Columbia Banking System, Inc. (NASDAQ:COLB) Q4 2022 Earnings Conference Call January 24, 2023 2:00 PM ET
Company Participants
Clint Stein – President & Chief Executive Officer
Aaron Deer – Chief Financial Officer
Chris Merrywell – Chief Operating Officer
Conference Call Participants
David Feaster – Raymond James
Jeff Rulis – D.A. Davidson
Jon Arfstrom – RBC Capital Markets
Chris McGratty – KBW
Andrew Terrell – Stephens
Matthew Clark – Piper Sandler
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System’s Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.
I would now like to turn the call over to your host, Clint Stein, President and Chief Executive Officer of Columbia Banking System. Please go ahead.
Clint Stein
Thank you, Justin. Welcome, and good morning. Thank you for joining us on today’s call as we review our fourth quarter and full year 2022 results, which we released this morning before the market opens. The earnings release and accompanying investor presentation are available at columbiabank.com.
It was another exceptional year for Columbia. Our bankers entered 2022 with tremendous momentum on the heels of a record 2021, and they were successful in capitalizing on opportunities, winning new business and providing the necessary capital to allow our customers to grow and expand.
We extended our footprint into Utah and Arizona during the year, all the while nurturing our existing client base in an interested rate environment unseen in well over a decade. That weren’t enough, teams across the bank were simultaneously involved in integration efforts for our merger with Umpqua. And during the first quarter of 2022, we completed the core conversion for our Bank of Commerce Holdings acquisition.
Notwithstanding these competing priorities, our bankers delivered outstanding full year results: annual net income exceeded $250 million for the first time in our history; full year EPS expanded by 15% to a new high; loans rose by 11% during the year, after adjusting for PPP runoff; and our operating efficiency ratio fell below 50% in the fourth quarter.
Although it took longer than initially expected, on January 9, we announced we had received approval from the FDIC clearing the last regulatory hurdle for our merger with Umpqua. I’m happy to report that we completed the first of the branch divestiture sales this past weekend, with the second scheduled in February. Consequently, we expect the merger with Umpqua to close February 28 and we are still planning for the systems conversion in March.
It’s an understatement to say I’m proud to lead such a talented and committed team. Associates across the company had done an outstanding job over the past 15 months remaining externally focused on all of our stakeholders in addition to preparing for our merger with Umpqua. Our bankers focused on sustaining and growing our normal business activities while simultaneously supporting integration efforts and conversion planning. I want to thank them for their commitment for rising to the challenge as we work towards creating one of the premier banking franchises in the Western U.S.
On the call with me today are Aaron Deer, our Chief Financial Officer; and Chris Merrywell, our Chief Operating Officer. Following our prepared remarks, we will be happy to answer your questions.
I need to remind you that we may make forward-looking statements during the call. For further information on forward-looking comments, please refer to either our earnings release or website or our SEC filings.
At this point, I’ll turn the call over to Aaron.
Aaron Deer
Good morning, everyone.
As Clint noted, full year net income of $250 million and EPS of $3.20 were new annual record. Our performance was a reflection of strong loan growth and rising interest rates combined with solid fee income, well-controlled spending and thoughtfully-managed credit. Excluding costs related to the Umpqua combination and Merchants acquisition of $19.1 million, pre-tax pre-provision income was a record $326 million, exceeding the prior record set in 2021 by $58 million or 22%.
Fourth quarter earnings of $68.9 million and EPS of $0.88 represented a linked-quarter increase of $4 million and $0.05, respectively. Quarterly pre-tax pre-provision earnings increased by $1.9 million to $90.9 million due to continued expansion of net interest income. The core increase was actually larger, but we had higher sequential merger costs, and recall that we had a non-recurring gain of $3.7 million on the building sale on the third quarter.
The balance sheet funding mix shifted during the quarter and was supported by an increase of $986 million in short-term borrowings, as deposits declined by $1.2 billion to $16.7 billion. The overall mix of deposits remained superb and our liquidity position remains very strong, providing us with continued deposit pricing flexibility. The loan-to-deposit ratio at year-end was 69%, which remains at the low end of the five-year average preceding the pandemic.
