Columbia Banking System, Inc. (NASDAQ:COLB) Q3 2023 Earnings Call Transcript

Columbia Banking System, Inc. (NASDAQ:COLB) Q3 2023 Earnings Call Transcript October 18, 2023

Columbia Banking System, Inc. beats earnings expectations. Reported EPS is $0.79, expectations were $0.71.

Operator: Thank you for standing by. Welcome to the Columbia Banking System’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. At this time, I’d like to introduce Jacque Bohlen, Investor Relations Director for Columbia to begin the call.

Jacque Bohlen: Thank you, Valerie. Good afternoon, everyone. Thank you for joining us as we review our Third Quarter 2023 Results which we released shortly after the market close today. The earnings release and corresponding presentation, which we will refer to during our remarks this afternoon are available on our website at columbiabankingsystem.com. With me this afternoon are Clint Stein, President and CEO of Columbia Banking System; Chris Merrywell and Tory Nixon, the Presidents of Umpqua Bank; Ron Farnsworth, Chief Financial Officer; and Frank Namdar, Chief Credit Officer. After our prepared remarks, we will take your questions. 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 provision of federal securities law.

For a list of factors that may cause actual results to differ materially from expectations, please refer to slide two of our earnings presentation as well as the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release and throughout the earnings presentation. I will now turn the call over to Clint.

Clint Stein: Thanks, Jacque. Good afternoon, everyone. Columbia’s third-quarter results reflect our associates’ emphasis on activities to generate business and drive efficiencies for our franchise. Our focus on balanced growth resulted in relationship-driven expansion in our loan portfolio and higher non-interest income. Despite industry headwinds, we continue to see stabilizing deposit trends. Integration activities are winding down as we are now in our eighth month since the merger closed. I’m pleased to report we achieved $140 million in annualized cost savings through quarter end, surpassing our originally announced target of $135 million. These savings are net of franchise reinvestment, which included investments in talent, products, technology, and strategic locations in the global markets.

While our formalized cost savings objectives related to the merger are coming to an end, our focus on efficient growth is not. We will continue to seek out offset store investments, driving our business forward in an efficient manner, while enhancing shareholder value. Our talented associates, expanded footprint and customer focused business model provide us with the resources and opportunities to profitably grow market share throughout the West. Our future is bright and I look forward to providing updates on these objectives in subsequent quarters. I’ll now turn the call over to Ron.

Ron Farnsworth: Okay. Thank you, Clint. And for those on the call who want to follow along, I will be referring to certain page numbers from the earnings presentation. Slide four lays out our Q3 performance ratios, noting stability in the NIM, our operating efficiency ratio of 52%, and our return on tangible common equity of just over 20%. These are five quarter views and recall, we closed the combination at the end of February this year. Slide five shows our summary balance sheet, noting our $0.8 billion of deposit growth exceeded net loan growth, resulting in a loan-to-deposit ratio falling back to 89%. We also reduced our short-term Federal Home Loan Bank borrowings this quarter by $2.3 billion which lowered our off-balance sheet in spring cash position to $1.9 billion.

On slide six, we highlight the income statement trends. GAAP earnings were $0.65 per share, impacted by declining merger expense as we complete the integration along with fair value changes, due to higher interest rates. On an operating basis, we earned $0.79 per share in Q3 about flat with Q2 as the increase in provision for loan loss was offset by declining non-interest expense, as we realized cost synergy. Operating PPNR was up 6.5% to $259 million in Q3. Turning to Slide 7, we break out Q3 GAAP earnings to help investors understand the non-operating and merger-related impacts on results. First column represents our Q3 GAAP fully combined results with net income of $136 million or $0.65 per diluted share, and return on tangible common equity of 17%.

The second column includes our non-operating designation for income statement changes again mostly related to fair value swings along with $23 million of merger and exit and disposal costs included in our expense, which are further detailed out in the appendix. These net to a $28 million reduction in Q3 earnings resulting in the third column for operating income. And again, our operating income for Q3 was $164.3 million or $0.79 per diluted share with our return on assets at 1.2% and return on tangible common equity at 20.5%. We added pages to the appendix trending on each of these columns. The discount accretion will be a steady and reliable source of interest income over time, as the majority is driven by rate, not credit, providing us with a steady build of capital over time.

And recall the CDI amortization does not impact tangible book value. So the $0.17 per share for merger accounting was the equivalent of $0.28 per share added to tangible book value in Q3. We’ll continue to highlight and trend here to aid investors in valuing all earning streams. And our tangible book value excluding AOCI increased $0.45 during the quarter to $17.48 per share. Moving to the next slide on section 9, we highlight net interest income in margin. Our NIM was steady from Q2 at 3.91%, resulting in $481 million of net interest income. The NIM excluding merger accounting was 3.28%. We reduced excess liquidity and cash flow in Q3. We should have a positive effect on our NIM in Q4. Both measures were at the upper end of our prior guidance, driven by the increase in customer deposits this quarter.

