Earnings Call Transcript - COLB Q1 2023

Operator, Operator

Thank you for standing by, and welcome to the Columbia Banking System's First Quarter 2023 Earnings Conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder today's conference call is being recorded. At this time, I'd like to introduce Jackie Bohlen, Investor Relations Director for Columbia, to begin the conference call.

Jackie Bohlen, Investor Relations Director

Thank you. Good afternoon, everyone. Thank you for joining us as we review our first quarter 2023 results, which we released shortly after the market closed today. The earnings release and corresponding presentation, which we will refer to during our remarks this afternoon, are available on our website at columbiabankingsystem.com. With me this afternoon are Clint Stein, President and CEO of Columbia Banking System; Chris Merrywell and Tory Nixon, the Presidents of Umpqua Bank; Ron Farnsworth, Chief Financial Officer; and Frank Namdar, Chief Credit Officer. After our prepared remarks, we will take your questions. During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to Slide 2 of our earnings presentation as well as the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release and throughout the earnings presentation. I will now turn the call over to Clint.

Clint Stein, President and CEO

Thank you, Jackie. Good afternoon, everyone. It was an extraordinary first quarter for Columbia. We closed our merger with Umpqua Holdings Corporation on February 28, reinforcing Umpqua Bank's position as the largest bank headquartered in the Northwest and creating one of the largest banking franchises headquartered in the West. At $54 billion in assets, our broader scale and additional products and services enable us to meet the needs of our customer base in expanded ways. Over the past 18 months, our organization has attracted top talent in new and existing markets. These leaders and teams, alongside our seasoned long-time bankers, continue to win new business and expand existing relationships. This activity has thrived despite the ongoing preparation for the integration of Columbia and Umpqua. I'm very proud of what our team accomplished during the first quarter. In addition to closing the merger, we also completed two branch divestiture projects and successfully converted our core systems. Careful planning and the dedication of our exceptionally talented team enabled us to achieve these accomplishments. I want to thank our associates for their commitment and diligence throughout this busy period. It has enabled us to remain on track to realize our targeted cost savings by the end of the third quarter. In addition to the heightened activities surrounding the merger, our associates were also engaged with customers throughout the industry events that unfolded in March. We were uniquely positioned during this period, given our robust customer engagement surrounding the core systems conversion. Our teams were able to expand conversations, already taking place, to discuss Columbia's diversified business model, granular deposit base and tailored solutions for those looking to add products like our insured cash sweep service. With a historic first quarter for our company, our customers, associates and communities are already benefiting from enhancements provided by the merger. We remain committed to supporting communities throughout our eight-state footprint, as evidenced by our five-year, $8 billion community benefits agreement. This agreement supports community development, expanded homeownership and small business formation. In that light, I'm pleased to announce we contributed $20 million to the Umpqua Bank Charitable Foundation in March. With the merger closed, our shareholders will quickly begin to realize the expected benefits of our strengthened operations and improved financial performance along with significant capital accretion. And now, I'll turn the call over to you, Ron.

Ron Farnsworth, Chief Financial Officer

Okay. Thank you, Clint. And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation. Starting on Slide 4. Now that we've closed the merger, we present here updated overall financial metrics expected as compared to the original projections in October of 2021. The changes in fair value since then led to significant rate-related discounts, which will accrete through interest income over time. With that, our tangible book dilution was larger, but our expected GAAP accretion and return on tangible equity increases significantly, with a similar earn back. With our core system conversion completed a month ago, we are on track to achieve our expected cost synergies of $135 million on an annualized basis by the end of the third quarter this year. Next on Slide 5, we present updated fair value marks at closing as compared to announcement. Given the increase in treasury yields and inversion of 10 versus 2 spreads since announcement, we ended with $1.76 billion in discount marks with all but $130 million of that related to rate. Again, these rate discounts will accrete to interest income, providing a significant and stable additional earnings stream over time, which I'll highlight in a few minutes. Also noted lower in the page is the larger core deposit intangible balance, which will be amortized to expense over time. On Slide 6, we carry forward the discount marks in CDI at closing and also present the current balances as of quarter-end. For the AFS securities discount, the decline from closing to quarter-end resulted from writing off existing premiums at close of roughly $200 million, along with removing the discounts of $165 million on the $1.2 billion of bonds sold as part of a restructuring. The remaining decline of approximately $15 million was accreted to interest income. Slide 7 projects our cost synergy realization estimate at quarter-end through the year. On an annualized basis, we estimate we realized $25 million of cost synergies in the month of March run rate with an additional $21 million achieved post-conversion, which will reduce our run rate in April. Looking forward, we expect to realize a further $59 million to $64 million in annualized cost savings by the end of the second quarter, or approximately $15 million to $16 million on a quarterly basis, achieving these synergies evenly throughout the quarter. Slide 8 covers our liquidity, including deposit flows during the quarter. For comparability, we presented the table on the left as if we were combined for all periods presented. Total deposits declined 4.9% in the first quarter, or 3.6% when excluding the divestiture required with the combination. Market liquidity tightening and the impact of inflation on consumer spending continued to pressure customer deposit balances. We utilized short-term Federal Home Loan Bank borrowings to fund the outflows, along with adding $2 billion for higher on-balance sheet liquidity. The upper-right table details our off-balance sheet liquidity with $9.7 billion available as of quarter-end. Below that, we had cash and excess bond collateral not pledged for lines to arrive at total available liquidity of $17.9 billion. This represents 121% of uninsured deposits as of quarter-end.

