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Columbia Banking System Inc (COLB) Q1 2019 Earnings Call Transcript

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Columbia Banking System Inc  (NASDAQ: COLB)
Q1 2019 Earnings Call
April 25, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System's First Quarter 2019 Earnings Release Presentation. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session through both the telephone and the web. Instructions will be given at that time. (Operator Instructions). As a reminder, the conference is being recorded.

I would now like to turn the call over to our host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System.

Hadley S. Robbins -- President and Chief Executive Officer

Thank you, Natalie. Good morning everyone and thank you for joining us on today's call as we review our first quarter 2019 results, which released before the market opened this morning. The earnings release and a supplemental slide presentation are available at columbiabank.com. We had a strong first quarter as many of you know, we have a seasonal pattern to our performance. First quarter is typically our weakest during the year. We are very pleased with our results and see positive momentum building across our footprint. Loan production was a new first quarter record, the mix of our core deposit base remained stable and deposit costs were well managed.

The total cost of deposits was 18 basis points, which continues to provide us with an important low cost funding advantage. Our credit profile remains healthy and our loan portfolio is well positioned for navigating the economic cycle. Total capital is well above regulatory targets and when coupled with a dependable earnings stream we have the flexibility to exercise a number of alternatives and deploying capital, including funding an organic growth, ordinary dividends, special dividends, share repurchases, and investing in our business. On the call with me today are Greg Sigrist, our Chief Financial Officer who will provide details about our earnings performance and an overview of our share repurchase plan. Clint Stein, our Chief Operating Officer, who will review our production activity and highlight the status of some of our digital investments and Andy McDonald our Chief Credit Officer, who will review our credit quality information.

Following our prepared comments, we'll be happy to answer your questions. It's important that I remind you that we'll be making forward-looking statement today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filing and in particular our 2018 SEC Form 10-K.

At this point, I'd like to turn the call to Greg, to talk about our financials.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Thank you, Hadley and good morning everyone. First quarter earnings $45.9 million and EPS of $0.63 per diluted share was an increase from the fourth quarter 2018, and an increase of $0.08 compared to the first quarter 2018. First quarter net income was the second best quarterly earnings performance in our history. During the quarter, total loans increased by 6% on an annualized basis. Much of the growth occurred near the end of the first quarter. So we will expect to see a positive impacts to earnings in subsequent quarters.

The operating net interest margin of 4.33%, was essentially flat to the prior quarter. As an uptick in asset yields from the late December rate increase was offset by a modest increase in deposit rates and a seasonal shift in funding. In previous quarters, we have discussed, our asset sensitivity and our long-term approach to reducing our exposure to falling rates. We feel our interest rate strategy is prudent and better positions us to mitigate and eventual decline in rates.

The trade-off is the modest NIM headwind, but overall has improved bottom line performance and protect earnings should rates decline.

After moving the effects of acquisition costs that did impacted 2018 results. Non-interest expense decreased $1.8 million on a linked quarter basis, due in large part to items subject to timing differences. Compensation and employee benefit expense, was that mostly due to the discretionary 401(k) employer contribution and increase employer payroll taxes as tax resets.

Excluding acquisition cost of $4.3 million in the first quarter of 2018, non-interest expense is up $3 million or roughly 3.5% on a year-over-year basis. In the first quarter, we incurred $600,000 of expenses that was directly related to our digital initiatives. As more projects come online in the coming quarters, we will provide you with the appropriate visibility to discern between our operating run rate and the expense impact of our digital investments.

We do expect to invest somewhere between $9 million and $12 million in digital initiatives over the balance of 2019. Though some of that will be capitalized rather than hitting expenses directly. So it is difficult to tell you the quarterly expense impact in advance. We expect our non-interest expense from ongoing operations to continue in the mid '80s. We believe we have appropriately balanced the continued investment in our franchise with our long-standing commitment to a disciplined approach to expense management.

Increases in our expense base over the past year are directly related to higher production and asset levels. Our effective tax rate was 90% for the first quarter which was down modestly from the prior quarter and is in the range we would expect for a full year, which is 19% to 20%. As Hadley mentioned and you may have seen in our 2018 SEC Form 10-K, our Board approved a share buyback plan that authorizes the Company to repurchase up to 2.9 million shares. We do intend to incorporate share buybacks into our capital strategy when it is advantageous for our shareholders to do so. Our ability to buy back shares when it makes sense, what also impact the level are special dividend going forward. We are very pleased to have this additional capital management tool available to us.