Slide 10 breaks out the repricing and maturity characteristics of the loan portfolio. Noting 42% is fixed, 29% is floating, and 29% are adjustable. Slide 11 provides an updated view of our combined interest rate sensitivity under both ramp and shock scenarios. We have taken proactive measures to reduce the balance sheet sensitivity to a future declining rate environment. You can see here the trending over the past year where our rates down risks have been reduced significantly. And noted below, we calculate our cycle-to-date funding betas, which are calculated on a combined company basis over the periods presented for comparability. As of the third quarter, our interest-bearing deposit portfolio has priced in 37% of the Fed funds rate increases.

A close-up of a customer signing a mortgage document inside a bank branch.

Notably, here is the cost of interest-bearing deposits, which was 2.01% for Q3 and 2.18% for the month of September. And again the lift this quarter was influenced primarily by the additional broker deposits, which were used to pay off maturing Federal Home Loan Bank advances for a relatively neutral impact on our funding costs. The cost of our spending liabilities was 2.77% for the month of September and 2.78% at September 30, relatively in line with the 2.72% for the entire quarter. Slide 12 breaks out non-interest income items, moving we had continued growth in service charges and card-based fees, due to higher revenues from customer-related products. The change in loans held at fair value at the bottom was a direct result of the increasing long-term yields this quarter.

Next up on slide 13, we’re happy to report we exceeded our original cost synergy target of 12% or $135 million. As of quarter end, we’ve achieved $140 million in annualized go-forward cost synergies as we finalized our integration. We expect that we’ll lift to $143 million by year-end. And again these amounts are net of re-investments made in various areas. Normalizing in the month of September expense ex-CDI with $81.3 million, which would be $245 million for the quarter, in the middle of our prior Q4 guidance range, which we reiterate at $240 million to $250 million. On the right side is the waterfall from the prior quarter, with reductions driven by lower comp, occupancy, and contract costs. To better help investors, given the combination accounting and moving parts on slide 14, we provide an updated outlook for 2023 on several key financial statement items.

Our current outlook is consistent with last quarter’s update with a tighter band around the margin as the third quarter results came in at the upper end of guidance, given favorable customer deposit flows. Moving ahead to the next section on the balance sheet. On slide 16 we detailed out the investment portfolio. The table takes you from current par to amortized cost to fair value. Knowing the difference between current par and amortized cost is the combined net discount, which will be accretive to interest income over time. The decline in market value this quarter, of course, resulted from higher market yields across the curve. As you can tell, I’m excited about this portfolio as it gives us a significantly higher and stable earnings stream with greater optionality.

The overall book yield was 3.61% with an effective duration of 5.7% as of quarter end. Slide 17 covers our liquidity including deposit flows during the quarter. For comparability, we presented the table on the left, as we were combined for all periods presented. Total deposits increased $0.8 billion or 1.9% in the third quarter and customer accounts increased $89 million, and again we use the brokered loan with excess cash to fund a portion of the home loan bank borrowing reduction. The upper right table details are off-family sheet liquidity with $12.2 billion available as of quarter end. And below that, we had cash and excess bond collateral not pledged for lines to arrive at total available liquidity of $19.1 billion. This represents 142% of uninsured deposits as of quarter end.

Slide 18 provides the loan roll forward, noting we sold $159 million of non-relationship reservoirs in Q3. Our loan portfolio increased 3% on an annualized basis when the sale was excluded. Turning now to slide 19, we present the remaining balance of discount marks as compared to the prior quarter and at closing. For the AFS portfolio, the acquired discount was reduced to $23 million via accretion to interest income. In our earnings release detail, we include this $23 million, along with $90 million of higher bond interest income from the portfolio restructure we completed post-close to arrive at the $42 million total accretion for bonds. On the loan side, we had $29 million of rate accretion and $6.4 million of credit. The total marks declined $93 million in Q3, through a combination of accretion to interest income and the loan sale.

And finally, in the back on Slide 26, we highlight our regulatory capital position, noting our risk-based capital ratios increased roughly 25 basis points as expected in Q3. We expect to quickly approach our long-term capital targets of 12% on total risk-based capital, which will provide for enhanced flexibility to return excess capital to shareholders. And with that, I’ll now turn the call over to Frank.

Frank Namdar: Thank you, Ron. Slides 20 through 22 provide select characteristics of our loan portfolio, including the composition of our commercial books and an overview of our office loans that highlights this diversified granular portfolio primarily supported by properties located in suburban markets. Moving on, Slide 23 displays our reserve coverage by loan category. Additionally, the remaining credit discount on loans provides a further 23 basis points of loss-absorbing capacity. The $37 million provision expense recorded in the quarter accounts for several factors, including shifts in the loan portfolio mix and trends in credit migration. The slight uptick in nonperforming loans during the quarter suggests a move toward a more standard credit environment following a phase of exceptionally high quality.

