Columbia Banking System, Inc. (NASDAQ:COLB) Q2 2024 Earnings Conference Call July 25, 2024 5:00 PM ET
Company Participants
Jackie Bohlen – Investor Relations Director
Clint Stein – President and Chief Executive Officer
Ronald Farnsworth – Executive Vice President and Chief Financial Officer
Frank Namdar – Executive Vice President and Chief Credit Officer
Torran Nixon – President, Commercial Banking of Umpqua Bank
Christopher Merrywell – President, Consumer Banking of Umpqua Bank
Conference Call Participants
Jon Arfstrom – RBC Capital Markets
Matthew Clark – Piper Sandler
David Feaster – Raymond James
Brandon King – Truist
Jared Shaw – Barclays
Jeffrey Rulis – D.A. Davidson
Chris McGrady – KW
Operator
Welcome to the Columbia Banking Systems Second Quarter 2024 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. [Operator instructions] Please be advised that today’s conference is being recorded.
I would like to introduce Jackie Bohlen, Investor Relations Director, to begin the conference call. Please go ahead.
Jackie Bohlen
Thank you, Lisa and good afternoon everyone. Thank you for joining us as we review our second quarter results. The earnings release and corresponding presentation are available on our website at columbiabankingsystem.com.
During today’s call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the Safe Harbor provisions of Federal Securities Law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures and encourage you to review the non-GAAP reconciliations provided in our earnings materials.
I will now hand the call over to Columbia’s President and CEO, Clint Stein.
Clint Stein
Thank you, Jackie. Good afternoon everyone. We made considerable progress over the past three months on the initiatives we discussed in April. We enacted changes to the way we evaluate and approve deposit pricing, which resulted in increased stabilization in the cost of customer deposits. We also achieved more expense reductions during the quarter than what we anticipated and communicated to you in April.
When we spoke last quarter, I outlined the realization of $43 million in annualized net cost reductions from the operational effectiveness work that began during the first quarter. This work is the result of identifying opportunities for improvement after observing a year of the combined company’s operations.
These opportunities resulted in a lower headcount given the elimination of redundant and overlapping positions and have simplified our organizational structure. But our opportunities are not limited to just expense cuts. They include revenue generating franchise reinvestment, and a cost conscious culture enables us to make reinvestments that support our long-term growth and profitability outlook.
Annualized expense reductions year-to-date from our operational effectiveness work equate to $64 million on a net basis and $76 million on a gross basis. We have roughly $6 million of remaining annualized expense reductions slated to be enacted in the third quarter, which will get us to our initiative goal of $70 million in net savings and $82 million on a gross basis. These savings are in addition to the $143 million net and $188 million gross savings related to last year’s merger.
We have achieved $264 million in annualized savings over the past 18 months, with $45 million already reinvested into the future growth of our company. We have $12 million of the $76 million of cost savings achieved in the first half of 2024 earmarked for franchise reinvestment that will occur over the next 18 months or so. We didn’t execute on near-term expense initiatives at the detriment of the future growth and competitiveness of our company.
At the end of the third quarter, our gross expense reductions will be $270 million merger-to-date, with the previously mentioned $57 million either already reinvested or allocated for reinvestment, resulting in net reductions of $213 million or 58% above our original commitment of $135 million at the announcement of the merger.
These steps were not taken with the survivors mindset. We executed this initiative and will continuously evaluate our expense base so we can thrive well into the future while delivering on our promise of being a high performer. Our headcount reductions were wrapped up during the second quarter. The remaining $6 million of planned expense savings will come from other operational sources during the third quarter.
The savings I outlined are as of quarter end. They are not fully reflected in the second quarter’s normalized operating run rate of roughly $270 million, which does not include the previously mentioned expected reinvestments in the coming quarters. While we have made substantial progress toward the annualized fourth quarter expense run rate we outlined in our March update, we are not adjusting that guide given these planned reinvestments.
As we wind down the work to right size our expense base, our ability to invest in our people, our franchise and our suite of products and services remains fully intact. We believe these revenue generating investments, along with a lower expense base, will continue to drive additional long-term shareholder value. The heavy lifting is behind us and we’re very optimistic for the future. The franchise we set out to create with the merger in 2021 is here. We’re running it and we’re making it resilient to any operating environment.
Our early success on near-term initiatives has not diminished our laser focus on regaining Columbia’s placement as a top quartile bank as we drive toward long-term, consistent, repeatable performance.
I’ll now turn the call over to Ron.
Ronald Farnsworth
All right thank you, Clint. We reported second quarter GAAP EPS of $0.57, an operating EPS of $0.57, and our operating return on average tangible equity was 17%, while the operating PP&R was $219 million. Please refer to the non-GAAP reconciliations provided at the end of our earnings release and presentation for details related to our calculation of operating metrics.
