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Edited Transcript of COLB.OQ earnings conference call or presentation 30-Apr-20 5:00pm GMT

Q1 2020 Columbia Banking System Inc Earnings Call

Tacoma Jun 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Columbia Banking System Inc earnings conference call or presentation Thursday, April 30, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew L. McDonald

Columbia State Bank - Chief Credit Officer & Executive VP

* Christopher M. Merrywell

Columbia Banking System, Inc. - COO & Executive VP

* Clint E. Stein

Columbia Banking System, Inc. - CEO, President & Director

* Eric J. Eid

Columbia Banking System, Inc. - Executive VP and Chief Digital & Technology Officer

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Conference Call Participants

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* Gordon Reilly McGuire

Stephens Inc., Research Division - Research Analyst

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jon Glenn Arfstrom

RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Clint Stein, President and Chief Executive Officer of Columbia Banking System.

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [2]

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Thank you, Tamera. Good morning, everyone, and thank you for joining us on today's call as we review our first quarter results, which we released before the market opened this morning. The earnings release is also available at columbiabank.com.

I want to begin the call today by thanking our 2,200 bankers who, despite tremendous disruption to their professional and personal lives, have joined together to support each other and serve our customers, communities and shareholders as the COVID-19 pandemic has evolved. The Puget Sound region entered into the pandemic earlier than other parts of the U.S., with the first coronavirus death reported on February 29. We developed a detailed pandemic plan many years ago and most recently tested it through a bank-wide exercise in December of 2018. It's a phased plan, and we began to execute against the first phase in early January. Since then, we've continued to follow our plan, proactively planning for additional escalation at predetermined trigger points.

Early on, our bankers were in direct communication with our clients to understand their individual challenges and work through options to provide relief for their businesses and families. We are a community bank at heart, and I believe that our bankers' empathy, compassion and support has and will continue to be our most valuable currency.

Columbia Bank is well positioned to handle the impact of COVID-19 and its ensuing market disruptions. This is different from the Great Recession of 2008 and 2009 in that it's not a financial crisis but a public health crisis with serious economic ramifications that are still evolving. The strength of our balance sheet, credit profile, liquidity and capital position, along with our proactive interest rate risk strategies and sensible expense management will serve us well as we weather the economic consequences of COVID-19.

We started off the year with tremendous momentum, and you can see the impact throughout our financial statement line items. EPS declined by $0.44 on a linked quarter basis due to the related credit loss provision expense of $41.5 million. On a preprovision basis, this was the fifth best quarter in our history in what is typically our seasonally weakest quarter. While net income and EPS were significantly impacted by the CECL provision expense, our bankers remained outwardly focused and produced strong loan and deposit growth during the quarter while reducing noninterest expenses. Absent the impact of COVID-19, it would have been an outstanding quarter.

On the call with me today are Eric Eid, who until this past Monday was our interim Chief Financial Officer; Chris Merrywell, our Chief Operating Officer; and Andy McDonald, our Chief Credit Officer. Following our prepared remarks, we'll be happy to answer your questions.

Let me remind you that we may make forward-looking statements during the call. For further information on forward-looking comments, please refer to either our earnings release, our website or SEC filings.

At this point, I'll turn the call over to Eric.

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Eric J. Eid, Columbia Banking System, Inc. - Executive VP and Chief Digital & Technology Officer [3]

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Thank you, Clint. First quarter earnings of $14.6 million and earnings per share of $0.20 included a CECL Day 2 provision for credit losses of $41.5 million. After factoring out the significant provision expense, quarterly pretax earnings were our best first quarter on record. Pretax preprovision income was $59.4 million and was $1.3 million higher than the first quarter of 2019. Net interest income for the first quarter was $122.4 million, a decrease of $2.4 million on a linked quarter basis and an increase of $1.4 million from first quarter 2019. The linked quarter decline in net interest income was due to lower loan income from the reduction in the interest rate environment, 1 day less of earnings and an increase in interest paid on FHLB advances. This was partially offset by $1.9 million of interest income and discount accretion related to the early payoff of 3 securities. The increase in short-term funding costs was mostly due to a decline in average deposits, although period end deposits increased during the quarter.