At this point, I would like to turn the call over to Clint.

Clint Stein -- Executive Vice President and Chief Operating Officer

Thank you, Greg. Good morning, everyone. Throughout our history, we've been successful in retaining our top performing talent as well as recruiting highly experienced bankers in all of our major markets. Over the last several quarters, we've had the opportunity to add more depth by bringing new bankers onto our team and we're certainly seeing the results of their activities.

Deposits continue to be one of our differentiating strengths with 49% and non-interest bearing products. Our total cost of deposits is just 18 basis points. We experienced our typical seasonality with average demand deposits declining $217 million during the quarter. However, consistent with prior years, period in balances rebounded and were down only 89 million at quarter end.

As I stated in the earnings release, our bankers are doing an outstanding job of winning of winning new deposit relationships, resulting in a nice pipeline of prospective business. As Hadley mentioned, loan production for the quarter was $366 million which is our best first quarter on record. It is worth mentioning that historically first quarter tends to be the low production point in the year. Production for the last four quarters is over 1.5 billion and our loan pipeline remains to our satisfaction. Term loans represented $254 million of new production, our new lines accounted for 112 million. The mix of new production was balanced in terms of loan size. With respect to geography 53% of their production was generated in Washington, 27% in Oregon, 5% in Idaho and the remaining 15% in other states. We had a late spring this year resulting in line utilization remaining at seasonal lows to quarter-end. Prepayments and pay-off activity has continued to moderate from their elevated levels in 2018.

Too early to call it a trend, but the first quarter prepayments were in line with our normalized historical experience. The quarterly average tax adjusted coupon rate for new loan production was in line with the portfolio rate of 4.99%. Average coupon rates on mobile home production were lower this quarter, as we selectively chose to fund some public administration loans, that were priced very competitively due to their credit profiles. During the first quarter, C&I production was 58% or $220 million of the total production, which under percentage basis is consistent with prior quarters. The C&I portfolio grew by $71 million to $3.5 billion with the strongest growth in the public, retail and healthcare sectors. Commercial and Multifamily real estate loans, were up $71 million on (ph) $112 million new production. The growth was spread across the multi-family warehouse, condo (ph) and hospitality sectors. Overall, we are pleased with the growth in loans, especially given the weather related delay and our seasonal uptick in line utilization.

We recently announced the consolidation of three branches. Two in Western Washington and one in the Portland metro area. We intend to continue to provide banking services to our clients in these areas, through the combination of nearby branch facilities and our digital channel. We have an ongoing and disciplined process in place for reviewing our branch network and markets and these closure decisions were a result of that process.

Over the past few quarters, we are giving you some insight into our digital initiatives. In 2019, we will be introducing new platforms for our business clients and improving our transfer functionality via sale and transfer our products. We are also focused on strengthening our internal capabilities to expand the foundation for all digital operations.

We are moving purposefully and in a disciplined manner balancing speed and our overall vision. In part the record production, earnings performance and success at winning new business we have mentioned on this call, it's because we are starting to see the maturity and resulting increased adoption rates from some of our 2017 digital investments and their positive impact on our financial performance.

For example, our consumer online banking product brought online in July of 2017, has seen annual mobile deposit growth go from 3% before the new solutions to 40% currently. New online banking users have risen from less than 4,000 annually with the old platform to over 20,000 new digital users per year. In the fourth quarter of 2017, we rolled out our customer relationship, management and platform as a way of helping our bankers deepen relationships, provide an improved client experience. Since then, referral activities have increased across the bank by getting the client -- right banker cross line referrals, cross line referrals increased 37%. In summary, we've been hitting on all cylinders and through selective hiring the periodic new capacity in (Technical Difficulty) markets.

Now, I'll turn the call over to Andy to review our credit performance.

Andy McDonald -- Executive Vice President and Chief Credit Officer

Thanks Clint. Our first quarter provision for loan and lease losses of $1.4 million compared favorably to the $1.8 million in the prior quarter. This included provisions of $1.2 million for the originated portfolio. $150,000 for Pacific Continental and $100,000 for West Coast. Offsetting these provisions was a release from the Intermountain portfolio of $75,000. The (inaudible) for the quarter was principally driven by net charge-offs and to a lesser extent loan growth.