On the balance sheet we have limited growth and reduced interest bearing cash levels to target approximately $1.5 billion. Within deposits, we had more of a traditional seasonal decline in noninterest bearing demand related to taxes and corporate distributions. Our net interest margin increased to 3.56% in Q2, though it was 3.52% for the month of June. Both were within our estimated range of 3.45% to 3.60%.
Asset rate pricing more than offset a 6 basis point increase in interest bearing liability costs. Our cost of interest bearing deposits was 2.97% for the quarter and 3% for the month of June. The quarter also benefited from higher prepayment speeds, which resulted in higher discount accretion for the securities portfolio. Looking forward we expect purchase accounting income to align more closely to the first quarter’s level than the second quarter’s level as detailed towards the end of the earnings release.
Our projected interest rate sensitivity under both ramp and shock scenarios remains in a liability sensitive position, and we expect our rates down deposit betas to approximate those experienced on the way up. Our provision for credit loss was $32 million for the quarter. The portion related to our leasing portfolio declined 18% this quarter to $17 million. Our overall allowance for credit losses remains robust, closing the quarter at 1.16% of total loans, or 1.35% when including the remaining credit discount.
Total GAAP expense for the quarter was $279 million, while operating expense was $262.5 million, both down from the first quarter, reflecting the efficiency initiative Clint discussed earlier. As discussed last quarter, we’ve included the $12 million restructuring charge this quarter in non-operating expense. Included in operating expense was a $7.7 million one-off nonrecurring credit. Absent this, I pegged our normalized level of operating expense at $270.2 million in Q2, down 5% from a normalized level of $286 million in the first quarter.
We continue to expect our Q4 operating expense run rate to be in the annualized range of $965 to $985 million, excluding CDI amortization. After adjustments, our normalized Q2 run rate was at the lower end of that range. As Clint noted, we expect franchise reinvestment to drive the run rate higher, partially offset by additional cost savings related to near-term initiatives.
I’ll close with commentary about our regulatory capital position. Our risk based capital ratios increased as expected in Q2. We expect to build capital above all our long-term targets, which will provide for enhanced future flexibility.
And with that, I’ll now turn the call over to Frank.
Frank Namdar
Thank you, Ron. The stable performance of our loan portfolio underscores the robustness of our through the cycle underwriting process and the caliber of our borrowers and sponsors, even as we continue the transition to a more typical credit environment after a prolonged period of exceptional quality.
This quarter, we saw 31 to 89-day delinquencies improve 22% to $86 million, with the rise in 90 plus day delinquencies primarily resulting from the expiration of COVID related designations within the residential mortgage portfolio. Nonaccrual loans decreased approximately $6 million, mainly due to reduced balances in the FinPac portfolio. These overall classified loans remain stable.
Our proactive and detailed monitoring of the portfolio, complemented by targeted reviews of specific asset categories like multifamily and office properties, has revealed no systemic issues across various industries, sectors or geographic regions. Notably, there are effectively zero delinquencies in our entire non-owner occupied and multifamily portfolios at the end of the quarter, and delinquencies within office properties specifically were remarkably low at roughly 40 basis points of the total office portfolio, with no charge offs in either category.
Overall, net charge offs for the company stood at an annualized rate of 32 basis points for the quarter of which the bank contributed six basis points and FinPac 26 basis points. We remain very satisfied with the quality and directionality of our granular and diversified loan portfolio, which is highlighted in greater detail in our investor presentation.
I will now turn the call over to Tory.
Torran Nixon
Thank you, Frank. Targeted actions taken during the first quarter resulted in tighter control and a renewed discipline around deposit pricing. Changes enacted directly contributed to the stability in our interest bearing core deposit rates in the latter part of the first quarter and through the second quarter as our teams continued to lead with service, not price, in their customer interactions.
Our branches recently wrapped up a three-month small business campaign in late April, which generated nearly 6000 accounts and $345 million in new deposits to the bank. Importantly, 27% of those balances were noninterest bearing and these accounts have collectively increased by roughly $20 million since the campaign ended in April. A new campaign was launched in June, with over $110 million in new money coming to the Bank through mid-July. As with the spring campaign, the summer campaign includes bundled solutions for customers without promotional pricing or special products.
The new accounts enhance the granularity of our already diversified deposit base and provide numerous opportunities to deepen relationships over time as businesses grow and we fulfill their needs with additional products and services. Our cost of interest bearing deposits increased by 9 basis points during the second quarter to 2.97% compared to 34 basis point increase during the first quarter, highlighting a significantly slower pace of increase following our actions.
Our cost of total deposits was 2.01% and if we isolate our customer balances, 36% of which are noninterest bearing, our total cost of customer deposits was 1.56% in the second quarter. Our focus on relationship banking continues to benefit our performance in this higher rate environment.
