This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
1/23/2025
After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. If you would like to remove yourself from the queue, please press star 11 again. Please be advised that today's conference is being recorded. At this time, I would like to introduce Jacqueline Boland, Investor Relations Director, to begin the conference. Please go ahead.
JACQUELINE BOLAND Thank you, Lisa. Good afternoon, everyone. Thank you for joining us as we review our fourth 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 of 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 reconciliations provided in our earnings materials. I will now hand the call over to Columbia's President and CEO, Clint Stein.
Thanks, Jackie. Good afternoon, everyone. Our fourth quarter results round out a year of financial and organizational performance improvement. Our optimized expense base, fine-tuned pricing strategies, and targeted franchise investments showcase our commitment to continued progress toward regaining long-term top quartile performance. Our normalized core expense base, which Ron will discuss in his remarks, is down 8% from the fourth quarter of 2023 because of organizational initiatives undertaken in early 2024. While our net interest margin is down 14 basis points from the year-ago quarter, It has increased 12 basis points since its low point in the first quarter. The favorable change reflects balance sheet mix improvement and proactive pricing actions ahead of and following interest rate actions by the Fed. We have also closely aligned our loan growth priorities around our business bank of choice strategy, which focuses on balanced growth in relationship-driven loans, deposits, and core fee income products as we allow transactional balances to exit our balance sheet. These actions combined to an 8% increase in pre-provision net revenue and a 29% increase in net income on an operating basis in the fourth quarter relative to the fourth quarter of 2023. I want to thank our associates for their hard work and dedication during our first full year as a combined organization. Their accomplishments contribute to the building momentum that supports my enthusiasm for the future. We continue to seek out ways to grow our customer base throughout our eight-state Western footprint. We currently have five branches slated to open in 2025 as we redeploy the savings achieved through four net consolidations in 2024 and other offsetting cost reductions. We're also continuing to bring talented bankers into the organization. Our investments in technology are ongoing, and we place customer satisfaction at the core of these initiatives. We look to innovation to help enhance processes that drive operational efficiency, because as we fine tune our ability to be the easiest bank to do business within, it supports our efforts to be the easiest bank for customers to do business with. Key investments in 2024 include the introduction of a new streamlined business online banking platform. Banking is not one size fits all, and we noticed a gap in usage between our small business and commercial customers. Our proactive development of the new platform highlights our focus on technology that enhances the customer experience. Plan 2025 investments include the expansion of our real-time payments offerings, the introduction of new digital solutions, and further development of data analytic tools to drive sustainable core fee income higher as we offer needed solutions to our customers. I want to take a moment to address the wildfires that have devastated parts of Los Angeles. Our hearts go out to those affected by the fires and we are keeping the entire community in our thoughts. We have few businesses and associates impacted directly by the damage, but the response from our teams across the organization has been inspiring. I am proud of the volunteerism, financial contributions, and overall empathy I have witnessed over the past few weeks. We are a company that cares for its communities, customers, and associates, and the call to action is a stark reminder of the strong culture that binds us together. We're pleased with our accomplishments in 2024, but the slate wiped clean 23 days ago. Across the organization, we remain focused on driving balanced growth with new and existing customers as we add to our franchise value through relationship banking. I'm proud of the consistency we have reported to you over the past year, and our actions are focused on long-term, repeatable results. I'll now turn the call over to Ron.