Problem loan migration was minimal and loss rates were essentially unchanged. As of March 31, 2019 our allowance to total loans was also essentially unchanged. As always, we'd like to remind folks that this ratio is impacted by our acquisition and associated loans that were recorded at fair value, embedded in those valuations is approximately $24 million of net discount for which approximately $17 million associated with the Pacific Continental portfolio, $5 million with the West Coast portfolio and $2 million with the Intermountain portfolio.

While net charge-offs drove the allowance for the quarter, they were relatively modest and we're centered in the originated and Pacific Continental portfolios. Across these portfolios charge-offs remain centered in commercial business loan. The charge-offs were fairly granular with no systemic issues or industry concentration.

In summary, it was a nice stable quarter, pretty much all of our metrics past dues, non-performing loans and problem loans, all remained essentially the same. So while we are obviously pleased with the performance of the portfolio, we remain cognizant of the fact that we are well into one of the longest economic recoveries in history and as such, we must remain diligent.

With that I will now turn the call back to Hadley.

Hadley S. Robbins -- President and Chief Executive Officer

Thanks, Andy. We're pleased to announce our regularly quarter dividend of $0.28 and special dividend of $0.14, which together constitute a payout ratio of 67% for the quarter, and a dividend yield of 4.81% based on the closing price of our stock on April 24, 2019. This quarter's dividend will be paid on May 22 to shareholders of record as of the close of business on May 8, 2019. I'd like to end by recognizing our employees commitments in all the communities we serve. This week is Colombia Bank's annual Melanie Dressel community commitment week. And our employees are out across all three states volunteering at nearly 60 different organizations, these commitments is at the root of our heritage and a source of pride for all Colombian Bankers.

This concludes our prepared comments this afternoon. And as a reminder, Greg, Clint and Andy are here to answer your questions. And now, Natalie will open the call.

Questions and Answers:

Operator

Certainly. (Operator Instructions) And our first question comes from the line of Jeff Rulis. Your line is open.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Thanks, good morning.

Hadley S. Robbins -- President and Chief Executive Officer

Good morning, Jeff.

Jeffrey Rulis -- D.A. Davidson -- Analyst

I like to -- the new call time -- the new early call time it just. Its a one time event.

Hadley S. Robbins -- President and Chief Executive Officer

So do we.

Jeffrey Rulis -- D.A. Davidson -- Analyst

So, I wanted to follow up on the expense side. Greg, I appreciate the detail on the digital spend, you said the remainder for '19. What was that figure again?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

We're expecting another $9 million to $12 million of investment in 2019. But again, not all of that will drop to the bottom line as we are still going through the chartering, our internal governance processes and figuring and negotiating with vendors. So some of that will get capitalized as well, Jeff. But that is the total investment level.

Jeffrey Rulis -- D.A. Davidson -- Analyst

So, you said the 600,000 in the quarter was that may be earmarked there were some offsets. Is that, would that be appropriate percentage of I guess what will fall to the bottom line and maybe that's tough to say. But with Q1 indicative or is this just going to be a lumpy items?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Well, I think for the balance of 2019. I would expect that $9 million to $12 million, a fair chunk of that will hit the bottom line. So, I think it's probably somewhere between 70% to 80% will hit the bottom line over the next three quarters, but it's going to be lumpy over the quarters Jeff, is the way I'm thinking about it. This is really a quarter for us to go through our internal governance and really start to hone in on who our long-term partners are going to be, until you really start to work with contracts with those partners and it's really going to take a bit of time and give more granularity until we've done that.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Got it. So the, -- if I just trying to do the math, this could be $2 million to $3 million a quarter for the rest of the year. So that's going to increase meaningfully from 600,000 this quarter?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Yeah, I mean, versus the 600 this quarter. I do expect it to float up over the balance of the year and as we get into next year, we're going to start to see the benefits of the digital both in terms of right now as we go through this. And I think we've talked about this before. For some of the platforms we are paying for the existing platform. At the same time, we're investing in the new platform. So we're going to start to see the benefits of that migration next year. And then just some of the more direct benefits as well. (inaudible) go ahead.