The operating NIM of 4.02% was down 7 basis points on a linked quarter basis, primarily due to lower loan yields. Our cost of deposits continue to be industry-leading at 14 basis points, down 7 basis points on a linked quarter basis. Total deposits ended the quarter at $10.8 billion, up $128 million from year end, primarily due to an increase of $105 million of public funds. Our typical seasonal pattern is for little to no deposit growth in the first quarter.

At March 31, 49% of our loan portfolio was fixed, 16% was at floors, with another $500 million or 6% protected by our interest rate collar. The result is 71% of our loan portfolio is protected from further rate declines.

Our liquidity position continues to provide us balance sheet capacity to meet funding needs. Overall, we have access to $4.5 billion of liquidity, primarily through our $3.5 billion investment portfolio, of which $3 billion are investment-grade, readily marketable and not pledged on any borrowing base. Additionally, we have $1.5 billion unused borrowing capacity with Federal Home Loan Bank and correspondent banks.

Noninterest income of $21.2 million was down $600,000 from prior quarter, principally due to decrease in deposit account and other fees, partially offset by an increase in loan fees. Compared to first quarter 2019, noninterest income was down $489,000 primarily due to lower deposit account fees and net securities gains, offset by higher loan fees.

Noninterest expense was $84.3 million in the first quarter which was a decrease of $2.7 million on a linked quarter basis. On a year-over-year basis, noninterest expense was actually down $429,000. We anticipate our expense run rate to continue in the mid-$80s million as we handle expenses associated with COVID and continue to invest in our future. Our core noninterest expense ratio was 2.41% for the quarter, down from 2.53% in the fourth quarter. Our expense ratio compares favorably to the 2.60% reported in the first quarter of 2019.

Our effective tax rate for the quarter was 18.1%, which compares to 20.5% on a linked quarter basis and 19% for first quarter 2019.

At this point, I'd like to turn the call over to Chris.

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Christopher M. Merrywell, Columbia Banking System, Inc. - COO & Executive VP [4]

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Thank you, Eric, and good morning, everyone. To echo Clint's opening comments, we have shifted the way that we work to serve the immediate and critical needs of our clients and communities, while at the same time, keeping our employees, clients and communities safe. Our production and back office teams have been outstanding as they worked around the clock to assist clients with payment forbearance and other relief programs, including the SBA Paycheck Protection Program. The teams have had to pivot very quickly as the regulations have evolved and have been successful in guiding our clients through the process. As a result, we believe that Columbia is positioned to participate in the Paycheck Protection Program at levels that are far in excess of our relative market share.

First quarter saw solid loan and deposit growth in spite of the economic shutdown. Deposits rose by $128 million during the quarter, and the mix remained at 59% business and 41% consumer. The increase was predominantly in the public funds and on the retail side. We experienced our typical deposit seasonality as retail clients withdrew funds to pay down credit and other expenses and then built them back up towards the end of the quarter.

Our deposits -- our cost of deposits of 14 basis points continues to be lower than our peers, reflecting the strength of our noninterest-bearing deposit base. On the interest-bearing side, we immediately moved to reduce rates after the 150 basis point Fed interest rate drop in March, and deposit rates are back at levels last seen in 2017. We continue to believe that our relationship-based approach is a key differentiator, and our clients rely on this as much as on any deposit interest rate available in the market.

Loan balances grew by $190 million on -- an annualized increase of 9%. New loan production was $331 million, and increased line utilization was $120 million during the quarter.

In line with the industry's first quarter's increase in line utilization, it was predominantly in the C&I revolving lines, increasing from 49% at year-end 2019 to 51.6% at the end of the first quarter. New loan production was mostly centered in CRE, 39% or $128 million; and C&I, 38% or $126 million with approximately 1/3 in the real estate rental leasing sector, followed by the construction, health care, hospitality and agricultural section -- sectors. This was similar to the first quarter of 2019 where production was centered in the same sectors as well as public administration.

It's worth noting that agriculture is now presented separately in our financial statements, previously, it was a component of C&I loans. Agriculture new production for the quarter was $32 million.

Term loans comprised 78% of the production, whereas lines were 22% of the total. The quarterly production mix was 68% fixed, 28% floating and 4% variable. The overall portfolio mix is now 49% fixed, 34% floating and 17% variable.

