Columbia Banking System, Inc. (NASDAQ:COLB) Q4 2021 Earnings Conference Call January 20, 2022 2:00 PM ET
Company Participants
Clint Stein – President & CEO
Aaron Deer – CFO
Christopher Merrywell – COO
Andrew McDonald – Chief Credit Officer
Conference Call Participants
Jeff Rulis – DA Davidson
Matthew Clark – Piper Sandler
David Feaster – Raymond James
Jon Arfstrom – RBC Capital Markets
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Operator
00:06 Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Bank System’s Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
00:32 I would now like to turn the call over to your host today, Clint Stein, President and Chief Executive Officer of Columbia Bank System.
Clint Stein
00:39 Thank you, Catherine. Welcome and good afternoon, everyone. And thank you for joining us on today’s call as we review our fourth quarter and full year 2021 results, which we released yesterday after the market closed. The earnings release and accompanying investor presentation are available at columbiabank.com. 2021 was another record year for Columbia, in terms of loan production, balance sheet growth, wealth management fees, and earnings.
01:09 For the first time in our history, net income exceeded $200 million, assets surpassed $20 billion, and $2 billion of new loan originations were generated outside of the PPP program. We closed the Bank of Commerce Holdings acquisition on October 1st and on October 12th announced our pending combination with Umpqua Holdings. The BOCH integration has progressed as planned and will conclude during the current quarter.
01:38 A constant theme on every earnings call over the past two years has been our commitment to remain open and laser focused on helping our clients keep pace with the changes affecting their lives and businesses. The efforts to which our bankers have done to support each other and our communities has been impressive. And it’s typical of who we are, working to build strong relationships, being innovative, and growing our people is the bedrock of our culture.
02:06 It was in place long before COVID-19 has guided our operations throughout the pandemic, and it will continue to propel us as we work to meet new challenges and grow. So, we transformed from a $21 billion company into the leading regional bank in the West. I want to thank all of our bankers for their dedication to keeping relationships with clients and each other at the forefront. We will continue to work hard for each other, our communities, and our shareholders.
02:34 On the call with me today are Aaron Deer, our Chief Financial Officer; Chris Merrywell, our Chief Operating Officer; and Andy McDonald, our Chief Credit Officer. Following our prepared remarks, we’ll be happy to answer your questions. I do 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, our website, or our SEC filings.
03:02 At this point, I’d like to turn the call over to Aaron.
Aaron Deer
03:07 Thank you, Clint. Full year net income of $203 million and EPS of $2.78 included a full quarter of earnings from our Merchants acquisition of approximately $4.3 million. Our performance was a reflection of strong growth in loans, deposits and fee income, combined with prudent spending and strategic investment. Excluding costs related to the Merchants acquisition and Umpqua combination of $14.5 million, pre-tax pre-provision income was a record $282 million, exceeding the prior record set in 2020 by $12 million.
03:41 Fourth quarter earnings of $42.9 million and EPS of $0.55 were a linked quarter decrease of $10.1 million and $0.19 respectively, mostly due to the [indiscernible] provision for the Merchants loan portfolio. Quarterly pre-tax pre-provision earnings declined by $1.99 (ph) million to $66.7 million with the decrease attributed to $9.6 million of higher merger-related costs and $6.3 million less interest income from the PPP portfolio, partly offset by the full quarter earnings for Merchants operations.
04:13 Total deposits exceeded $18 billion at year end, up $2.1 billion from September 30th and $4.1 billion over the past year. The Merchants acquisition contributed $1.7 billion to the sequential increase and our cost of deposits held steady at an all-time low of just 4 basis points for both the quarter and the year. This is down from 7 basis points for all of 2020.
04:39 The Merchants acquisition added over $800 million of liquidity to the balance sheet, propelling the investment portfolio to $8.1 billion with 27% held to maturity and 73% available for sale as of year-end. The securities investment yield increased on a linked quarter basis from 1.82% to 1.98%. However, both quarters benefited from the prepayment of interest. Absent this, the investment securities yield remained level at 1.73%.