While recent pricing trends and our successful deposit campaign results are encouraging, the second quarter was also impacted by anticipated declines in noninterest bearing deposit balances due to seasonal pressures that include customer tax payments. Noninterest bearing balances were down 2% on both an end of period and average basis in the second quarter, while pricing pressures have moderated compared to 2023, as the Fed funds rate has remained constant for the past year, persistent inflation continues to draw down customers account balances.
That said, our teams are focused on generating new business to offset this headwind, as evidenced by our ongoing campaigns and our proactive activity by our bankers. Their success will be key to containing our deposit cost regardless of whether we see any rate cuts from the Fed this year.
Turning to the loan portfolio, relationship driven growth remains our primary focus. Loan balances increased 2% on an annualized basis in the second quarter after adjusting for a $95 million in targeted loan sales. Commercial lines of credit and construction draws activity drove the quarter’s expansion.
While our loan pipeline remains steady, our core fee income pipelines continue to expand. We are seeing growth across categories including treasury management, commercial card, merchant services and international banking, to name a few. The contribution of these line items to core fee income was up 7% on the quarter and 14% from a year ago.
We are also seeing tremendous traction with our Umpqua Smart leads. Umpqua Smart leads use predictive analytics to help our teams capture additional business with our existing customer base through needs based solutions. Our close rate was up 22% between the first and second quarters.
While incremental growth in a single product takes time to drive notable bottom line performance, we are encouraged by the favorable trends in our collective products and services. Our bankers remain focused on the activities that drive balanced growth in customer deposits, core fee income and relationship based loans.
I’ll now turn the call back over to Clint.
Clint Stein
Thanks Tory. We remain committed to optimizing our financial performance to drive long-term shareholder value. In line with our expectations, our capital position continues to build as our ratios expand. At a total risk based capital ratio of 12.1%, the parent company is above our long-term target of 12%. The bank, however, remains modestly below at roughly 11.7%.
Our TCE ratio was 6.8% at quarter end, up from 6.6% at March 31 despite some modest adverse impacts from AOCI. We continue to target a ratio closer to 8% before considering meaningful options for deploying excess capital. The second quarter demonstrates our ability to organically generate capital well above what is required to support prudent growth and our regular dividend, providing us longer term flexibility for additional returns to shareholders.
This concludes our prepared comments.
Chris, Tory, Ron, Frank and I are happy to take your questions now. Lisa, please open the call for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question is coming from Jon Arfstrom of RBC Capital Markets. Your line is open.
Jon Arfstrom
Hey, thanks. Good afternoon everyone.
Clint Stein
Hi Jon.
Jon Arfstrom
Hey, looks like a good quarter. Ron maybe start with you. Can you maybe help us think through the margin outlook a bit more? I see the 352 margin you flagged in June. I hear you on a little less accretion but you probably have a rebound in noninterest bearing. So help us think through a good starting point of some of the puts and takes that you see on the margin outlook.
Ronald Farnsworth
Yes. Good question and actually, really no change from the last quarter. It’s really going to depend on deposit flows. Do we see that seasonal strength and arms bearing in Q3 will be on the upper end of that range, if not, we’ll be in the middle or on the lower end. But I do want to flag the discount accretion was a bit of higher in Q2. I don’t expect that to recur unless you saw a meaningful rally in the bond markets, so probably somewhere in the middle of the range.
Jon Arfstrom
Okay. Okay, good. That’s helpful. And then just to confirm, you guys would welcome a couple of cuts. It looks that way in your documents and your comments, but you’d welcome a couple of cuts in terms of the margin outlook?
Ronald Farnsworth
Yes, it would be beneficial, obviously, in interest income, we are liability sensitive, positioning the balance sheet that way over the last year. So what we position for it when and if it ever comes.
Jon Arfstrom
Yes. Okay, good. And then Clint or Tory, obviously some decent success on the deposit initiatives, can you talk about what’s really worked well and what you’re seeing in terms of overall deposit cost pressures? Thank you.
Torran Nixon
Sure Jon, this is Tory. I would say I think there are a couple of things that work really well, and we mentioned in the call, and I think Chris maybe can add in on this. I think our small business group within retail, the branch system, has done just an outstanding job just being kind of having energy deployed outbound, and I think the entire company is doing that.
I mean, it’s been a year and a half as we kind of work through all the process, product knowledge, infrastructure within the company, and just a ton of energy that’s being deployed outbound and they had some great results in without pricing, without any special pricing or any other gimmicks, it’s really getting out and hitting the street and presenting the value of Umpqua Bank and what we can do for small businesses and what we can do for commercial customers to just bring their relationships over, so added a ton of accounts and a lot of balances.