Frank Namdar, Chief Credit Officer

Thank you, Ron. Turning to Slide 23, the addition of the historical Columbia loans at fair value was the primary driver of the quarter's loan growth as new originations were nearly offset by payment activity. Slide 24 details select characteristics of our loan portfolio by major category, with added details surrounding production during the first quarter. Our portfolio is diversified by mix and geography. Average loan size displays the granularity of the portfolio and, where applicable, average loan to value and debt service coverage supports the quality of our underwriting. Additional industry detail for our commercial portfolio is provided on Slide 25, further highlighting our diversification by industry and collateral type. Let's spend a little time on Slide 26, which provides an overview of our office portfolio in response to increased investor focus on this asset category. Like other verticals, our office portfolio is characterized by a diversified mix of granular loans that exhibit strong credit metrics. Our average office loan is $1.3 million. The average loan to value of the portfolio is 57% and the average debt service coverage of the non-owner-occupied portion of the portfolio is approximately 1.75 times. Properties are located across our broad Western footprint and majority are in suburban markets. We have very limited exposure to core downtown metro markets. 83% of our office loans have a guarantee in place and performance of the portfolio remains exceptional. Past due and non-accrual levels are de minimis at a combined $1 million, and criticized balances represent only 2% of the overall portfolio and less than 20 basis points of our total loan portfolio. We remain very comfortable with our office exposure given the characteristics I've outlined.

Chris Merrywell, President, Umpqua Bank

Thank you, Frank. Shifting the focus to deposits. Slide 29 highlights the quality of our portfolio. 41% of balances are in non-interest bearing accounts. Of the overall, consumer balances comprised 41% of our base with the average account balance at $20,000. Commercial balances make up the remaining 49% of our deposit portfolio with the average account balance at $108,000. The company offers multiple deposit solutions like our insured cash sweep service, the ability to collateralize select accounts and opportunities for enhanced returns through Columbia Wealth Management. These products provide our customers with the flexibility they seek and improve the stability of our granular deposit base. At quarter-end, just 36% of our deposit portfolio was uninsured, screening on the lower end of peer averages. Net contraction in our deposit balances, on an organic basis, during the quarter reflects normal customer uses of cash, the impact of inflation on spending and market liquidity tightening. Offsetting these headwinds to net expansion was continued growth in new account balances as customers transferred funds into recently opened accounts throughout the quarter. We also continued the development of our franchise throughout the West. With the merger closed, we now have deposit and other capabilities in Utah, which further enables us to bring full banking relationships to the company. We will continue to invest in this market and throughout our other geographies. We believe this will lead to enhanced, long-term, organic growth opportunities. With the core systems conversion now complete, our teams have an invigorated focus on generating balanced growth for our franchise. Relationship banking within our communities drives our purpose. And our broader footprint, expanded set of products and services, and our collaborative spirit across our teams support our expectations for continued success.

Operator, Operator

Thank you. Our first question comes from Jeff Rulis of D.A. Davidson. Your line is open.

Jeff Rulis, Analyst

Thanks, good afternoon.

Clint Stein, President and CEO

Good afternoon.

Jeff Rulis, Analyst

I appreciate all the detail in the presentation. I'll start by asking about the cost and expense run rate. Ron, you went through that pretty quickly, and I didn't catch the specifics as you detailed Q3. I believe you concluded with the range of $240 million to $250 million for Q4. Could you please go over that part again?

Ron Farnsworth, Chief Financial Officer

Yeah, I mean, I think you summarized it well. We've got $25 million we have included within our run rate for the month of March. There's another $21 million that is in place, but at the end of the quarter, which will be reflected in Q2. So, we talked about that. And then on that Slide 7, we show you the ramp for an additional $59 million to $64 million we expect to achieve on an annualized basis in Q3, which will put us at the $135 million level by the end of Q3. $59 million to $64 million additional in second quarter, and then the balance in Q3 will end at $135 million annualized again at the end of Q3 looking forward. And the guidance we gave for Q2 on the expense side reflects those trends along with the Q4 amount noted in the far right note column on that outlook page.