05:08 Encouragingly, new purchases during the quarter had an average yield above this level at 1.93% and a duration of 4.5 years. The net interest margin decreased 12 basis points on a linked quarter basis to 3.05%, mostly due to a decrease in the loan yield, driven by a reduction in accelerated PPP fees and partly offset by higher yields and securities due to prepayment interests.
05:34 Excluding PPP fees and prepaid interest, the net interest margin declined 1 basis point to $2.99. The impact to margin from the Merchants acquisition was de minimise. For the year, net interest — excuse me, for the year, the net interest margin decreased by 48 basis points due to reductions in loan and investment yields at 30 bps and 42 bps respectively, as well as greater liquidity on the balance sheet.
06:01 PPP loans added 8 basis points to the margin in 2021 driven by $19 million of accelerated fee recognition as loans were forgiven. This compares to 2021 PPP loans negatively impacted the margin by 2 basis points with only $6 million of accelerated fee recognition. We believe our balance sheet is very well positioned for a prospective rise in interest rates. Given its asset sensitivity, we see a significant opportunity in terms of improving yields as the Fed begins to normalize monetary policy.
06:33 Currently $2 billion of loans within the portfolio at floor and we anticipate $658 million to increase with a single 25 basis point rate hike. Meanwhile, our deposit costs remain among the lowest in the industry. Total loans rose by $1.1 billion during the quarter to $10.6 billion with $1 billion coming from Merchants. Adjusting for PPP forgiveness and Day 1 Merchants balances, loans increased $228 million or 9% annualized.
07:04 New loan production was brought on at an average tax adjusted coupon rate of 357, which compares to the overall portfolio, excluding PPP loans of 378. Non-interest income increased $282,000 on a linked quarter basis to $24.2 million with $776,000 from Merchants. For the year, non-interest income decreased by $10.4 million, but when adjusted for the Visa B share gain of $16.4 million realized in the second quarter of 2020, it rose by $6 million on the strength of card revenues, financial services, and trust income.
07:44 Non-interest expense increased $12.6 million on a linked quarter basis to $102.6 million and included $6.4 million of new run rate expenses from Merchants and an increase in acquisition and merger expenses of $9.6 million offset by a $2 million recapture for unfunded loan commitments. Our non-interest expense ratio declined to 1.97% for the quarter and our operating efficiency ratio decreased 3 points to 51%.
08:12 With the addition of Merchants, we expect our quarterly non-interest expense run rate to be in the mid-90s range in 2022, excluding deal costs. Expenses could start the year a little higher given seasonal factors and without the benefit of the Merchants systems conversion planned for late this quarter. The provision for income taxes was down slightly linked quarter to $13.1 million representing the 23.4% effective rate. The higher rate comes from certain non-deductible merger costs, income earned in California, and other factors that true-up our full year effective rate to 20.9%. We expect our 2022 effective rate to be similar to the 2021 rate.
08:53 And with that, I’ll turn the call over to Chris.
Christopher Merrywell
08:56 Thank you, Aaron. We had strong core loan growth in the fourth quarter powered by record production. Excluding PPP loans, quarterly production of $640 million was a new all-time fourth quarter high, propelling full year production to $2 billion for the first time in Colombia’s history.
09:17 Normal seasonality provided a bit of a headwind during the quarter with line utilization falling to 43% and we continue to refill our pipelines and they remain to our satisfaction. Loans ended the year at $10.6 billion, which was up $1.1 billion or 12% and excluding the PPP portfolio, up $1.3 billion or 14% during the quarter with $1 billion attributed from Merchants.
09:44 Growth in CRE led the way during the quarter with $307 million of production predominantly with rental and leasing properties, followed by C&I production of $199 million spread across all sectors. During the quarter, the mortgage team originated and sold $75 million of loans with the mix 30% purchase and 70% refi.
10:11 For all of 2021, $353 million of mortgages were originated and sold. The quarterly production mix was 62% fixed, 29% floating, and 9% variable. The overall portfolio now stands at 2% PPP, 53% non-PPP fixed, 30% floating, and 15% variable. PPP loans were $184 million at the end of the year and Merchants added $40 million with overall payoffs during the quarter of $171 million.