On the pricing front, I think this has been the very constant since we employed some restrictive pricing pressure on our bankers within the footprint. We’ve seen rates continue to kind of track down a little bit, 5, 10, 25 basis points as we’ve had conversations with customers, one by one by one. And I think we’ve done a really nice job kind of keeping the lid on costs. And I don’t think there’s, at this point, any additional outside pressure from many institutions that bring that back up.
So, Chris, I don’t know if you have anything else you want to add to that.
Christopher Merrywell
Yes thanks, Tory. Hey Jon, this is Chris. I think that what Tory is saying there, leading into it there, there are a ton of conversations that are going on every single day with our customers about what they’re using the money for, how long they’re looking for, what the current rate environment is, what the competitive environment is. And I think part of the competitive environment is definitely calmed down, which makes those conversations a little bit easier.
It’s not as frantic, and it’s a lot of hard work by our bankers that are out there each and every day doing that and working with the customers about directionally where we go if we get a cut. Our customers, I think, will be ready because our bankers have been having conversations with them and we’ll see if that happens, so yes.
Jon Arfstrom
Okay. Thanks, guys. I appreciate it.
Christopher Merrywell
Welcome.
Operator
Thank you. And our next question will be coming from Matthew Clark of Piper Sandler. Your line is open.
Matthew Clark
Hey, good afternoon, everyone. I guess, on deposit costs for my first question, it looks like you lowered deposit rates in some of your consumer categories in early July. I guess, can you speak to kind of retention as you’ve been doing that and plans to do more or not?
Christopher Merrywell
Yes, Matthew. This is Chris. Thanks for the question. We really lowered them throughout the last few months. July was one piece of it, but really started back in the late February timeframe. Retention has been extremely good. When you look at and I’ll point to the campaign that Tory mentioned and all of those balances, new accounts that came in, they’re actually growing and without extra pricing.
And then on the CD portion and things of that nature, we’re maintaining, retaining 80%, 85% of those balances and so, yes we’re following it extremely closely. Commercial is experiencing the same thing. And again, we still have flexibility to make exceptions and do things that make sense, but it’s really working on that piece of it. We’ll continue to look for opportunities in the competitive market of where our posted rates are, and we’ll continue to work the exceptions down as we can. And then, of course, pay attention to what our forward CD pricing is. Torry if you want to add anything.
Torran Nixon
No, I think that’s it.
Matthew Clark
Great. And then on your brokered CDs and borrowings, they were both relatively flat in the quarter. Could you just speak to whether or not those might start coming down and just trying to get a sense for the pace and magnitude and the overall kind of earning asset level.
Ronald Farnsworth
Hey Matt, this is Ron. Good question. If you look back at the last couple of quarters, we’ve taken down the level of in spring cash at the Fed, now in this right around $1.5 billion. And that’s really been the clutch as to what we do with the wholesale funds based on other loan and deposit flows. So if we see net seasonal growth in deposits second half of the year over and above loans, then you’ll see those wholesale balances drop, but the offset’s always going to be targeting right around $1.5 billion on instrument cash at the Fed. And of those wholesale funds, be it broker deposits or the home or bank advances, they’re structured anywhere from two to call it 9, 10 months out. So we’ve got plenty of opportunity to drop that over the course of the year.
Matthew Clark
Okay, great. And then may be one for Frank on charge-offs, I didn’t see FinPac isolated. I know you gave the bank charge-off of six basis points, but I haven’t done the math to back into FinPac. But can you just speak to how the FinPac net charge-offs trended in 2Q and I think there’s an expectation for more relief in the second half, but just want to double check there.
Frank Namdar
Yes, FinPac came in at about 26 of the total charge-offs, and they’re right on track to our expectations. We’re definitely seeing improvement through all of the delinquency bands. Notably, 31 to 180-day delinquencies are down over 12% from last quarter. Nonaccrual balances as a percent of the portfolio are down about 23% and those turn into future charge-offs. And so throughout the rest of the year, I think we’re going to see more significant improvement than we’ve seen over the course of the last two quarters. So things are progressing as planned.
Matthew Clark
Great. Thanks again.
Clint Stein
Yes.
Operator
Thank you. [Operator Instructions] And our next question will be coming from David Feaster of Raymond James. Your line is open.
David Feaster
Hi. Good afternoon, everybody.
Clint Stein
Hey, David.
David Feaster
It’s great to see the significant progress that the team, you guys have made on the cost savings from that deep dive and exceeded expectations, but you talked about reinvesting some of those savings. Could you maybe talk about what you’re reinvesting in, in the roadmap and timeline for some of those initiatives?