Slide 24 provides an overview of our consolidated credit trends. In general, our credit performance is and has remained positive, excluding the anticipated trend in FinPac chargeoffs. FinPac chargeoffs remained elevated during the third quarter, still centered in the trucking sector of the portfolio. However, the plateau and related early-stage delinquency trends we discussed on last quarter’s call resulted in a reduction in FinPac net chargeoffs, which react on a lag to delinquencies. Excluding FinPac, charge-off activity at the bank remains at a very low level. I’ll now turn the call over to Chris.

Chris Merrywell: Thank you, Frank. Turning to deposits. Slide 25 highlights the quality of our granular deposit base. As Ron noted, customer deposit balances increased during the quarter despite the continued effects of market liquidity tightening and inflation. Our teams remain active in their markets, and their focus on customer acquisition and retention resulted in net deposit increases throughout many of our business lines. Strategic expansion also supports our business generation activities. We opened our first retail branch in Utah during the third quarter, supporting our intention to pick businesses, their owners, their employees, and any others in the communities we serve throughout our eight-state Western footprint.

We also selectively added to our talented associate base, including the addition of two key bankers in Northern California, one in commercial and one in wealth management. We continue to capitalize on opportunities our expanded customer base provides and our commitment to our relationship-focused model. I’m pleased to announce our wealth management team had the best quarter in our company’s history. We are positioned well throughout our markets to win business and drive balanced growth. I will now turn the call back over to Clint.

Clint Stein: Thanks, Chris. Our regulatory capital position is outlined on slide 26. We remain above both well-capitalized and our internal threshold targets. And as Ron discussed, we expect capital to continue to accrete quickly in the coming quarters, providing us with ample flexibility for future shareholder return. This concludes our prepared comments, the team is now available to answer your questions. Valerie, please open the call for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open.

Jeff Rulis: Thanks, good afternoon.

Clint Stein: Hi, Jeff.

Jeff Rulis: Wanted to kind of look at that margin guidance you’ve got for the full year. Looks like — you know, to hit the low end of the 385 for the full year, you got be — looks like it’s got to kind of really tank in the fourth quarter in terms of margin. What was — I guess if you could kind of frame up the environment of how you hit the low end of the guidance for the full year on margin?

Ron Farnsworth: Jeff this is Ron. Hey, good morning or good afternoon. That would be similar to what we saw last quarter, right? So it depends on customer deposit flows. If we’re on the upper — positive on that front, will be on the upper end. If we’re negative on that front, we’ll be on the bottom end. Feel pretty good about it, heading into the quarter.

Jeff Rulis: Okay. So again, all right, it seems pretty well, I’ll move on. On the credit side, just on the increase in nonperformers, could we kind of break out what type that was in and perhaps where within the footprint?

Ron Farnsworth: It was really centered in two commercial accounts with the bank. Both of them had been struggling for quite some time, and one of them just decided to cease operations. And so that one migrated into nonperforming, and the balance of it is really associated with in terms of nonperforming assets, there’s a slight escalation in the 90-day plus in residential construction. They were — in terms of geography, they were located — one of them was located in Portland, kind of the Pearl District of Portland, and another one was located in California.

Jeff Rulis: Okay. Got it. And I guess the expectation, if we kind of track FinPac losses like you said, kind of a lagging indicator on — tied to delinquencies. Is that still the case that we’ve seen that plateau, and if we follow delinquencies that continue to come down on that end?

Ron Farnsworth: It is still the case. I mean, I will say that, things — the third quarter has a few holidays in it, that impacts collection activity. Any impact to collection activity really hampers, obviously reducing those past dues. And we had that in the third quarter. Had we not had that in the third quarter, we would have seen some further improvement. But that trend should continue, obviously into the fourth quarter. Fourth quarter is usually another difficult one for collection activity, but we make sure that we’re staffed up to handle it. So we feel we’re continued to be on track.

Jeff Rulis: Okay, one last one on the expense front. I don’t know if it’s possible to launch here a ’24 expense growth expectation. It’s a big year of cleaning up, and you got a little extra on the cost savings on the deal in the fourth quarter. But maybe not, if you can’t point to a figure, just talk about kind of big picture. I think you kind of spoke to Clint, sort of continuing to optimize is sort of the message. But any big-picture sort of branch consolidation or larger investments that may come in ’24?