10:51 At year end, deferred fees related to the PPP portfolio totaled $3.8 million. With the addition of Merchants, the geographic loan distribution is now 45% Washington, 31% Oregon, 12% California and 5% Idaho with the remaining 7% in other states. We rose to number one SBA position in the Seattle district and are now the leading SBA lender in both the Seattle and Portland districts.
11:25 Going forward, we have our sights set on being the leading SBA lender in all of the communities we serve. As was mentioned, deposits grew by $2.1 billion during the quarter with $1.7 billion from Merchants. The deposit mix did not change remaining at 60% business and 40% consumer at year-end. The product mix shifted slightly from 50%-50% to 49% demand and 51% interest bearing.
11:57 Clint mentioned the record setting year that our Wealth Management Group had nearing $16 million in revenue. This has been the culmination of years of building internal partnerships and our focus on deepening existing client relationships and we are very pleased with the progress.
12:14 Now, I will turn the call over to Andy to review our credit performance.
Andrew McDonald
12:17 Thank you, Chris. The primary driver of the increase of $12.8 million in the allowance for credit losses over the quarter to $155.6 million is the increase in the loan portfolio from the Merchants Bank of Commerce acquisition. Our Day 1 allowance for credit loss reserve of $2.6 million was added for purchase credit deteriorated loans in the acquired portfolio and a $16.2 million provision was added for the remaining months. These additions were partially offset by a more favorable economic forecast and improvement in the credit quality to the overall portfolio.
12:58 The IHS Markit economic forecast is more favorable than last quarter, particularly with respect to unemployment, which is a major driver for the model. Last quarter, the unemployment rate was expected to end 2021 at 5% and remain above pre-pandemic levels through the end of 2022.
13:20 The current forecast assumes the unemployment rate in 2021 at 4.4% and remains at or below pre-pandemic levels throughout the forecasting period. The current forecast for GDP continues to be healthy, with a full year GDP growth expectation for 2021 remaining the same as the forecast last quarter at 5.7% and growth expectations for 2022 only slightly lower than the forecast last quarter at 4.3%.
13:56 Despite the continuing challenges the pandemic has been causing our borrowers have been able to adapt to this new environment and have shown great resilience. NPAs for the quarter improved 2 basis points to 11 basis points, and pass-through loans were only 7 basis points. Net charge-offs annualized were 13 basis points and our impaired capital ratio improved from 26.2% to 21.7%.
14:28 We are continuing to see credit quality improve across the whole portfolio and on the risk-rating front, loans rated watch or worse declined from $724 million to $626 million as of year-end.
14:45 Okay. Back to Clint.
Clint Stein
14:45 Thanks, Andy. This concludes our prepared comments. As a reminder, Andy, Chris, and Aaron are with me to answer your questions. And now, Catherine, let’s open the call for Q&A.
Question-and-Answer Session
Operator
14:57 Thank you. [Operator Instructions] Our first question comes from Jeff Rulis with DA Davidson. Your line is open.
Jeff Rulis
15:15 Thanks. Good morning.
Clint Stein
15:18 Good morning, Jeff.
Jeff Rulis
15:21 Hi, Clint. Maybe I’d just start with and not to make a big deal out of this, but the lending team announcement that you had this week, I think it’s a pretty good proxy for a group that at least was aware of the pending merger with Umpqua. And I guess, maybe the timing of those discussions were — had you engaged with those folks prior to the Umpqua merger?
15:45 And then secondly, just there — maybe kind of talk about their attraction to the platform given the merger and how they — their confidence kind of going forward, if you could?
Clint Stein
16:02 Yeah. I’ll share with you what I can. In terms of the timing, it was post announcement. And I think it’s back to some of the things that we feel and you probably heard from Court and Tory in the last hour is that what we’re creating is a franchise that hasn’t existed in the Northwest for 25 or 30 years. And for C&I bankers, they want to be in an organization where they know that they’re going to be able to meet the needs of their — existing needs of their clients, but also grow the relationship as those businesses grow.
