Columbia Banking System - Q3 2024

Transcript

Operator (participant)

Welcome to the Columbia Banking System third quarter two thousand twenty-four earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. At this time, I would like to introduce Jackie Bohlen, Investor Relations Director, to begin the conference call.

Jackie Bohlen (Head of Investor Relations)

Thank you, Gigi. Good morning, everyone. Thank you for joining us as we review our third quarter results. The earnings release and corresponding presentation are available on our website at columbiabankingsystem.com. During today's call, we will make forward-looking statements which are subject to risks and uncertainties and are intended to be covered by the Safe Harbor provisions with federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliation provided in our earnings material. We'll now hand the call over to Columbia's President and CEO, Clint Stein.

Clint Stein (CEO)

Thank you, Jackie, and good morning, everyone. Our third quarter activities and results demonstrate our commitment and continued progress toward regaining long-term top quartile performance. We grew core deposits even as we reduced their cost. We also completed the near-term initiatives we detailed in April, and we continued to reinvest in our people, systems, and processes to drive our franchise profitably forward. When we spoke last quarter, I outlined the drivers of $270 million in merger-to-date gross expense reductions, and we fully achieved our target during the third quarter. Our operational effectiveness work eliminated redundancies and streamlined operations, making our organization more efficient. This work is enabling us to better serve our customers and our communities while enhancing long-term shareholder value. Our gross expense savings represent double the $135 million we outlined at the announcement of the merger.

The merger to date net savings of roughly $213 million accounts for $45 million of franchise expansion and reinvestments made leading up to and shortly after the merger close, as well as the additional $12 million of investments planned in the coming months and quarters. Our expense run rate in the third quarter was just below the expected fourth quarter annualized run rate we have consistently discussed since March. Planned reinvestments will continue into 2025. Our cost-conscious culture will support a reasonable amount of inflationary lift from this level. However, we will continue to remain diligent with resource allocation and work to find expense offsets for franchise reinvestment beyond the $12 million already earmarked. We believe our reinvestment dollars will support the continued growth and competitiveness of our company. We continue to remain an employer of choice for experienced bankers throughout our footprint.

Our ability to attract top talent enabled us to enter and grow our newer markets like Arizona, Colorado, and Utah, while continuing to invest in long-established regions. Recent examples include establishing a team of seasoned private bankers in Colorado, commercial banking teams in Southern Idaho and Northern California, and a new market leader for Southern Nevada. In all cases, these new team members have spent their careers serving a broad range of customers, ranging from families and entrepreneurs up through larger commercial clients within these markets. We opened our second retail branch in Arizona and announced a planned third location in Mesa to supplement the commercial teams that established our presence in the state three years ago. Subsequent to quarter end, we have identified the site for our fourth Arizona office and will provide more specific details on next quarter's call.

We also continue to enhance our internal technology in support of our associates. We are piloting applications to improve efficiency, and we are onboarding a thousand associates to an upgraded CRM tool. The third quarter also included a reduction in transactional loans and funding sources. Solid seasonal customer deposit growth and an intentional reduction in transactional real estate loans enabled us to reduce brokered deposits by 20% during the quarter. Although commercial loan growth was below our expectations, portfolio activity reflected healthy customer behavior, which Chris will cover in more detail. We are very optimistic for the future of our company. With the merger and integration behind us, activity throughout our organization is fully focused on driving balanced growth with new and existing customers, and we continue to win business every day.

We are driving franchise value through relationship banking, and we will continue to opportunistically reduce our exposure to transactional loans and funding sources. We continue to remain laser-focused on regaining Columbia's placement as a top-performing bank that produces long-term, consistent, and repeatable results. I'll now turn the call over to Ron.

Ron Farnsworth (EVP and CFO)

Okay, thank you, Clint. We reported second quarter EPS of $0.70 and operating EPS of $0.69 per share, and our operating return on tangible equity was 16%, while the operating PPNR was $221 million. Please refer to the non-GAAP reconciliations provided at the end of our earnings release and presentation for details related to our calculation of operating metrics. On the balance sheet, we maintained our target interest-bearing cash levels of approximately $1.5 billion. As Clint mentioned, loans declined $200 million in the quarter, driven mostly by reduced transactional loans, and deposits in total were flat.