Clint Stein -- Executive Vice President and Chief Operating Officer

I'll just add. I think you hit the nail on the head and you said, it's just going be one of those items it's going to be lumpy and it's similar to -- we'll go through an acquisition and we have acquisition expense a hit. We have an idea and we forecast it until we actually get there. So what we really want to focus on -- making sure that we provide you and others with what our operating run rate is. And then what that lumpiness created by these digital investments in that being. (Multiple Speakers)

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. Like you said, you gave us the guidance on the mid-80s. So that's baked into the guidance there?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Why we say the mid '80s again, it's really our operating run rate. I think you should think about digital being incremental to that. So I think to Clint's point. We're really going to try and focus on our run rate, which we feel is quite stable and directional proportionate our ability to generate loan production. So I think we're comfortable giving guidance on that basis and then to add lease point we will continue quarter-on-quarter to give you some outlook going forward.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Great, thanks and then the loan growth, -- I think the previous guidance was low-to-mid single digit. It kind of crush the first quarter number. Does that adjust your expectations for the full year instead, more toward the high end?

Andy McDonald -- Executive Vice President and Chief Credit Officer

(inaudible) Jeff, what is the former guidance was based on trends that we saw with pay and pay off and we bound to really had concerns about our level of production, which is something that we control. But as we see trends kind of shifting away from the headwinds we have. It will take a couple of quarters, I think before we're satisfied that kind of trend is behind us. So, I don't know, Clint, what do you think?

Clint Stein -- Executive Vice President and Chief Operating Officer

I agree, the headwinds we talked about most of last year have minimized this quarter. But I'm cautiously optimistic that it's the start of a trend, but I want more than one quarter behind us before I'm ready to take that stake in the ground and say that, that's where we're at. From a production standpoint though we're very satisfied.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. And too early to tell of that lessen payoff activity is it checking the temperature out in the kind of the business community. Could you just pointed in anything and say it well, maybe it was lighter, it's just sort of timing and it's too early to say.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

It's too early to say. I'll give you one counterpoint to the normalized payout activity is one of the themes, that we hear from our customers is that they are cautiously optimistic about their own businesses. But they worry about the economy and where we're at this late in the cycle. And so that type of concern could cause some consolidation in additional sales that we've experienced really since we've got out of the downturn and so we didn't see as much of that this first quarter. It could pickup in the ensuing quarters or maybe not.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. Appreciate it. Thank you.

Operator

And our next question comes from the line of Matthew Clark. Your line is open.

Matthew Clark -- Piper Jaffray -- Analyst

Hey, good morning.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

How are you doing? Matt.

Matthew Clark -- Piper Jaffray -- Analyst

Just on the pay-offs. Could you quantify what they were this quarter?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

In terms of dollar amount, is that what you're looking for?

Matthew Clark -- Piper Jaffray -- Analyst

Yeah, I think there are -- I think, yeah, dollars I think there were 267 million last quarter.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Well, it was in the current quarter, what I'd call prepayment activity was 100 -- just under $119 million relative to the fourth quarter that number was $161 million. And when we look at a year-over-year basis, first quarter of 2018 prepayments were by the $144 million. If we look at it as a percentage of the of the portfolio, we're actually, this quarter, lower than what we were in 2017 and 2018 by about 20 basis points. So, I think that, that -- that's part of the cautious optimistic -- cautiously optimistic statement I made to Jeff's question is that -- it's actually lower than where we were and so there could be a bit of a timing issue. We did have some significant weather during the quarter tended to slow things down. I don't know -- the extent that it impacted this number as well.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then I think you mentioned line utilization was still around seasonal lows. Can you just, can you have that percentage as well.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

I think it's about 49%. It's pretty much flat with where we were at the end of the year.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then just on the core NIM, if you exclude the purchase accounting accretion and you think about the seasonality on the funding side that occurred this quarter. You get some of that core funding back maybe pay-off some of the borrowings and, is your expectation that you might see a little relief in the core NIM here in 2Q, before stabilizing again or some modest pressure?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

No, I think you're thinking about it, right, especially with the seasonality on the funding side, and a lot of the production, we had in the first quarter close late in the quarter. And just with a strong pipelines. I would expect that, combined with line utilization coming back with the weather to be good upward lift. And as you know, we've been able to manage our deposit cost very closely. So I'm cautiously optimistic over the next couple of quarters.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Operator

And our next question comes from the line of Jon Arfstrom. Your line is open.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Hey, thanks.

Hadley S. Robbins -- President and Chief Executive Officer

Always Jon.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

How are you doing?