16:57 And I think that they saw, first, what our capabilities are today on a standalone basis, as well as the information we put out with respect to the combination with Umpqua. And they got excited by it and started the conversation and they’ve hit the ground running. There is — I’m not going to share any numbers with you, but even I was very pleasantly surprised by what they have in flight right now. They’re keeping Andy busy, keeping him off the ski-slopes. So, that’s one aspect of it.
17:39 But I also want to share with you that we’ve done some other things. We added a physical presence in the Phoenix market for our National Healthcare platform. And we think that’s going to be very complementary post close to the things that Umpqua is doing with the announcements they’ve made and hires in that market. We’ll be able to fold that in and have a more comprehensive offering in that market.
18:12 There’s other markets that we’re also very actively engaged in conversations and looking at other teams that want to be a part of what we’re doing. So, more to come on that later. But I do think it’s a — I think it’s a testament to people that are in our markets, that are familiar with both our organizations, Columbia and Umpqua. And they see that back to the comment that I’ve said many times is that we are more similar than what the market perception has been.
Jeff Rulis
18:57 Sure. Good perspective. I appreciate it, Clint. Just to shift gears, maybe attack Aaron a bit on the expenses. Could — any chance you could sort of layout how that’s mapped in the income statement, where the merger costs were assuming legal data processing comp? But any chance you could kind of discuss where those came from, from the merger cost?
Andrew McDonald
19:24 Yeah. I can break that down for you. And I think we’ve said in the press release, how it breaks down between the two deals with — of the total of the $11.8 million, $7.7 million is related to Merchants and $4.1 million is to Umpqua. But by line item, it works out to about $4.9 million is in the comp and benefits line, about $300,000 is occupancy; another $300,000 is in data and processing software, $5.6 million is legal and professional, about $100,000 in advertising and promotion, and then about $600,000 in the other category.
Jeff Rulis
20:05 Got it. And then just a follow-on to your — I think your guide, you had mentioned looking for a mid-90s run rate on a quarterly basis, ex the Umpqua transaction maybe a little higher in the first quarter. So, you kind of talked about expectations for ‘22. I think if you think about growth rates, I think that sets us. But if we think about cost savings into ‘23, that target of $135 million, is that — what would you CAGR (ph) underlying expense growth rate in ‘23? I know we’re getting way out there, but safe to assume there’ll be some creep on a baseline, ex the targeted cost saves?
Clint Stein
21:01 I guess we’re kind of mixing standalone and combined there. But the — I think that — and you’ve probably heard Aaron make similar comments on the earlier call, but we’re very comfortable with the expense save targets that we’ve laid out. Certainly, expenses all else equal are likely to turn higher as a result of both some of the inflationary pressures that — we’re obviously well aware of them and have been enduring, as well as the investments in the business that we intend to be making on a go-forward basis. So, there is an element of expense growth in that. But we’re — our internal targets for what we can achieve are better than what we’ve laid out in terms of the expense save guidance in the deal announcement.
Christopher Merrywell
21:58 And Jeff, this is Chris and I’ll add some color to that. At the beginning of this year, we increased our starting wage to $18 an hour for our non-exempt teams. And as part of that process, and you’ve been with us a long time, you’ve heard of how we offset and we’re always looking for how we can cover that additional expense. And we were able to find that offset through some of the financial things that we had. And so we feel really confident that we’ve covered that increase to our starting wage and it won’t show up in our ongoing run rate.
Jeff Rulis
22:40 Okay. I appreciate the detail there. Thank you. I’ll step back.
Operator
22:49 Thank you. And our next question comes from Matthew Clark with Piper Sandler. Your line is open.
Matthew Clark
22:55 Hey. Good morning, guys. Maybe just sticking with expenses. [indiscernible] to know the amount of cost saves that you’ve realized to date in the Bank of Commerce deal and what’s left?
Aaron Deer
23:17 I’ll follow up with you on that, Matt. We’re tracking right in line with what we expect. In fact, I think we might actually be a little bit ahead of what we’re expecting. So, we’re in good shape, but I don’t have that number right in front of me at the moment. I can maybe try to pull it up before the call ends.