Clint Stein: Yeah. We’re always looking at how can we become more efficient. And I do think that there is opportunities for us to do that. As we’ve already started, we’re well into our 2024 planning process. So that’s what I was alluding to. We’re going to continue to invest, especially in our de novo markets. And Chris and Tori have made some strategic hires in existing markets. You know, in Chris’s prepared remarks, he mentioned California — Northern California. So we’re going to continue to be opportunistic within legacy markets, but also invest in those newer markets and those high growth markets. But we’re going to challenge ourselves to do that by finding offsets and efficiencies in other parts of our organization as opposed to just simply letting expenses ramp up. In terms of kind of a launch point for modeling purposes, I’m going to defer to Ron on that.

Ron Farnsworth: Yeah, and Jeff, we’ll talk about that. That’s an updated guide in January as we look into ’24.

Jeff Rulis: Okay, and just curious on the — you said that cost saves are net of investment. Is there a ballpark number that you pass along in terms of what you think you invested against the cost saves of $140 million?

Ron Farnsworth: Hey, Jeff, this is Ron again. Yeah, it’s actually a specific number, $21 million. So we’ve got a gross of 164 and then down to 143.

Jeff Rulis: Okay, great. Thank you.

Ron Farnsworth: Thank you.

Chris Merrywell: Jeff, this is Chris. To answer your question you asked about branch consolidations, we have five leftover from the original ones that we did. And when we look at our go-forward, very pleased with our footprint. I think we’re in a good spot with those and don’t anticipate anything further.

Jeff Rulis: Thanks, Chris.

Operator: Thank you. One moment please. Our next question comes from the line of David Feaster of Raymond James. Your line is open.

David Feaster: Hi. Good afternoon, everybody.

Clint Stein: Hi, David.

David Feaster: I was hoping maybe we could just touch on the funding side and specifically focusing on the core funding side, exclusive of the broker deposit increases that we talked about earlier. I’m just curious what you’re seeing there as we dig in. It sounds like core trends are stabilizing, that you’re actually having some success attracting new clients, which may be difficult for us to see in some regards, just given clients utilizing excess liquidity. I’m just curious some of the underlying trends that you see there within your core deposit franchise where you’re seeing the most opportunity to drive core deposit growth and attract those new deposit clients and how new core deposit pricing is trending.

Tory Nixon: David, hi, this is Tory Nixon, I’ll talk a little bit on the commercial side of the house and let Chris kind of chime in on the consumer side of the house. You know for commercial banking, I mean, you’re seeing just a few different things. One, folks are using excess cash to invest in their companies when and where appropriate rather than borrow. So the borrowing side is just less robust than it was a year ago. Folks are also kind of looking for yield where they can with any excess deposits. We have done, I think a really nice job connecting with our existing customer base and just looking holistically at their relationship. And with that in mind, kind of focusing on where they may have funds at other places and talking about bringing those funds to Umpqua Bank and have a lot of success with that.

That will continue without a doubt. We had a lot of success this quarter with it. And we’ve got a really, I think a really nice pipeline as we kind of move into Q4. So, Chris?

Chris Merrywell: Yes, pretty much the same piece on that, David, I would add that, on the new side, our rates are very competitive in the market, but where we’re really seeing the opportunities to deepen relationships is in talking with the customers, taking them through our relationship model, asking questions about what else they have out there. And we continue to source deposits from other institutions. As well the teams have really kind of moved towards, there is still some minor integration, but not technology types of things. And our teams are out jointly calling together in all of our markets and winning new business just with their outward-bound efforts.

Tory Nixon: Hey, David, it’s Tori, again. I thought I’d just add one more thing on it. One of the things kind of going on in our marketplace is tremendous disruption from other financial institutions. And we’re looking — you know, we got, it gives us a lot of opportunity. And so we’re working hard in the markets, in our footprint to talk to anybody and everybody that we think fits the bank and having some success with that.

David Feaster: Okay, that’s great. And maybe stepping back a bit, it seems like we’re going to be in a higher for longer environment for some time. I’m just curious maybe, and look I know it’s still early, but I’m just curious how you think about maybe the margin trajectory. And the business performance more broadly in a higher for longer environment and how you’re looking to manage the balance sheet in the business for that kind of environment?

Ron Farnsworth: Hey Dave, this is Ron, and again I’ll come back to the comments we talked about earlier, or do we see continued customer deposit growth? And I’ll feel really good about where we’re at in a higher prolonged environment. I think maybe in terms of 2024 specifically, we’ll definitely give you an update on that in January [Technical Difficulty] as we look into the year, but it’s going to be the basic blocking and tackling. You heard Chris and Tori talk about a continued customer deposit growth. We’ll look there on that front.

David Feaster: Okay. And then last one from me, you guys have been accreting capital at a rapid pace. You’re getting close to your 12% total risk-based target. I’m just curious as you approach those targets, how do you think about capital management? Is there any interest in potentially returning capital maybe early next year or at this point in the cycle, would you primarily be focused on capital preservation?