Okay, thank you, Clint. We reported fourth quarter EPS of 68 cents and operating EPS of 71 cents, and our operating return on average tangible equity was 16%, while the operating PPNR was $229 million. Please refer to the non-gap 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 $1.4 billion while continuing to deliver wholesale funding. As for the movements, the decline in AFS securities was mostly market value driven. Loans in total increased $178 million in the quarter. And within this, we had stronger commercial relationship lending, with commercial loans up $228 million, or 9%, on an annualized basis, more than offsetting the $50 million decline in CRE loans. On the right side of the balance sheet, deposits in total were up $200 million, while borrowings declined $550 million. Within deposits, we saw the typical year-end decrease in non-interest-bearing DDA more than offset by an increase in money market and time balances. We brought in half a billion of broker deposits at lower costs to fund the reduction in borrowings, knowing the Fed BTFP was paid off in full. The net effect of this was reducing the wholesale funding costs from roughly 5% at the start of the quarter to 4.5% at year end. This wholesale funding shift, combined with active promotional deposit cost reductions, drove the improvement in our net interest margin. The NIM increased eight basis points to 3.64% for the quarter. Our interest-bearing deposit cost declined 2.66% for Q4. Given the Fed's additional 50 basis points of cuts in the second half of Q4, it may help to compare the month of December to the month of June. Our month of December interest-bearing deposit cost was 2.59%, down 41 basis points from the high of 3% in June. More importantly, the spot cost as of December 31st was 2.51%. down 49 basis points from the month of June. This approximately 50% data is impressive in a short period of time and demonstrates the slightly liability-sensitive positioning we've worked to maintain. 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 our relationship banking strategy where our customers bank with us for the value our bankers provide, not the rate. As we look ahead to 2025, we seasonally see a decline in customer deposits in Q1, while at the same time, we may see continued net commercial loan growth depending on seasonal line utilization. We expect this to result in a net increase of wholesale funding of up to half a billion dollars, which today is in the 4.4% to 4.5% cost range. All else equal, this will have a negative effect on the NIM compared to Q4, and should leave it in the lower half of the range over the last few quarters. Customer deposits historically seasonally decline further into Q2 before bottoming late in the quarter, and we usually see growth in Q3 and less so in Q4. As for the NIM over the remainder of 2025, it will depend much more on customer deposit flows and the non-expiring deposit balance than if the Fed cuts one, two, or three times. 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 $28 million for the quarter. The portion related to our leasing portfolio declined again as expected this quarter to $14 million. Our overall allowance for credit loss remains robust at 1.17% of total loans or 1.33% when including the remaining credit discount. Non-interest income was $50 million for the quarter with the change from Q3 mostly related to fair value swings. Given the bond market rallied in Q3, we had gains in Q3. The opposite occurred in Q4 as the bond market sold off, leading to fair value losses. On page 21 of the release, we detail out the non-operating fair value changes. Excluding those items are operating non-interest income at $55.3 million for Q4 compared to $59.6 million for Q3. This reduction on an operating basis resulted from $1.7 million in loss on sale of loans and another income item which was offset by like change in comp expense. Total gap expense for the quarter was $267 million, while operating expenses were $263 million. The $5.3 million reduction in compensation from Q3 related to non-recurring credits and other adjustments. X of these, I peg our normalized operating expense at $269 million for Q4, which when excluding CDI amortization annualizes at $960 million. Clint mentioned our reinvestment plans earlier, which will increase our quarterly operating expense in Q1 forward, with a starting point expected to be in the middle of our annualized range of $965 to $985 million. On top of this, for 2025, we expect continued annual inflation of approximately 3% to 3.5%, 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. So at CDI amortization, our operating expense should be in the $1 to $1.01 billion range for 2025. And our CDI amortization should decline slightly in Q1, then settle at approximately $26 million for Q2 forward, with the full year 2025 amount expected at $105 million. And lastly, our tax rate was 25.7% for the full year, which should serve as a good rate to use for 2025. I'll close with commentary about our regulatory capital position. Our risk-based capital ratios increased as expected in Q4, with our CDT1 at 10.5% and total risk-based capital at 12.6%. We expect capital ratios to continue to build, which will provide enhanced future allocation flexibility. With that, I'll now turn the call over to Frank.
Thank you, Ron. The stable performance of our loan portfolio continues to highlight the strength of our through-the-cycle underwriting process, portfolio management, and the quality of our borrowers and sponsors. As I've mentioned over several quarters, we have transitioned to a more typical credit environment after a period of exceptional quality. Classified loans declined in the quarter due to risk rating upgrades which contributed to an increase in criticized loans along with the normal dynamic migration of risk ratings. Our proactive and detailed monitoring of the portfolio continues to reveal no systemic issues across various industries, sectors, or geographic regions. Overall net charge-offs for the company stood at an annualized rate of 27 basis points for the quarter with the bank contributing seven basis points and FinPAC 20. As expected, improvement continues within the transportation sector of the FinPAC leasing portfolio. Delinquencies are decreasing, resulting in reduced non-operating leases, non-performing leases, and ultimately lower net charge-offs. We are pleased with the ongoing and predictable progress we are observing. Overall, we remain very satisfied with the quality and directionality of our granular and diversified loan and lease portfolio, which is detailed further in our investor presentation. I'll now turn it over to Tory.