Matthew Clark
23:35 Okay. And then just you may have hit this during your prepared comments, and I apologize if you did. But on the better than expected cost control this quarter, ex-merger charges held in a lot better than expected. Can you speak to anything unusual? I know you guided for the upcoming quarter and the outlook but anything unusual this quarter?
Aaron Deer
24:06 I think it’s — we had a $2 million benefit from the negative provision in the quarter. I think that might be what you’re thinking out there.
Matthew Clark
24:18 Nothing above and beyond that, though?
Aaron Deer
24:21 No.
Matthew Clark
24:24 Okay. And then on commercial the real estate growth stepped up meaningfully this quarter. Can you speak to the underlying properties you guys are financing? And where you’re sourcing the growth from in terms of customers, whether existing or new?
Clint Stein
24:46 Yeah. Matt, it’s a combination of both and it’s not straying from anything that we have typically done. We’re looking at owner, user as well as other types of projects that are out there as well. But nothing that falls out moving away from our historic portfolio and what we would normally do. But I will say there is a good mix of existing clients as well as due to our approach, we continue to attract new clients from other institutions and that’s got a really positive outlook as we go forward.
Matthew Clark
25:24 Okay. And then just on the loan pipeline, if you could quantify and how compares to last quarter or year-over-year?
Clint Stein
25:33 We’re still very pleased with it. Of course, it’s down slightly after a record quarter as we’ve had previous record quarters. I think the piece there is while it’s down slightly, we have all the confidence with what we’ve talked about previously of new team coming on and just the focus of our bankers of being external out in the market, talking to our clients, talking to prospects that we’ll rebuild that and the prospects are good for this year by all means.
Matthew Clark
26:05 Okay. Thank you.
Operator
26:09 Thank you. And our next question comes from David Feaster with Raymond James. Your line is open.
David Feaster
26:17 Hey. Good morning, everybody.
Clint Stein
26:19 Hi, David.
David Feaster
26:22 Just I want to start on the growth side. I mean the growth exceeded forecast, record 4Q originations and digging into the numbers, it almost looks a little bit better when you look and see that payoffs and paydowns were pretty materially higher. Just curious whether there’s just some noise in the payoffs and paydowns line from the Bank of Commerce deal and essentially normal season — seasonal activity at the year-end or whether there’s any other trends you’re seeing? Just kind of taking this into account with the improving origination activity, less loan participations given the combination with Umpqua. Does this imply that we could actually see potentially accelerating growth just given the continued strong originations and normalizing payoffs?
Clint Stein
27:07 Yeah. There’s a lot in there, David. I would say to try to pull it apart a little bit, been very pleased with the activity from Merchants or, I should say, the lack of payoff activity. The process that we went through in retaining the teams, retaining Randy Eslick on the — as the leadership down there. We’ve held on to the clients. Many of them are excited about the opportunity to be with a larger organization, to be able to take care of their needs. They don’t have to look anywhere else, and that’s only going to get enhanced when we move forward with the Umpqua combination.
27:50 Now bringing it back more to our legacy piece of it, we did have a fair amount of payoffs and paydowns during the quarter of some CRE types of transactions that buildings sold, things of that nature. Obviously, as you mentioned, the good news is the teams are active and they’re out, and the originations are more than offsetting that. I think rising interest rates. So, if they materialize, we could start to see payoffs, paydowns be somewhat muted.
28:23 I would say though that I’m cautious on businesses will still sell, properties will still sell and things of that nature. So I think all signs are pointing in the right direction. We just have some — we have a little ways to go before we see how it actually materializes.
David Feaster
28:43 Okay. That makes sense. And then just touching on deposits. Organic deposit growth has remained extremely strong. Just curious how you think about deposit growth as we go forward? Do you think loan growth might start outpacing deposit growth as we head in next year or just given the increase in contribution from C&I, would you perhaps continue to see outsized deposit growth?