Clint Stein: Well, I think our focus is — we always want to be good stewards of capital. And we have our long-term targets and we’ve spoken about those and been very consistent with those. Even on a standalone pre-merger basis, our thoughts around capital levels were pretty consistent. And so essentially at 150 basis points to whatever the criteria is to be considered well capitalized and that’s our long-term target. You know, total risk-based capital has been the constraint. You mentioned the 12%. Absolutely, we’re going to look at all capital deployment opportunities. I don’t think that as soon as we hit like 12.01% or something that we’re going to look at a major shift. But if we’re creating 25 bps, 30 bps of capital a quarter, it happens pretty quickly, where then suddenly you’re 5,000 basis points, 7,500 basis points over that target, and still growing capital.

We’ve mentioned that with our forecasts and expectations and the earnings power of this company that there is not a level of what we think would be a prudent organic growth that would absorb all of that capital. So by default, yes, we will be looking at capital return and how we do that as we manage those ratios. Now, I don’t think you should expect it next quarter necessarily, but I do expect that it will be a nice problem that we’ll have as 2024 progresses.

David Feaster: Absolutely. Thanks for the color, everybody. Thanks.

Ron Farnsworth: Thank you.

Clint Stein: Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Timur Braziler of Wells Fargo. Your line is open.

Timur Braziler: Hi, good afternoon. For the broker deposits that were added during the quarter, can you just talk through kind of the timing during the quarter they were added, their costs, and then the expected duration?

Ron Farnsworth: Yes, this is Ron. Good afternoon. That was later in the quarter, roughly two to four months in tenure. That’s how we managed all of this from a wholesale standpoint, including the Home Loan Bank Advances. And you’re talking probably mid-5s in terms of cost.

Timur Braziler: Okay. And then I guess as you look at your borrowing position where is that today relative to where you want it to be? And as that continues to mature, maybe just give us a schedule of how that matures and if the expectation is to replace that with additional brokered.

Ron Farnsworth: Yes. And again the Home Loan Bank Advances are also in that two to four-month tenor. So they’re all repricing in that call it mid-5 as well. And that just gives us the most flexibility, right? And back to your second question, we’re obviously sitting on the more borrowing than what we like. It’s in response to, of course, what’s happened with just the liquidity drain in the overall system over the past year. Ideally, over time, deposit growth continues to exceed loan growth, customer deposit growth exceeds customer loan growth, and we’re able to pay those down with due plan.

Timur Braziler: Okay, that’s helpful. And to the first question, it seems like the low end of the margin guide seems fairly conservative. And I’m just wondering as we look at NII, is that also kind of 50-50 for an inflection point in next quarter or even though there is some stability in the NIM? We could see another quarter of NII compression prior to that higher for longer really kicking in and benefiting the top line in ’24.

Ron Farnsworth: Yes, I mean, specific to that question in Q4 and the guide, if we’re talking about material move, it’s going to come down again to customer deposit growth. So I feel good about — you’re not going to see a significant — you should not see a significant change in the net interest income dollars if we do have continued customer deposit growth in the portfolio.

Timur Braziler: Okay. Okay, and then the FinPac early stage plateauing last quarter charge-off, still somewhat elevated this quarter. Still focused on trucking. I guess, is that more of a cliff event, is that — where that pretty much subsides going forward? Or is that going to be more of a tail where this lingers for a couple of additional quarters prior to subsiding?

Clint Stein: It’s going to be a slow — it’s going to be a slow reduction over time, over multiple quarters to my best estimation.

Timur Braziler: Okay, great. And then just last for me the resi loans that were sold about $159 million. What was the discount they were sold at, if you can provide that?

Ron Farnsworth: Yeah. The par value is in the $185 to $190 range, so discount was in ballpark 35.

Timur Braziler: Got it. Great. Thank you for the questions.

Clint Stein: Yes. Thank you.

Operator: Thank you. One moment, please. Our next question comes from the line of Brody Preston of UBS. Your line is open.

Brody Preston: Hey, good evening, everyone. How are you?

Clint Stein: Good afternoon. Doing well.

Brody Preston: Hey, I just wanted to follow-up just on the loan waterfall chart. Ron, I just wanted to make sure I understand the 343 from payoffs or sales. The single-family side, I think it was the 159 that’s in there. And then the remainder of that is just payoffs, correct?

Clint Stein: That’s correct.

Brody Preston: Okay. And then the 515 of prepayments, I just wanted to ask, kind of like was — what was the success rate and kind of maybe converting those into new originations this quarter?

Tory Nixon: Yes, this is Tory, Brody. So let me just real quick on that. I think the success rate is very, very high. That’s what we want to do. We had growth in the commercial side and our C&I teams of about 40 million or 50 million, and then growth in the CRE teams at about 180. So, a lot of success in the rollover of that.