Hadley S. Robbins -- President and Chief Executive Officer

Good.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Couple of questions for you, just go back to the loan growth number the period end loan growth. Are you guys surprised at all that number. It just seemed unusually strong not being critical at all, but it just seems like it's a really, really solid number for you.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

It's a very solid number. And I think that we -- rewind a lot of the discussions that we had last year, regarding the headwinds that we had. Some of the close -- the delayed closing of Pacific Continental and the time that it takes to rebuild the pipeline there. We already addressed the prepayment headwinds, the new teams that we were able to bring on, selectively in some of our key markets and getting their pipelines built. And then the ability or the opportunity that we had to bring in some fresh talent with some departing bankers and we've seen all of those things come to fruition in the first quarter.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Okay, good -- good numbers. On the digital programs that you're talking about for 2019. I think we understand the spending piece of it and it's hard to pin down, but you talked about the 2017 program starting to show success. And when you look at the six programs you lay out for 2019, which one or two, do you think are the most critical or most important for you to complete?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

All others probably want to jump in and so, I'll start with the easy one. And then as it gets more difficult to differentiate between them I'll kick it over to Hadley.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Okay.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Our business online banking version to me is the most critical as a commercially oriented organization, what we see the capabilities of that platform and when we layer in. What we've experienced to date with the consumer online banking platform, which is one of the ones that I mentioned in my prepared remarks.

I think that not only is it a critical application for retaining our existing client base deepening in those relationships. But also our ability to go out and compete for middle market business.

Hadley S. Robbins -- President and Chief Executive Officer

Well, actually I think that treasury management conversion that we go -- that was going forward, which is a critical one because it creates a very contemporary products for our key depositors, and at the same time that offers us an opportunity to provide a higher level of treasury management services to our small business clients, which would, -- we'd like to build going forward in a more direct way and we also have some payment technology that's coming forward, which is important to us. We're going to introduce (inaudible) and think that will certainly help our customer base through as well we're bringing the products that they need to them.

And some of the projects that are going on that, that don't have the application sizzle to them are the hard work that's going on behind the scenes to position the bank's operations to be much more customer focused and frictionless as we work through creating efficiencies and at the same time and making our services faster and more less complex for our customers. So those are the initiatives that are kind of unfolding and they'll take awhile to get introduced and stabilized. I'm very convinced that will help our performance long-term.

Clint Stein -- Executive Vice President and Chief Operating Officer

And the only one I would incrementally add because I think we all have our favorite -- has we really worked to strengthen the internal capabilities and really set the foundation for all the digital operations. I think that as we roll to 2019 and into 2020s is also incredibly critical.

Hadley S. Robbins -- President and Chief Executive Officer

We will also start work and be very close to completing before the end of the year on, online account opening and hopefully in 2020, our online small business capabilities as well.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Okay. And then just last -- last follow-up on that. You've talked about the $9 million to $12 million, Greg, but longer term, do you feel like there are potential expense offsets, maybe changed the rules of some people to be more revenue generating and does this take some of the burden off the back office?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I think that the spend itself combined with -- creates capacity that hopefully we are either generating revenues or reducing to your point, some of the friction. We're also, just broadly speaking, focus on operational efficiencies, Jon. So, you know, we absolutely see opportunity to have a meaningful return on that investment as we head into next year.

Andy McDonald -- Executive Vice President and Chief Credit Officer

Just add to that, we've consistently reinvested in our business over our 25 plus year history. It -- that's continuing, it's just the nature of the investment is different rather than investing in expanding brick and mortar locations, it's really into more digital area and we are able to optimize our branch footprint and achieve some offsets. And as I mentioned on the start of the call, we have three pending branch consolidations right now, and as the expense levels and branch traffic counts continue to change, we'll find that balance. But in general, it's not a huge spend story. I think it's a continuation of what we've been doing it's just a different type of expense -- its migrating from the occupancy. And in some cases, there will be some efficiencies on the personnel side as well into more of a digital spend.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. Thanks for the help. I appreciate it.

Operator

(Operator Instructions) Our next question comes from the line of Jackie Bohlen. Your line is open.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Hi, good morning everyone.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Hi, Jackie.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

I wanted to -- turn to capital management, just given the discussion in -- of the buyback. And then the specific highlighting in the press release. I know that the special dividend policy has been more what you look for in the past and I wanted to get your thoughts on how those two will play together, if you might lower at special dividend and repurchase shares, if you might switch more to a buyback, if it's going to be very specifically driven by stock price. Just how you're thinking about those two together?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Yeah, I mean, let me start and Hadley can jump in. But he sees fit, but obviously any buybacks are dependent upon the price point and making sure that -- the executions at a level that makes sense for our shareholders quite frankly. So, one of the challenges thinking about it, is with that forward look in terms of what's going to happen to the share price and the ability to transact at levels that make sense. To the extent that we are able to buy back shares, but I do think directionally it would cause us to look at that overall level of special dividends. At the end of the day our payout ratio for the quarter between the rigor and the special dividend was I believe 67% in that neighborhood.

