mid-single digits, though acknowledging it becomes more challenging later in the year. CFO Dave Bonaccorso outlined NIM drivers, including a 13 basis point lift from the recent repositioning and 20-25 basis points of natural loan repricing over the next year, suggesting a 3.5% NIM is more likely a target for the second half of 2026. Myers added that they are optimistic about meaningful credit upgrades in Q3 across several loan types, including some larger credits, due to refinancing and remargining efforts.

Jeff Rulis of D.A. Davidson Companies sought clarification on whether the bank expects net loan growth for the full year, the outlook for the net interest margin (NIM) including the restructuring benefit, and details on anticipated credit upgrades in the third quarter.

Answer

Director, President & CEO Tim Myers affirmed that the bank is still targeting net loan growth for the year, aiming for mid-single-digit growth. EVP & CFO Dave Bonaccorso detailed NIM drivers, including natural loan repricing and a 13 basis point lift from the recent restructuring, but suggested a 3.5% NIM is more likely a target for the second half of 2026. Myers added that upcoming Q3 credit upgrades are expected to be meaningful and involve some of the larger C&I and real estate credits previously discussed.

Inquired about the net interest margin outlook, including the March spot rate, and asked about the process for charitable contributions and the potential for further expense cuts.

Answer

The March NIM was 2.85%, and the outlook is positive due to liability sensitivity and expected rate cuts. Charitable contributions are a budgeted, Board-approved part of the bank's community commitment; the timing was just pulled forward. The bank is not planning further major expense cuts as the underlying run rate is already trending down.

Jeff Rulis of D.A. Davidson & Co. asked for the net interest margin (NIM) for the month of March and the outlook for the margin going forward. He also questioned the timing of charitable contributions and whether management was considering any further expense rationalization.

Answer

CFO Dave Bonaccorso provided the March NIM of 2.85% and stated the bank is slightly more liability-sensitive, which should benefit the margin from potential Fed rate cuts. CEO Tim Myers explained that the timing of charitable contributions was moved to Q1 to better align with community needs, and the total amount is a budgeted item approved by the Board. He added that after last year's staffing reductions, the bank is comfortable with its current expense run rate and is not planning further cuts, focusing instead on selective hiring.

Jeff Rulis of D.A. Davidson asked for the net interest margin (NIM) for March and the outlook for future margin trends, as well as the rationale for the timing of charitable contributions and whether further expense cuts are being considered.

Answer

CFO Dave Bonaccorso provided the March NIM of 2.85% and expressed optimism for further expansion, citing the bank's liability-sensitive position. CEO Tim Myers explained that charitable contributions were moved to Q1 to better align with community needs and that the bank is comfortable with current staffing levels after last year's reductions. Bonaccorso added that the underlying expense run rate, excluding seasonal noise, continues to trend down.

Jeff Rulis asked for an outlook on Bank of Marin's net interest margin (NIM) for 2025, inquiring about the potential for continued expansion and where the margin might ultimately settle. He also requested details on the loan growth pipeline and any clarity on loan payoff activity for the upcoming year.

Answer

CFO Dave Bonaccorso detailed the drivers for NIM, noting that the loan book is expected to reprice upward by about 27 basis points over 12 months, and that recent deposit rate cuts were executed faster and at a higher beta than modeled, suggesting further margin benefit. He stated the bank outperforms in higher rate environments but did not provide a specific terminal margin rate. President and CEO Tim Myers addressed loan growth, stating the Q1 pipeline is 40% higher than the prior year's Q1 and the total pipeline has doubled year-over-year, driven by new talent. He noted that predicting payoffs is difficult, with the largest drivers being cash deleveraging and construction project completions.

Jeff Rulis asked if any loan payoffs were driven by credit-related balance reductions, the factors behind the strong core deposit growth in the quarter, and the future trajectory of the net interest margin, considering rate cuts and the impact of lost trades.

Answer

Bryan McDonald, President and CEO, clarified that some Q4 payoffs involve adversely classified credits where customers chose to sell assets, rather than being forced by the bank. He attributed deposit growth to both traditional Q3 seasonality and effective execution in new account activity. Don Hinson, CFO, anticipated muted NIM improvement, with continued deposit cost benefits from rate cuts, but flattish loan yields due to floating rate loans and new originations repricing higher.

Jeffrey Rulis of D.A. Davidson & Co. inquired about the securities loss trade, including its earn-back period and margin impact, the potential for future balance sheet restructuring, capital deployment priorities like buybacks and M&A, and the drivers behind the recent increase in credit downgrades.

Answer

EVP & CFO Donald Hinson detailed a roughly three-year earn-back for the Q2 trade and stated future trades depend on market conditions. He also noted buyback activity was opportunistic. President & CEO Bryan D. McDonald commented that organic loan growth is strong but offset by payoffs, and that the bank remains active in M&A conversations. EVP & Chief Credit Officer Tony Chalfant clarified that credit normalization, not a change in review aggressiveness, drove the downgrades.

Jeff Rulis of D.A. Davidson & Co. inquired about Heritage Financial's competitive position in the Northwest amid ongoing M&A, the strategy behind acquiring a new team in Spokane, and the reason for pausing share buybacks in Q1.

Answer

CEO Jeff Deuel stated the bank is well-positioned with a solid balance sheet and is prepared for both team acquisitions and potential M&A. President Bryan McDonald added that the Spokane team addition was a strategic move to acquire talent while carefully managing expenses. CFO Don Hinson explained the Q1 buyback pause was a quarter-by-quarter decision influenced by a higher stock price, but noted repurchases could resume at current levels.

Jeff Rulis from D.A. Davidson & Co. inquired about Heritage Financial's net interest margin outlook, including the December average and the impact of recent restructuring, and also asked about capital allocation priorities like buybacks, dividends, and M&A.

Answer

Chief Accounting Officer Jennifer Nino stated the December core margin was 3.44% and expects continued expansion, aided by the late-quarter restructuring and lower borrowing costs. CEO of Heritage Bank Bryan McDonald confirmed M&A discussions are active but unchanged, and they plan to add at least one new team. Jennifer Nino added that moderate buybacks will continue, dependent on stock price, and further loss trades will be considered if market conditions are favorable.

Jeff Rulis inquired about the net interest margin (NIM) outlook following a recent balance sheet repositioning, 2025 loan growth expectations given delayed construction payoffs, and the expense run rate for 2025 considering recent and planned hires.