Thank you, Frank. Momentum from the third quarter strong customer deposit growth carried into the fourth quarter as balances continued to expand into December. Non-interest bearing deposit balances were up 50 basis points on average in the fourth quarter, but they were down 1.7% at quarter end with downward movement mostly in the last couple weeks. This late quarter decline was due to normal customer uses of cash like tax payments, business distributions, and holiday spending. We believe we have returned to traditional seasonal patterns given our deposit flows during 2024, and we expect customer account contraction to continue through the first quarter As a result of normal business trends and seasonality, our bankers continue to focus on the activities that drive business and our successful small business campaigns, which generated approximately $700 million in new balance to the bank in 2024, are an example of this achievement. Further, the deposit repricing information Ron provided highlights our bankers' ability to convey the value we provide to our customers beyond rate. Commercial loan growth drove overall portfolio growth during the quarter, as total loans were up 2% on an annualized basis. Commercial loans expanded by 2% during the fourth quarter and by 3% for the year. Bringing strong companies with outstanding management teams to the bank is a long sales cycle, and we are pleased to see the momentum we have been discussing over the past year materialize on our balance sheet. Commercial balance expansion was partially offset by contraction in transactional real estate loans, a trend we expect to continue through 2025 and beyond. We continue to see expansion in core fee income, and our pipelines for these products remain very strong. Treasury management and commercial card income increased by 11% and 8% in 2024, respectively. Financial services and trust revenue were also key contributors to core fee income growth. rising 4% from the third quarter and 50% from 2023 as these services were added through the merger and enhanced by our conversion to a new broker platform a year ago. We are pleased with the favorable trends in our collective product and service income as we target a more diversified revenue stream to contribute to our top quartile performance. I will now turn the call back over to Clint.
Thanks, Torrey. Our focus remains on optimizing our financial performance to drive long-term shareholder value. Our capital position continues to build, and our regulatory ratios are expanding in line with our expectations. Our TCE ratio was 7.2% at quarter end. That's down from 7.4% at September 30th, but up from 6.7% at year end 2023, despite a higher accumulated other comprehensive loss between the periods. Our operational 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. Tori, Chris, Ron, Frank, and I are happy to take your questions now. Lisa, please open the call for Q&A.
Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. We also ask that you please wait for your name and company to be announced before you proceed with your question. One moment while we compile the Q&A roster. Our first question today will come from Jeff Willis of DA Davidson. Your line is open.
Thanks. Good afternoon. Just following up with Clint on that. My line cut out a little bit on the capital use as that builds. Just the priority of now you've hit some of your targets, what do you expect to see in 2025 in terms of deployment?
Sure. Didn't really specify that in the prepared remarks, but I think it's really just reiterating and reinforcing what we've said all along, which is that we continue to generate a fair amount of capital and capital in excess of what typical operations and or prudent growth would require, as well as outstrips level of regular dividend payments, and so we still feel really optimistic that we have that capital flexibility. We're above our long-term targets from a regulatory standpoint, which, if you recall, basically take the regulatory requirements to be considered well capitalized at 150 basis points, and those are our longer-term goals. We'd like to see TCE a little higher still, but it's in, as Ron likes to say, it's within grenade range of where we want to be if you back out the AOCI component of it. And so we're just going to be opportunistic as we get deeper into 2025 with what that might look like in terms of capital actions.
Thanks, Clint. And Tori, I wanted to reorient on the loan growth expectations for 25, given the transactional business that you expect to kind of be a net to core growth. Where do we sit in terms of Q4 growth or the balance of 24 growth, a good proxy for 25, or do you see there's an uptick on net?