Total loans were essentially flat linked-quarter after accounting for $76 million of loans moved to held for sale in preparation for the divestiture of 10 branches as a condition of the Umpqua merger. Excluding this, new loan production exceeding $400 million was essentially offset by contractual prepayments — rather contractual payments along with an uptick in early prepayments and seasonally lower line utilization. Early repayments were $190 million in the fourth quarter versus $157 million in the third, as more borrowers are choosing to use their liquidity to pay down debt that is repriced to current market rates.
The investment portfolio decreased $156 million to $6.6 billion, as paydowns and maturities were partly offset by fair value movement related to the available for sale book. The portfolio was split 31% held to- maturity and 69% available for sale as of year-end. The overall investment securities yield was essentially unchanged at 2.05%, while the duration decreased slightly to 5.2 years.
Our net interest margin continues to benefit from rising rates, increasing 17 basis points linked-quarter to 3.64%, predominantly driven by higher average loan rate and a stronger earning asset mix. Partly offsetting this, our cost of deposits rose relatively modest 8 bps to 18 basis points. Our overall cost of interest-bearing liabilities rose 36 basis points to 58 basis points due mostly to higher FHLB borrowing, though our exceptional deposit base continues to support a favorable overall cost of funds. New loan coupons in the fourth quarter were at an average rate of 6.16%, which compares to 3.57% in the fourth quarter of 2021. Notably, the vast majority of our loans moved above their floors in the latter half of 2022.
Noninterest income decreased $3.3 million linked quarter to $23.3 million. After adjusting to the property sale gain I noted earlier however, noninterest income increased by approximately $400,000, mostly due to BOLI gains of $354,000. We continue to see solid deposit account and treasury management fees with strength in financial services and trust revenue offsetting lower loan revenue due to weakness in mortgage banking activity.
Excluding merger-related expenses in the third and fourth quarter, noninterest expense decreased $2.6 million sequentially to $95.6 million, primarily due to lower compensation and benefits expense that we had [good] (ph) cost control across the board.
Combined with our strong revenue, operating efficiency dropped to 48% for the quarter. Meanwhile, the effective tax rate remained at level of 21%.
Lastly, credit metrics improved during the quarter, reflecting continued industry-leading asset quality. Nonperforming assets decreased slightly with NPAs at year-end representing just 7 basis points of total assets. And we reported net recoveries of $1.2 million. Despite these favorable trends, we recorded a $2.4 million provision, reflecting a less optimistic economic forecast. As a result, the allowance as a percentage of total loans rose to 1.36% at year-end compared to 1.32% as of September 30.
And with that, I’ll turn it over to Chris.
Chris Merrywell
Thank you, Aaron, and good morning, everyone.
As Aaron mentioned, solid loan production of $402 million was in line with previous fourth quarters and drove full year production to a new post PPP record of $2.2 billion. While quarterly loan growth was tempered by a normal seasonal reduction in line utilization, loan balances grew to $11.6 billion, representing an increase of 9% during the year and 11% when adjusted for PPP paydowns.
Production during the quarter was predominantly split between CRE and C&I. Overall, line utilization fell 2 basis points during the quarter to 47.5%, but was up from 43.3% a year ago. CRE remains well diversified across multiple industries and is well balanced with 54% income properties and 46% owner occupied. We’re very proud of our bankers and our C&I portfolio continues to reflect their disciplined relationship-based approach.
The quarterly production mix was 49% fixed, 41% floating, and 10% variable. The overall portfolio now stands at 54% fixed, 32% floating and 13% variable. PPP loans are no longer a measurable part of the portfolio at only $10 million as of year-end. The geographic distribution of our loan portfolio stands at 48% Washington, 29% Oregon, 10% California, 5% Idaho, with remaining 7% in other states.
Deposits fell by $1.2 million — excuse me, $1.2 billion during the quarter and the outflows were due to a variety of factors, including normal seasonal activity and a reversion of excess client liquidity back towards historical levels.
Clients use funds for a variety of purposes to include year-end bonuses and distributions, paying down debt, making investments and moving cash to higher paying alternatives, including approximately $200 million to CB Financial Services during the quarter and almost $800 million during the full year, with the majority of that coming in the second half of the year.