Answer

CFO Donald Hinson stated that while the NIM should be steady in Q4, he is optimistic about expansion in 2025, driven by repricing CDs and lower borrowing costs offsetting pressure from floating-rate loans. President and CEO of Heritage Bank Bryan McDonald projected mid-to-high single-digit loan growth for 2025, supported by a strong pipeline. CEO Jeff Deuel noted hiring would be judicious, while CFO Donald Hinson forecast expenses rising to a $41-$42 million quarterly range in 2025.

Jeff Rulis sought clarification on QCR Holdings' projected double-digit loan growth pace for 2026, specifically whether it represents gross production or is net of securitizations and construction loan sales. He also asked if the developing partnerships for securitizations would lead to a more consistent, less lumpy channel for LIHTC loan sales.

Answer

President and CEO Todd Gipple clarified that the 10%-15% loan growth range continuing into 2026 refers to gross production, with more precise net figures to be provided in January. Regarding LIHTC loan sales, he stated that QCR Holdings is not pursuing a 'forward flow' arrangement for real-time sales. Instead, the company prefers to retain flexibility to use securitizations and participations as strategic tools to manage the LIHTC business, capital, and concentrations, which will result in a more lumpy, rather than fluent, channel for sales.

Jeff Rulis sought clarification on the correlation between the decline in non-performing loans and the increase in net charge-offs, the composition of the increase in criticized loans, and the net impact of the M2 portfolio runoff on the 8-10% gross loan growth guidance.

Answer

President & CEO Todd Gipple explained there was a high correlation, as the company aggressively charged off fully reserved NPAs from the M2 equipment finance portfolio, which improved the NPA ratio. He noted the criticized loan increase was due to a single, well-collateralized ag-related credit that is being managed out. He also clarified the gross loan growth guidance, providing specific M2 runoff projections of ~$32 million for Q3 and ~$28 million for Q4.

Jeff Rulis of D.A. Davidson Companies inquired about the connection between the decline in non-performing loans and the rise in net charge-offs, the composition of the increase in criticized loans, and how the M2 equipment finance portfolio runoff affects the 8-10% gross loan growth guidance for the second half of the year.

Answer

President & CEO Todd Gipple confirmed a direct correlation, explaining the company aggressively charged off fully reserved NPAs from the M2 equipment finance portfolio to clean up the balance sheet. He stated the criticized loan increase was due to a single, well-collateralized ag-related credit being managed out of the bank with no expected loss. Gipple clarified the 8-10% gross loan growth guidance would be netted down by the M2 runoff, which is projected to be approximately $32 million in Q3 and $28 million in Q4.

Jeff Rulis sought clarification on the relationship between the decline in non-performing loans and net charge-offs, the composition of the increase in criticized loans, and the net impact of the M2 portfolio runoff on the gross loan growth guidance.

Answer

President & CEO Todd Gipple explained a high correlation, stating the company aggressively charged off previously reserved M2 equipment finance NPAs, which reduced non-performers without impacting provision expense. He noted the increase in criticized loans was due to a single, well-collateralized $13 million ag-related credit that is being managed out of the bank with no expected loss. Gipple clarified the 8-10% loan growth guidance is gross, with the M2 runoff expected to reduce that by approximately $32 million in Q3 and $28 million in Q4.

Jeff Rulis questioned if the NIM sensitivity to rate cuts would persist into 2025, whether the drop in criticized loans was related to the m2 Equipment Finance wind-down, and how customer loan demand and the competitive landscape have recently evolved.

Answer

Executive Todd Gipple suggested it is reasonable to expect continued NIM lift into 2025 if the Fed continues to cut rates, though it won't be perfectly linear. Executive Larry Helling clarified that the drop in criticized loans was due to a combination of upgrades and charge-offs, with credit stress concentrated in the 'micro business' sector. Helling also noted that pricing power remains good, the traditional commercial pipeline is modestly improving, and businesses are adjusting to current interest rates.

Jeff Rulis asked about the acquired problem loans, specifically if there were any 'low-hanging fruit' or credits with quick resolution potential that could be addressed swiftly. He also sought an update on Old Second's M&A strategy, particularly regarding potential deposit-heavy or in-market acquisitions, following the Evergreen deal.

Answer

James Eccher, President and CEO, noted that about $10 million in resolved remediation occurred right after the quarter, providing a tailwind for Q4. He explained that most classified additions were due to macroeconomic slowdowns in trucking/transportation, with strong collateral positions. Bradley Adams, COO and CFO, stated that while the balance sheet is ready for M&A, the focus remains on the liability side, with Evergreen being an unusual asset-generation acquisition.

Jeff Rulis asked about the resolution of acquired problem loans, specifically if any credits had a quick resolution in place. He also inquired about the company's stance on additional M&A, particularly if there was a focus on deposit-heavy acquisitions.

Answer

James Eccher, President and CEO, stated that $10 million in resolved remediations occurred right after the quarter, providing a tailwind for Q4. He explained that most classified additions were due to a slowdown in the trucking and transportation industry, but collateral positions were strong, often backed by SBA 504 deals. Bradley Adams, COO and CFO, confirmed the balance sheet is ready for M&A, noting that while Evergreen was an unusual asset-focused deal, their general M&A strategy is primarily focused on the liability side of the balance sheet (deposits).

Jeff Rulis of D.A. Davidson Companies inquired about the integration timeline for the Evergreen acquisition, the expected core expense run rate post-conversion, Evergreen's loan and deposit balances, and details regarding a specific classified owner-occupied CRE credit.

Answer

COO & CFO Bradley Adams stated that the system conversion for Evergreen is expected in the early fourth quarter, with a clean expense run rate visible by Q1 of the next year. He also provided the loan balance of approximately $1.02 billion. CEO & Chairman James Eccher addressed the classified credit, identifying it as a healthcare transaction in Oregon, and expressed confidence in their strong collateral position and the sponsor, stating they do not anticipate a loss.

Jeff Rulis requested expectations for full-year loan growth, asked for the average net interest margin for the month of March, and questioned why the company is not active with its share buyback program ahead of the merger closing.

Answer

Executive James Eccher stated he would be "thrilled with low single-digit growth" for the full year, emphasizing a focus on risk-adjusted returns rather than growth for its own sake. Executive Bradley Adams confirmed the March NIM did not decline from February's level and explained that Regulation M legally precludes the company from executing share buybacks until the pending merger with Evergreen is finalized. He also affirmed that a mid-24% tax rate is a reasonable assumption.