Within deposits, we saw the seasonal increase in non-interest-bearing DDA, along with strong customer interest-bearing deposit growth, and utilized the excess to reduce brokered deposits by $635 million, or 20%, along with reducing term borrowings $250 million. Within investments, the increase in available-for-sale investments was market value driven as the bond market rallied during the quarter. The locked-out structure of the portfolio, combined with this rally, led to the 50% reduction in our accumulated other comprehensive loss, adding $1.06, or 6%, to our tangible book value per share. Overall, tangible book value per share increased 10% to $17.81. Our net interest margin was stable at 3.56% in Q3, and on the upper end of our estimated range of 3.45% to 3.60%.

Our interest-bearing deposit cost declined to 2.95% for Q3. Given the Fed's fifty basis point cut late in the quarter, it may help to compare the month of September to the month of June. Our month of September interest-bearing deposit cost was 2.90%, down ten basis points from 3% in June. More importantly, the spot cost as of September thirtieth was 2.74%, down twenty-six basis points from the month of June. This represents a beta of 52% in a very short period of time. Now, I want to thank all of our bankers and support professionals for their timely work with customers on reducing deposit rates.

It was great to see the speed with which they worked, and it is reflective of a relationship banking strategy, where our customers bank with us for the value our bankers provide, not just rate. Absent any further Fed moves down, we expect continued reductions in our interest-bearing deposit costs in Q4, given the term structure on time deposit repricing and wholesale funding, along with continued expected reductions in wholesale funding balances. Our projected interest rate sensitivity under both ramp and shock scenarios remains in a liability-sensitive position, and we expect our rates down deposit betas to approximate those experienced on the way up. Our slide deck includes enhanced repricing and maturity disclosure, including details on over $8 billion in customer CDs and wholesale funding that matures over the next six months. Our provision for credit loss was $29 million for the quarter.

The portion related to our leasing portfolio declined again, as expected this quarter, to $16 million. Our overall allowance for credit loss remains robust, increasing to 1.17% of total loans or 1.34% when including the remaining credit discount. In total, GAAP expense for the quarter was $271 million, while operating expense was $268 million. In Q2, we had the restructuring charge along with the nonrecurring credit, so our operating expense of $268 million for Q3 was lower than the $270 million normalized level in Q2 and $287 million in Q1, reflecting continued achievement of our efficiency initiatives. The Q3 level, excluding CD amortization, annualizes at $957 million.

Clint mentioned our reinvestment plans earlier, which will increase our quarterly operating expense, excluding CD amortization, into the annualized range of $965 million-$985 million. We expect continued annual inflation of approximately 3% on top of our expected Q4 exit range, inclusive of items such as the typical Q1 payroll tax increase, a 7% increase in health insurance costs, and the annual merit cycle for the end of Q1. We'll always work to find additional efficiencies to help offset these pressures and enable continued franchise reinvestment, and I'll close with commentary about our regulatory capital position. Our risk-based capital ratios increased as expected in Q3 and are now all above our long-term target levels. We expect capital ratios to continue to build, which will provide enhanced future allocation flexibility.

With that, I will now turn the call over to Frank.

Frank Namdar (Chief Risk Officer)

Thank you, Ron. The stable performance of our loan portfolio highlights the strength of our through-the-cycle underwriting process, portfolio management, and the quality of our borrowers and sponsors. As we transition to a more typical credit environment after a period of exceptional quality, we observed a 22% improvement in 31- to 89-day delinquencies, reducing them to $67 million, following similar improvements in the previous quarter. The slight increase in nonaccrual loans and 90-plus delinquencies reflects normal business fluctuations and the migration of smaller credits affected by higher interest rates. Classified loans declined due to risk rating upgrades and a payoff during the quarter. Our proactive and detailed monitoring of the portfolio continues to reveal no systemic issues across various industries, sectors, or geographic regions. At the end of the quarter, there were effectively no delinquencies in our entire non-owner-occupied and multifamily portfolios, with no charge-offs in either category.

Overall, net charge-offs for the company stood at an annualized rate of 31 basis points for the quarter, with the bank contributing 10 basis points and FinPac 21. As mentioned in previous quarters, loss activity within FinPac was anticipated to improve, and did, by approximately 20% this quarter, reflective of an annualized rate of 4.7%. We are pleased with this progress, but we are not finished. We remain very satisfied with the quality and directionality of our granular and diversified loan portfolio, which is detailed further in our investor presentation. It remains relatively predictable and boring. Similar to waiting in line for a haircut. I'll now turn the call over to Chris.