We don't want to be in a position where we're taking that payout ratio above 100% over a longer horizon, Jackie. So, we're absolutely going to be looking to see what our experience is on the buybacks. And using it to calibrate the special going forward.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, so more information I guess on the future as we see how pricing levels are and how that unfolds?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

We have quarter-on-quarter conversation certainly internally and I would expect us to have the conversation with you as well.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. And then a question from a loan perspective, it sounds like most of the pruning that took place last year is now complete. Is that a fair assessment?

Hadley S. Robbins -- President and Chief Executive Officer

Well, I think it's an ongoing discipline and it's something that we're always looking at the portfolio making decisions about it and I'm pretty comfortable with the activities that have taken place and we haven't seen systemic move of any kind within the portfolio. With regard to risk with migration, but I'll turn it over to Andy.

Andy McDonald -- Executive Vice President and Chief Credit Officer

Yeah, I would just echo Hadley's comment that -- we certainly saw a lot of institutions being aggressive in the marketplace in terms of trying to build assets on their balance sheets and so we felt that was a good opportunity for us and so some of the printing activity may have been a little bit higher than normal. I don't think it was substantially higher as our bankers, here is the things that I always say the biggest key to credit quality is who we choose to bank.

Second thing, is we need to monitor those that we choose. And then thirdly, which is not the fun part of the business, but we do have to actively prune clients that for whatever reason choose to take their businesses and directions that we're not comfortable with or their performance is one that we are uncomfortable with. So in that case we (inaudible) to part amicably, it's just business.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, that's good color. Thank you, Andy. And then just one last one, in terms, of the advertising expense line. I know you gave good color on how you expect the digital spend to go and then outside of that just operating expenses, but how are you from that line item in particular, how are you expecting that to go in the next quarter or so. Just given past seasonal trends?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Yeah. I'll maybe start and ask (inaudible) to jump in. I mean, I would just say as we roll out our digital initiative, Jackie. There's certainly going to be an element of digital marketing associated with it. You know off the top of my head, I'm not sure there's really range or any incremental thought I would give you other than the fact that it is going to be part of our -- digital strategy going forward.

Hadley S. Robbins -- President and Chief Executive Officer

Yeah. We'll have some quarter-by-quarter calls on that, but overall I look to last year for the guidance on where we plan for (inaudible).

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. Great. Thank you everyone.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Thank you, Jackie.

Operator

Our next question comes from the line of Gordon McGuire (ph). Your line is open.

Gordon Mcguire -- Stephens Inc. -- Analyst

Good morning or good afternoon over here.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Good morning.

Gordon Mcguire -- Stephens Inc. -- Analyst

So, Clint, the new production yields of 499 basis points. You mentioned there was lower because of the public administration funding. Is there any way you could strip out what the yields might have been if those hadn't funded, just trying to get a sense of new production outside of those?

Clint Stein -- Executive Vice President and Chief Operating Officer

Yeah, we can. Yeah. I don't have the detail in front of me to do that. I think it was about $60 million of the production that accounted for that, but we can certainly follow-up with you offline and give you the number or what the coupon rate was, excluding the public finance.

Gordon Mcguire -- Stephens Inc. -- Analyst

Great. That would be great. And then it looks like you completed the securities leverage strategy earlier this quarter. Do you have the total balances that you added from that? And maybe what the duration and the average yields on those purchases were?

Clint Stein -- Executive Vice President and Chief Operating Officer

Well, I would say we really kind of filled up the bucket late into last year and into this year and we are at the level we would expect to be, which is roughly $500 million. And its really, I think if you get, you know its borrowing overnight and then investing into securities products that will perform all rate down environment. The rate over and I don't actually have the rate overnight with me, I can tell you the differential between the overnight borrowing rate and maybe you can back into it and what we were earning on those assets is about $1 million of net interest, a quarter, that drops to the bottom line.