Clint Stein
29:08 Yeah. Deposit growth is one that we spent a lot of time looking at. I would love to tell you we have the exact crystal ball that we can predict what’s going to happen. I think the story there really is we’ve attracted the deposits. We’ve attracted new clients. We haven’t changed our philosophy about how we price. So, we’re winning these relationships and these deposits based on our capabilities, based on our bankers and the relationships and the solutions that they’re providing. I think that puts us in a really good position should rates start to rise that we’ll be able to maintain kind of our historical cost of funds that we’ve had on how we follow that up.
29:55 But I think that what was really in there is, we have a lot of liquidity and we’ll be very mindful as we start to see where the flows go from money being spent. I would caution that all the money being spent is staying in the system, and it comes right back around into another client’s account typically. But more importantly, I want to point you back to our bankers are winning business. And that’s bringing on new relationships and many of them are significant. And so, that’s going to be a piece that if we started to see some deposits leave, I’m pretty confident we’re going to continue to win that type of business and it should be able to offset it. All things being equal, that’s where I would look at that aspect.
Aaron Deer
30:45 And I’ll just — David, I’ll just add, with all the deposit growth that we’ve had and the last two years, we’ve done that, and it hasn’t changed what I think is some structural advantages that we have in our deposit base, roughly half non-interest bearing, 60% business oriented. And we had for 2021, again, another strong year of deposit growth at 4 basis points for cost of funds. And so, I think that, that quality — high-quality deposit franchise that we’ve been known for, for a very long period of time, it’s actually been strengthened and not diluted by the growth.
31:41 And so, it’s a good first world problem for us to have, which is how do we deploy that liquidity because it has outstripped loan growth. And so, we’ll see — there’s a lot of activity going on. I think Chris is trying to contain his excitement about the economic activity in our existing markets. And then the focus that we have with our Umpqua combination and the momentum that we still have each as separate companies and our strategy around having the integration management office to insulate our client-facing bankers from client-facing bankers from all the integration activities. I think we’ve seen that play out over the last three months. And I think we’re going to see that momentum continue to carry well into 2022 and 2023.
David Feaster
32:43 That’s a really good point and kind of dovetails into my last question. I was hoping to get kind of an update on how the Umpqua merger, those discussions are going. And just whether you — I was hoping you could provide us with a little bit of color and detail around the [indiscernible] office and just some of the things that, that team is working on currently to help ensure a smooth integration. And again, like you said, preventing destruction on the producer side.
Clint Stein
33:16 Yeah. So Chris was in my office before the call and we were talking about an existing client relationship that wants to expand what they do with us significantly in anticipation of our combination with Umpqua. We also had another conversation about some production teams. Eric Eid comes into my office, and he’s talking about vendor selection, how the process for the redundant facilities or the excess facility space that we have, something like even our HRIS system, which sounds like it’s not just payroll, it’s how we train and develop our people and the integration throughout our company.
34:32 And so thinking about the employee experience as we go through the integration. So Chris is very focused on the client piece and others. It’s a whole executive team, but I’m just giving you some illustrative examples of the types of things that they’re working on and how they’re staying — I guess, staying in their lane and executing on that vision of insulating the client facing bankers from any distraction.
34:59 There’s a lot of activity around planning towards the Day 1 close and converging processes and policies and all of those discussions are taking place. Chris and then on the — from the Umpqua team, Tore, they’re not totally isolated from this. They do sit on the steering committee that we have. And so they’re involved, but they’re not consumed by it. I’ll tell you that Eric and then his counterpart at Umpqua, Drew, they are consumed by integration planning activities right now.
David Feaster
35:44 Okay. That’s great color. Thanks everybody.
Operator
35:48 Thank you. And we have a question from Jon Arfstrom with RBC Capital Markets. Your line is open.
Jon Arfstrom
35:54 Hi, there. Jon Arfstrom, RBC. How is everybody doing
Clint Stein
35:59 Good. How are you, Jon?
Jon Arfstrom
36:01 Good. Question for you, Aaron, just on the margin. In the release, it feels like you’re almost optimistic on the outlook for the margin or at least less pessimistic. If you set rates aside, how do you feel about just the prospect of margin stabilization, maybe some of the puts and takes you want us to think through.