Chris Merrywell (COO)

Thank you, Frank. Customer deposit growth during the third quarter reflects continued success through targeted small business campaigns, expanding balances with existing commercial and new relationship customers. Customer deposit balances increased $602 million, enabling a 20% reduction in brokered deposits. Notably, core deposit growth occurred even as we reduced the rate on both deposits, both ahead of and following the Fed funds rate reduction in September. Our teams continued to lead with service, not price, in their customer interactions. Our branches wrapped up their summer small business campaign in July, and we launched a new campaign in September that will run through the next several weeks. Through mid-October, our three highly successful campaigns have generated $600 million in new deposits, and account retention from the first two campaigns exceeds 99%.

We are also seeing a related increase in cross-department referrals as we work towards additional needs-based solutions for our customers. As a reminder, there are no special products or pricing associated with these campaigns, and we would like to thank our bankers for their focus and attention to driving new relationships to the bank. Loan balances declined by $207 million during the quarter, as we intentionally allowed transactional real estate balances to trend lower. Healthy customer activity, which includes business and property sales, as well as project completions, also contributed to net portfolio contraction during the quarter. We continue to target a low single-digit level of loan growth in the current operating environment, as our activities focus on relationship-driven commercial loans and the balanced deposit and core fee income growth that activity supports. Our core fee income pipelines continue to expand across all categories.

Treasury management and commercial card income increased by 12% and 19%, respectively, for the year-to-date period. Income from wealth management is also up notably for the period, as our teams continue to find opportunities, following our transition to a new broker-dealer platform at the end of last year. Additionally, our trust team is benefiting from our new, larger organization, handling more referrals and onboarding new relationships. While overall non-interest income remains a relatively smaller percentage of our total revenue, the favorable trends in our collective product and service income will drive incremental bottom-line growth over time, helping to diversify our revenue stream while strengthening and deepening our customer relationships. I'll now turn the call back over to Clint.

Clint Stein (CEO)

Hey, thanks, Chris. We remain committed to optimizing our financial performance to drive long-term shareholder value. Our bankers' activities and the organic runoff of transactional loans and funding sources drives us closer to optimal capital efficiency. As Ron mentioned, our capital position continues to build, and our ratios are expanding in line with our expectations. With a total risk-based capital ratio of 12.5% at the holding company and 12.2% at the bank, we are above our long-term targets of 12%. Our TCE ratio was 7.4% at quarter end, up from 6.8% at June thirtieth, as capital generation received an added lift from favorable AOCI changes.

Our performance continues to demonstrate our ability to organically generate capital well above what is required to support prudent growth and our regular dividend, providing us flexibility for considering additional returns to shareholders. This concludes our prepared comments. Tory, Chris, Ron, Frank, and I are happy to take your questions now. Gigi, please open the call for Q&A.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Clark from Piper Sandler.

Matthew Clark (Managing Director and Senior Research Analyst)

Hey, good morning, everyone.

Clint Stein (CEO)

Morning, Matt.

Matthew Clark (Managing Director and Senior Research Analyst)

Just starting on the core margin. We had a Fed cut, obviously, late in the quarter. You gave us the spot rates on deposits, which is really helpful. But any color on kind of where your core NIM kind of settled out at the end of September, maybe on a spot basis, or. And just your kind of near-term thoughts on the core NIM, given, you know, not only the rate changes, but also your expectation for deposit flows?

Ron Farnsworth (EVP and CFO)

Hey, good morning, Matt. This is Ron. Yeah, on the NIM, I mean, we're not declaring a victory on the inflection point with the core up, but you know, the bigger driver is gonna be, again, deposit flows. I do feel good about the tailwinds we have with the $8 billion of CDs and wholesale funding that we laid out on that new table on slide 20. But again, I think normalized deposit flows will be the key. Generally, in the fourth quarter, we see it flat to up slightly early in the quarter and then tailing off later in the quarter. This is, of course, long-term seasonal averages around you know, property tax payments, year-end distributions, things of that nature, so we'll see how it plays out but feel good about the tailwinds, at least at this point.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. And then just on the adjusted expense, kind of annualized run rate guide, how do you feel about that range? Do you feel like you can hit the low end of that range here in 4Q?