Jeff Rulis of D.A. Davidson & Co. asked for an outlook on the net interest margin (NIM), particularly the impact of potential rate cuts, and sought clarification on the 4-5% expense growth guidance for 2025, including its calculation base.

Answer

Executive Bradley Adams stated that while he doesn't foresee more rate cuts, two cuts could push the NIM toward a $4.35-$4.40 range, but it would be higher without cuts. He clarified the 4-5% expense growth is calculated off the core 2024 expense base, excluding nonrecurring merger and OREO costs. Executive James Eccher added that the full benefit of the First Merchants acquisition on interest expense was not reflected in Q4.

Jeff Rulis sought more detail on the C&I credit that moved to nonaccrual, asking about its industry and if it was an isolated issue. He also asked about the drivers behind the linked-quarter decline in noninterest-bearing deposits.

Answer

Executive James Eccher identified the nonaccrual credit as being in the 'scrapping industry' and confirmed it was an idiosyncratic, one-off situation. Executive Bradley Adams explained that the decline in noninterest-bearing deposits was due to normal seasonality, tax payment flows, and liquidity movements by a few larger customers, not a broader trend of account loss.

Jeff Rulis inquired about National Bank Holdings Corporation's net interest margin outlook, specifically the mid-3.90% guidance, the impact of lower deposit costs, and how potential rate cuts might affect the margin, especially given the 3.98% reported margin. He also asked for clarity on the 2UniFi expense step-up, whether it represents a new run rate, and the overall expense expectations for 2026, considering cost reduction actions.

Answer

Nicole Van Denabeele, CFO, explained that the Q3 margin benefited from $0.5 million in recovered interest and fees (2 basis points). She confirmed that teams are preparing to adjust deposit rates in line with anticipated Fed rate cuts, expecting these actions to offset the repricing of the variable loan portfolio. Regarding 2UniFi expenses, Ms. Van Denabeele noted the Q3 step-up was expected due to the amortization of capitalized development assets, with further investments in marketing and variable costs anticipated. Tim Laney, Chairman and CEO, added that while partnership discussions for 2UniFi are ongoing, the company aims to keep overall expenses relatively flat in 2026, assuming the current status quo.

Jeff Rulis asked for clarification on the 2Unify expense step-up, whether it represents a new run rate, and if further increases are expected in coming quarters, particularly regarding overall 2026 expenses.

Answer

Nicole Van Denabeele, CFO, explained that the Q3 step-up in 2Unify expenses was anticipated due to the launch and associated depreciation of capitalized development assets. She noted that marketing investments and variable expenses tied to client onboarding would continue. Tim Laney, Chairman and CEO, added that the company is in partnership discussions for 2Unify and will provide more details in the Q4 earnings call, aiming to keep expenses relatively flat under a status quo scenario.

Jeff Rulis of D.A. Davidson Companies inquired about loan growth dynamics, asking if the cleanup of higher-risk portfolios was largely complete and if growth was being managed to stay below the $10 billion asset threshold. He also asked what factors could drive the net interest margin (NIM) to expand toward 4%.

Answer

Chairman & CEO Timothy Laney confirmed the bulk of the portfolio risk reduction is complete and stated the bank is not managing growth to stay under the $10 billion asset mark. President Aldis Birkans added that the loan pipeline is the strongest in 12 months, supporting the mid-single-digit growth outlook. Regarding the margin, Birkans explained that significant DDA (non-interest-bearing deposit) growth would be the primary catalyst for expansion beyond the current guidance.

Jeff Rulis of D.A. Davidson Companies inquired about the loan portfolio, asking if the strategic reduction in higher-risk loans is largely complete and whether the bank is managing growth to stay below the $10 billion asset threshold. He also asked what factors would be necessary to drive the net interest margin (NIM) above the current guidance and closer to 4%.

Answer

Chairman & CEO, Timothy Laney, clarified that the bank is not managing its growth to stay under the $10 billion asset mark and confirmed that the bulk of the planned loan portfolio derisking is complete. President, Aldis Birkans, added that loan pipelines are the strongest they have been in the last twelve months. Regarding the NIM, Mr. Birkans stated that meaningful growth in zero-costing DDA deposits would be the primary catalyst for margin expansion.

Jeff Rulis of D.A. Davidson & Co. asked about National Bank Holdings' loan portfolio, questioning if the derisking of trucking and CRE loans is largely complete and if the $10 billion asset threshold is suppressing growth. He also inquired about the net interest margin (NIM) and what factors could drive it above the guided range toward 4%.

Answer

Chairman & CEO Timothy Laney confirmed the bulk of the targeted loan portfolio cleanup is finished and stated that the bank is not actively managing its size to stay below the $10 billion asset threshold. President Aldis Birkans added that the loan pipeline is the strongest it has been in the last twelve months. Regarding the NIM, Mr. Birkans explained that while they are proud of the 3.95% margin, significant future expansion would primarily be driven by growth in non-interest-bearing DDA deposits.

Jeff Rulis asked for details on the Q1 fraud-related charge-off, including potential for recoveries, its impact on net interest margin, and the nature of other charge-offs. He also inquired about the expense run-rate needed to meet guidance and the timing for the 2UniFi revenue outlook.

Answer

Chairman and CEO Tim Laney confirmed the fraud was a non-systemic, one-off event that has been fully addressed, but could not comment on recoveries due to an ongoing investigation. President Aldis Birkans noted the margin impact was minimal at ~2 basis points and that other charge-offs were minor and previously reserved for. Tim Laney also confirmed the expense math and stated that 2UniFi revenue guidance, including a multi-year outlook, would be provided with Q4 results.

Jeff Rulis asked for details on the net interest margin (NIM) outlook for late 2024 and into 2025, including the impact of potential Fed rate cuts. He also inquired about capital allocation priorities, specifically M&A, investment in the 2UniFi platform, and share buybacks.

Answer

President Aldis Birkans confirmed the mid-3.8% NIM guidance for Q4, noting the bank is relatively neutral to near-term rate cuts and that loan yields and deposit costs are trending favorably. Chairman and CEO Tim Laney added that detailed 2025 guidance would be provided next quarter. Regarding capital, Laney stated that the bank is prepared for strategic M&A, will continue investing in 2UniFi, but is not considering share buybacks at current valuation levels.