Well, thanks, Jeff. I think it depends on a few different things. But I would say this, we, you know, we feel we're in the very low single digits and total portfolio growth after any kind of contraction in transactional real estate. And we feel that the CNI side of the house, you know, is still kind of low to mid single digit. A lot of good momentum. Pipelines are pretty steady. They haven't In aggregate, it increased a bunch, but the mix continues to move more towards heavier weighted on the C&I front rather than the real estate front. So we're seeing all the right behaviors and all the right momentum.
And Tori, more of a specific question. I know that you just said C&I and relationship business is where you're headed. There is an exit of a appear out of the mortgage business in your footprint, wanting to see if the single family mortgage or residential is an area that you think that's an opportunity. Can you work that into the strategy or not necessarily a focus for you?
Hey Jeff, this is Chris. Yeah, great question. I would say we're committed to the pivot that we've made with the two, right before the two companies came together. and that we'll do mortgages for our customers, relationship basis. If a business owner, another customer comes in and needs something that belongs and resides in the portfolio, we have the capacity and we'll look to do that. We'll do saleable product, of course. But as far as looking to expand it, build upon it, I would say it's a more steady state. We're really happy with where it's at. And barring any drastic decrease in interest rates, I think we've kind of settled into a really nice spot.
I'm going to give you a little more on that, Jeff. I can't help myself. You know, for Chris and Jay and the home lending team, my direction is originate all you want that's sellable to the secondary market. But I think that where we sit today in terms of the percentage of the portfolio that's in single family resi, I'd like to see that over time actually go to about half of where it's at today. So big believer in home lending. I think especially where we're in a lot of rural communities, I always maintain that somebody goes to see their banker, they don't differentiate in those communities between they need an operating line, if they need a home loan, or if they need an equipment loan. So it's something we're committed to. But it's definitely going to be very similar to what we've been doing the last two years, which is a mortgage division of a bank serving the needs of our customers, but then utilizing the secondary market to push those off our balance sheet.
Got it. Appreciate the detail there. Thanks.
Thank you. One moment for the next question. And our next question will be coming from the line of John Ostrom.
Hey, good afternoon. Hi, John. Hi. Ron, wondering if you can go over kind of the margin thinking again. I was running quickly. But I think you said given some deposit flows in the first quarter and second quarter, it's appropriate to go back to maybe the Q2 or Q3 levels. Is that what you want us to take away from that?
That was the message. We do expect an increase in wholesale funds, which would be the primary driver of that, just given seasonal customer outflows, as Clint mentioned, that recur in the first quarter. So with that, wholesale funding costs today is in the 4.4 to 4.5 range in terms of percentage costs. I think there could be up to half a billion dollars of additional wholesale funds put on the balance sheet, which You know, if you look back at Q2, Q3, I consider that bouncing along the bottom. Q4, we're up eight bits, just given the better deposit performance and some deal over wholesale. I think I would just look at it between those Q2, Q3 levels and Q4s being the range. And if it does play out to where the wholesale funds are upwards of close to half a billion dollars, I'm probably on the bottom end of that range.
Okay. All right. That's very helpful. And what do you have coming up? from a deposit repricing point of view. Can you maybe size that and let us know what you're getting on some of your deposit repricing?
Yeah, and we do include some good data at the back of the deck where we highlight over $8 billion of wholesale funds between CDs and borrowings along with the yields by time period. So $8 billion over the next six months is going to be quite a bit of opportunity. I think that's on page 21 of our investor presentation, which covers our interest rate sensitivity.
Okay, perfect. Thank you very much. Appreciate it, guys.
Thank you. Thanks, John. Thank you. One moment, please. And our next question will come from the line of David Feaster of Raymond James. Your line is open. Hey, good afternoon, everybody.
Good afternoon.
Hey, David. Let's start on the small business campaigns. You've had a lot of success with those. I'm curious the opportunity for additional campaigns this year and maybe what you've seen beyond just the immediate deposit growth. How effective have those new relationships been, you know, maybe cross-selling into other products, bringing over loan relationships, and how sticky have those new relationships been?