Chris Merrywell (COO)

Yeah, I do. And more importantly, you know, as we look at that range going into twenty twenty-five, we talked about, you know, the expectation for approximately 3% inflation on that. Generally, seasonally, over the course of the year, you know, your payroll taxes pop in Q1 and Q2 and come down a bit Q3, Q4. Merit cycles usually into Q1, looking forward. The health insurance costs, of course, are throughout the year. We feel good about that. We know we've got quite a few reinvestments that are in flight. We'll continue to make additional reinvestments, but you're talking only $2 million a quarter annualized to get into the, you know, basically midpoint of that range from where we're at now. So we're pretty close.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. And then just on the buyback, Clint, I know rates are up here more recently, but you know, definitely getting closer to that 8%. You're above where you want to be, I think, on regulatory capital. Is any chance ... I mean, what's your expectation in terms of potentially buying back stock? And should we have to wait for mid-next year, or do you think it could be a whole lot sooner?

Clint Stein (CEO)

Well, I mean, I think that this is, you know, ongoing conversations that Ron and I have with our board, and, you know, we're, as you mentioned, we're above on the regulatory side. You know, the 8% on TCE is kind of a range. It's not a hard floor, like how we view the say 12% on total risk-based capital, for example. So, you know, I do think that as we set out at the onset of the announcement of the merger and what our expectations were in terms of capital generation utilization, that it was going to be a capital return story for shareholders.

I do think in 2025 we enter into that window and that dynamic. In terms of timing of what it might look like, it's probably too preliminary to really pin that down. But it is something that we're actively evaluating internally.

Matthew Clark (Managing Director and Senior Research Analyst)

Great. Thank you.

Clint Stein (CEO)

Thanks, Matt.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of David Feaster from Raymond James.

David Feaster (Managing Director and Analyst)

Hi, good morning, everybody.

Clint Stein (CEO)

Good morning, Dave.

Chris Merrywell (COO)

David.

David Feaster (Managing Director and Analyst)

Let's start on these small business campaigns. I mean, you guys have had a ton of success with this. Retention's been extremely high. I'm curious whether these have been more targeted to specific markets or geographies, or have they been broad-based? And do you see additional opportunity here, I guess, for additional campaigns? And then just to deepen the relationship with those that you've won and continue driving further growth, I guess, on both the loan and deposit fronts.

Chris Merrywell (COO)

Yeah, David, this is Chris. Thanks for the question. It's really been, and we've talked about it previously, it continues to be broad-based. It's across all markets, wide participation, all branches, in every campaign have achieved results in that. And, you know, it's really to, the relationship strategy, bringing in, new relationships from the standpoint of getting to know people, sharing what we do, sharing the value that our bankers bring each and every day, to those relationships, and in that kind of community bank at scale, way that we think about things. I think what's most impressive is that we do continue to see the deepening of relationships with merchant and corporate card and some wealth management referrals, treasury management referrals. So the targeted businesses are things that could continue to grow with us.

We're also uncovering larger opportunities that get referred off to the commercial bank, and we've got some great partnership stories. The team's working well together to land some bigger relationships as well with it. But yeah, it's really, it's across the board. We haven't armed them with, like, say, any special pricing or product. It's everything we have off the shelf put together for the benefit of the customer and solving their needs, and it's working out extremely well. We couldn't be more pleased. Going forward, you know, we'll take a little break here in about mid-November, let everybody kind of catch up, refresh, and you know, I fully expect we'll have something that comes out in the first quarter of next year, and we'll continue there.

It's kind of more of a way of life than it is a campaign, if you will.

David Feaster (Managing Director and Analyst)

Okay. That's great. And then, you know, you guys have also been active with expansion plans, right? Both on, on the hiring side and, and the expanding the branch network. You, you talked about that in the prepared remarks. How do you think about opportunities going forward? You know, it seems like Arizona is obviously a focus, just given the branches that you're opening there. But looking at the branch maps, you know, Colorado, Utah, Nevada seem to be pretty attractive opportunities, especially just given those hires... How do you think about de novo expansion opportunities, where you're focused, and, and whether organic's the best way to do it, or could M&A be an opportunity to help limit-- help supplement, you know, the organic expansion that you're doing?

Tory Nixon (EVP)

Hey, David, it's Tory. I'll take the first part of that, and I'll let Chris and Clint kind of weigh in at the end of it. I, you know, we have basically four, I would say, de novo markets over the last year and a half or so. You got Utah, Colorado, Arizona, and then a little bit in Northern California, and just kind of a specialty team that we've hired into the bank. And then kind of put a branch system around it, some private banking folks around it to kind of, like, fill in this full relationship banking. I mean, one of the great things about the company is our really our ability to attract talent into the organization, as Clint mentioned earlier.