The deposit mix shifted slightly during the quarter, with 59% of our deposit sourced from businesses and 41% from consumers as of year-end. And the ratio of noninterest-bearing demand deposits improved from 49.1% at the end of 2021 to 50.1% at the end of 2022.
On the fee income front, our wealth management group had yet another record year with over $17 million in revenue. Our retail, commercial and wealth management teams continue to work together in an effort to bank the entire relationship across our clients’ life cycles.
And with that, I’ll turn the call back over to Clint.
Clint Stein
Thanks, Chris.
Our regular quarterly dividend of $0.30 was announced this morning. This quarter’s dividend will be paid on February 21 to shareholders of record as of the close of business on February 6.
This concludes our prepared comments. As a reminder, Chris and Aaron are with me to answer your questions. And now, Justin, we’ll open the call for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question comes from David Feaster from Raymond James. Your line is now open.
David Feaster
Hey, good morning, everybody.
Clint Stein
Good morning, David.
Aaron Deer
Good morning, David.
David Feaster
I’d kind of like to follow-up maybe on the deposit front. Maybe you touched on some of the competitive dynamics there. I was wondering if you could maybe help quantify maybe some of the surge deposit outflows versus seasonal dynamics and versus client utilizing cash to pay down higher cost debt. And then, I guess from a competitive standpoint, are you seeing certain geographies maybe more competitive? And do you think we’re through the surge deposits? Just curious on some comments on that front.
Aaron Deer
Sure. This is Aaron. I’ll start, and let Chris clean up for me. But we certainly have seen some revision of excess client funding kind of revert back towards normal levels. I think there’s probably still a little bit more of that to be seen, given some of the analysis we’ve done on that front. But I think if you look overall through the pandemic, we saw outsized inflows relative to a lot of our competitors. Even after the outflows that we saw this quarter, we continue to run ahead of most of our peers.
And so, we’re still feeling very good about the — what the deposit flows have been and the mix. And we’ve just continued — and I think a lot of that just reflects our continued discipline in terms of pricing. And I can let Chris talk a little bit more about that.
Chris Merrywell
Sure. Thanks, Aaron. David, yes, you mentioned the part of that is it more competitive in certain markets, and I would tell you it’s — all markets are competitive and it’s different competitors in certain markets, but you’re seeing lots of deposit specials, things of that nature, really happy with the team and how they’re working with our clients to find out what the purpose of the funds were, trying not to become interest rate sensitive when we don’t have to, and utilizing the tools that are available through wealth management and such.
But the reality is there are some pretty significant specials that are out there. We’ve used our exception pricing and the discipline around that to keep our costs from going up on that. But there are some folks that have chosen to pivot into a treasury bill or a CD special or a money market special in another bank. But we’re not seeing that we’re losing the relationships. We’re just seeing a pivot for some — put it more into the hot money category, but we’re really comfortable with the relationships we still have with those clients.
David Feaster
Okay.
Aaron Deer
And, David, also, if you look at the composition of noninterest-bearing as percentage of the total, that continue to be very stable. In fact, it actually ticked up just a little bit sequentially. And just in terms of the loan deposit ratio, if you look back to where that stood, as I mentioned in my opening comments, over the five years preceding the pandemic, it basically ranged between 70% and 85% and we’re still down at the very bottom end of that. So, we’ve still a lot of flexibility.
David Feaster
Yes, absolutely. And if you do see some more of those surge deposits outflow, is FHLB advances the primary way of funding those versus security sales or CDs or anything like that?
Aaron Deer
Yes, at this point that would be our preferred source of funding.
David Feaster
Okay. And maybe a question on the growth side. And somewhat of a seasonal slowdown in originations. Just curious how much of that is your appetite for credit diminishing somewhat just given the economic backdrop versus demand for credit in the market slowing or competitive dynamics maybe even fewer attractive deals coming across the desk. And just curious where — what segments are still attracted to you and still coming up — bringing good risk adjusted returns at this point in the cycle.
Clint Stein
Well, David, as always, you pack a lot into a question. So, feel free to circle back if we don’t fully address each aspect of that. I guess, I’ll start off and then hand it over to Chris.