Jeff Rulis, Analyst

Thank you. Regarding capital, I was wondering if you have projections for year-end or expectations for those capital levels. Additionally, now that the deal is closed, are you considering a buyback or other ways to deploy that capital as it increases?

Ron Farnsworth, Chief Financial Officer

Hey, Jeff, it's Ron. On the first one, very much. We have forecast on the capital build and it's going to be in a range of 20 to 30 basis points on the risk-based measures across the various separations over the course of the year and into the following year and the year after, that's got a long life. This will be a long-life level of accretion in that. Also interestingly enough, just given the nature of how rates have moved up over the last year, you'd have to go significantly below where rates were prior to last year in order to see a real acceleration in prepay on a lot of those instruments. So, excited about that. That 20 to 30 basis points would be a quarterly accretion in the capital ratios.

Clint Stein, President and CEO

And Jeff, this is Clint. I'll just add that as you do the math in terms of just what the accretion adds and then factor in earnings, you can pretty quickly reconcile Ron's comments and mine about the capital generation and the capabilities of the company. With respect to buyback, I don't see anything this year. I think that just all the volatility that's out there and the fact that we'll be building in the next couple of quarters to our long-stated, long-term target capital ratios. We'll let that occur. And then, if market conditions are favorable, by all means, it would be something that Ron and myself would have a discussion with our Board and make sure that we're being good stewards and keeping the appropriate amount of capital so we have the flexibility to run our business through the entirety of any cycle, but also not have too much capital sitting around that hurts our returns for our shareholders.

Jeff Rulis, Analyst

Okay, thank you. And then, maybe one last one for Chris. Just on the deposit side, could you comment on flows in April so far? It's kind of the first part of that. And then, second, you talked about expanding tools into Utah. And I guess your expectations for the growth through the end of the year if you think you can stretch up from 3/31 levels? Thanks.

Chris Merrywell, President, Umpqua Bank

Sure. Now that we have completed the conversion and as we move into April, we are starting to reintroduce our team into the markets. We've also initiated our own deposit promotion, and early trends are promising since it has been running for a couple of weeks. Additionally, both Tory and I are noticing an increase in inquiries from clients and prospects wanting to establish new business with us. While I can't provide a specific dollar figure at this moment, it is encouraging to see this new business activity, along with multiple discussions happening with existing clients regarding retaining their deposits and exploring opportunities with funds held elsewhere. As we expand into Utah, we expect to be operational within the quarter and are optimistic that our team, which has already begun working on loans, will effectively generate significant deposits. While I can't give an exact dollar amount, we remain confident in our market presence and the capabilities of our experienced bankers to attract deposits. We are also evaluating opportunities in other states where we have loan production offices, with the aim of becoming a full-service provider across all eight states. Tory, would you like to add anything?

Tory Nixon, President, Umpqua Bank

Jeff, this is Tory Nixon. I would just like to mention that in the first three weeks of April, we have seen a slight decrease in deposit balances, primarily within retail and consumer banking, which is typical due to tax payments and regular outflows; it's not significant. Additionally, echoing Chris' earlier comment, there has been substantial activity within the commercial bank focused on developing new relationships and transferring deposit funds from other institutions for our customers. Overall, there's a lot of positive activity happening.

Jeff Rulis, Analyst

I guess, putting it another way, I guess by year-end, are you looking at, in your budget, from the 3/31 deposit balances, are you in a stable down or up type mindset?

Tory Nixon, President, Umpqua Bank

I believe there is a great opportunity for us to increase the company's balances, and we are fully committed to achieving that. We are continuing to concentrate on commercial and industrial relationships as well as comprehensive banking relationships. This focus brings in core deposits and fee income, which are essential for driving the company's value.

Clint Stein, President and CEO

And Jeff, I'll just add that there seems to be a bit of unpredictability in the situation. It looks like we have returned to seasonal patterns that have been absent since before COVID. Historically, many positive deposit flows have occurred in the second half of the year, starting to build in the late second quarter. In addition to the activities Tory and Chris mentioned, this seasonal pattern is noteworthy. I expect it to return and function similarly to the past. However, the Fed is still withdrawing liquidity from the system, so there is still some industry activity that hasn’t fully occurred yet. That makes it difficult to definitively say how much the percentage has increased. Nonetheless, I share the team's optimism regarding our potential to capture market share and the discussions we're having. This reflects my earlier comments about not only the new teams but also our experienced bankers, who are consistently winning new business and strengthening existing relationships. Ultimately, regardless of macroeconomic conditions, these efforts will positively impact our balance sheet.