Brody Preston: Okay. Great. And then could I ask just a generic question about the loan portfolio, what portion of it is shared national credits? And then of that, what do you lead on?

Tory Nixon: So we — our total commitments in the SNC portfolio is around $3 billion. Our outstandings are roughly $1.8 billion. We lead a couple of deals today, but most of them are just a participation with ancillary business. And it is not a part of the organization that we are growing really at all. We have really straight guidelines of what we want to be in and what we’re going to do and obviously has got to have significant ancillary business, including deposits to even consider.

Brody Preston: Got it. Okay. Thank you for that. And maybe just on the office portfolio, you gave great detail there, but I was wondering if you happen to have what the ALLL for the office portfolio was?

Frank Namdar: Yes. We — yes, thanks for the question, Brody. We choose not to provide that much detail surrounding ACL on that portfolio. We feel that there’s enough detailed information provided elsewhere for the group to really ascertain the quality of our loan portfolio, which is high. Very good quality.

Brody Preston: Okay. Cool. And then I did want to ask, this was more of interest for me. Just on the multifamily originations this quarter. I just noticed that there was like a big difference, I think, between the debt service coverage ratios that you initiate — that you had originated last quarter. I think they were like 1.7 and this quarter, they were 1.32 and like that’s still healthy, but it was just a big difference. And so I just want to know if there’s anything specific that kind of caused that?

Frank Namdar: Nothing specific, Brody. I — without having that detail in front of me, it’s hard for me to say, but what I would intimate from this is that we had extremely strong sponsorship on those deals and their relationship-based opportunities. So we have the banking relationship and knew the client.

Brody Preston: Got it. And then I just had a couple of last quick one’s for you. Just on the nonaccruals. I wanted to understand was the — was any of that included in the delinquencies just because when I looked at the buckets that you disclosed on page 20. I noticed that the DQ rates had kind of moved higher for owner-occupied and C&I and mortgage and then FinPac as well. I just wanted to make sure, was there any kind of overlap between the nonaccrual moves and the DQ moves?

Frank Namdar: Explain DQ moves.

Brody Preston: The delinquencies. So the mortgage went from 0.43 to 0.59, the C&I went from 0.3 to 0.6 on the total delinquencies owner occupied from 0.23 to 0.51.

Frank Namdar: Yes. That was primarily centered in a couple of loans, Brody.

Brody Preston: Okay. Were those the ones that you talked about earlier?

Frank Namdar: Correct.

Brody Preston: Okay. And on — and then this is my last one. On the one that you talked about earlier where they just decided to — or I guess you said they have been struggling for a bit, and then they ceased operations. What was the collateral that was backing that specific loan? And I guess, like how does the workout process evolve here from when a business just decides to shut down kind of what do the steps look like?

Frank Namdar: That was an owner-occupied commercial real estate piece of collateral. The — what we do initially, obviously, is we downgrade it, we then get the property reappraised, which did come in. And I’ve said on these calls historically about our lending discipline and our aversion to leverage. Well, it played out in this case because we got the property reappraised. We still have equity in the property. And we continue to work with the borrower on trying to structure an orderly way out of this. We will not take a loss on this piece of property.

Brody Preston: Awesome. That’s fantastic. I appreciate the detail. Thank you very much, everyone.

Operator: Thank you. One moment please. Our next question comes from the line of Chris McGratty of KBW. Your line is open.

Chris McGratty: Ron, I’m starting on Slide 10, the rate disclosures. So I think somebody had asked before about higher for longer. You do have, I guess, a back book narrative. So I guess I’m interested in a little bit more color in a higher for longer environment. Your views like in terms of the opportunity to defend margin? I guess that is the first question. The second question is, and you provided the spot deposit rate. Do you have the September margin?

Ron Farnsworth: Yes. The September margin was within a couple of bps of the Q3 margin. And just back to the first part of the question, again, I think was around the loan repricing maturity schedule, a higher rate environment for longer, et cetera. Again, the things are going to come down to can we continue to be successful at growing customer deposit balances. That is going to be one of the single biggest drivers in terms of where our margin — higher margins perform if rates safety levels over time because then that can continue to reduce higher cost wholesale funding, right, to help offset.

Chris McGratty: Okay. And then what’s the approximate difference between roll-off yields and new production yields for loans?

Tory Nixon: This is Tory. I don’t know — I don’t — on the top of my head, I don’t know roll-off yield, but I can tell you, production on the commercial side for the quarter range anywhere from 7.25% at the low end to 9% on the highest weighted average by just over 8%.

Chris McGratty: Okay. Great. And then last one on the tax rate. Any help on kind of go-forward tax rate?

Ron Farnsworth: Yes. The ballpark 25% still is a go-forward rate.

