Columbia Banking System, Inc. (COLB) Q4 2024 Earnings Report, Transcript and Summary

Welcome to the Columbia Banking Systems' Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. At this time, I would like to introduce Jacquelynne Bohlen, Investor Relations Director, to begin the conference. Please go ahead.

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, Jacque. 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 8-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. Planned 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 are 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 $0.68 and operating EPS of $0.71, and our operating return on average tangible equity was 16% while the operating PPNR was $229 million. Please refer to the non-GAAP reconciliations provided at the end of our earnings release and presentation for details related to our calculation of operating metrics. On the balance sheet, we maintained our target interest-bearing cash levels of approximately $1.4 billion while continuing to delever our 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 noninterest-bearing DDA more than offset by an increase in money market and time balances. We brought in $0.5 billion of brokered deposits at lower cost 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 8 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 31 was 2.51%, down 49 basis points from the month of June. This approximately 50% beta 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 $0.5 billion, 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, then 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 noninterest-bearing deposit balance than if the Fed cuts one, two, 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 out. 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. A portion related to our leasing portfolio declined again as expected this quarter to $14 million. Our overall analysis for credit loss remains robust at 1.17% of total loans or 1.33% when including the remaining credit discount. Noninterest 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 nonoperating fair value changes. Excluding those items, our operating noninterest income of $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 a light change in comp expense. Total GAAP expense for the quarter was $267 million while operating expenses were $263 million. The $5.3 million reduction in compensation from Q3 related to nonrecurring credits and other adjustments. Ex 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 the starting point expected to be in the middle of our annualized range of $965 million 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 cost, 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 ex CDI amortization, our operating expense should be in the $1 billion 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 ratio has increased as expected in Q4 with our CET1 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. And 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 contribute 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 7 basis points and FinPac, 20. As expected, improvement continues within the transportation sector of the FinPac leasing portfolio. Delinquencies are decreasing, resulting in reduced net nonoperating leases -- nonperforming 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. Noninterest-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 of 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, Tory. 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 30, 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. Tory, Chris, Ron, Frank, and I are happy to take your questions now. Lisa, please open the call for Q&A.

Thank you. [Operator Instructions] Our first question today will come from Jeff Rulis of D.A. 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 '25 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 our 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 Tory, 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 - is 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 feel we're in the very low single-digits in total portfolio growth, after any kind of contraction in transactional real estate. And we feel that the C&I side of the house, is still kind of low to mid-single-digit, a lot of good momentum. Pipelines are pretty steady. They haven't, in aggregate, 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 Tory, 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 - 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?

Hi Jeff, this is Chris. Yes, great question. I would say we're committed, to the pivot that we've made with the two - well, right before the two companies came together in 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 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. 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 a big believer in home lending. I think especially 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 in 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 Jon Arfstrom.

Hi, good afternoon.

Hi, Jon.

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 cost. Think there could be up to $0.5 billion of additional wholesale funds, but on the balance sheet, which if you look back at Q2, Q3, I consider that bouncing along the bottom. Q4. We were up eight bps, just given the better deposit performance and some delever wholesale. I think I would just look at it between those Q2, Q3 levels and Q4 as being the range. And if it does play out to where the wholesale funds are upwards, of close to $0.5 billion and probably on the bottom end of that range.

Okay. All right. That's very helpful. And then 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?

Yes. 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 periods. 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, Jon.

Thank you. One moment, please. And our next question will come from the line of David Feaster of Raymond James. Your line is open.

Hi, good afternoon, everybody.

Good afternoon.

Hi, 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, maybe crossing 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 missed something, don't hesitate to call me out on it. 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 each tranche is a little bit different. But overall, it's in the mid 80% that we put on that we've capped. One of the interesting pieces, is the average balance. Even though while we're losing a few of the accounts upfront, 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. 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 is 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. 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. So 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.

Oh got it. That was great. And maybe shifting gears to the loan growth side. I mean, the loan growth was solid, I appreciate the commentary. But I think it was pretty impressive to see a notable increase in originations, right? Could you just touch on what drove that? Is that a function of increasing demand, you gaining market share, your past investments in hires that you've made starting to bear fruit? And just any commentary on kind of, the competitive landscape and borrower sentiment from your perspective?

Sure, David, this is Tory. I would say yes, yes, and yes. A little bit on the demand side, but not a ton there. Would love to see more of that as 2025 unfolds. But definitely in just momentum around the company, as just we continue to evolve. And the sales culture of the organization continues to grow from an adding value perspective, hiring 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. So coming from a bunch of different places. I look at the footprint, of where the growth is. And for this quarter, in commercial, the biggest growth happened to be Southern California, but Pacific Northwest was second. L.A. was strong. So you just - you kind of see some different parts of the company. Colorado was pretty strong. So it's just, it's kind of all over the map and it's, 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 of 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 has 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?

Hi, Dave, this is Ron, yes. So late in the quarter was $200 million, give or take, of outflows again along the lines of what Tory talked about. Nothing out of the ordinary other than year-end distribution and/or seasonal costs. In the first quarter, we expect that to $0.5 billion of wholesale funding. That would be a net result of customer deposit flows, and/or an increase in loan balances from that standpoint. So ideally to 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. It shows you wholesale funding, over the coming six months that are still above where current rates are.