Clint Stein
Yes, I’ll start and then I’m sure that Chris and Tory might want to add in and clean up the mess I leave on the table here with it. But in my prepared comments, I talked about the reinvestment that’s already occurred and we’ve spoken over the last couple of years about where we’ve expanded into new geographies that’s we tracked that and we didn’t — that’s what’s coming off that original $188 million that we talked about a year ago to get to that net number of the 143. So we still have some things.
We opened our first branch in the Phoenix metro area last month. We have a second one opening in Scottsdale here in a couple of weeks, and then we have some other locations where we’re putting in so we can have full service banking capabilities within those new geographies. And Tory was reviewing the new markets activity from a commercial perspective with me yesterday, and it’s pretty impressive what the teams have accomplished in all of those markets. And so our commitment to them is that if they perform and produce, that we will continue to invest in helping them grow those markets and so that’s what some of that looks like.
The other thing is we continue to attract really, really good talent from other organizations, and so we’re seeing opportunities to fill in, in certain geographies and strengthen the team. We’ve got some technology platforms that are in flight that are pretty exciting for our teams. I’m not going to mention on the call because I don’t want to give our playbook away to any of our competitors that might listen in. But so it’s people, it’s facilities, it’s technology, it’s all the things that we think will help us grow revenue over the long haul. Tory, Chris, anyone?
Torran Nixon
I think it’s well said. I mean, I think Clint, really, one thing you mentioned I think we’re really proud of is we had four new commercial offices that we partnered with, retail banking. We’ve got branches that are good flight, and they’re in, some great markets for us, [indiscernible] in the Bay Area and Napa Valley and Arizona, Colorado and Utah, all are well ahead of budget and substantially in the black profitable and really great to see.
So it really gives us a ton of confidence that we can continue to hire and attract really talented folks and put them in market and give them the tools to be successful. We’ve got some product and some technology that, as you mentioned, I think it’s just going to continue to advance the company and our ability to serve our customers. And I think we’re all really excited about certainly the future of this organization.
Christopher Merrywell
Yes David and this is Chris. What I’ll add is just I want to kind of emphasize full service while we have very successful commercial teams in those markets that are now, you know, give us a flag plant, plant the branch in there. It’ll help us grow. We’re not just looking to grow in retail and commercial. It’ll be across wealth. It’ll be mortgage offerings. It’s going to be full service like we do in our other markets. It will just look more branch light than it would look in say, Washington and Oregon.
David Feaster
Okay, you guys, you also sold a book of transactional resi mortgages in the quarter. Are there any other transactional books that you may be interested in selling to maybe help optimize the balance sheet further, just as the secondary markets pretty open right now?
Christopher Merrywell
The short answer is yes, and we’ve spoken about that. We talked about it, I think, during some of the conversations that we had in the first quarter about optimizing the balance sheet and where there’s some transactional real estate portfolios, we need the market. We need rates to come down to certain levels before we could execute on that. In the meantime, we’re trying to convert them from transactional into full relationships. And to the extent there’s any success with that, then we would just lower the amount that we expect. But offhand, in terms of anything immediate, I don’t really see that there’s anything.
We’ve kind of cleaned up a lot of that stuff over the past year. Shortly after the merger last year, last June, July, I think it was around a little over half a billion of transactional loans that we sold out of the mark to Columbia portfolio. And then just as opportunities presented itself with some of these resi portfolios, we’ve taken those down as well.
Clint Stein
That’s correct.
David Feaster
Okay. And then maybe just thinking about the loan growth side, obviously, this quarter, there’s some declines in non-occupied CRE growth in construction. You’ve made a bunch of new hires like you talked about, where we’re investing in that side of the business. I’m curious, how do you think about the loan pipeline? What’s the pulse of your markets? How’s demand looking and where are you seeing growth opportunities?
Torran Nixon
This is Tory. There are a lot of pieces in there. I’ll start with this. The pipeline is very consistent to what it was last quarter. And I think if you can recall last quarter, I talked a little bit about it. Q1 pipeline at the end was pretty consistent with Q4, except in terms of total dollars. Just that there was a shift. There was a reduction in the CRE pipeline and a likewise like amount increase in the C&I pipeline, and that has held steady.
So we continue to see a slight decrease in the CRE pipeline and kind of a matching number, a dollar amount increase in C&I. So feel good about this continued progress of focus on the C&I side and C&I front. But demand is relatively benign. There’s just not a ton of demand for lending opportunity anywhere. There are some pockets of real optimism. We recently did a survey with commercial customers throughout the west and done a very significant contrast between middle market customers and their optimism versus small business or smaller commercial customers.
So there’s some opportunity in the middle market side, but then less on the lower, the lower middle market and small business. In terms of loan demand, geographically, the west is still strong. I mean, companies are performing well. They’re still just kind of electing to use cash for some investment needs rather than borrow money. But I feel good about it. The teams are deployed. We’re really focused on full relationship banking. If we’re going to make loans to people, we want their deposits and we want the opportunity to provide services to create fee income for the bank. So I feel good.