Gordon Mcguire -- Stephens Inc. -- Analyst

Okay. And just on the securities balances from here. Would you expect that to decline over time as you -- if you need them to deploy liquidity into loan growth or do you think you can still kind of build the balance sheet growth out of those?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Well, I think that's a great question and one -- it's the discussion we are having internally and as we sold securities kind of late in the first quarter it was consciously to fund loan growth, to be honest. So you would have seen our loan to deposit ratio ticked up a little bit up to 82, I believe for the end of the quarter. So, I think part of the conversation is around what happens with the seasonal deposit outflows. And over time, I think we would be comfortable seeing that loan to deposit ratio moved up a little bit.

Gordon Mcguire -- Stephens Inc. -- Analyst

Okay. And then lastly just clarification on the 9 to 12 million investments this -- that was on a annualized basis or was it quarterly?

Clint Stein -- Executive Vice President and Chief Operating Officer

No, that's what we would expect over the balance of the remainder of 2019.

Gordon Mcguire -- Stephens Inc. -- Analyst

Okay. And then how much of that would be more of consulting fees that would be out of the run rate once you're finished with the projects or something that kind of stays in the expense base. I'm just try to figure out what 2020 expense adds from this could look like?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Yeah, I'm not sure there's going to be much of the consulting spend in that quite frankly. A lot of it just gets down to how you negotiate the contracts with the vendors. There will be some component of it that could be capitalized and then become part of the run rate going forward. But to the extent we are replacing existing platforms even now to takeout the costs that was already there. So I think the detail, you're looking for is really important and I think it's part of what we would plan to keep coming back quarter-on-quarter and giving better transparency on.

Gordon Mcguire -- Stephens Inc. -- Analyst

Okay, great. Thank you guys.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

And our next question comes from the line of Aaron Deer. Your line is open.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Hey, good morning, guys. I'm just following up on that point. To the extent that there is cost that are coming out that, well -- that 9 to 12 is a gross spend, right. So you see -- you could have either some costs that go away or maybe there's capitalized software expenses that might be included in that, anything like that would add additional noise?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Well, and I think, I talked about it a little bit last quarter. We certainly have a number of platforms including the treasury management platform that Clint and Hadley talked about we're paying for the existing platform today, and as the new platforms come online, we will start dropping off the run rate associated with this existing platform. I'd have to look back at last quarter's notes Q&A to give you the exact number on it, but we certainly expect to see sales of that nature, start to filter in, in the fourth quarter of this year and then into next year and I think to Clint's point as each digital platform comes online we do expect to see the benefits downstream and have a return on those investments that really start to trickle in, into next year.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay. And then, Andy you sounded pretty pleased with the, the credit position. But given the very wet spring that -- Pacific Northwest had this year -- has -- if any, if you had opportunity to kind of check in with some of your Ag producers and any crop types or anything that are causing any concern at this point?

Clint Stein -- Executive Vice President and Chief Operating Officer

Yeah. The late spring is going to cause some issues just like they are in the Midwest. The farmers are getting into the ground later. So, it's certainly going to impact potatoes and onions, especially potatoes. They're contractually has to be taken out of the ground, so that the world doesn't run out of french fries. So that means that the payday are going to be smaller because they will have as much time to grow and so yields will be down, so we're analyzing that relative to farmers budgets. Also the cold weather and the snow lake is going to impact cherries and apples, simply because those trees now are kind of behind the curve as well. (inaudible) which areas you always try to get into the grocery stores for the July 4th, red, white and blue and all that.

So, we would anticipate that the Ag portfolio, which started to show some healing say two, three quarters ago, will probably migrate back to where it was, that won't be a material change for us, but we will have to continue to deal with it.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay, that's helpful. And then lastly, just, it sounded like most of that kind of deposit activity that we saw this quarter was more kind of seasonal in nature, but to what extent have you seen any changes in consumer behavior or increased demand for exception pricing that sort of thing that could cause us to see any sort of sudden increase in deposit costs going forward?

Clint Stein -- Executive Vice President and Chief Operating Officer

We continue to -- throughout the quarter, we continue to have a lot of outreach with our larger customers, and we did make some rate concessions and I think that later in the quarter, the frequency of things at least hit my desk slowed, but it's still there, they're still -- there still at the risk for our continued pricing pressure for deposits. But I'll also add that we had a lot of success with winning new relationships and it's not just it's obviously not going out competing on price. But it's our service the expertise that we bring to the table, our product set. All of those things. So it's a very competitive environment, but I think that we have -- we have a very solid team of bankers that are not only defending their existing portfolios, but also going out and winning the business.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay. That's great. Thanks for taking my questions.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Thanks.