Operator, Operator

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

David Feaster, Analyst

Hey, good afternoon, everybody.

Clint Stein, President and CEO

Good afternoon, David.

David Feaster, Analyst

Staying on the deposit side, I'm curious about the flows you observed in the quarter. Could you discuss whether the declining balances at existing customers were more pronounced on the commercial or retail side? How much of this is due to seasonality compared to customers using cash to pay down higher cost floating rate debt, migration into wealth management, changes due to banking failures, or other factors?

Ron Farnsworth, Chief Financial Officer

Dave, this is Ron. I'll take a shot at that. It’s quite broad, but traditionally, it follows a bell curve throughout the year, showing stronger performance in Q2 and Q3, with a bit more pressure in Q4 and Q1, depending on the specific segment. On Page 8, we outlined the changes in deposits in the upper-left table, treating it as pooled or combined for consistency. Looking at it without the broker influences from divestitures or public deposit changes on the customer count side, the balance appears even between commercial and consumer, reflecting the overall portfolio mix. On the consumer side, it seems to be a continuation of the inflation narrative we discussed last quarter. We anticipate similar trends in Q4 for commercial, influenced by the effects of quantitative tightening at the customer level as they utilize cash.

Clint Stein, President and CEO

David, you raised several points, and there's a lot to unpack. You mentioned investments and the shifts we've discussed previously. The level of activity we've experienced seems to be slightly above historical averages. The great part about our current situation is that we now have even more options available. Not all clients are eager to move into treasury bills immediately. With our insured cash sweeps and deposit promotions, our bankers have various tools at their disposal to meet the clients' needs. This flexibility allows us to effectively address their concerns.

David Feaster, Analyst

That makes sense. Perhaps we can discuss the loan growth aspect, especially considering the current market's volatility. I'm interested in how demand is trending from your perspective, the new loan yields, and which segments are still yielding favorable risk-adjusted returns. Additionally, you might have some unique growth opportunities available due to recent deals and larger targets, which could lead to significant short-term growth. I'm curious about your views on organic loan growth opportunities.

Tory Nixon, President, Umpqua Bank

David, this is Tory Nixon. You summarized a lot of points in your question. I see significant opportunities for the company to progress and accomplish much of what you mentioned. We have the capability to serve various markets across all the states we operate in, whether that's small business, consumer banking, commercial, middle market banking, or real estate. As a combined company, we can certainly increase hold levels and expand credit facilities for our customers as they grow, which presents a great opportunity for the bank. Our leasing capability is being very well received by our commercial and industrial customers, which wasn't available in the legacy Columbia portfolio. We have strong financial stability and can actively engage in all our markets, and I'm optimistic about our loan growth potential. Our pipeline is looking strong and has actually increased slightly from last quarter, which is encouraging. While demand in the marketplace isn't what it was six to nine months ago, there is still demand. As Clint mentioned earlier, we have a fantastic chance to gain market share in all our markets.

David Feaster, Analyst

Okay. And then, just kind of in that question too, how are new loan yields? And what segments are you still expecting to kind of drive that growth and give good risk-adjusted returns?

Tory Nixon, President, Umpqua Bank

Yes, I believe it definitely varies by asset class. However, I think yields are around 6%, possibly slightly higher. We have a significant amount of capital available and numerous opportunities to serve our existing customers while also attracting new ones to the company.

Clint Stein, President and CEO

And so, this is Clint. The margins on any new loans should be anywhere from 100 to 150 basis points above those historic yields that we're seeing. So, I'm excited about it.

Tory Nixon, President, Umpqua Bank

So, this is Tory again. I mean we've done a lot of work, gaining efficiency in segments, et cetera, to be able to take on the pricing, understand those ranges, et cetera. So, we feel very comfortable in the different segments willingly to lend, and do so prudently for our customers.

Clint Stein, President and CEO

Okay. And then, I guess looking at your footprint and thinking about new hiring opportunities in the future of the bank, is this the time to be greedy and pick off new talent just given the volatility? Are you looking at new hires? And if you are, is it primarily deepening existing footprints? And you talked about continuing to invest in the franchise, but are you considering further market expansion?

Tory Nixon, President, Umpqua Bank

This is Tory again. We are actively hiring in the new markets where we have recently expanded, including Arizona, Colorado, and Utah. We have already brought on new talent in these areas and will keep doing so. Additionally, across the rest of the company, we are consistently seeking out talented individuals and believe in bringing them on board when we find the right fit. We have a compelling story to share, and it’s clear that we are very optimistic about the future of this company. When we consider the opportunities ahead and the potential to add bankers in our markets, there is a palpable excitement. We continue to share this narrative and expand our hiring efforts in the Pacific Northwest, Northern California, Southern California, Idaho, and beyond, while pushing the bank forward.