I mean, folks want to be here and want to work here and, and find this place to be a great place to, to be successful. In all of those markets, the de novo markets, we've been profitable, within a year, and they're starting to drive some nice, really nice balances and some growth, in the relationships. Really, a prime example is our, our wine team in Northern California. You know, they've got, about $17 million in outstanding loan balances and about $95 million in deposits. So just a, a really nice, really nice mix for the company and some really nice, strong relationships. And we see that in all of our de novo markets.

We'll continue to kind of infill on that and to grow as we are presented with the opportunity to get the right talent into the company continuously. Another real important market for us on an expansion plan is gonna be Southern California. It's just tremendous density in Southern California. We've got some really good, strong teams there today and we've been very successful. But we will continue to invest in the market and grow in the Southern California as well. So I think really good opportunity just organically for us to continue to invest in those markets and to grow quite nicely.

Clint Stein (CEO)

And I'll jump in on the back half of that question. As usual, David, you pack a lot into your questions. But you know, from an M&A perspective, you know, our focus is really getting the most performance we can out of the company that we're running today. And you know, we're very excited about the opportunities that we have and you know, as Tory mentioned, you know, those de novo markets. But even our long, well-established markets, I mean, we continue to win new business every day and take market share from the larger banks.

And so, so there's a lot of enthusiasm around what we can just do on an organic basis. You know, the M&A front itself, I mean, you know, we should talk next quarter. There's quite a bit of election activity going on, and, and you know, and that, whatever the outcome is, it will have an impact on a bank our size. And, you know, and so, as we get greater clarity on that, as we get greater clarity on where the Fed takes interest rates and how that looks, our you know, our thoughts might change, but, but right now, that focus is truly on getting the most that we can out of the company that we're running.

David Feaster (Managing Director and Analyst)

Okay, that makes sense, and then maybe just staying on the organic growth side, I mean, look, Clint, we've talked in the past about the pipeline your bankers have and the momentum that it seems to be picking up. It hasn't necessarily materialized yet, you know, as payoffs and paydowns have been a headwind and some of the strategic runoff in the CRE book, but I'm curious how the pipeline's shaping up, where you're seeing the most opportunity as you think about that low single-digit pace that you talked about, and just the competitive landscape on the growth front from your seat.

Tory Nixon (EVP)

Yeah, David, it's Tory again. You know, the pipeline's been pretty stable and steady over the last several quarters. We talked previously about the total pipeline staying about the same, but the mix changing from real estate pipeline being down a little bit and the C&I pipeline up a little bit. That continued even into this quarter and the overall number is about the same. And it's a nice, healthy loan pipeline spread throughout the company. So feel really good about, you know, continuing the low to mid-single digit loan growth number and kind of core relationship banking, excluding some of the transactional rundown in real estate that we'll see a little bit of as we continue to go forward.

It's a very nice pivot in the company of moving away from transactional into full relationship banking. So the lending piece is just one part of it, and going back to even, you know, Chris's comment on the small business campaigns of bringing small business relationships into the bank, deposit and loan and fee income relationships into the bank. So when we look at the pipeline, the fee income pipeline is very strong and healthy. Chris mentioned a couple statistics on just some growth we've had in treasury and other parts of the company, and we'll continue to see that because the bankers are doing an exceptional job, focusing on all different parts of a relationship to bring into the company as we look to add value to our customers.

David Feaster (Managing Director and Analyst)

That's great. Thanks, everybody.

Tory Nixon (EVP)

Thanks, David.

Operator (participant)

Thank you. One moment for our next question... Our next question comes from the line of Jon Arfstrom from RBC Capital Markets.

Jon Arfstrom (Research Analyst)

Hey, thanks. Good morning, everyone.

Chris Merrywell (COO)

Good morning, John.

Jon Arfstrom (Research Analyst)

Just to follow up on loans. Chris, can you talk about how large that pool of transactional loans are that you're looking to reduce?

Chris Merrywell (COO)

Well, I think we've previously talked about between multifamily and single-family, there was approximately $6 billion on the balance sheet that didn't have relationships attached to them. And, bankers are working to try and generate relationships. That's not always the easiest thing to do, but that gives you kind of a marker that's out there. They come due over time, so it's not anything that happens tomorrow by any means, but it's always under evaluation.