From an appetite standpoint, we’re very comfortable with all the different verticals that we’ve historically been in. We’re committed to remaining throughout the cycles to our clients and to our bankers within those verticals. And then, when we look at our pending merger with Umpqua, there’s not any portfolio concentration issues that get created as a result of that. In fact, it actually gives — on a combined basis, gives us more room to run within those verticals that we do have expertise in.
I think the key part of your question though is — I’ll paraphrase, can we quantify what we stepped away from because of either underwriting, I don’t really call — I guess you could say it’s competitive dynamics. I think I just call it people that are still very much focused on putting up loan growth number as opposed to really looking at where we might be heading from an economy or economic standpoint, and then, realizing that, all right, the risk return isn’t there. And so, from our perspective, we would rather pass and protect shareholder value and let somebody else take that deal. And there was quite a bit of that during the quarter.
And I’ll let Chris give you the specifics.
Chris Merrywell
Okay. Thanks. Yes, David, the dynamics during the quarter of what we were tracking as we saw rates coming in and what the requests were, it approaches a couple hundred million in deals that we simply looked at and said that it is not in the shareholders’ best interest to put that on the books. And we were seeing rates that frankly were below the 10-year treasury and it just doesn’t seem prudent to put that type of business on at this time.
Now, if there was something that was a relationship or something like that, as we’ve mentioned in the past, we certainly would be flexible with that type of pricing. But when you look at some of the new business that we would normally attract throughout the year, that’s where we chose to walk away from those types of deals.
David Feaster
That makes sense. And then, last one maybe for me. You guys talked about having the first mock conversion and a readiness review with the upcoming systems conversion. Just curious how that went, and maybe what you learned from that? And then, as we think about this whole conversion process, it’s kind of unique opportunity. From the integration management office standpoint, they’ve been looking at this for a long time. Is there any anything while we’re going through these opportunities or other investments or upgrades as we go through the conversion and integration that maybe we can accelerate? Just curious from the conversion standpoint, your thoughts around that.
Aaron Deer
Hey, David, this is Aaron. Yes, the mock conversions went very well. Of course, there’s always some lessons learned and we’re figuring out ways we can make sure we do things better. But we’re having a tremendous amount of client communication right now that’s going out to make sure that when we do get to the actual conversion that it goes as absolutely smoothly as possible and we want it to be a seamless and experience for the customer and for our associates as possible. So, we’re spending a lot of time there.
IMO, obviously, is leading that effort. And as we’ve gone through this, we’ve had a principle of not introducing new risk to any of this process. So, we haven’t necessarily been actively looking to build in new products as part of this process. Certainly, we’re continuously looking at the competitive environment and speaking to our clients about what their needs are and making sure that we’re staying ahead of that and anticipating that. And so, there are things that we will be looking to do in the year ahead to make sure that all of our treasury management capabilities continue to be a leading edge, but there’s nothing that we’re trying to implement through the integration process.
Clint Stein
The one thing I’ll add to that is we’ve spent a lot of time over the past 15 months talking about the complementary nature of Columbia’s business activities and Umpqua’s business activities. So, we think that there’s a lot of opportunity for upside with existing capabilities between the two organizations.
So, for example, our healthcare book leveraging impacts capabilities, some of those types of things. Umpqua has got a more sophisticated and broader product set on the treasury management side that existing Columbia customers will instantly get the benefit of those expanded offerings.
So, I do think that there’s plenty of opportunities already existing. And then, to Aaron’s point, try to minimize the number of moving parts as — to the extent, we can at these critical moments of conversion and integration. But with the conversion scheduled shortly after we close, I think we’ll be able to quickly pivot in the back half of the year towards looking at, are there things that have emerged that neither bank has that we think long-term would give us an advantage.
And so, I think it will be a quick turn, but I think we’re set up very, very well day one to meet — not only meet the needs, but exceed the needs of most of our customers and continue to grow with them.
David Feaster
That’s great color. Thanks. We’re excited to see what 2023 has got in store for you all. Thanks.
Operator
And thank you. [Operator Instructions] And our next question comes from Jeff Rulis from D.A. Davidson. Your line is now open.