I really feel we’re probably a low single digit loan growth number through the balance of the year. But I think we’re poised. When the opportunity exists for us in terms of more demand, we’ll be ready to go and get out there and make sure that we’re providing great service for our customers and bringing in new names to the bank.
David Feaster
That’s helpful. Within C&I, are these, are you seeing more opportunity with deepening relationships at existing customers, or are these new relationships that you’re bringing to the bank?
Torran Nixon
I would say both. There’s a major emphasis on expanding relationships that we already have. So new products, new services, a lot of fee income business. I talked about the fee income pipeline. I mean, if I look at treasury management, commercial card merchant services, international banking, I mean, those four products, those four solutions right there are big for us. We’re seeing a lot of activity.
We’ve had a lot of growth in that part of the fee income pipeline and in just production itself. So feel really good there. New names are a tougher road, but we’ve had some really good success in some of our de novo markets. But we’re also having success everywhere and the whole idea here is that we’re going to focus on our customers. We’re going to serve them really well, provide products and services for the needs that they have, and then there’s an outbound effort to make sure we can bring in a new names to the company.
David Feaster
Terrific. That’s extremely helpful. Thank you all.
Torran Nixon
Yep.
Operator
Thank you. One moment for the next question. And our next question will be coming from Brandon King of Truist. Your line is open.
Brandon King
Hey, good afternoon.
Clint Stein
Good afternoon.
Brandon King
So, in regards to credit quality and your targeted reviews, could you just elaborate further on, amount of the loan portfolio that you reviewed? I know you mentioned zero delinquencies, but any other surprises and any other takeaways that would be great to hear.
Clint Stein
No surprises, Brandon. I mean, I think everything is moving how we kind of expected. The higher rate environment, the high duration for longer, you see the impact and some of the smaller customers, HELOC delinquencies are ticking up. And our SBA loan portfolio continues to experience higher delinquencies and higher charge offs than we typically would see within the portfolio, though most of those carry some sort of a government guarantee.
So that’s a form of mitigant for us. But the biggest kind of success that I would point to, at least for me, is just our commercial real estate portfolio is just performing absolutely fantastic. The teams are laser focused, I would say first on portfolio management and staying ahead of, of any potential repricing and maturities. And second is kind of going out there and looking for additional business. And so as we see these repricing opportunities on the horizon, they’re already identified. They’re not surprised by them. If it looks tight, we’re the first ones out talking to them, and we address it ahead of time as opposed to being proactive. We are proactive as opposed to being reactive. Excuse me.
Brandon King
Okay. And in the reviews, did you include any reappraisals or updated LTVs, or is it mainly just kind of looking at what it value was?
Clint Stein
Yes, we would not reappraise unless there is an event of maturity or a downgrade into more of a classification type status. But what we do, do is we look at current rent rolls, and we kind of extrapolate from that, a form of evaluation, and we update the value internally, if you will, for that evaluation. So we feel good about the position of the portfolio and the numbers that we throw out there in the investor presentation.
They’re as current as we can make them and as accurate as we can make them. Based upon the information that we have we have seen some decreases, obviously, in value, but we’ve always employed a leverage adverse kind of posture, to underwriting. And so we feel really good about the portfolio and the loan to values in the event that we have to restructure some of these things as we move forward, which we don’t see presently.
Brandon King
Okay, very helpful. And lastly from me, just on fee income, particularly core fee income, there was some good strength there. Could you just speak to the momentum in those line items and kind of what’s your outlook over the back half of the year and beyond?
Torran Nixon
Sure. Hey, Brandon, it’s Tory. So those four big categories that I talk about, treasury management, commercial card, merchant services, and international banking, collectively, they’re up about 7%, quarter-over-quarter, and then year-over-year, they’re up about 14%. The two biggest movers are in terms of percentage or commercial card and international banking and I would categorize it this way. The fee income pipeline continues to grow every single day.
I think, I mentioned I’m plus more leads this ability to look at predictive analytics and help our bankers see a product or service that can provide a solution for a customer and gives them kind of a warm lead. We’ve had a lot of success in leveraging that and going out to our customer base and kind of walking them through what certain products and services will do to support their business and to help them become more efficient, more cost effective, and the pipeline, we’re very well received by the bankers and it’s even better than that.
It’s really well received by the customer base and they see it as a real positive and a real, very helpful for them. So it’s a pretty easy sale and so a lot of growth there. The pipeline is strong and very optimistic about that. I mean, there’s no reason why this can’t just continue with these kind of growth numbers because the activity just keeps picking up and eventually just kind of, it hits to the bottom line. It’s just reoccurring every single day.