Chris Merrywell, President, Umpqua Bank

We are definitely looking to expand our retail presence in the states where we have a commercial footprint. As mentioned, we plan to incorporate small business services to complement the loan production offices we have had. Additionally, we are exploring opportunities in wealth management in the eight states where we are growing. Both companies have always been ready to seize opportunities when talented bankers become available, and that remains true. I share Tory's sentiment that there is excitement among our teams. Considering our capabilities and balance sheet, as Ron explained, we anticipate ample opportunities ahead.

David Feaster, Analyst

Yeah. Thank you. Appreciate it. Congrats on closing the deal.

Chris Merrywell, President, Umpqua Bank

Thanks, David.

Operator, Operator

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

Chris McGratty, Analyst

Mr. McGratty, your line is open. One moment.

Operator, Operator

One moment. Our next question comes from the line of Jared Shaw of Wells Fargo. Your line is open.

Jared Shaw, Analyst

Hey, good afternoon.

Clint Stein, President and CEO

Good afternoon, Jared.

Jared Shaw, Analyst

Hey. Maybe just staying on the track of opportunity, clearly, there's been a lot of disruption with Silicon Valley and First Republic and just in general some banks said they are seeing more weakness. Maybe more specifically, do you see specific opportunities in some of those business areas, some of those markets to step in? And I'm not sure when you talk about new commercial customers coming to approach you, any of that from some of those specialty business lines that some of those banks focus on that could be an opportunity for you?

Clint Stein, President and CEO

Yeah, Jared, this is Clint. I'll kick it off, and then see if Tory and Chris want to add anything to it. The short answer is yes. We have seen opportunities. We saw that actually in the days and hours leading up to Silicon Valley's failure. We've got a pretty diverse offering and we talk about our portfolio and you look in the slide deck and you can see both sides of the balance sheet, there is a lot of granularity and diversification. And so with that, we have a lot of very experienced bankers and we won't do something if we don't have expertise in it. But there is some crossover. And to the extent that there's crossover, we'll compete for the business, and I think we compete very well and it will create opportunities. But in terms of going all in and shifting our focus, that's not necessarily the plan. We love the diversification that we have. We think that's foundational element of strength for our company. But certainly, we'll be opportunistic when and where we can be. Tory, anything to add?

Tory Nixon, President, Umpqua Bank

I believe you've captured it very well. The opportunity is present in all our markets, and we will continue to focus on what we do exceptionally well while seeking out customers who want to be part of the bank.

Jared Shaw, Analyst

Okay, thanks. Shifting to capital, you mentioned the goal of returning to a CET1 target of 9%. Do you believe this is adequate moving forward? Is 9% sufficient, or might there be a need to increase that threshold before seriously considering other capital deployment options?

Ron Farnsworth, Chief Financial Officer

Yeah, this is Ron. I think our long-term target for CET1 is 9%, and we're currently at 8.9%. So, we'll reach that next month. For the total risk-based capital ratio, our long-term goal is around 12%, and I expect we'll achieve that throughout the year, driven by earnings accretion and the financial benefits from both companies coming together, including cost reductions. It's important to consider all four ratios at both the parent and the bank. So, by default, CET1 is expected to be above 9%, but in terms of our long-term target, it won't be significantly higher.

Jared Shaw, Analyst

Okay. So, you don't feel a need to change that or raise that in light of sort of the turmoil that we've seen in the last month?

Ron Farnsworth, Chief Financial Officer

In terms of long-term targets, no. There are times when you might aim to be below or above certain levels, depending on the circumstances. As I mentioned, we expect significant capital generation over time. A large portion of the mark, specifically $1.6 billion of the $1.7 billion, was related to interest rates, particularly on the bonds. Most of this is backed by government-to-government agencies. It's important to consider how the merger accounting impacts our capital ratio position now but will improve over time. I would say the Common Equity Tier 1 (CET1) is a key measure that many analysts and investors watch closely. However, we also need to monitor other ratios. For total risk-based capital, I am aiming for around 12% over time for both the bank and the parent, which I consider a favorable target.

Clint Stein, President and CEO

The history of both companies prior to the merger has always presented challenges in achieving our long-term targets. Additionally, considering the accretion income and the earnings potential once we fully implement the cost synergies, our main challenge in the coming years will be managing our capital ratios to ensure they do not exceed those targets significantly. Any ratio you choose will likely increase quite rapidly.

Jared Shaw, Analyst

Okay. And then finally from me, when we look at the average earning asset guide, where do you see cash going back down to, I guess, where do you see cash flowing as a percentage of the balance sheet after we get through the end of March, back down to 5% or below 5%?