Jeff Rulis
Hi, good morning.
Clint Stein
Good afternoon, Jeff.
Jeff Rulis
Just wanted to narrow in on the — maybe if I could, the core noninterest expense and fee income lines. I got it around 96 in, call it, ’23, ’24. So, I wanted to first see if those numbers align with what your thoughts are on core? And then, if you have any thoughts about how that transitions outside of seasonal influences, but look at for kind of growth rates for the year? Thank you.
Aaron Deer
Yes, Jeff, those are pretty close. If you want, I can give you the specifics behind the underlying merger costs in terms of what lines those hit, if that’s helpful to you. But I think I would echo the comments that Ron made on the earlier Umpqua call in terms of expectations for first quarter typically you’re going to see an uptick in expenses related to FICA and that sort of thing. And then, shortly after that, you get the kind of annual merit increase impact. But a lot of those seasonal costs that hit in the first quarter then trail off through the year. So, I don’t think you’re going to see anything outsized or abnormal related to that, of course, the exception of our two institutions coming together. So…
Jeff Rulis
Aaron, expectation of growth in the — outside of that — let’s just exclude the cost saves, but just standalone Columbia, are you in kind of a 3%, 4% or 5% kind of growth for ’23?
Aaron Deer
We’re probably — I would say, 2% to 3% is probably more in the range of what I’d be thinking.
Jeff Rulis
Okay. Got you. Okay. And then, I guess, similarly looking at growth — loan growth that is and understood on some of the puts and takes competitively and within customer movement, your own appetite, also if you layer in, I don’t know if you’ve got visibility on payoffs or paydowns, but kind of where you budget on a 2023 growth expectation for the Columbia standalone?
Chris Merrywell
Yes, Jeff, this is Chris. I think the visibility to it, there’s always payoffs, paydowns, there’s normal amortization, et cetera. Just put it in the kind of normal course of business right now with the interest rate environment where it is, your unforeseen payoffs are less likely. You may still see some business sales or some things like that, but we’re pretty comfortable where we are on it.
I would look at overall low- to mid-single digit. I don’t know that I would go much over 5% on that as far as the mid. But you’re in that space kind of with the market dynamics where they’re at and what we’re looking at. But again, our bankers are seeing lots of opportunities and it’s just a matter of which ones make the most sense to put onto the balance sheet. But low- to mid-single digits is, I think, a comfortable spot to be.
Jeff Rulis
Thanks, Chris. I’ll step back.
Operator
And thank you. [Operator Instructions] And our next question comes from Jon Arfstrom from RBC Capital Markets. Your line is now open.
Jon Arfstrom
Hey. Hello, everyone.
Aaron Deer
Hey, Jon.
Clint Stein
Good morning.
Jon Arfstrom
Hey, I don’t know if you’ll answer this one, but I’ll give it a shot. On Slide 30 of your presentation, the last bullet shows core expense run rate communicated. And if you go back to your original deck, you talk about $135 million of full run rate savings with two-thirds of it in ’23. How do you want us to think about the timing of the cost saves given that your systems conversion is going to occur at the same time than you originally planned?
Clint Stein
Yes. It’s a great question. Just given the passage of time with the protracted approval, we’ve identified the full $135 million. Typically, the timing of when those are realized is some immediately at close, and then usually there’s another wave of those somewhere between 30 and 60 days post systems conversion and integration. So, we’re shooting for a clean run rate for fourth quarter of ’23. So, we would expect that all $135 million is fully implemented sometime within the third quarter.
Kind of how that flows between first quarter, second quarter? I don’t have that in front of me. I don’t know if Aaron does specifically. What I will say is that we’ve had some of that has actually been realized just as some of the attrition that we’ve had from an employee standpoint, where centered-in positions that will not go forward. And so, there’s a little bit of that that’s already in the run rate, I’d say.
I don’t know if you want to add anything to that, Aaron.
Aaron Deer
No. I just think — I mean, the thing that’s changed is maybe the order or the timing of when the various saves are realized. But in terms of the end date of when we expect to hit a good run rate, as Clint said, that expectation of hitting that by year-end remains.