Chris McGratty: Alright, great. Thanks a lot.

Ron Farnsworth: Good. Thank you.

Operator: Thank you. One moment, please. Our next question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open.

Jon Arfstrom: Thanks. Good afternoon, everyone.

Jon Arfstrom: Hi, Jon. A question for you on the — just the deposit flows during the quarter. It seems like deposit growth is back. And so, Ron, I’ll take the over on customer deposit growth. But what was the difference between Q3 and Q2? I think some of us were disappointed in the Q2 deposit growth, and this has obviously rebounded. But what’s driving these increases? Is it rate driven or something else?

Ron Farnsworth: I think there’s a little bit of both in there. As far as the market has calmed down somewhat as far as the rapid increase in rates. You can see as much of that in the third quarter. We’re farther past our initial conversion and things of that nature where I’ll just say it again, that our teams are out in the markets, winning new business using the expanded capabilities that we have. And when you put those things together, the value proposition really comes to play. We’ve got great bankers that are externally oriented and they’re doing it in a collaborative manner that allows us to keep our deposit costs down, but we’re also being winning business. And when you win operating accounts, it helps keep it down as well.

But some of it is just the stability of the rate environment and that we stopped seeing increases during the quarter and move past some of the issues that happened in March as well. It’s, I won’t say business as usual, but it’s a whole lot of calmer. And Torran, I don’t know if you want to add anything?

Tory Nixon: No, I think that’s very well said. I think it’s all those things. And it’s a real outbound focus by all of our teams to connect with our customers and connect the [indiscernible] and bring business into the bank and realizing that the most important business we bring in the bank is on the deposit front.

Ron Farnsworth: The other thing I’ll add to that is there is an element of seasonality. And it’s a little murky more so than what it has been historically in terms of isolating the seasonality, but I do believe there was some seasonality and it’s pretty easy for us to track new relationships that we’re bringing in, in particular, on the commercial side. But the seasonality aspect, I think, also played a role. And then kind of as a continued headwind is consumers are still pressured and the impact of inflation. And I’m not sure necessarily what this translates to where you’re at, Jon. But I filled the car up the other day, and it was $6.50 a gallon. So you think about $175 to fill your SUV up, that takes a bite out of a lot of consumers.

And so I think we’re still seeing the impact of inflation on that aspect. Fortunately, we lead a lot with the commercial and the operating account side, and we’re seeing great success in winning new business and bringing in additional aspects of existing relationships on that front.

Jon Arfstrom: Okay. Good. That’s very helpful. I don’t know if this is you Clint or Tory, but can you comment on the overall lending pipeline? Are they changing at all? And what’s a comfortable pace of loan growth for the company?

Tory Nixon: Yes, this is Tory. The loan pipeline is down just a touch from last quarter, but it’s actually — it’s pretty strong still and fairly robust. So I feel good about the mix in the pipeline and actually the size of the pipeline throughout the footprint. I think Clint mentioned earlier, our de novo offices of Utah, Colorado and Arizona. We’ve got some really nice pipelines there, which is great to see. And I feel good about it. I think we’re still probably a low to mid-single-digit in loan growth for the bank. Pipelines for deposits are nice, and the fee income pipeline is really strong, which is kind of the — I think, connection to the conversation that Chris and I have both said about connection with clients and prospects and looking at a bunch of different solutions to solve — to help customers strive.

Clint Stein: Yes. The one thing I don’t think that — the pipeline — the absolute level of the pipeline tells the whole story because of — we’re being very disciplined and focused on the types of loans and the types of relationships that we’re pursuing. And so we’re maybe in — outside of a quantitative tightening environment, we might have done more in terms of real estate and things like that. So the types of — and jump in here, Chris or Tory, if you feel differently. But the types of loans that we’re really interested in the pipeline and the activity that our bankers are surfacing is really, really solid.

Tory Nixon: Yes. 100% on the commercial side, it’s a C&I pipeline, C&I growth. And it’s business orientation. And it comes with — to the point, the relationship comes with deposits and fee income, and that’s critically important in the way that we will do business.

Jon Arfstrom: Okay. Okay, thank you very much.

Operator: Thank you. One moment please. Our next question comes from the line of Andrew Terrell of Stephens. Your line is open.

Andrew Terrell: Hey, good afternoon.

Ron Farnsworth: Good afternoon.

Andrew Terrell: Ron, just a quick one on the cash balances. Should we expect any more normalization from this, call it, $1.9 billion level? Or is this kind of the right level to think about the cash balance?

Ron Farnsworth: Again, that will come down to the customer deposit flows as we talked about earlier. So ideally, yes, you’re going to see us continue to more normalize that to a lower level, probably somewhere in the mid-1 range. But I’m not sure if that will occur by Q4 or not, but that’s ultimately where I’d expect it to settle.