Ron Farnsworth, Chief Financial Officer

In our guidance, we are noting that we expect to maintain a higher level of cash. This will largely depend on macroeconomic factors, including overall deposit flows. However, if we were to convert an additional $2 billion of off-balance sheet liquidity to on-balance sheet liquidity, while currently holding $3 billion, we would estimate our cash position would be in the range of $1 billion to $1.5 billion if we had not made that conversion. This is likely a more accurate forecast of our expected position.

Clint Stein, President and CEO

Yeah, we have flexibility and we decided that it was appropriate to use that flexibility and just keep a little more cash on balance sheet during the near term.

Operator, Operator

Thank you. One moment please. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open.

Matthew Clark, Analyst

Hey, good afternoon.

Clint Stein, President and CEO

Good afternoon.

Matthew Clark, Analyst

I wanted to ask about the $6 billion in borrowings, with $2 billion allocated to cash funding. What are your thoughts on how borrowings might trend for the rest of the year, and do you plan to sell securities to pay them down?

Ron Farnsworth, Chief Financial Officer

Ideally, we expect to see an improvement in our deposit activities over the next few quarters following the conversion, as Chris and Clint mentioned earlier. We have no plans to reduce our investment portfolio, which is well structured and will offer significant value over time. The discount will accumulate as we keep the currently discounted bonds on our books. We intend to maintain the wholesale borrowings, although that may fluctuate in contrast to the trends we observe with net loan and deposit flows. In the near term, we anticipate relatively stable conditions.

Matthew Clark, Analyst

You've had ample time since the merger closed to identify cost savings and ensure the realization of the $135 million target, which is happening sooner than expected. However, have you also been able to determine any additional cost savings beyond the $135 million? If so, what is the estimate, and could this impact the bottom line?

Clint Stein, President and CEO

Yes, Matt, this is Clint. Over the past year, we've indicated that our internal target is actually higher than $135 million. Our confidence in reaching the $135 million mark by the end of the third quarter stems from our identification of that internal target. However, we haven't revealed what that internal number is for a couple of reasons. First, due to inflation and wage pressures we've experienced in the last year and a half since we set the original target, we want to maintain some flexibility. Secondly, we are committed to investing in the growth of our franchise, as Chris and Tory discussed. We intend to proceed with these investments while ensuring they do not compromise the $135 million or the 12.5% cost savings we promised investors. There is indeed a higher internal target that will be reflected in the fourth quarter and beyond, though it may be somewhat impacted by other potential investments we may choose to pursue, which we will address when they arise. Additionally, as we merged two significant banks, I believe our team did an excellent job establishing the organizational structure for a bank exceeding $50 billion. However, we recognize there are areas where we have some excess personnel or redundancies. Addressing these issues is a long-term process of refining our company to make it as effective and efficient as possible. These activities will be evident in 2024, 2025, and beyond as we progress in the coming years.

Matthew Clark, Analyst

Okay. And then, just around the deposit pricing outlook. It sounds like you're doing some promotional activities in some of your newer markets. But can you talk through the deposit pricing philosophy now that you guys are together? I mean legacy COLB wasn't very promotional when it came to deposits. But obviously, with the combined entity that may have changed a little bit and the turmoil in March may have also changed your view on pricing maybe going forward? Just any comments around deposit pricing outlook in particular when the Fed stops raising rates?

Clint Stein, President and CEO

Sure, Matt. That's a great question. I would say that our approaches to exception pricing are quite similar. We're still aligned in that area. We currently have some promotional rates available, not just in new markets but also in existing ones across our entire footprint. This establishes a benchmark for us. We're actively negotiating rates with clients and exploring various options, considering their actual needs and objectives. As I mentioned before, there are many different strategies to consider. The actions of the Fed and the current slowdown may lead to some delays in trends. Historically, deposit rates have also lagged in response to such changes. As we near a potential peak, it's important to keep in mind that we can't predict how competitors will react. We must remain disciplined and stay connected with our clients to grasp what's happening in the market. Tory, do you have anything to add?

Tory Nixon, President, Umpqua Bank

Matt, I would like to mention that in our discussions with clients, the focus has shifted from price to security and safety. While price does come up, most of the conversation revolves around how we explain our company's balance sheet, earnings stream, and deposit base, which is hugely beneficial for our customers. As Chris mentioned earlier, we have several products that significantly enhance the safety and security of funds, such as our ICS and CDARS products. Over the past couple of months, we've successfully increased ICS balances by about $400 million to $500 million, which provides reciprocal insurance for deposits, particularly in the commercial sector. We have a variety of options available for customers and have engaged in many discussions. Ultimately, the emphasis is less on price and more on building relationships based on safety and security.