Christopher Merrywell
Hey Brandon, this is Chris. I’ll add from the kind of the other side of the business that we talked about, the campaign in the spring, we’re seeing increased in merchant, the referrals that are now starting to book. And so merchant card revenues up and that’s a real positive sign.
And then the other one would be, it’s in our wealth management division. Our trust company is doing extremely well. We built a lot of connections with our, the new bankers and others in there and we’re getting a lot more referrals internally into that space.
So it’s good quality growth there. Assets under management are up considerably this year from new business being driven in. And then on our wealth advisor group, we talked back in the fourth quarter that we pivoted our platform over to Raymond James and that transition went through into the second quarter.
It’s now officially, I would declare it behind us. And those groups are now starting to see what we planned for was with a platform that had better technology and end user experience, we expected to see revenue increasing in that space. And that’s exactly what we’re starting to see and would expect that to continue throughout this year.
Brandon King
Thanks, I really appreciate the detailed response.
Operator
Thank you. [Operator Instructions] And our next question is going to come from Jared Shaw of Barclays. Your line is open.
Jared Shaw
Hi, good afternoon. Hey maybe just could you go back to the growth in residential non-performers? I think you referenced that coming off of COVID protections. What is that? Just loans that were delinquent that are now switching to non performing. And did that require a provision associated with that or is that separate?
Frank Namdar
Hey, Jared, this is Frank. Yes, that’s exactly what they were. They were loans that started to struggle sometime during COVID. And we employed modifications, deferrals to them. Our accounting group subsequently removed the flag for those loans and that’s what you see in the 90 plus category today.
Ronald Farnsworth
And Jared, this is Ron. No meaningful provision on that. A good chunk of that also is government guaranteed.
Jared Shaw
Okay. And then looking at mortgage banking, any sort of update on what to expect for that going forward? I guess maybe second quarter you got a little benefit seasonally, but how’s the outlook there?
Christopher Merrywell
Yes, Jared, this is Chris. I think it’s really settled into a really nice spot since the transition of it. It’s very consistent. Month in, month out, we’re seeing most of the volume, obviously, is being driven by purchases at around 69%, 70%. There’s still refi activity in there that comes in around 15%, 16% each and every month. And there’s a little bit of construction lines to perm that make up the remainder of it.
Most of it, as we had discussed about the strategy and where we were going, is more of a bank, a mortgage company within the bank. Excuse me; a bank apartment of the bank is the mortgage company. 80% of the production is saleable product with the remaining part going into the portfolio. So, yes, I know it’s settled in. I think the teams have done a really nice job. We’re seeing good internal referral activities. I couldn’t be happier with it.
Jared Shaw
Okay. And then just finally for me, the $7.7 million incentive comp reversal that you referenced, I guess, what were the triggers that caused that to be reversed?
Clint Stein
Yes, it’s part of the analysis that we did in terms of overall, as part of the expense initiative and looking at some of our compensation programs and being able to correlate those to driving shareholder value versus utilizing those as part of reinvesting and growing revenue streams in the future. So we had an accrual out there when we terminated or altered the programs, then we just didn’t have a need for the accrual, so we had to reverse it.
Jared Shaw
Okay. So should we think that a core run rate on sellers and benefits this quarter would be closer to that 152, 153 level?
Ronald Farnsworth
Hey, Jared this is Ron. With that $7.7 million, that’s be correct. But more importantly, $270.2 million would be a normalized level of expense for Q2, excluding that, because that won’t be recurring.
Jared Shaw
Okay. 270.2 for the overall expenses. Got it. Okay, thank you.
Ronald Farnsworth
For the second quarter on a normalized basis. Right. Eventually we’re going to get into our – and that’s just right on the bottom end of our 965 and 985 annualized range that we expect for Q4 less CDI amortization. So the driver there being the reinvestments Clint mentioned earlier.
Jared Shaw
Got it. Thank you.
Operator
Thank you. [Operator Instructions] And our next question will be coming from Jeff Jeffrey Rulis of D.A. Davidson. Your line is open.
Jeffrey Rulis
Thanks. Good afternoon. I wanted to talk about another question on the mortgage side. I thought at one point there was an effort to maybe look at minimizing the volatility within that line item in the fee income side. And I can’t remember if that was a legacy unquote thing or maybe shrinking the MSR portfolio. Is there any thought or effort to minimize that ahead or was that something that was in the past? Sorry, that’s…
Ronald Farnsworth
Hey, Jeff, this is Ron. Good question. And yes, very much that was, unquote historically, and we have reduced volatility within mortgage related fair value changes. For example, prior to the run up in rates, we didn’t have a hedge on the MSR, right so we benefited from that on the way up. Now we got a hedge on the MSR, so that’ll help protect no matter which way rates go in the future on that front.