Andrew Terrell: Okay. And then on the deposit flows, specifically within the quarter on the noninterest-bearing side, do you see most of the balance contraction occur earlier in the quarter? Or was it pretty ratable throughout the quarter? And then just to put a fine point on the margin and the customer deposit balance discussion. If we see 4Q deposit trends from a core perspective look similar to 3Q, that would put you at the top end of the full year margin guidance, correct?

Ron Farnsworth: On the first question, yes, that was ratable over the course of the quarter. There was no specific shock in — and I think, again, back to what you hear — Clint talked about earlier on the consumer side, driven by discontinued inflation. Majority of the decline is there. In terms of Q4 and the guide, you’re spot on, right? So if we do better on that front in Q4 we’ll be on the upper end. If we’re a little less, then we’ll be on the bottom end. But feel good about where we’re at, ballpark going into it.

Andrew Terrell: Okay. And then on the FinPac portfolio, it looks like the delinquencies in that book moved from, I think, I recall, nearly 6% last quarter down to its low 4% this quarter. I guess, should we expect to see the commensurate kind of move lower in charge-offs heading into the fourth quarter, I guess, just like magnitude wise or I guess do you think they’ll hang around this 5% kind of charge-off level for a while?

Ron Farnsworth: I think in the fourth quarter, I think it’s going to be pretty stagnant. That’s what I would say. Again, I mean fourth quarter is historically the most difficult quarter to collect in that business. And that just coupled with the — just the overall economic headwinds that truly impact these most susceptible companies. I think it’s going to be pretty stagnant in the fourth quarter. But I think the trucking will continue to gradually decline. It’s just going to be — it’s just going to take a while. It’s going to take a few quarters to get to more normalized level in that space.

Andrew Terrell: Yes. Okay. Got it. And then the last question I have is just following up on the SNC discussion. I think you said you’ve got $1.8 billion outstanding in syndicated loans. And I realize some of the rationale there, it sounded like a — the rationale for participation was deposit driven. Do you have a similar level or I guess, is that $1.8 billion of SNCs fully funded with deposits generated by those relationships? Or is there a greater deposit sponsorship that comes with it? Or is it — or is it less? Just any more color there would be helpful.

Tory Nixon: Yes. No, this is Tory. Just by nature of the — that part of the borrowing apparatus that there’s less deposits associated with that than there is loan outstanding. So it’s just byproduct of participating in a large credit. So — but with that in mind, I mean, what we do have, we’ve had for a longer period of time, and we have a very strong connection to management and to the companies, and we have in almost all cases, ancillary business, whether that’s some sort of fee income business and/or deposits.

Andrew Terrell: Okay, thanks for taking the questions.

Ron Farnsworth: Thank you.

Operator: [Operator Instructions] One moment, please. Our next question comes from the line of Matthew Clark of Piper Stanley. Your line is open.

Matthew Clark: Hye, good afternoon all. Just a couple of questions on credit. Classified up 15 basis points, I think, to 1.28%. And it looks like you built reserves C&I reserves by about $22 million. Just want some additional color behind the increase in classified and then not only that, but just the increase in C&I related reserves?

Frank Namdar: Yes. Hey Matt, the increase in classified was really driven by a migration from special mentioned into the classified loan status, and it’s really centered in the commercial book of business and again, these are the two properties — not properties, but the two commercial borrowers that I mentioned that just continued to struggle when we had to downgrade them into classified status, and that’s the bulk of that change. And as far as the building of the reserve, I mean, you see the FinPac continues to have elevated charge-offs, we’ve got the increase in classified loans and the Moody’s baseline economic forecast continues to move in the direction that warrants building of the reserve.

Matthew Clark: Okay. Okay. Yes. I was actually speaking to the $16 million, not $22 million, $16 million increase in C&I. Okay. And then just on the overall reserve. I think last quarter, there was an expectation that maybe reserve coverage kind of trends lower towards 1%, but went the other way this quarter. Just any updated thoughts. I know obviously macro assumptions change and the environment changes. But any updated thoughts on the overall reserve coverage going forward?

Ron Farnsworth: I would just say you just said yourself, the macro environment changes. The economic forecast change. They got a little worse this quarter. We had a little bit of migration this quarter. And so we’ll have 3 bps instead of down 3.

Matthew Clark: Okay, fair enough. Thanks.

Ron Farnsworth: Okay, thanks.

Operator: Thank you. I’m showing no further questions at this time. I’d like to turn the call back over to Jacque Bohlen for any closing remarks.

Jacque Bohlen: Thank you, Valerie. Thank you for joining us on this afternoon’s call. Please contact me if you’d like clarification on any of the items discussed today or provided in our earnings material. This concludes our call. Goodbye.

Operator: Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.