Jeff Rulis inquired about the expected pace of Bridgewater Bancshares' net interest margin (NIM) improvement towards the 3% target, asking if it would be steady or ramp later. He also asked about the potential quantifiable benefits of anticipated rate cuts on borrower health and the loan portfolio, and sought clarification on the allocation of merger-related costs and the outlook for expense normalization.

Answer

Joe Chybowski, President and Chief Financial Officer, stated that the margin improvement is expected to be fairly steady, at two to three basis points a month, assuming two rate cuts in October and December. Katie Morrell, Chief Credit Officer, noted that while no quantifiable analysis was available, the bank is proactively addressing repricing risks, and rate reductions would benefit loans. Joe Chybowski further clarified that merger-related expenses were specifically highlighted in the non-interest expense slide, and future expenses are expected to normalize, growing in line with asset growth, similar to pre-deal levels.

Jeffrey Rulis of D.A. Davidson & Co. asked for the average net interest margin (NIM) for the month of June, details on the securities sold, and the outlook for swap fee income, including its recurrence and the competitive environment.

Answer

CFO & President Joe Chybowski provided the June standalone NIM of 2.65% and explained that the sold securities were primarily low-4% yielding treasuries and mortgage-backed securities, making their redeployment into higher-yielding loans a favorable trade. Chief Banking Officer Nick Place added that while swap fees can be lumpy, they are a strategic focus and are expected to be a more consistent contributor, driven by broad banker participation and as a tool to remain competitive.

Jeff Rulis inquired about the competitive landscape for commercial real estate (CRE) lending, the drivers of net interest margin (NIM) performance including the March average, the timing of loan growth within the quarter, and the expected workout timeline for a specific nonaccrual office loan.

Answer

Chief Banking Officer Nicholas Place acknowledged that increased activity from smaller banks has tightened lending spreads but noted that Bridgewater's strong client relationships often provide a 'last look' at deals. President and CFO Joseph Chybowski reported a March NIM of 2.53% and expects the pace of margin expansion to moderate. Nicholas Place added that loan growth was relatively even throughout the quarter. Chief Credit Officer Jeffrey Shellberg stated that the workout for the nonaccrual CBD office loan will be longer-term, though the borrower remains engaged.

Jeff Rulis of D.A. Davidson followed up on the net interest margin, asking for the specific margin for the month of December and whether the 'modest' expansion guidance includes or excludes purchase accounting accretion. He also asked about the assumptions for loan payoff activity within the 2025 loan growth forecast and inquired where the Q4 merger costs were recorded on the income statement.

Answer

President and CFO Joseph Chybowski provided the December net interest margin of 2.36% and confirmed the guidance for modest expansion includes the expected 1-2 basis points of quarterly purchase accounting accretion. Chief Banking Officer Nicholas Place stated that they anticipate loan payoff levels to be similar to Q4, but that strong new origination activity should enable growth. Mr. Chybowski also confirmed the Q4 merger costs were primarily recorded as professional fees and other expenses.

Jeff Rulis inquired about the drivers of recent loan payoffs, asking if they were bank-encouraged for credit reasons or customer-driven, and whether a specific loan vintage was responsible. He also asked if the current payoff level represents a high watermark, the timing and cost of recent brokered deposit runoffs, and how the bank's expense growth will track against potentially lighter asset growth into 2025.

Answer

Chief Banking Officer Nicholas Place explained that loan payoffs were a mix of strategic exits and natural life-cycle events that had been delayed, with no single vintage theme, and he expects elevated payoffs to continue in Q4. President and CFO Joseph Chybowski added that higher-cost brokered deposits, with rates above 5.5%, were called mid-quarter as core deposit growth accelerated. Chybowski also affirmed that the bank's principle of expense growth tracking asset growth is expected to hold true for 2025.

Jeff Rulis questioned the slight increase in early-stage past due loans, specifically in commercial real estate, and sought clarification on the timing of these delinquencies. He also asked about the specific segments contributing to the quarter's charge-offs and the expected expense run rate, particularly marketing, given historical seasonality.

Answer

Richard Murphy, Vice Chairman and Chief Lending Officer, clarified that the increase in past dues was episodic, often related to working with customers on maturing loans, and not indicative of systemic problems. Dave Dykstra, Vice Chairman and Chief Operating Officer, added that while 30-59 day past dues were up from Q2, they were still among the lowest in the last five quarters, with non-accruals and classified loans showing improvement. Richard Murphy stated that charge-offs were unrelated to any specific segment, stemming from the final resolution of previously reserved credits. Dave Dykstra indicated that marketing expenses typically decrease in Q4 and Q1 due to reduced sponsorships, expecting overall expenses to remain in the low to mid-$380 million range.

Jeff Rulis of D.A. Davidson Companies asked for details on the increase in commercial (C&I) non-performing loans, inquired about areas of pressure in the C&I portfolio, and asked about the outlook for covered call option income.

Answer

Vice Chairman & Chief Lending Officer Richard Murphy explained the C&I NPL increase was due to one specific credit and was not industry-driven. EVP & CFO David Stoehr added that the overall NPL ratio remains low and that covered call income, typically $1M-$6M quarterly, acts as a hedge and generally increases when rates fall.

Jeff Rulis inquired about the company's 2025 focus on expense management, its M&A appetite following the Macatawa acquisition, capital allocation priorities, and the reason for a change in OREO.

Answer

CFO David Dykstra clarified that expense management is a matter of 'good practice' and that they expect expense growth in the mid-single digits, which is below the anticipated loan growth, allowing for continued investment. Executive Timothy Crane stated that while M&A interest has increased post-election, Wintrust remains disciplined and focused on organic growth. Dykstra added that supporting growth is the primary use of capital and the OREO change was normal business flow.

Jeff Rulis of D.A. Davidson sought details on the industry concentration of recent C&I charge-offs and questioned the rise in early-stage delinquencies in the office CRE portfolio. He also asked for guidance on the expense run rate, factoring in the full impact of the Macatawa acquisition.

Answer

Richard Murphy, EVP and Chief Credit Officer, clarified that the bulk of the C&I charge-offs were transportation-related. He explained the increase in early CRE delinquencies was administrative due to extended renewal negotiations and not a credit concern. David Stoehr, CFO, projected that Macatawa would add approximately $5 million to Q4 expenses and reiterated a mid-single-digit expense growth outlook for 2025.