Jon Arfstrom (Research Analyst)

Okay. Okay. Yeah, it just seems like it was a pretty heavy prepayment quarter for you. Is that strictly from that, or is there anything else that's going on there?

Tory Nixon (EVP)

Yeah, let me. I'll just... This is Tory. I'll just weigh in a little bit on that part of it. You know, one thing we did have was a very large C&I loan that got paid off. The customer had a really nice business that we banked for a long period of time, and they sold it. And somebody else wrote them a big, giant check, and they paid us off. So that was kind of an anomaly for what we typically see, but it was a pretty big number. And so that has an impact as well, a little bit.

Jon Arfstrom (Research Analyst)

Yeah. Okay. Okay, that's helpful. Good. Ron, on slide twenty-one, it's a good slide, the balance sheet optimization slide. What do you want us to take away from this slide, and what could make this more likely to happen?

Ron Farnsworth (EVP and CFO)

Yeah, my takeaway from this is recognize it's these two items together are a headwind today. In a lower rate environment, they'll be relatively neutral. We look at it as we've isolated this as, you know, non-relationship focused, so inconsistent with our strategy going forward. But just more so from a visibility standpoint, that we're going to have a lot of optionality in the future as rates decline to reposition portions of the balance sheet, reallocate capital to continued organic growth and reinvestment opportunities. So really just calling it out for the headwind it is today. Ideally, in the future, we'll be able to remove that when we get a bit lower on the rate side.

Over time, these will run down naturally based off schedule amortization, but at some point in the future, we'll have the opportunity to deleverage this portion.

Jon Arfstrom (Research Analyst)

Okay. Okay, good. So nothing imminent, but just flagging it. Okay.

Ron Farnsworth (EVP and CFO)

Right.

Jon Arfstrom (Research Analyst)

Yep, okay. And then just a follow-up on the small business deposit campaign. You said that's really not rate driven, but what kind of pricing on those new deposits are you offering?

Chris Merrywell (COO)

It's just our normal posted rates that are out there, and so there's certainly a range in there. Mid threes to, you know, upper threes. There could be some CDs that are still at about four, but it's, like I say, it's just our posted rates and nothing special that goes along with it.

Jon Arfstrom (Research Analyst)

All right. Thank you very much.

Chris Merrywell (COO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Andrew Terrell from Stephens.

Andrew Terrell (Managing Director and Research Analyst)

Hey, good morning.

Chris Merrywell (COO)

Morning.

Andrew Terrell (Managing Director and Research Analyst)

Was hoping to dig into maybe just some of the loan yield repricing dynamics. The core loan yield of kind of six basis points this quarter was maybe a little better than I expected, especially given the move or the leg down we saw kind of mid-quarter and so far. So I guess it kind of implies that some of the repricing dynamics on the fixed rate or adjustable rate is a bit better than I was thinking. Can you maybe just talk through some of those dynamics, you know, over the next few quarters, how much you have kind of coming up that's fixed rate, adjustable and the incremental spread you think you can get on those loans?

Ron Farnsworth (EVP and CFO)

Yeah, good, great questions. And I'm going to highlight again, slide twenty of our investor presentation, and Jackie did a great job pulling together all that information for you, bottom left, just in terms of the loan portfolio between fixed maturity by period, floating repricing by period, and adjustable repricing by period. So you can see that tail over time. And also, we'll call out again, the very bottom of that table, we highlight the $8 billion- over $8 billion of wholesale funding between brokered CDs and term advances, which we'll have repricing lower opportunities in the quarter, ex anything with the Fed.

Andrew Terrell (Managing Director and Research Analyst)

Yep. So if I'm reading it right, you know, in, like, the four- to six-month bucket, call it five hundred-ish million or so of fixed and adjustable repricing-

Ron Farnsworth (EVP and CFO)

Yep.

Andrew Terrell (Managing Director and Research Analyst)

Does that sound like a fair amount, kind of on a quarterly basis? And then what type of spread pickup could you get on that?

Chris Merrywell (COO)

Spread pickup, just in terms of as those reprice?

Andrew Terrell (Managing Director and Research Analyst)

Yeah, just like the adjustable or the fixed rate, say, for the $212 million, what's the yield on that that's coming due versus where you're putting new loans on at today?