Matthew Clark, Analyst

Okay. And last one for me, just housekeeping. Tax rate, what do you suggest we use going forward?

Ron Farnsworth, Chief Financial Officer

25%.

Matthew Clark, Analyst

Okay, thank you.

Ron Farnsworth, Chief Financial Officer

You bet.

Operator, Operator

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

Andrew Terrell, Analyst

Hey, good afternoon.

Clint Stein, President and CEO

Good afternoon.

Andrew Terrell, Analyst

I would like clarification on the margin guidance. You mentioned that the margin was 4.31% on a GAAP basis in March. The excess cash and borrowings contributed about 10 basis points to that. In your full year margin guidance of 4.15% to 4.25%, what assumptions are you making regarding borrowings and cash? Do you expect those to remain at a relatively similar level?

Ron Farnsworth, Chief Financial Officer

Yes, we assume a consistent level and also recognize that, that full year number will also reflect the effect of averages with the combination fully included for 10 of those 12 months, but not the full 12. So, maintaining consistent cash balances. And then I'd clarify one item. So when we talked about the impact of the excess liquidity, I was really referring to the month of March, at the 3.55% would have been ballpark of 3.65% had we not brought on that excess borrowing, but insignificant impact in terms of the interest income, but 10 basis points on the margin.

Andrew Terrell, Analyst

Yes. Got it. Understood. Okay. And on the core fee income side, it looks like when I adjust the items called out that the core operating fee income was around $47 million or so for the quarter. I guess given there's several moving parts here, can you help us out just expectations for kind of a core fee income run rate moving forward?

Ron Farnsworth, Chief Financial Officer

Yeah. We didn't provide a guide on that, but I can tell you for the month of March noninterest income, excluding, again, the fair value change type stuff was $22 million, just for the month on a combined basis.

Andrew Terrell, Analyst

Okay, that makes sense.

Ron Farnsworth, Chief Financial Officer

You bet.

Andrew Terrell, Analyst

And last one for me is just on the office. I appreciate all the color here on Page 26 of the presentation. A couple of questions. For the six properties that are listed as greater than $30 million, what markets are those in? And can you talk about the underwriting specifically on the larger end of the spectrum and whether it differs at all from what you list as the kind of averages there? And then, the second part was the credit mark taken on acquired office portfolio, is that similar to the overall credit mark in the transaction? Or did the deal allow you to put a greater kind of mark against the office book?

Frank Namdar, Chief Credit Officer

Yes. This is Frank, Chief Credit Officer. Regarding the first part of your question, the majority of those in the larger tranche are really centered in the Puget Sound area, if you will. And the underwriting is very similar, but the qualification criteria, I would say, is much more steep. So, we've got to know the sponsors extremely well. They've got to sensitized extremely well. We shock it for rate. We shock it for vacancy even to a greater degree of some of our smaller relationship deals that we evaluate. So, they are all leased at this point, I will say, fully leased under lease agreements and are performing well.

Andrew Terrell, Analyst

Okay. And then, on the credit mark on the office portfolio, specifically, was it similar to just the overall mark, or was there a bifurcation? I guess, did the deal allow you to put a larger credit mark on the office book?

Ron Farnsworth, Chief Financial Officer

We have the ability to do if the data supports it. But again, we talked about the quality of this portfolio, I'd say it's ballpark and average in line with the overall CRE level.

Andrew Terrell, Analyst

Okay. Thanks for taking the questions, and congrats on closing the deal.

Ron Farnsworth, Chief Financial Officer

You bet. Thank you.

Operator, Operator

Thank you. One moment please. Our next question comes from the line of Brody Preston. You line is open.

Brody Preston, Analyst

Hey, good evening everyone, or good afternoon for you all. Thank you for taking the questions. Just wanted to ask on the securities that you sold and then the securities that you purchased at the end of March, what was the duration of those securities? And what was the rate on the $1.2 billion that you sold, I guess, more the effective rate for the marks?

Ron Farnsworth, Chief Financial Officer

Yes, this is Ron. We sold off front-end cash flows, which likely made the duration of the purchases about six months longer than the overall duration. We aimed to extend that duration, so we were around 5.5 but ended up at 5.7 due to the longer-term repurchases. We did this in the first week of March, right after the peak bond yield on February 28. It took about a week to a week and a half for the rally in the bond markets and a decline in yields to occur. Overall, regarding the mark book, you mentioned 4.5%. The securities sold were likely a bit below that, while the purchased securities were probably a bit above, reflecting the slight difference in duration.

Brody Preston, Analyst

Got it. Thank you for that. Regarding the core NIM guide, I wanted to ask about your rate expectations and the interest-bearing beta and the NIB mix assumptions that support that.