Jeffrey Rulis from D.A. Davidson inquired about Glacier Bancorp's net interest margin expansion trajectory, including the outlook for Q4 and 2026, the reception and future M&A opportunities in the Texas market following the Guaranty acquisition, and the elevated tax rate for the quarter.

Answer

Treasurer Byron Pollan confirmed continued margin growth, projecting an additional 18-20 basis points in Q4, including Guaranty's impact, with moderation expected in 2026. CEO Randy Chesler noted the excellent cultural fit of Guaranty and anticipated future M&A conversations in Texas after the Q1 conversion. CFO Ron Copher attributed the elevated tax rate to non-deductible merger-related expenses, advising to use the Q3 rate for Q4.

Jeff Rulis of D.A. Davidson Companies inquired about Glacier Bancorp's net interest margin (NIM) trajectory, asking if the Q2 performance was free of one-time items and on track for the year-end guide. He also requested an updated outlook on non-interest expenses, considering the full-quarter impact of the Bank of Idaho acquisition.

Answer

SVP & Treasurer Byron Pollan confirmed the strong NIM trend, upgrading the forecast to a 15-17 basis point increase per quarter for the remainder of the year, driven by the Bank of Idaho acquisition and strong loan growth. CFO Ron Copher provided a detailed expense update, revising the Q3 core expense guide to $159-$161 million and Q4 to $161-$163 million, accounting for the acquisition and deferred spending.

Jeff Rulis of D.A. Davidson Companies inquired about Glacier Bancorp's net interest margin (NIM) outlook, asking if the strong Q2 performance was sustainable or included one-time items, and sought clarification on the expense guide for the upcoming quarters.

Answer

SVP & Treasurer Byron Pollan confirmed the margin strength is sustainable, projecting 15 to 17 basis points of growth per quarter for the remainder of the year, driven by the Bank of Idaho acquisition and strong loan growth. CFO Ron Copher provided a detailed expense forecast, guiding for core non-interest expense of $159-161 million in Q3 and $161-163 million in Q4, reflecting the full impact of the Bank of Idaho acquisition and controlled spending.

Jeff Rulis of D.A. Davidson & Co. asked for an update on the net interest margin progression, the components of the Bank of Idaho's margin contribution, the drivers behind the expense guide, and any M&A developments in the Southwest.

Answer

Treasurer Byron Pollan confirmed the margin trajectory is supported by structural drivers like securities runoff and FHLB paydowns, reaffirming the $3.20-$3.25 full-year guide. He noted the Bank of Idaho acquisition could add 4 basis points to the margin. CFO Ron Copher detailed the expense guide, explaining Q1's lower figure was due to slower hiring and providing an updated quarterly forecast including the acquisition. Executive Randall Chesler confirmed ongoing M&A conversations in both the Mountain West and Southwest.

Jeff Rulis of D.A. Davidson & Co. inquired about Glacier's net interest margin (NIM) outlook for 2025 and the expected loan growth trajectory. In a follow-up, he asked about the drivers behind the quarterly increase in charge-offs and provision expense.

Answer

Treasurer Byron Pollan projected the full-year 2025 NIM to land between 3.20% and 3.25%, driven by asset repricing and maturing borrowings. Chief Credit Administrator Tom Dolan forecasted low to mid-single-digit organic loan growth. Regarding credit, Mr. Dolan explained that Q4 charge-offs were routine year-end cleanup and the provision increase was driven by new unfunded construction commitments, not a change in the funded portfolio's outlook.

Jeff Rulis from D.A. Davidson & Co. inquired about the drivers behind the strong organic growth in noninterest-bearing deposits, the timing of this growth, and the spot deposit cost at quarter-end. He also asked for an updated expense run rate and questioned the slight increase in credit issues, particularly in agriculture and 1-4 family loans.

Answer

Treasurer Byron Pollan attributed the noninterest-bearing deposit growth to typical third-quarter seasonal strength, noting it was spread nicely throughout the quarter. He provided a spot rate for total deposits of 1.35% as of September 30. CFO Ron Copher credited the divisions for strong expense control, aided by technology, and lowered the Q4 core noninterest expense guidance to $143-$145 million. Chief Credit Administrator Tom Dolan explained the minor credit uptick as normalization from record levels, attributing the agriculture increase to a single manageable relationship and stating there were no systemic negative trends.

Jeff Rulis inquired about WaFd's loan pipeline, specifically the budgeting for fiscal year 2026 net growth, and the expected runoff pace for the inactive loan portfolio. He also asked for an update on the net interest margin (NIM) spot rate at quarter-end and the company's rate sensitivity given anticipated Fed rate cuts.

Answer

Brent Beardall, President and CEO, and Kelli Holz, CFO, explained that WaFd anticipates 8%-12% growth in the active loan portfolio for the next year, with the inactive portfolio expected to run off at $200 million-$300 million per quarter. Kelli Holz confirmed the 2.82% NIM was the spot rate at quarter-end, indicating a positive starting point for the next fiscal quarter, and noted that the margin could expand with future rate cuts, typically lagging by about a quarter for full effectiveness. Brent Beardall added that a positive slope of the yield curve would be very beneficial.

Jeff Rulis inquired about Banner Corporation's net interest margin, specifically the timing and tail benefit of FHLB payoffs, and the impact of anticipated Fed rate cuts on future margin performance. He also asked about the company's capital deployment strategy, including share buyback activity, dividend policy, and interest in M&A opportunities. A follow-up question concerned the September average margin and the duration of office space consolidation costs.

Answer

CFO Rob Butterfield explained that FHLB advances were paid down by mid-quarter, suggesting a potential tail benefit. He detailed the margin's sensitivity to Fed actions, expecting expansion with no cuts, flatness with one cut, and moderate compression with multiple cuts due to adjustable-rate loan repricing. CEO Mark Grescovich affirmed confidence in share repurchases at current pricing and stated that while M&A opportunities are considered, Banner's strong earnings momentum means acquisitions are not essential for improved earnings power. Rob Butterfield later clarified that September's margin was close to the quarterly average and that lease termination costs from back-office consolidation are expected for a few more quarters, potentially through mid-2026.

Jeffrey Rulis of D.A. Davidson & Co. sought clarification on the projected Q3 loan growth pullback, the outlook for the net interest margin, and the specific drivers behind the quarterly increase in nonperforming assets.