Well, David, once again, this is Chris, but once again, you pack a lot of things into one question. So if I miss something, don't hesitate to call me out on it you know the three that were done last year you heard about the numbers and the success when we look at and track those through we're retaining around the mid 80s on all of those accounts and you know each tranche is a little bit different but overall it's in the mid 80% that we've that we put on that we've we've kept one of the interesting pieces is the average balance even though while we're losing a few of the accounts up front, the average balance of the accounts is increasing. So I would say it's been very effective. The balance increases leads us to customers are coming over, they're sticking with us, and then they're finding other opportunities. Most of the, in the three campaigns, I'll talk about the one we just launched here recently, recall there's no special pricing, there's no special products, it's bundling. everything that we currently offer. And very much focused on making referrals. So we've seen our merchant referrals go up. We've seen our corporate card referrals go up. You know, it's a little more difficult in that space to look at larger loans and things like that. But there have been some of those that have made their way into commercial banking, and that's really nice to see as well. So it's granular across the footprint. Everybody's participating and we couldn't be more proud of that team and what they do. So two weeks ago they kicked off the latest campaign. Results are very similar. A real focus on the cross sales and the referrals of that. And it's got a superhero theme this time. And maybe someday we'll get you in front of a sales meeting that they do. it's actually pretty energizing. Again, I'm sure I missed something in there, but small business lending is certainly a piece of it as well. Heavy focus on that for kicking off this latest one, but it's always a piece of it too.
Got it. That was great. Maybe shifting gears to the loan growth side. The loan growth was solid. I appreciate the commentary, but I think it was pretty impressive to see a notable increase in originations. Could you just touch on what drove that? Is that a function of increasing demand, you gaining market share, your past investments and hires that you've made starting to bear fruit, and just any commentary on the competitive landscape and borrower sentiment from your perspective?
Sure, David. This is Torrey. I would say yes, yes, and yes. A little bit on the demand side, But not a ton there. I'd love to see more of that as 2025 unfolds. But definitely in just momentum around the company as we continue to evolve and the sales culture of the organization continues to grow from an adding value perspective. Hiring us some new bankers in existing markets, and then some of our de novo markets. Just good, solid activity. I think very similar to what Chris said on the small business front, there's just a lot of really talented people hitting the streets and providing some lending to existing customers, bringing new names into the bank. Just some good, healthy momentum. Coming from a bunch of different places, I look at the footprint of where the growth is. For this quarter in commercial, the biggest growth happened to be Southern California, but Pacific Northwest was second. L.A. was strong. You kind of see some different parts of the company. Colorado was pretty strong. It's kind of all over the map, and it's a great thing to see. It's very diversified.
That's terrific. Terrific. And then just last one from me. You touched on the deposit seasonality. Could you maybe quantify how much outflows you saw in December? It sounds like there might be another couple hundred million on the horizon. And then just how do you think about continuing to reprice deposits lower? You guys have been very proactive reaching out to clients. I'm curious just how reception's been. Have you gotten a lot of pushback? Has there been any attrition? and just the opportunity to continue to reprice deposits lower, even exclusive of Fed cuts.
Hey, Dave, this is Ron. Yeah, so late in the quarter, it was $200 million, give or take, of outflows. Again, long lines of what Tori talked about, nothing out of the ordinary other than year-end distributions and or seasonal costs. In the first quarter, we expect up to half a billion dollars of wholesale funding. That would be a net result of customer deposit flows and or any increase in loan balances from that standpoint. So ideally it would be less than that, but we have seen historically upwards of that much. And with that, I'll kick it over to Chris to talk about the deposit repricing efforts by the teams. And I'll also refer you back to page 21 of the presentation that shows you wholesale funding over the coming six months that are still above where current rates are.
Yeah, I'll start with that piece of it. In there, you'll see a little over a billion two of CDs that are maturing during their quarter. Different tranches, different opportunities there, but some of them are still priced in the mid fours. Posted rates are under four. So we've got some opportunity there and that's really the bulk of that billion two. There's probably about a billion dollars of it that's over 4% still. So some room on that aspect of it as well. When you start moving into money markets and things of that nature, It's a little more fluid. It's a little bit more what's happening in the market. I think we've settled into a really good position. We watch the market each and every week. We're very fluid with being able to make that move when and if it needs to be done, so it's pretty active there. The other part I guess I would point to is we still have exception rates deposits, and that's something that'll always be there, but we've got some opportunities in there as well. All that said, I would put it into, even if there's not a Fed rate cut, say, later on here in March or something of that nature, we still have some opportunity. It won't be as great, but it's a daily discipline that our bankers have got a hold of, adopted, they believe in it, and we're looking to drive them down each and every day.