Jon Arfstrom
Okay. That’s actually very helpful and what I was looking for. And then, just to follow-up on the margin question, actually, it’s kind of impressive when you see your earning asset yields up like they were, but your interest-bearing liability costs were up about the same amount, and that’s outperformed most of the other banks that I’ve seen. Just philosophically when you think about those — the direction of those two interest-earning asset yields and interest-bearing liability costs, is there more pressure on the liability side at this point? Or do you feel like you can kind of keep pace with asset yield expansion that maybe matches your exceeded viability cost expansion?
Aaron Deer
That’s a good question. Because the — you are seeing an acceleration here through the year on the liability side, but I think if you look at where the new asset yields are coming on, and then continue to see a little bit of mix shift as we utilize those cash flows coming off the investment securities portfolio, I think we should see them at least be matched if we’re not seeing continued expansion overall between the two.
Jon Arfstrom
Okay. That’s helpful. And then, I guess, one more follow-up. You may have kind of answered it before, Chris or Clint, but any of the big picture themes that you laid out when the merger was announced, have they changed at all in your mind positive or negative? And in terms of the revenue synergies, I know you don’t really want to lay them out at this point, but any other opportunities that you found as you’ve kind of played this waiting game for approval? Thanks.
Clint Stein
It’s — so big picture. The world is completely different than what it was when we announced this thing, what, 16 months ago almost. But in terms of what our expectations were and what we thought that we would achieve on a combined basis or be able to achieve on a combined basis, nothing has changed there. In fact, just with the passage of time, probably more firmly entrenched in our beliefs that we’re going to be able to capture those revenue synergies.
I think we did a fairly robust analysis of some of these things through the diligence process. But then as you start to truly understand the depth of talent that Umpqua Bank has in some of these areas that would be additive to Columbia standalone revenue streams, it’s hard not to get excited waiting for March 1, so we can hit the ground running. So, there’s nothing that we expected that we now today are thinking that we won’t be able to accomplish together.
I’ll step back and see if Chris has anything he wants to add.
Chris Merrywell
Yes. I think that the piece around now having a firm date sticking with our conversion is, Jon, honestly, it’s what we’ve learned over all this time about the expanded capabilities and what our bankers are going to be able to take to market. They now have that point in time where they know what’s coming and we get right back out there and get to taking advantage of those capabilities.
So, big picture, I don’t think things have changed, but I think there’s been a little bit more excitement created because of the length of time. And only because we now have a finish line to it that we’ll be often in working on that aspect of it. But yes, the world has changed. Rates are, obviously, different. Mortgage market is different, and things of that nature. But our bankers are still out there looking and prospecting. And then, now with that finish line in sight, I think it’s really exciting actually.
Jon Arfstrom
Okay. Thanks. Good luck over the next five weeks.
Clint Stein
Thanks, Jon.
Operator
Thank you. [Operator Instructions] And our next question comes from Chris McGratty from KBW. Your line is now open.
Chris McGratty
Great. Thanks. Just a question on credit. Obviously, you guys have unbelievable credit numbers. One of the conversations that’s taken a lot of our time as analysts recently is just office? So, I was hoping you could speak to kind of your thoughts on that portfolio. It looks like it’s about 10% or 11%. Maybe some characteristics, the underwriting statistics, anything you’re particularly concerned about, that would be great. Thank you.
Clint Stein
Good morning, Chris. I’ll start, and we’ll take maybe a team approach to answering your question here. I’ll start by saying our metrics you saw in the release continue to remain pristine. I think this is the first — probably the first earnings call in 18-plus years that Andy McDonald hasn’t been. On Andy is skiing someplace in Idaho right now. So, I think, that in itself is a testament to how we’re thinking about credit.
Specific to the office space, some of the — a lot of the kind of urban core downtown-type office buildings, that’s not really the type of things that we have in our portfolio. And so, I think there’s a little bit of a significant difference between what you’re seeing in, let’s say, Downtown Seattle and Portland and some of the other areas that we’re in from an occupancy standpoint.
But with that, I’ll pass it over to Chris, and he can give you some more details.