Answer

EVP & Chief Credit Officer Jill Rice clarified that the projected Q3 loan growth pullback is from the high 9% annualized rate of Q2, not a net decline. EVP & CFO Robert Butterfield noted a positive margin outlook if the Fed remains on pause, with loan yields expected to rise and funding costs potentially decreasing with seasonal deposit growth and the sub-debt redemption. Jill Rice further explained that the increase in nonperforming assets was almost exclusively from 1-to-4 family residential properties, which have prolonged resolution timelines, while the agricultural sector has seen some downgrades to substandard but did not drive the nonperforming increase.

Jeffrey Rulis sought clarification on the expected Q3 loan growth 'pullback,' asking if it meant a slower pace or a net decline. He also asked about the net interest margin outlook given several positive drivers and questioned which loan categories contributed to the increase in nonperforming assets.

Answer

EVP & Chief Credit Officer Jill Rice clarified the 'pullback' refers to a moderation from Q2's 9% annualized growth rate, not a net loan decline, consistent with seasonal trends. EVP & CFO Rob Butterfield confirmed a positive margin outlook, expecting loan yields to rise 4-5 bps per quarter and funding costs to potentially decrease with seasonal deposit inflows. Jill Rice specified that the increase in nonperforming assets was almost exclusively from 1-4 family residential mortgages, while recent credit downgrades were more concentrated in the agricultural sector.

Jeffrey Rulis sought clarification on the projected Q3 loan growth 'pullback,' the outlook for the net interest margin given recent balance sheet moves, and the specific drivers behind changes in credit metrics, including nonperforming assets and risk rating downgrades.

Answer

EVP & Chief Credit Officer, Jill Rice, clarified that the Q3 loan growth 'pullback' is relative to Q2's strong 9% annualized pace, not a net decline. EVP & CFO, Robert Butterfield, suggested a favorable margin outlook if the Fed remains on pause, with loan yields expected to rise and funding costs potentially decreasing with seasonal deposit inflows. Jill Rice added that the increase in nonperforming assets was mainly from 1-4 family residential loans, while downgrades were concentrated in the agricultural sector due to commodity price pressures.

Jeffrey Rulis of D.A. Davidson & Co. sought clarification on the expected Q3 loan growth pullback, the outlook for the net interest margin, and the specific drivers behind the increase in nonperforming assets.

Answer

EVP & Chief Credit Officer, Jill Rice, clarified the Q3 pullback refers to a slower growth rate than Q2's 9% pace, not a net decline, and noted the rise in nonperforming assets was almost exclusively from 1-to-4 family residential properties. EVP & CFO, Robert Butterfield, suggested margin tailwinds from rising loan yields and potential funding cost improvements from seasonal deposit inflows reducing FHLB reliance.

Jeff Rulis of D.A. Davidson & Co. inquired about the drivers behind the better-than-expected net interest margin (NIM), future margin expectations, credit quality trends in the agriculture portfolio, C&I line utilization, and the full-year loan growth outlook.

Answer

EVP & CFO Robert Butterfield attributed the strong NIM to higher earning asset yields and stable funding costs, projecting further expansion in Q2 assuming the Fed remains on pause. EVP & Chief Credit Officer Jill Rice confirmed the agriculture portfolio is a key area of watch due to tariff risks but noted its small size (3% of loans). She also stated C&I utilization is in the mid-30% range and reiterated the mid-single-digit loan growth target for 2025, supported by rebuilding commercial pipelines.

Jeff Rulis inquired about Banner's net interest margin (NIM), asking about any unusual recoveries, the impact of a maturing hedge, and the outlook for 2025. He also asked for a strategic update on the mortgage business and the loan growth forecast for the upcoming year.

Answer

Executive Mark J. Grescovich and CFO Robert Butterfield clarified that the Q4 margin improvement was driven by lower funding costs and a maturing hedge, not unusual recoveries, calling the 3.82% NIM a 'pure number'. Butterfield projected a relatively flat Q1 NIM due to rate cut impacts on loan yields. Grescovich affirmed the company's long-term commitment to its mortgage banking business, seeing opportunity in market disruption. Executive Jill Rice confirmed the company is targeting mid-single-digit loan growth for 2025.

Jeff Rulis inquired about the net interest margin outlook for Q4 and 2025 given potential Fed rate cuts, asked for details on the increase in nonaccrual loans, and sought management's perspective on M&A activity by credit unions in the Northwest.

Answer

EVP and CFO Robert Butterfield pointed to rate sensitivity disclosures, noting the bank is slightly asset sensitive and has the potential to outperform its modeled 28% downside deposit beta. EVP, Commercial Banking Jill Rice attributed the rise in nonperforming loans primarily to a single Northern California agricultural relationship in tree nuts, with the remainder being smaller consumer and small business loans. President and CEO Mark J. Grescovich commented that while credit unions have an unfair pricing advantage in M&A, any banks they acquire were likely already reviewed by traditional bank buyers like Banner.

Jeff Rulis of D.A. Davidson Companies inquired about the expected timing for the loan portfolio to stabilize, the potential level of earning assets by year-end, and the company's capital deployment priorities given its strengthening CET1 ratio.

Answer

EVP & CFO David Della Camera stated that after adjusting for strategic actions, the underlying loan decline was modest. He anticipates loan balances will be modestly lower in Q3, with hopes for stabilization in Q4. He also projected that earning assets would bottom in Q3. Regarding capital, Della Camera acknowledged the strong levels create optionality and confirmed the company is evaluating all deployment options. President & CEO James Reuter added that some of the significant loan payoffs in the quarter were intentional exits from non-strategic lending areas.

Jeff Rulis of D.A. Davidson & Co. probed further into the credit issues, asking whether the increase in problem assets was driven more by a worsening macro environment or an internal 'credit reset' with a more critical view. He also asked for a sense of where the bank is in the credit review process and if further increases in criticized loans should be expected. Lastly, he requested a figure for the expected expense savings from the recently announced branch sale.

Answer

CEO James Reuter responded that the credit migration was a combination of both factors, citing slower lease-ups in multifamily due to economic conditions alongside the internal credit reset. He confirmed that the special external and internal reviews are complete, and future reviews will be part of normal-course due diligence, but declined to predict future credit trends given economic uncertainty. Deputy CFO David Della Camera quantified the branch sale impact, stating that noninterest expense as a percentage of the divested deposits is in the 'mid-2s'.