I'll just maybe just add one thing to this story. The customer conversations have gone extraordinarily well. I mean, we were very, very proactive, as Chris pointed out. And, you know, when you have a very good, strong relationship with folks, it's a fairly easy conversation to have. And it's understandable. And I think the teams have done an outstanding job working with customers. And to Chris's point, I think there's more of that to come.
That's great. Thanks, everybody, for all the color.
Thank you.
Thank you. One moment for the next question. And our next question will be coming from the line of Matthew Clark of Piper Sandler. Your line is open.
Good afternoon, everyone. Good afternoon. Drilling down a little more on the repricing on the funding side, the $3.85 billion at 431 within the next three months. It looks like your special is $375 for seven months. Is that kind of the rate you assume most of that's going to roll into? And then on the $2.6 billion of debt at 504 within the next three months, is mid-fours also kind of what you expect to roll to?
Yeah, Matt, this is Chris. I'll take the CD part. Yeah, you would expect that that's where a majority will drive into that seven-month product. It's a good proxy for it.
And the broker piece of that is going to be in that 4.4 to 4.5 range. In terms of the term debt spot on, yeah, that's at 5.04%. We've kept the tenor on these all really short for a very specific reason. Those should be repricing down to the mid-fours.
Okay. And then it looked like you trimmed deposit rates another 10 bps in January. Because how do you think about the overall beta, you know, already above 50%? I mean, do you feel like you can chip away still even if the Fed doesn't move and maybe we only get one rate cut?
Yes.
What's your latest sense on the beta, I guess, through the cycle?
Well, I think we assume within our sensitivity disclosures, 55% was the beta. As rates went up, we assumed the same in terms of on the down rate side in those disclosures. Ideally, over time, if there are additional cuts, it should be north of that. But that's just more about the level of it. So I feel very good about 55% on the way down over the course of the cycle.
Okay. And then an update on the $6 billion of transactional loans that are funded with wholesale. Given rates being higher for longer, should we just assume that
of amortizes and pays down over time or do you have any any change in the way you think about that book and your willingness to maybe sell some loans matt i'll start and then i'm sure tori's going to want to want to weigh in on this as well um we haven't changed our our thoughts around uh one the desire to move that off our our our balance sheet um You know, it is nice that we're below 300% now on the CRE ratio, but that these transactional portfolios, the way I look at it is, you know, with our loan-to-deposit ratio kind of right in the sweet spot of where we'd like to see it from a risk appetite standpoint, I don't want those transactional portfolios to take away from our ability to serve our relationship centric customers. So right now, there is some amortization. I'm sure Tory's got the number at the top of his mind in terms of what that looked like in the fourth quarter. But with the backup in rates, it still doesn't make sense to do a repositioning and hard code losses on a portion of that portfolio. The payback period on that would be pretty extensive. And we looked at what we have in terms of repricing in 25, 26, 27, 28, 29. And the best long-term economic outcome is to stay the course and let those things reprice and amortize down. And if we get a decline in rates that's meaningful enough where the math on the hard coding the loss changes,
then we'd reassess it at that time but tori do you want to go in on some details yeah man i would just i would just add on the the multi-family division portfolio in particular we have somewhere between 40 and 50 million a quarter that uh either amortizes out or runs out and leaves the company um in in 2024 2025 it's kind of the same roughly the same number we have about 175 that's uh uh fixed today that will uh roll over into floating and and either it stays in the company it goes from you know four percent coupon to seven or it exits the the company and goes someplace else so that's about 175 for um for 2025. and we're you know we're not making obviously any new loans in multi-family division and we're just managing the portfolio um from a credit quality perspective as best we can
Great. And then last one for me, just on your expense guide for the year, I think a billion to billion one, I believe is what you mentioned.
One to 1.01.
One to 1.01. Correct.
Yeah, I just did the math, taking the 975 annualized starting point with a three to three and a half percent expected inflation across various items between payroll taxes, merit, and or health insurance costs. being bigger drivers of that inflation.