Yes, I'll start with that piece of it. In there, you'll see a little over $1.2 billion of CDs that are maturing during the quarter. Different tranches, different opportunities there, but some of them are still priced in the mid-fours. Posted rates are under 4%. So we've got some opportunity there. And that's really the bulk of that $1.2 billion. There's probably about $1 billion 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, of 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 will always be there. But we've got some opportunities in there as well. So 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, this is Tory. The customer conversations have gone extraordinarily well. I mean, we were very, very proactive, as Chris pointed out, and if you have - when you have a very good, strong relationship with folks, it's a fairly easy conversation to have and it's understandable. And it's - 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.

Hi, good afternoon everyone.

Good afternoon.

Just drilling down a little more on the repricing on the funding side, the $3.85 billion at 4.31% within the next three months. Looks like your special is 3.75% 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 5.04%, within the next three months, is mid-fours also kind of what you expect to roll to?

Yes, Matt, this is Chris. I'll take the CD part. Yes, you would expect that, that's where a majority of it will drive into that seven-month product. It's a good proxy for it.

Yes. 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, yes, that's at 5.04%. We've kept the tenor on these all really short, for very specific reasons. Those should be repricing down to the mid-4s.

Okay. And then, it looked like you trimmed deposit rates another 10 bps in January. I guess how do you think about the overall beta, 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 assume 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 feel very good about 55% on the way down, over the course of the cycle.

Okay. And then the - 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 kind of amortizes, and pays down over time? Or do you have 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 Tory is going to want to weigh in on this as well. We haven't changed our thoughts around one, the desire to move that off our balance sheet. 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 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 has 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, and '29. And the long-term - 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, well then we'd reassess it at that time. But Tory, do you want to go in on some details?

Yes, Matt. I would just add on the multifamily division portfolio, in particular, we have somewhere between $40 million and $50 million a quarter that, either amortizes out or runs out and leaves the company in 2024. 2025 is kind of the same, roughly the same number. We have about $175 million that's fixed today that will, roll over into floating and either it stays in the company. It goes from 4% coupon to 7%, or it exits the company and go someplace else. So that's about $175 million for 2025. We're not making, obviously, any new loans in multifamily division, and we're just managing the portfolio from a credit quality perspective as best as we can.

Great. And then last one from me just on your expense guide for the year, I think, $1 billion to $1.1 billion, I believe, is what you mentioned?

$1 billion to $1.01 billion.

$1 billion to $1.01 billion?

Correct, yes. I just did the math, taking the $975 million annualized starting point, with a 3% to 3.5% expected inflation across various items between payroll taxes, merit and/or health insurance being bigger drivers of that inflation.

Yes, I would have loved to have left that $100 million range in there, but Ron thought he should tighten it up a little bit.

All right. Never mind. I thought - I was going to ask about the 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 JPMorgan. Your line is open.

Hi everyone. Ron, just following up on the expense guide of $1 billion to $1.01 billion, 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 one - first quarter - in 2025?

There will 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, a couple of million dollars between 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 in Q2 forward.

The other aspect that you'll see will be the timing of some of the reinvestments. In 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, we're 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 - this is Tory, by the way. We continue to advance real-time payments platform for the company. 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 all of those have been a constant evolution over the last several years, and we just continue 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 on the commercial side. So 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 we do listen to our customers. We do listen to what they want in functionality. 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 Samuel Varga of UBS. Your line is open.

Hi. Good afternoon. I just want to go back to the margin for one more question. You touched on the C&I 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. And I think we talked about low single-digit for the entire balance sheet, and low to mid-single digit on the C&I front throughout the course of the year. So good, steady, solid C&I growth expected for the company that will be a part of full banking relationship, so 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 we do track, we call it our wins and losses. And what we've seen, I think the number was approaching $0.25 billion of things that we step back from, just whether it was term pricing. One of the things kind of made me chuckle was, I think they called it presidential pricing on a deal that we elected not to match, because it just didn't make sense. But different people are focused on different things these days as we go forward. 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 Tory 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 color. And then just on credit, a real quick question. It 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 in portfolio, and/or economic assumptions.

Understood. Thanks for taking my questions.

Good, 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 Jon Rau on 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.

Jon, this is Clint. I'll start and then I'm going to kick it over to Ron for the details. What we started talking about midyear last year was it felt like that 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, 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, it looked like the seasonal 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 as we get into the later half of the year.

Yes. And I talked a lot about just seasonal flows over the year, so we fully expect customer deposit growth over the course of the year. And 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 delever the wholesale, which should respond favorably from that standpoint. So I don't have a specific number for you other than to say, it's not out of the realm of possibilities that we would see a new increase. Again, that will be based off the number of deposit flows, with our customers much more so than if there's one, two, or three Fed rate cuts.

Okay. That makes a lot of sense. And then just last one from me. In that loan growth guide, is there any assumption for a pickup in line utilization? It looks like commercial utilization rates picked up slightly over third quarter. Just what's behind that?

Yes, this is Tory. 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 Q3 - or 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. [Operator Instructions] And our next question will be coming from the line of Chris McGratty 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?

Yes. Chris, yes, we did talk a little bit about that earlier in the call. Our thoughts haven't changed. 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. 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, test, 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 a 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.

Great. Thanks a lot.

You bet.

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.