So all with an eye towards just reducing, reducing volatility in many ways, in many cases, it’s fair value volatility. Just given which way rates move. No plans at this point to significantly reduce the level of MSR, I think you’re going to see a pretty steady state. And again, we’ve got that edge for any potential future rates down environment.
Clint Stein
Yes. Just to add to that, I mean, I think beyond just volatility in the mortgage area, really any part of our operation that’s volatile, I mean, seasonality is one thing, business cycles are another thing. But if it’s truly just something that’s volatile and creates noise, we’re going to take a hard look at those things.
And anything that has a negative implication on our ability to just be consistent quarter-after-quarter is going to get a lot of scrutiny.
Jeffrey Rulis
Got it. Thanks. And Clint, you kind of teased this a little bit, taking a look at some of your newer production in Denver, Phoenix, Salt Lake City. Is there. Have you guys put a dollar figure to that in terms of like year-to-date production that comes from? I just have a vague idea of what those newer locations you’ve talked about reaching breakeven, but wanted to get a sense for what is the loan production out of those relative to the total company?
Clint Stein
Yes, I mean, they’ve done a tremendous job and I’d say if they’re listening to the call, they’ll be disappointed if I don’t clarify that they’re beyond breakeven. And I don’t know that we’ve disclosed anywhere in terms of specific for, by geography, we. That’s a slippery slope, because then we, you know, we start thinking about all the other elements of our footprint but. So I don’t know if we really can give you any additional context unless Tory has something.
Torran Nixon
No, I would just say that other than just balances, it’s with a few people. So the expense base is pretty low, but they’re very, very talented, hardworking folks, and they’ve been able to bring new names into the company. They’ve got strong non-interest bearing and interest bearing deposits.
They’ve got good, strong, almost solely C&I loan balances and really good fee income. So they’re kind of carrying the flag of the bank in a great way on relationship banking in all of those new markets and starting from basically scratch, and very proud of the efforts that they’ve put in, the success that they’ve had. And it’s meaningful numbers.
I mean, relative to the rest of the company, it’s a smaller number, but it’s a meaningful number. And the ability to be able to go in and start from a dead stop and have success so quickly and to be profitable so quickly is a great thing.
Jeffrey Rulis
Got it. Lastly, Clint imagine if you look at open bank M&A, if that’s even an option, but you might be prioritized. Team lift outs or anything from an acquisition standpoint, is that anything you’re looking at?
Clint Stein
Yes. Our top priority is my prepared remarks. I said the company that we set out to create when we announced the merger in 2021, we’re running it today. So our top priority is to get the most out of this company and hopefully these last two quarters, and the efforts that you’ve seen with the execution of the expense initiative, the momentum that Chris and Tori have talked about on the business side that we’re starting to prove that out. So I think we still have some work to do.
But, we live it every day, so we know the strength of this company and the quality of the people that we have, that are out there every day taking care of our customers. So that’s our top priority. I mentioned earlier that we’re still attracting talent, and whether it’s a team lift out.
Tory mentioned the [indiscernible] team that is one of the new groups that we started in the past nine months or so. If you think about that, I don’t know. We probably interviewed 50 plus people, or looked at 50 plus people from that organization and took like, nine. It was so just because somebody’s out there doesn’t mean that they’re going to meet our criteria, how they go to market, how they drive value. But we do. We’re always looking at any opportunity that’s there.
I would say the lowest priority right now would be open bank M&A. I don’t know what’s going to happen with the election, and that process. And, we’re just now getting the scar tissue healed up from the hell that we were put through, in 2022, 2023, so never say never. But I just, I don’t think now is the time for that. We’ve got other priorities that are more pressing and I think will drive more shareholder value over the long run.
Jeffrey Rulis
Okay. Thank you.
Operator
Thank you. [Operator Instructions] Our next question will be coming from Chris McGrady of KW. Your line is open.
Chris McGrady
Oh, great. Thanks, Ron. Just a quick one on the fourth quarter expense range to annualized 965 to 985. Balancing what you did this quarter in the investments, is there any reason for us as analysts to lean on either side of the midpoint?
Ronald Farnsworth
I think at this point, looking into Q4 midpoint probably makes the most sense.
Chris McGrady
Okay. That’s all I have, thank you.
Ronald Farnsworth
You bet, thank you.
Operator
Thank you. That concludes today’s Q&A session. I would like to go ahead and turn the call back over to Jackie for closing remarks. Please go ahead.
Jackie Bohlen
Thank you. Lisa. Thank you for joining this afternoon’s call. Please contact me if you have any questions and have a good rest of the day.
Operator
Thank you for joining today’s conference call. You may all disconnect.
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