Yeah, I would have loved to have left that $100 million range in there, but Ron thought you should tighten it up a little bit.
All right, never mind. I thought I was going to ask about what gets you the low and the high, but that's a tighter range than expected. Thank you. You bet.
Thank you. Thank you. One moment for the next question. And our next question will be coming from the line of Anthony Elian of J.P. Morgan. Your line is open.
Hi, everyone. Ron, just following up on the expense guide of 1 to 1.01, should we think about that as 1Q sees a material bump up due to payroll and merit and what you mentioned, and then declines after fourth quarter in 2025?
There'll be a bump in Q1 at least compared to Q4 just given we had non-recurring credits in Q4. The payroll tax is what you'll see in Q1 along with the group insurance. And then that payroll tax generally stays around that level into early Q2 and then starts to decline over the course of the year, you know, a couple million dollars between, you know, Q1, Q2 levels versus Q3, Q4 levels. Merit increase generally is going to be right around the end of Q1, so you'll see that Q2 forward.
The other aspect that you'll see will be the timing of some of the reinvestments. My prepared remarks, I mentioned we have five retail branch locations that are in some form of permitting construction, ready to open, and so as we hire staff for those locations, and then also we continue to attract some really talented bankers on the commercial side that were being opportunistic in bringing those on board. And that was always part of our reinvestment plans as well. So I think you'll see a little bit of a build as we fully utilize that pool of $12 million that we set aside out of last year's expense initiative to reinvest in the company.
Okay. And then is the five-branch build-out and the hires and everything you just mentioned included in the expense range you provided?
Yes.
Okay. And then my follow-up, you talked earlier in the prepared remarks about some investments you plan to make this year on real-time payments and data analytics to drive fee income higher. Could you just provide more color on these and the revenue opportunity you see behind them? Thank you.
Well, I think we continue to do it. This is Tory, by the way. We continue to advance real-time payments platform for the company. You know, we've made investments into various products, some online banking for small business, some enhancement in some of the payment tools, automated payables and automated receivables that we use to the treasury management function for the various commercial and healthcare customers. And so, you know, all of those have been a constant evolution over the last several years, and we just continue to to enhance and invest where we feel appropriate for our customer base. And one thing that we talk about often here in the company is just the growth in the core fee income part of the company and our pipeline. And it is a direct result of the investments that we've made and the momentum within the company, whether it's on the consumer small business side or in the commercial side.
of these all of these pieces are adding up to a very very nice pipeline on the fee income side and I'll just I'll add some of it is we're not going to get into specifics because we have a lot of various people that dial into these calls and would love to have our playbook and we're not going to give that out but but we do listen to our customers we do listen to what they want in functionality and and sometimes it's a matter of what one customer needs. We spend some time and we work through it, we develop it, and then we figure out how do we monetize it and create recurring revenue streams out of it. And so it's those types of things, and we've got several examples of things that we did in 2024, and that's where it gives us the optimism that we're going to be able to convert that into broad-based fee opportunities for existing and new customers.
Thank you. Thank you. One moment for the next question. And our next question will be coming from the line of Sam Varga of UBS. Your line is open.
Hey, good afternoon. I just wanted to go back to the margin for one more question. You touched on the CNI growth that you expect. Can you give some colors around the new originations in those lines of business?
This is Tory. I don't have new origination. I don't really look at it that way for this call. It's really just on the growth side. I think we talked about... low single digit for the entire balance sheet and low to mid single digit on the CNI front throughout the course of the year. So good, steady, solid CNI growth expected for the company that will be a part of full banking relationship. So the emphasis on that of really core low cost deposit growth and fee income growth as combined with the loan part.
The one thing I'll add is, you know, we do track, we call it our wins and losses, and what we've seen, I think the number was approaching a quarter billion dollars of things that we step back from, just whether it was term pricing. One of the things that kind of made me chuckle was I think they called it presidential pricing deal that we elected not to match because it just didn't make sense. But, you know, different people are focused on different things these days as we go forward. And I think that's the real key is we're maintaining our discipline and we're seeing great origination volumes. We're seeing solid pipelines, as Tori talked about. But we're also still stepping away from what could look like meaningful growth. but would be either sub-earning and or not necessarily hold up to credit underwriting guidelines.
