Nathan Race: Okay, great. I’ll step back. Thanks guys.
Operator: Your next question is coming from Terry McEvoy with Stephens. Please post your question. Your line is live.
Terry McEvoy: Hi, thanks. Good morning everyone. You’ve been using loan modifications a bit more than your peers, specifically the term extensions. Can you just talk about 4Q activity and modifications in the portfolio?
Brad Adams: So that’s in the context of the discussion I just had, Terry, where we’ve taken variable rate structures and moved them into fixed rate structures as part of our basically almost 12 to 15 months of strategy of reducing asset sensitivity. So it’s basically taking variable loan portfolios and moving them into fixed. It’s not a function of credit give-up or restructuring in terms of doing that sort of thing at all. That’s not what you’re seeing.
Terry McEvoy: Thanks for clearing that up. I guess just looking at the $137 million of CRE fixed rate loans that mature in the first half of this year, I guess, when is the last time you stress test the portfolio for today’s rate environment? And are there specific reserves against that bucket of loans?
Jim Eccher: Yeah. Terry, we did an analysis on all fixed rate CRE loans that are maturing in 2024 and stress tested all of them and feel that we have no additional reserve needed. I think what’s important to know is we started building reserves pretty significantly, really in the second and third quarter of ’22 and into ’23, when we really started seeing stress in certain portfolios. We hadn’t really used those reserves until really the last two quarters. So despite a little bit of a decline in the reserve levels, we still have a pretty healthy pooled reserve level out there, and the team has done a good job of stress testing what we have coming forward.
Terry McEvoy: And just last one, Brad, I was trying to track when you’d look to repurchase stock. Is it the forward 12-month expectations on where tangible book value is expected to be?
Brad Adams: Yes. So take basically four quarters of earnings. And if we cross below one, we absolutely will be active and aggressive in terms of repurchasing shares. Although as we sit here today, it is less than a two-year earn back on that same basis. And a bank like us with a two-year earn-back is not a bad acquisition. So it’s not something that I’d rule out. And that’s not trying to be flirty I’m just trying to tell people how we think about it. And it’s in relation to an M&A outlook type thing, Terry.
Terry McEvoy: Understood. Thanks a lot.
Operator: [Operator Instructions] Your next question is coming from Brian Martin with Janney. Please post your question. Your line is live.
Brian Martin: Hey, good morning, guys.
Jim Eccher: Hey, Brian. Good morning.
Brian Martin: Hey, Jim, just to clarify, one, the special mention level today, just the total criticized and classified. Can you just run through what those are today? I think you said they were the lowest level, but just want to make sure if you give the classified in the release, I don’t know about the special mention.
Jim Eccher: Yeah. So obviously, criticized or special mention, those are the early warning buckets, right, that all banks focus on with that. Those levels have declined four consecutive quarters and are down 26% just this last quarter and lowest level in two years. So that gives us a little bit of optimism that future migration from there to substandard is going to be a lot lower than it has been the last couple of years. Total classified and substandards are down about $100 million over the last year. So we’re making progress. Obviously, a tough quarter, but we think we’ve done a pretty good job around putting a fence around a lot of these problems moving forward.
Brian Martin: Yeah. Okay. Got it. And then I think just on the M&A outlook, I guess, I know you mentioned that in the context of capital and kind of how you’re looking at the things. I mean is that market soft today? I guess, are you not given the — working through these credit issues, is it less of a focus? Or just how should we think about the M&A opportunities that may be out there in the context of how you’re running the bank today?
Brad Adams: I mean, as always, banks are sold and not bought. So it’s a question of are there willing sellers? I think over the last two months, we’ve seen a pretty large influx of hopium, that short rates are going to fall and that all the sins in terms of duration are going to be forgiven and absolved. I don’t, as you know, necessarily agree with that interest rate outlook. So I think that at least possible that, that will swing back the other direction to some degree. Duration is a tricky thing. As great as it’s been to not have any in terms of interest rate risk management, it does offer kind of an opposite impact when it comes to credit and credit migration. There was an awful lot of people in our industry doing seven and 10-year balloons on commercial real estate from 2020 all the way through 2022.
And that may give some comfort that those loans are fine. And obviously, the cash flow was benefited by that having that locked in low debt service coverage. But given the fact that we didn’t really depart from three and five year balloons, we don’t have that duration cushion that others may have been experiencing.
Brian Martin: Got you. Okay. And then Brad, you talked about the fixed rate — the fixed loans repricing. Can you just remind us how much of that — how much is occurring over the next maybe 12 months? And just what pickup you’re getting on that that fixed rate repricing?
Brad Adams: You’re basically talking between somewhere between $150 million and $200 million depending on some level of prepayments. That is repricing from a 3.5% to 4% range into a 7% to 8% range.