Hadley S. Robbins -- President and Chief Executive Officer

Thanks.

Operator

And our next question comes from the line of Matthew Clark. Your line is open.

Matthew Clark -- Piper Jaffray -- Analyst

Hey, just on expenses, next year. It does sound like there's some relief coming later this year and into next year. But maybe thinking about it a different way. Do you still expect to achieve that mid '50s efficiency ratio at some point next year?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Yeah, I think, into the next year with everything we talked about, I certainly think that's the target we're shooting for. We're going to continue to focus on operational efficiencies, Matt. And yeah, I think that's the right target.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then the tax rate just kind of hung in closer to 19% more recently is 19, a good number to use going forward?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

I may be blended with last year's rate or maybe look at last year's average rate for the full year is probably the better barometer, Matt.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then the business?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Which I will building that range. Go ahead, I'm sorry.

Matthew Clark -- Piper Jaffray -- Analyst

Yeah, it's in that range. Okay. And then on the business and occupancy tax expense just bumped up this quarter after being and within a tighter range, was there anything unusual in that item or is that a good run rate?

Clint Stein -- Executive Vice President and Chief Operating Officer

Yeah, there was a little bit of unusual activity. So we had a unfavorable interpretation from -- I believe the city of Seattle on how we calculated or B&O tax and so there is a catch-up period, and I don't have the exact number in front of me. But it's probably the majority of that delta that you're seeing there.

Matthew Clark -- Piper Jaffray -- Analyst

Thank you.

Clint Stein -- Executive Vice President and Chief Operating Officer

Roughly 400,000.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Operator

And our next question comes from the line of Don Worthington. Your line is open.

Donald Worthington -- Raymond James Financial Inc. -- Analyst

Thank you. Good morning, everyone.

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Good morning.

Clint Stein -- Executive Vice President and Chief Operating Officer

Good morning, Don.

Donald Worthington -- Raymond James Financial Inc. -- Analyst

Just to had maybe one more and that was. What's your current thoughts might be on M&A as a way to deploy capital?

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Well, it's always in our thoughts and it's an ongoing part of the strategic thinking that we have and the way that we're thinking through a lot of M&A related opportunities is simply, we've got a significant amount of investment that we're putting into our existing bank. And that -- its a dedication not only of dollars, but a dedication of resource that is applied to them. And so if we're considering M&A, it's going to be strategic benefit to the shareholders that drives accretion a level that within -- so hopefully is above mid-high-single digits. And so that puts us in a range where we're looking at -- much larger banks and there are fewer and fewer M&A opportunities in our existing footprint. Although we will be interested in any that come available, but it seems, I though -- the current time those opportunities have yet to arise and so we'll be prepared when the time comes. If we have that opportunity. We have talked about looking at expanding the footprint thinking of California, particularly Southern California that remains a conversation that we have internally. And we would consider going well, excuse me, it's Northern California. And moving a bit South in the Valley as far as there's reliable water. But it's a different, it's a more difficult proposition for us simply, because we don't have the ability to get the takeouts that you would normally get within your footprint, which makes your ability to provide a price that competitive within the market competitor. As competitive as it take it put on the table. So it's ongoing, it's conversation, we want to be ready for our capital -- levels that would put us in position to do it and we have the interest. But one of the things that we think a lot about is the discipline and we don't want to overpay. So we're thoughtful about it.

Donald Worthington -- Raymond James Financial Inc. -- Analyst

Okay, great. That's great color. Thank you.

Operator

And there are no further questions at this time. Now, I would like to thank everyone for joining us today and we hope you found this webcast presentation informative. This concludes our program and you may now disconnect. Have a great day.

Hadley S. Robbins -- President and Chief Executive Officer

Thank you.

Duration: 52 minutes

Call participants:

Hadley S. Robbins -- President and Chief Executive Officer

Greg Sigrist -- Executive Vice President and Chief Financial Officer

Clint Stein -- Executive Vice President and Chief Operating Officer

Andy McDonald -- Executive Vice President and Chief Credit Officer

Jeffrey Rulis -- D.A. Davidson -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Gordon Mcguire -- Stephens Inc. -- Analyst

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Donald Worthington -- Raymond James Financial Inc. -- Analyst

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