Ron Farnsworth, Chief Financial Officer

You bet. We'll discuss this further in the sensitivity slides, getting closer to that model beta from our sensitivity perspective. So it's expected to be higher than 28%, but not at the 53% level mentioned in a later slide. There will be a continued increase because we are considering a lag in the adjustments to deposit pricing.

Brody Preston, Analyst

Got it. And is there a static deposit mix assumption that underpins the NIM guidance?

Ron Farnsworth, Chief Financial Officer

Relatively stable overall, although we noted earlier that DDA increased in April. However, the overall mix remains largely unchanged.

Brody Preston, Analyst

Got it. Regarding the margin waterfall chart, can you provide insight into how much of the 43 basis point decrease from deposits was due to mix as opposed to rate?

Ron Farnsworth, Chief Financial Officer

Well, in terms of this waterfall, the Q4 reported amount was for stand-alone Umpqua Holdings. The Q1 reported amount was for a combined company for one month and the stand-alone prior Umpqua Holdings for the first two months of the quarter. So that is really driving a significant portion of the overall mix.

Brody Preston, Analyst

Okay. Understood.

Ron Farnsworth, Chief Financial Officer

It'll make a lot more sense for you next quarter.

Brody Preston, Analyst

Yes. I wanted to ask on the loans that are maturing in the less than six months bucket, the fixed, the $2.6 billion. Do you have a sense for what the current yield is on those loans versus what current origination yields are?

Ron Farnsworth, Chief Financial Officer

Yes, those loans will be dated from before the increase, so they will be in the mid-4s to 5 range at most, which is significantly lower than what was mentioned earlier for new loan yields.

Brody Preston, Analyst

Got it. And do you all have any hedges in place on the loan portfolio that we need to think about for NII modeling?

Ron Farnsworth, Chief Financial Officer

Not on the balance sheet. We do have customer swaps, but those are offsetting back-to-back on our balance sheet. We've taken the approach of using instruments within the portfolio. Specifically here, in this case, we're talking about the bond portfolio, along with the use of the short-term borrowings to really help improve our interest rate sensitivity position we talked about earlier.

Brody Preston, Analyst

Got it. And then just one last one for me. I'm sorry if you mentioned this earlier and I missed it. But just on the FinPac portfolio, I wanted to ask two questions. What is the growth outlook for that portfolio going forward? I know it's a much smaller piece of the overall loan portfolio now. And then the 3.89% annualized charge-off ratio, I know it's tough to say, but could you help us think about what a peak net charge-off ratio kind of looks like through cycle for that loan book?

Tory Nixon, President, Umpqua Bank

This is Tory. I'll talk about the growth side, and then Frank can weigh in if he wants on the charge-off piece. I mean, first of all, the FinPac portfolio is three different businesses. It's a small ticket, which makes up about half of it. And then we have a vendor space and a traditional commercial bank leasing business for our customers. Each of those are about 25% of the portfolio. The growth outlook for the combined FinPac portfolio is somewhere between $50 million and $100 million over the course of 2023. And that's evenly distributed within those 3 businesses. So moving up a little but nothing significant at all. Frank, do you want to talk about...

Frank Namdar, Chief Credit Officer

Yes. Generally, what we find within the FinPac portfolio, we look at the nonaccrual numbers and how those are tracking. And generally, of the preceding quarter, approximately 80% of those nonaccruals typically roll the charge-off. I think that the top of it will be north of 4%. And I would be surprised if it peaks over 5%.

Brody Preston, Analyst

Got it. That's very helpful. If I could ask a follow-up, do you see the FinPac portfolio as different in terms of the mix and types of underwriting compared to what other banks are doing in the equipment finance space, or do you find it to be quite similar to the equipment loans underwritten by other banks?

Frank Namdar, Chief Credit Officer

It's different. In comparison to the classic FinPac, these are small loans. They offer high returns but come with higher risks, as they involve specialized lending. This explains the current loss figures, and we’re not surprised by them. Generally, when referring to an equipment finance company, most operate on a larger scale and do not engage in small-ticket leasing. They typically focus on the middle market, which we also serve. The losses in that segment are quite low, if they exist at all, and it is a much lower-yielding business. Therefore, it represents a more specialized leasing operation.

Brody Preston, Analyst

Got it. That's very helpful. Thank you very much for taking my questions, everyone. I appreciate it.

Operator, Operator

Thank you. One moment please. I'm showing no further questions at this time. I turn the call back over to Jackie Bohlen for any closing remarks.

Jackie Bohlen, Investor Relations Director

Thank you, Valerie. Thank you for joining us on today's call. Please contact me if you would like clarification on any of the items discussed today or provided in our earnings material. This will conclude our call. Goodbye.

Operator, Operator

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