Jeff Rulis inquired about the outlook for the loan loss reserve level in 2025, the expected pacing of net charge-offs throughout the year, and whether expense guidance includes costs for hiring new lending teams. He also asked for a 'temperature check' on staff morale following the recent CEO transition.

Answer

CFO Marcy Mutch stated that the reserve level is expected to remain stable, assuming no significant change in portfolio mix, and that net charge-offs are anticipated to be balanced throughout the year rather than front-loaded. CEO Jim Reuter added that there are no plans to hire lending teams, as he is confident in the existing staff, with expense increases earmarked for marketing. Both Ms. Mutch and Deputy CFO David Redmon affirmed that employee morale is positive and the team is encouraged by the new strategic direction.

Jeff Rulis of D.A. Davidson Companies inquired about Alerus's net interest margin guidance, specifically seeking the expected purchase accounting accretion for Q3 and Q4. He also asked about the drivers of the recent CRE hospitality loan sale and whether further portfolio cleanup is anticipated.

Answer

EVP & CFO Al Villalon provided specific accretion guidance, expecting 27 basis points in Q3 and 22 in Q4, excluding any early payoffs. EVP & COO Karin Taylor explained the loan sale involved assets from the Home Federal portfolio with more liberal underwriting standards, adding that the company will continue to seek opportunities to de-risk the balance sheet.

Jeff Rulis sought clarification on the basis point impact of a nonaccrual recovery and purchase accounting on the reported margin, the outlook for reported vs. core margin, the source of a large nonaccrual reduction, and the quarterly expense run rate.

Answer

Chief Financial Officer Alan Villalon confirmed a 5 basis point impact from the recovery and 4 basis points from excess accretion, and affirmed the 3.20% to 3.30% reported NIM guidance for the year. Chief Operating Officer Karin Taylor explained the nonaccrual reduction was from a legacy Alerus credit and a separate CRE loan payoff. President and CEO Katie Lorenson added that overall credit is normalizing. Mr. Villalon guided to a Q2 core expense run rate of around $49 million.

Jeff Rulis sought clarification on the expense growth guidance, the 2025 net interest margin outlook including the expected dollar amount of purchase accounting accretion, and confirmation of Q4 organic growth figures. He later asked for a breakdown of merger costs and an update on a large multifamily construction project.

Answer

CFO Al Villalon confirmed a low double-digit expense growth outlook off a core 2024 base of ~$176 million and projected purchase accounting accretion of about $4 million per quarter. He also confirmed the organic loan and deposit growth numbers. COO Karin Taylor provided an update on the construction project, stating it is over 90% complete, will require additional funding to finish, and is expected to be listed for sale upon completion in mid-2025.

Jeff Rulis of D.A. Davidson & Co. inquired about a large nonaccrual construction credit, asking for its location, completion timeline, and whether credit extension was capped. He also sought clarity on the expense run rate, specifically which operational costs were non-recurring, and questioned whether the strong loan growth was due to market share gains or overall market expansion.

Answer

Karen Bohn, an executive, detailed that the nonaccrual construction loan is a Class A property in the Twin Cities, 87% complete with an early 2025 target, and that various resolution options are being evaluated. CFO Alan Villalon and Executive Katie Lorenson addressed expenses, indicating professional fees should normalize and that the core legacy expense run rate is expected to decline. Chief Revenue Officer James Collins confirmed that the robust loan growth is primarily from taking market share as new talent brings over established relationships.

Jeff Rulis from D.A. Davidson Companies inquired about First Business Financial Services' loan growth outlook, asking if the 10% annual target is achievable and if borrower sentiment is improving. He also questioned the impact of rising deposit competition on the company's net interest margin (NIM) target.

Answer

CEO Corey Chambas and President & COO David Seiler affirmed that the 10% loan growth target is still in sight, noting the year-over-year rate is close at 8.9% and that borrower sentiment is stabilizing. CFO Brian Spielmann stated that while deposit competition remains high, the bank has always paid competitive rates and does not see it as a threat to their long-term NIM target of 3.60% to 3.65%.

Jeff Rulis asked for a follow-up on the provision for credit losses and its correlation to the quarter's higher charge-offs. He also questioned the elevated cash and securities balances and sought to clarify if the reclassification of loan fee income represented a new permanent run rate.

Answer

CEO Corey Chambas and CFO Brian Spielmann explained that the charge-offs were covered by existing specific reserves, meaning the provision was more influenced by loan growth and CECL model factors. Spielmann described the high cash balance as 'intentional, but temporary,' resulting from strong late-quarter deposit inflows that have since been deployed. He also confirmed that while the fee income reclassification is permanent, the company still expects to achieve its overall 10% annual fee income growth target through its other diversified revenue streams.

Jeff Rulis asked about the outlook for loan yield repricing and its potential impact on the average loan yield. He also sought clarity on the net interest margin, asking about the stability of the core NIM relative to the 3.48% reported. Additionally, he requested confirmation of the 16-18% tax rate guidance, the implied expense growth rate, and details on the components of the Q4 increase in nonaccrual loans.

Answer

CFO Brian Spielmann stated that reinvestment opportunities and an improving C&I lending mix should support asset yields. He affirmed the bank's goal for a stable NIM in the 3.60% to 3.65% range, with fees in lieu of interest expected to normalize around 15 basis points. He confirmed the 16-18% tax rate guidance and that high single-digit expense growth is a fair assumption. The nonaccrual increase was primarily attributed to a single C&I relationship in the wholesale equipment industry, with the remainder from small-ticket equipment finance.

Jeff Rulis of D.A. Davidson & Co. inquired about the outlook for the cost of funds, asking about a potential peak and the nature of deposit rate reductions. He also asked for clarification on the expense line, specifically the SBA recourse provision, and questioned which of the company's strategic initiatives might be easier to acquire versus build internally.

Answer

CFO Brian Spielmann explained that the bank has been proactive in reducing deposit costs both before and after the recent Fed rate cut, using a combination of broad-based and targeted approaches on exception-priced clients. He noted the SBA recourse provision was a non-recurring item. Executive Corey Chambas added that the robotic process automation (RPA) initiative is already well underway, having brought the team in-house after working with an outside consultant, making it one of the more advanced strategic projects.

Jeff Rulis of D.A. Davidson Companies questioned the expected timeline for running off the $6 billion transactional asset portfolio, the potential for a securities yield tailwind in Q3, the net interest margin for June, and the forward-looking expense run rate.