Chris Merrywell
Sure. Chris, you mentioned in our underwriting sense of that nature, it hasn’t changed. I mean, we’ve always been fairly conservative by nature. We’ve talked about that in the past. What’s changed is when you look at the portfolio and you stress-test it towards higher rates, we’re very comfortable with what we’re seeing there in the credit side. And anything new that’s coming on to you, being stressed at even higher rate.
So, when you look at the ability of a borrower to withstand potentially if rates were to go up further, values were to come down, we’re working on lower loan to values overall, certainly in the portfolio, never been a max proceeds lender on anything new, and, again, stressing the portfolio to those higher rates, we’re not seeing anything. And as Clint mentioned, we’re not really in the markets where you’re seeing the headlines of businesses pulling out, turning back-office space and things of that nature. That’s really not our niche.
Chris McGratty
Okay. Thanks for that. Aside from office, I mean the wall of worry is high, I guess, broadly on the economy. Where else would you be spending more time just stress-testing within your portfolio?
Chris Merrywell
Well, actually, everything that’s stress-tested. Not seeing any — I mean, there’s not any early warning signs that we’re seeing. I think from conversations with Andy, there’s an eyebeam kept on it. When we do our provision with Aaron, we’re certainly looking at economic indicators and the unemployment and things of that nature.
But I guess you would say we’re keeping an eye on what may happen with some of these large companies and doing some downsizing and some layoffs. But again, when you hear some of those numbers, these are companies that are not only across many states, but they’re multinational. And so, it doesn’t mean it’s all affecting an area right down the street from us. But we are looking at those types of things. Haven’t seen anything that’s popped up yet in any reviews or any of our testing.
Clint Stein
The other thing I’ll add is that it really comes down to our bankers being proactive in managing their portfolios. We talk a lot — and a lot of banks probably do this, talk about relationships, but that’s really the value of having a relationship is that there’s ongoing two-way communication so that you’re operating under the premise of no surprises.
And that’s part of that is, if we, through that process, it sort of does well for the 30 years that we’ve been in business, you find a borrower that maybe isn’t as forthright or isn’t communicative is what you would think. Well then, those are the types that we prune out just on an ongoing basis and trying to make sure that we have the best clients possible or the best portfolio within each vertical possible that we can.
And so, one area I’ll mention just specifically would be our builder banking area. That’s something that as part of our ongoing management was early 2021, that really started communicating with each of their clients about, what’s your plan if rates go up? What does it look like? How is your inventory going to hold up? What’s your exit strategy for projects. And as a result, those portfolios are performing very well. There probably was a little bit of pruning that occurred in late ’21, early ’22 as a result of those conversations. But the vast majority of those relationships are intact and part of the great metrics that you see.
It also leads into other things that you see in the balance sheet. Now these are smaller portions of that dynamic. But, for example, our builders are putting more of their own money into their projects. So that lowers their deposit balances, lowers their line utilization. There’s different things that kind of come into play that you can see at a macro level as you look at our financials.
Chris McGratty
Great. Thanks. Thank you for all the color.
Operator
And thank you. [Operator Instructions] And our next question is Andrew Terrell with Stephens. Your line is now open.
Andrew Terrell
Hey, good morning.
Clint Stein
Good morning, Andrew.
Andrew Terrell
Maybe just to start, Aaron, on the FHLB borrowings this quarter, were all of the FHLBs added? Were they overnight funding? Or was there any term to the borrowings?
Aaron Deer
It’s all very short term. A fair bit of overnight, but it’s weeks, not months or years.
Andrew Terrell
Yes. Okay. And then, maybe just bigger picture, if I think about the balance sheet on a pro forma basis throughout the year, you will have marked the securities portfolio after the deal close, so that’s reflected in pro forma capital. Do you feel like that gives you maybe philosophically just greater flexibility to roll or sell a greater portion of the bond book, either to fund loan growth or maybe reduce the borrowing position throughout the year?
Aaron Deer
Yes. I mean, once marked, obviously, that arguably gives you more flexibility. That doesn’t mean that’s going to be the decision. And obviously, those cash flows on those marks come back and supports capital levels. But it’s — I mean, that’s going to be a decision dependent upon what the rate environment is and what the balance sheet trends are going forward. So — and — so I’m not going to presume just what that’s going to be just yet.