Tory Nixon (EVP)

This is Tory. I'll answer the new loan side. I mean, the new commercial production, it ranges based on, you know, asset type, loan type, geography, et cetera. It probably ranges from the mid sevens to mid eights, generally speaking, for new loan activity. It's been actually climbing just a little bit over the last several quarters, but relatively stable.

Ron Farnsworth (EVP and CFO)

Yeah, and just from a repricing standpoint, they'll continue to move higher, just even as rates come down.

... you know, the spread, of course, depends on the loan type, which are mixed throughout those categories, but we'll see continuing repricing higher from that adjustable bucket.

Andrew Terrell (Managing Director and Research Analyst)

Got it. Okay, and if I could just shift gears a little bit. I appreciate all the commentary around, you know, capital, as well as the discussion around the buyback. I'm just curious, you know, as you kind of have conversations with the board and you contemplate incremental capital deployment from here, you've obviously also earmarked a couple of portfolios of loans that, you know, are discontinued or kind of running down over time. I guess, you know, as you think about the buyback, is the other contemplation potentially early exit of any of those kind of loan pools? And you know, how do you compare and contrast the attractiveness of the two?

Clint Stein (CEO)

You know, we were. I guess in my prepared remarks, I was fairly generic in terms of capital alternatives. I didn't specify buyback, but I think David and you are zeroing in on that, and that's certainly one of the things that we can consider. In terms of an early exit from those transactional portfolios, you know, I think as Frank said, you know, credit is as boring as waiting in line for a haircut, and we have zero concerns about the credit quality of these portfolios.

You know, and so we look at, you know, I think in March, when we first started identifying these and publicly talking about them, you know, created a, an earnings or it was an earnings headwind, and it still is, in terms of when you look at the wholesale funding that we have on our balance sheet, the rates that we're paying on that versus the yields on these loans. Now, as rates have come down, that earnings headwind is getting, you know, lighter and diminishing. It's still there. But the market price, if we were to go price these and look at it, I mean, we just think about it like a bond.

You know, it's gonna price at a, you know, at a below par that would probably have a payback period that would exceed something that I would think is reasonable given the expectation that rates are going to continue to come down. Also, you know, if our deposit growth trends continue, and we're able to continue to replace wholesale funding levels with good core customer deposits, then it really doesn't create a need to do that. You know, it will help our operating ratios. It'll free up some capital, obviously. But we're above our-- broadly above our most, well, pretty much all our regulatory ratio targets.

You know, we're trending in the right direction towards where we'd like to be on a TCE basis. There's not a burning need or desire to do it, and with you know, zero credit concerns on these portfolios, I think that the best thing for shareholders long term is to just wait it out and either let them amortize off, or when rates get to a certain point, then we can decide if we want to selectively exit a substantial portion of any of these portfolios.

Andrew Terrell (Managing Director and Research Analyst)

Okay, great. I appreciate all the color there. I'll step back. Thanks.

Clint Stein (CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Chris McGratty from KBW.

Chris McGratty (Managing Director and the Head of U.S. Bank Research)

Oh, great. Thanks for the question. Just a quick one on, on credit. Your, your charge-offs were very stable. Your trends were very good as well. Any update on, maybe I missed this, any update on FinPac normalization and any other potential offsets that you're, that you're keeping an eye on? Thanks.

Clint Stein (CEO)

Sure. Yeah, as I alluded to in my remarks, we finally did see some material improvement in that number for FinPac, with them improving about 20%. That's about 4.7% annualized rate. I would expect that to come down over time to somewhere in that 3.5%-4% range. So we've got a little bit to go, and we do expect further improvement. The fourth quarter, I'll say right now, is going to be tempered a bit because of just the difficult nature of collection activity in the fourth quarter because of holidays, vacations, and just the limited days that creates to collect accounts.

But they will continue to drop, and I think they will settle out at that 3.5%-4% range. So delinquencies continue to decrease within that portfolio. That's another indicative sign that things are trending the right way. I mean, from Q1 to Q3, delinquencies have improved 24%, and non-performing leases have also reduced 24%. So you can see how closely those numbers tie together, right? I mean-

Ron Farnsworth (EVP and CFO)

... and we in turn saw a reduction in charge-offs of 20%. So things are trending in the right way, and there's nothing else systemically at issue within that portfolio. It's normal activity, and nothing systemic within the commercial C&I portfolio. So feel pretty good about it.

Chris McGratty (Managing Director and the Head of U.S. Bank Research)

Okay, awesome. Thank you.