Answer

CEO Clint Stein explained that the transactional asset runoff is a 2-3 year process, as a quick sale would be detrimental to shareholder value. EVP & CFO Ronald Farnsworth confirmed the June margin was 3.79% and that Q2 bond yields are a better run rate than Q1. Clint Stein added that the expense run rate will likely increase from Q2 levels due to planned investments in Intermountain states, which were previously delayed.

Jeff Rulis of D.A. Davidson Companies questioned the runoff timeline for the $6 billion in transactional assets, the net interest margin outlook for Q3, and the forward-looking expense run rate before the Pacific Premier acquisition.

Answer

President & CEO Clint Stein explained that the transactional asset runoff is a multi-year process, as a quick sale would be value-destructive, and emphasized that the portfolio remix improves profitability even with muted growth. EVP & CFO Ronald Farnsworth provided the adjusted June net interest margin at 3.79% and noted Q2 bond yields are a better go-forward indicator than Q1. Stein added that the current expense run rate is slightly low, as planned investments are being shifted to new markets, which will increase future spending.

Jeff Rulis of D.A. Davidson & Co. inquired about Columbia Banking System's capital deployment priorities for 2025, loan growth expectations, and potential opportunities in the single-family mortgage market.

Answer

President and CEO Clint Stein stated that capital generation exceeds operational needs and the dividend, providing flexibility for opportunistic capital actions in 2025 as regulatory ratios are above long-term targets. Executive Torran Nixon projected very low single-digit total loan growth, with C&I growth in the low to mid-single digits. Executive Christopher Merrywell and CEO Clint Stein clarified that while they will serve existing customers' mortgage needs, the strategy is to use the secondary market and reduce the on-balance-sheet single-family portfolio over time, not to expand it.

Jeff Rulis from D.A. Davidson inquired about strategies to reduce mortgage banking volatility, the loan production contribution from new expansion markets, and the company's current stance on M&A priorities.

Answer

EVP and CFO Ron Farnsworth stated that volatility in mortgage banking has been reduced, notably by hedging the MSR portfolio, with no plans to significantly reduce its size. President and CEO Clint Stein and President of Commercial Banking Torran Nixon described new market production as meaningful and profitable but declined to provide specific dollar figures. On M&A, Clint Stein emphasized that the top priority is optimizing the current franchise, with team lift-outs being a consideration and whole bank M&A being the lowest priority at this time.

Jeff Rulis of D.A. Davidson Companies asked what triggered the move of a large QSR loan to non-accrual status and whether the balance could be reduced incrementally as properties are sold. He also questioned if faster regulatory approvals are influencing the M&A environment.

Answer

EVP & Chief Credit Officer Krzysztof Slupkowski clarified that the non-accrual classification was a timely and appropriate accounting step. The resolution plan involves exiting unprofitable stores, which could take several quarters. Chairman & CEO Brad Elliott added that forcing a sale of the entire package is another potential path to resolution. Regarding M&A, Elliott stated that the current high level of activity is driven by the age of bank ownership and management teams who had previously delayed sales, rather than by the speed of regulatory approvals.

Jeff Rulis inquired about the potential for future government-guaranteed loan purchases, the drivers of organic growth optimism, and the mindset of potential M&A sellers given market volatility. He also asked for a specific dollar figure for the expected accretion from the NBC Corp. merger.

Answer

CFO Chris Navratil stated the Q1 loan purchase was a one-time opportunistic deal and not an ongoing strategy. He and Chairman and CEO Brad Elliott attributed growth optimism to proactive calling efforts and noted that M&A seller motivation is still driven by age and succession planning, with stock deals being attractive when there is upside potential. Regarding the NBC deal, Chris Navratil projected about $0.50 of accretion in 2026 and noted an $0.18 estimate for the back half of 2025.

Jeff Rulis inquired about the drivers behind the recent loan growth, the impact of Fed visibility on customer activity, details on the expense guide including amortization, and the nature of inflation pressures on borrowers.

Answer

CFO Chris Navratil clarified that recent loan growth was driven by the closing of deals already in the pipeline, not by Fed rate visibility. He confirmed amortization is included in the expense guide and detailed future expense reductions from non-repeating accruals and other small efficiencies. Chief Credit Officer Krzysztof Slupkowski explained that credit pressures are a normalization affecting smaller operators, but the bank's exposure is granular and not a broad concern. CEO Brad Elliott added that a larger nonaccrual credit was SBA-related.

Asked about the redeployment of staff from the completed charter consolidation project, sought details on new nonperforming loans and areas of credit softness, and inquired about the metrics being used to evaluate geographies under the HTLF 3.0 initiative.

Answer

Staff from the consolidation project, who were not fully dedicated to it, will be reassigned to HTLF 3.0 initiatives. The increase in NPLs was mainly a single, largely guaranteed ag credit, and there are no systemic credit concerns. The evaluation of geographies is focused on markets where the bank lacks scale, with the ultimate goals of improving efficiency and growth potential, guided by metrics like EPS, expense control, and TCE impact.

Jeff Rulis of D.A. Davidson & Co. asked about the loan growth outlook for 2023, specifically the balance sheet impact from the planned exit of the GreenSky partnership, and the forecast for fee income given the pending MSR sale and investments in wealth management.

Answer

Executive Jeffrey Ludwig projected that GreenSky loan balances could decline by $100 million to $300 million in 2023, creating a headwind that would be partially offset by growth in the commercial and equipment finance portfolios. He also stated that growth in wealth management revenue is expected to offset the income lost from the MSR sale later in the year, with the potential for overall fee income to be slightly better than the previous year. Executive Eric Lemke confirmed the quarterly impact of the preferred stock dividend.

Jeff Rulis of D.A. Davidson & Co. inquired about the loan growth outlook, specifically the balance sheet impact from exiting the GreenSky partnership. He also asked about the core fee income run rate considering the planned MSR portfolio sale and the push into wealth management, and sought clarification on the quarterly impact of the new preferred stock dividend.

Answer

Executive Jeffrey Ludwig projected that GreenSky balances could decline by $100 million to $300 million, creating a headwind, but expects growth in commercial and equipment finance to result in modest overall loan growth. He also confirmed that growth in wealth management should offset the future loss of MSR revenue, potentially leading to slightly higher fee income for the year. Executive Eric Lemke affirmed that a $2.2 million quarterly dividend impact from the preferred stock is a fair estimate.