Clint Stein
Andrew, the one thing I’ll add there. And you were on the Umpqua call just before this, and I think Ron fielded a similar question. We’re not going to give our playbook out because there’s a lot of folks besides just our investors that listen to this call or listen to the playback of it. But it does present an opportunity for us to start thinking about just how we manage downside risk, the following rate over the intermediate term.
And Ron and myself and the rest of the go-forward executive team have started having those conversations. And so, we’re not going to say anything about what exactly the details are, but we do have flexibility and, I think, more flexibility than most of the banks in our peer group will have to put some protection on the balance sheet for following rates and that could be part of that — the component of that strategy.
Andrew Terrell
Okay. Very good. I appreciate the color. And the rest of mine were asked and addressed already. So, thanks.
Clint Stein
Thanks, Andrew.
Operator
And thank you. [Operator Instructions] And our next question comes from Matthew Clark from Piper Sandler. Your line is now open.
Matthew Clark
Hey, good morning. Thanks for the questions. First one just on the — your updated thoughts around your pro forma deposit beta through the cycle. I think in the deck, you guys showed 28%, it seemed to be your base case. Is that kind of what you’re managing to as Umpqua comes on board and with only a couple more rate hikes allegedly from the Fed?
Aaron Deer
No. I mean it’s — I wouldn’t say we’re managing to a deposit beta per se. Obviously, you’ve seen our deposit costs start to come up here in the last quarter of the year. But the — but to date through the cycle, our deposit beta on interest-bearing is only 9 basis points. So, overall, it’s about half of that 9%. So that’s going to continue to rise.
Whether or not that exceeds what we saw in the last cycle is to be determined. I think there’s a decent expectation that it’s a bit higher than that just given the rate rising pace has been more aggressive and longer lasting. So, there’s going to be more follow through than what we saw during the last cycle. But what that ultimately is, is going to depend on what we see in terms of just deposit flows, loan demand, and as Clint kind of alluded to in the prior question about what we might do with the balance sheet overall.
Matthew Clark
Yes. Okay. And then, if you had the spot rate on interest-bearing deposits or total deposits at the end of the year and the average NIM in the month of December?
Aaron Deer
I don’t know if I’ve got the margin…
Matthew Clark
Maybe in core base?
Aaron Deer
But the deposits were 44 basis points for interest-bearing deposits.
Matthew Clark
Okay. I’ll follow up with you on the monthly. Maybe just last one around M&A. I know you guys have a lot on your plate with the integration with Umpqua. But what are your general thoughts around additional kind of M&A to the extent something comes available, that’s high quality in Northern California?
Clint Stein
Well, our highest priority is getting to February 28 and getting our merger closed and then assimilating the two companies. And we’re both very experienced at that. And I think the work that we’ve done, we haven’t let the protracted closing process go to waste. We’ve got a clearly defined combined culture. We’ve put a few thousand of our associates from both companies through training on that.
So, I think that the process of, what I’ll say, the systems piece, that’s all scheduled. I think social aspect of integrating two large companies is well underway and has been for quite some time. And so, as we emerge from the back half or into the back half of — approach the end of ’23, that’s where we’ll refine our combined strategy and strategic plan in terms of what we — will be our primary focus over the next two to five years.
M&A, I envision, will be a part of that. The challenge, frankly, that we’ll have is at $50-plus billion and with the growth capabilities, organic growth capabilities that we have today — I mean, if you look at what the two banks have done in the midst of all this uncertainty around when the closing would be, the expansion in the de novo markets, the production that those teams have had, there’s, I would say, a short list of quality franchises that would meet our hurdle from an M&A perspective.
But we have more work to do on that. We have to get the work at-hand done first and then we’ll turn our focus to what targets might be a good fit for us and make a meaningful difference in terms of the size of the combined organization.
Matthew Clark
Okay. Thank you.
Operator
And thank you. And I’m showing no further questions. I would now like to turn the call back over to Clint Stein for closing remarks.
Clint Stein
Great. Thanks, Justin. Thank you again for joining our call this morning. Have a good day, everyone. Bye.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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