Ron Farnsworth (EVP and CFO)

Thanks.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our next question comes from the line of Timur Braziler from Wells Fargo.

Timur Braziler (Managing Director and Senior Equity Analyst)

Hi, good morning.

Ron Farnsworth (EVP and CFO)

Good morning.

Timur Braziler (Managing Director and Senior Equity Analyst)

Good morning. My question is on the securities accretion. It seems prepayments maybe were elevated again in 3Q, and I know you provided some color on kind of the near-term guide there. But I'm just wondering, the last two couple quarters of elevated paydowns, kind of what the remaining schedule might look like, and if that accretion is maybe pulled forward a little bit versus the original guide.

Ron Farnsworth (EVP and CFO)

Yeah, I mean, I'd consider it to be relatively stable over time. The last two quarters, it was like an individual security prepaid, which gave a little bit of a pop. But I'd expect to see that effective interest method amortization just to ratably run down over time. You're not gonna see a significant increase in that level, unless you saw a rather large rally in the bond markets, driving prepays off, you know, securities purchased, say, in twenty twenty-two.

Timur Braziler (Managing Director and Senior Equity Analyst)

Okay, but barring any additional paydowns, I mean, should we expect that level somewhere in the low thirties here going forward? Or are you saying, you know, low forties and rate that down is the right run rate?

Ron Farnsworth (EVP and CFO)

Low thirties, specific to investment security discount accretion?

Timur Braziler (Managing Director and Senior Equity Analyst)

Right. Yes.

Ron Farnsworth (EVP and CFO)

I don't have that number right in front of me here, but I'd assume pretty consistent trends, just slightly lower than what you saw the last couple quarters over the next handful of quarters.

Timur Braziler (Managing Director and Senior Equity Analyst)

Okay, great. And then, you know, certainly very encouraging on the early deposit trends, with the cycle-to-date beta already kind of in the fifties and additional opportunities through 1Q. I guess I'm trying to gauge the results to date versus the expectation for beta to mirror what it had been on the way up, which also was somewhere in the mid-fifties. Is a lot of that liability sensitivity kind of front-end loaded over these next couple of quarters and then stabilizes out? I guess, you know, how are you thinking about cycle-to-date beta versus through-the-cycle beta, with both of those seemingly, you know, pretty similar here?

Ron Farnsworth (EVP and CFO)

Yeah, I mean, the historical modeling would suggest it's gonna mirror, and our disclosure suggests it's gonna mirror what we saw on the way up to date. With some of the wholesale funding, we've been able to, you know, get close to that level over the course of two weeks in September. But I think in terms of the time period of how long that plays out. Given the $8 billion of wholesale funding, and the short-term nature of that, it's really gonna be more a story of what's the tail or period of Fed moving rates slower, right? If that all occurred over the course of a couple quarters and then they stopped, then yeah, that'd be your window.

But, I, you know, if it's over a longer period of time, that'll just continue to reprice lower. Kind of like the conversation we had earlier on, the $6 billion of, you know, non-relationship loans, multifamily, single family, resi. It's a headwind today. At some point, it's gonna be relatively neutral, gonna give us a lot of optionality.

Timur Braziler (Managing Director and Senior Equity Analyst)

Great. Thanks for the questions.

Ron Farnsworth (EVP and CFO)

Yeah, thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Anthony Elian from J.P. Morgan.

Anthony Elian (Managing Director and Senior Equity Analyst)

Hi, everyone. Just a quick follow-up on NIM. So your adjusted NIM increased about seven basis points in the third quarter, but just given the tailwinds you outlined on this call and on slide twenty, on the funding side of the balance sheet and the full benefit of the September cut, you know, is it reasonable to assume a similar level of increase in the adjusted NIM in the fourth quarter? Or I guess, what would hold you back from realizing a similar increase? Thank you.

Ron Farnsworth (EVP and CFO)

It'd be bouncing along the bottom, and again, deposit flows will have such a bigger impact on that.

Anthony Elian (Managing Director and Senior Equity Analyst)

Thank you.

Ron Farnsworth (EVP and CFO)

Thank you.

Operator (participant)

Thank you. At this time, I would now like to turn the conference back over to Jackie Bohlen for closing remarks.

Jackie Bohlen (Head of Investor Relations)

Thank you, Gigi. Thank you for joining us on this morning's call. Please contact me if you have any questions, and have a good rest of the day. Bye.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.