Understood. Thanks for that, Collar. And then just on credit, a real quick question. Looks like the allowance ratio for the commercial loans, the C&I part, moved up a little bit, whereas CRE moved down a tiny bit. Were there any sort of key drivers there?
Nothing significant to call out, just normal fluctuations and portfolio and or economic assumptions.
Understood. Thanks for taking my question.
Yeah, thank you. Thank you. One moment for the next question. Our next question will be coming from the line of Jared Shaw of Barclays. Your line is open.
Hi, this is John for Jared. Most of my questions have been answered, but Just going back to the margin, I understand there's some pressure in the first quarter, but do we get back to that fourth quarter level by the end of 2025? It's just assuming that that low single-digit loan growth is funded by core customer deposits.
John, this is Clint. I'll start, then I'm going to kick it over to Ron for the details. You know, what we started talking about mid-year last year was it felt like the NIM was bouncing along the bottom. And I'll say we've bounced off the bottom, but it's still going to bounce. And as Ron mentioned, you know, the seasonal deposit flows play the biggest role in how big that bounce is or how far it goes back down before it bounces back up. And so our thoughts are still around that. We're encouraged by the fact that 2024 for the year looked like the historical seasonal pre-COVID patterns that both companies experienced on an independent basis had played back out throughout the entirety of the year. So we feel much better from that standpoint that we're going to be able to forecast these flows. better, but I'll step back and let Ron talk about the details as to what that may look like, you know, as we get into the later half of the year.
Yeah, and I talked a lot about just seasonal flows over the year. So, you know, we fully expect customer deposit growth over the course of the year, and, you know, a lot goes into where that NIM ends up, but if we do see that, which we expect, over and above the net loan growth, we'll use those additional funds to deal over the wholesale, which you know, should respond favorably from that standpoint. So I don't have a specific number for you. I was going to say it's not out of the realm of possibilities that we would see an increase. Again, that will be based off the number of deposit flows with our customers, much more so than if there's, you know, one, two, or three fed rate cuts.
Okay, thanks. That makes a lot of sense. And then this last one from me. In the loan growth guide, is there any assumption for pick up in line utilization. It looks like commercial utilization rates picked up slightly over third quarter. Let's find that.
Yeah, this is Torrey. Not much. It's been relatively flat over the course of the past five or so quarters, up just slightly. So I think between year-end 23 and year-end 24, it's up about 2.5% in utilization on the commercial side. But Q3 24 to Q4 24, it's basically flat. So it's about 37.5% on the commercial side. So relatively low, but it's been that way plus or minus 1% or 2% for quite a while.
Thank you. One moment for the next question. As a reminder, if you would like to ask a question, please press star 11 on your telephone. And our next question will be coming from the line of Chris McGrady of KBW. Your line is open.
Oh, great. Thanks. Just a quick one on the balance sheet optimization slide. I think I've asked in the past. Any updated thoughts here? Apologies if I missed any comments there.
Yeah, hey, Chris. Yeah, we did talk a little bit about that earlier in the call. You know, our thoughts haven't changed. You know, it's still our focus is committed long-term on full relationships, and these portfolios we flagged in the late first quarter last year as being transactional. You know, it's still a point where they're amortizing off. Just the way the math works to just hard code a loss and exit them, it's a pretty long earn back. And so we think that still the best course of action is to keep our eye on them, watch rates, you know, test to get an understanding of kind of where Market might be for portions of the portfolio from time to time, and then either wait for them to reprice, and we have some repricing, modest repricing in 2025, a little bit more in 26, and then as we get into 27 through 29, there's pretty significant repricing of those portfolios. But right now, it's just let it amortize out and stay close to what market values are on them.
Great. Thanks a lot.
Thank you. That does conclude today's Q&A portion. I would like to go ahead and turn the call back over to Jackie for closing remarks.
Thank you, Lisa. Thank you for joining this afternoon's call. Please contact me if you have any questions and have a good rest of your day.
Thank you for joining today's call. This concludes today's conference call. You all may disconnect.