Aaron Deer
36:24 Yeah, I mean, I think we’re getting closely. I would highlight that in the quarter, we had a pretty good amount of work we called prepay income on the mortgage, on the bond book MBSB, (ph) that was about $4.7 million. So we got a pretty good bump from that that’s about where we have a little bit about each quarter but that was about 3 times what we might ordinarily see in a quarter. So that helped on our investment securities yield during the quarter. The loan yields in the quarter, if you look at where the tax adjusted coupon was ex-PPP was 378 and the new loans came on the book at 357, which was about the same level as the prior quarter, it does bounce around quite a bit, but so the new loans are coming on still below where the portfolio.
37:14 So I think there’s still likelihood for some [indiscernible] there, but I think that we’re getting closer to — to a bottom or an inflection point and I think very importantly, obviously the tone around the likelihood of rate hikes we’ve already seen it exhibited in the — at the longer end of the curve, the tenure is up pretty materially over the past quarter and we’re seeing that too in our new bond purchases already and also, we will start to feel that in on the loan side as well. That’s likely to take a little longer we could ultimately see a little bit of spread compression before the real benefit of higher rate hikes materializes that we were are obviously have a fantastic funding base. The balance sheet is very asset sensitive. We have really good disclosure in the deck.
38:25 I would point you to, actually a new slide that we put in at slide 16, investor presentation because it’s — historically presented a pretty conservative picture in terms of our betas and what’s assumed in our interest rate sensitivity and but we provided some additional beta levels going down as low as 15, which even fills above the beta that we exhibited during the last rate rising cycle. So I think that will give you a better picture of just how powerful higher rates can be to our net interest income as we — as it hopefully the benefit of that.
Jon Arfstrom
39:12 Yeah. I was just going to, you answered my follow-up on that, because it just feels like maybe your deposit base like others is a little bit different at this point in the last cycle. And I’d probably take the bet on lower betas at least early on, but I think that’s type of information.
Aaron Deer
39:32 On the same side [indiscernible] that. And also, to go back to sequential earlier comments here about the strength for non-interest bearing deposits and how our clients is truly differentiated with our commercial focus or the percentage of non-interest bearing deposits, the total percentage of the total increase during the last rate rising cycle and there’s not a lot of institutions to consider that.
Jon Arfstrom
40:02 Okay. Andy, one for you, on the provision. It looks like absent Bank of Commerce, who would have had another negative provision of reserve release. How are you feeling about overall credit and there’s anything that you would call out other than growth that would impact of provisioning going forward?
Andrew McDonald
40:22 Yeah. Your conclusion is correct. We would have had a release. Obviously, we’re feeling pretty good with where the portfolio stand. We enjoyed a lot of healing during the quarter as well as during the year. I think that the economic forecast is beginning to stabilize and as you know CECL is very dependent on the economic forecast that you use. So as that stabilizes it will create less volatility in the model, and I think that the provision will become much more stable as well quarter-to-quarter. So in general, I feel good about credit quality and I feel optimistic about the level of provisioning that we would have to do even given growth.
Jon Arfstrom
41:15 All right. Thanks everyone. That’s all I had.
Andrew McDonald
41:18 Thanks, Jon.
Operator
41:23 Thank you. And I’m sure no further questions at this time. I’d like to turn the call back to Clint Stein for closing remarks.
Aaron Deer
41:30 Actually, this probably go there — I just wanted to respond to Matthew Clark’s question on the cost saves on the Merchant still. Year-to-date, we have realized $2.3 million annualized, in terms of the cost saves by the end of this quarter, I think we should be around $9.2 million which about 80%, little over 80% of what we targeted. And at this point, our expectation is that we do better than target on the cost saves, so we’re tracking as expected and looking to get on that front.
Clint Stein
42:07 Thanks, Aaron. Thank you for attending our fourth quarter call. We look forward to seeing many of you in the coming weeks. In the meantime, have a great day and goodbye.
Operator
42:18 This concludes today’s conference call. Thank you for participating you may now disconnect.