New loan production throughout the quarter was booked at an average tax-adjusted coupon rate of 4.32%, which is lower than the overall portfolio rate of 4.44% as of quarter end. The overall portfolio rate declined 25 basis points during the quarter with C&I down 39 basis points and CRE down 11 basis points.

We are continuing to invest in the business. As we have said in prior calls, we expect improvements in our peer-to-peer and bank-to-bank money transfer capabilities, online deposit account opening and back office small business lending capabilities to go online later this year or in early 2021.

Now I will turn the call over to Andy to review our credit performance.

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [5]

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Thanks, Chris. The increase in provision under CECL of $41.5 million is primarily due to a deteriorating economic forecast resulting from the COVID-19 pandemic. We use IHS Markit for our economic forecast. And when compared to the estimate at the beginning of the year, as you can imagine, it has changed quite a bit.

In general, our forecast anticipates an annualized reduction in gross domestic product in the second quarter approaching 28% to 30%, relatively flat performance, after that, with the following quarter beginning to see a rebound. Therefore, the change in the forecast accounted for about $34 million of our provision, and the rest was due to negative migration that occurred in the portfolio.

NPAs clicked up a bit to 34 basis points, however, this was not related to COVID-19 impact. The increase was in nonaccrual loans represented by borrowers who had been under stress well before COVID-19 issues and related impacts came to fruition. Past due loans for the quarter were 23 basis points, and net charge-offs annualized were also 23 basis points for the quarter. Therefore, your standard credit metrics for the quarter were very acceptable.

On the risk-rating front, loans rated watch or below increased approximately $450 million during the quarter. We saw watch loans increase $126 million, going from $184 million to $310 million. Special mentioned loans increased $265 million to $317 million, and substandard loans saw an increase of $65 million and are now around $304 million in total. These changes increased our watch and below risk ratings from 5.4% to 10.4% of total loans. Many of these downgrades occurred in portfolios that we believe will be quickly impacted by COVID-19 measures.

Clearly, these are unprecedented times. The rapidly changing environment we are operating in today has dramatically changed the bank's assessment of credit risk. As with the Great Recession, we believe it is in the best interest of all of our stakeholders for us to get out in front of this by focusing on the industries we believe will be some of the first to exhibit stress. As such, it is only prudent to acknowledge these risks, and we believe the provision taken in the quarter and the assessment of risk ratings undertaken prior to quarter end demonstrate our resolve in doing so.

We have also granted 2,600 requests for payment deferrals amounting to about $1.2 billion in total loans through April 24. We believe these deferrals are in the best interest of our stakeholders as we try to work our way through this pandemic. Most of the deferrals, about 1,400 or roughly $580 million, were granted to clients in our dental portfolio. Roughly 770 were for small businesses, which accounted for another $300 million in loan deferrals.

With that, I would now like to give you some color on the portfolios we believe will be some of the first to be impacted by the pandemic. For Columbia, that includes hotels; retail; restaurants; aviation and, of course, our dental and health care portfolios. In aggregate, these industries account for about $2.2 billion in loans or roughly 25% of our portfolio.

The largest portfolio impacted by COVID-19 is our dental portfolio. I'm sure most of you are aware, most states have directed dental practices to cease operation with the exception of emergency type procedures. So effectively, dental offices are closed and are not expected to reopen until sometime in May. As of March 31, we had $812 million in dental-related loans representing approximately 2,100 notes for an average note size of $382,000. Therefore, it's a very granular portfolio. As I said, to date, we have processed payment deferrals for approximately 2/3 of this portfolio. As such, most will note be required to resume making payments until August of this year. We believe the impact on this portfolio is truly transitory, and by working with these clients, we will be able to minimize the impact of COVID-19 on their businesses as well as the bank's balance sheet. We anticipate a large number of these clients will also participate in the Paycheck Protection Program, which will assist them with working capital needs as they reopen their businesses.

Before I move on, I would like to share a few credit metrics with you concerning this portfolio. As of March 31, approximately 95% of the portfolio was rated pass. Past dues were minimal at 17 basis points. I would also highlight that deferrals did not affect this number as deferrals are only granted to customers in good standing. Said another way, they made their March payment. We also have approximately $4 million in nonaccrual dental loans, however, these loans were already on nonaccrual prior to the COVID-19 outbreak.

So excluding the dental portfolio, we have another $1.4 billion or 16% of our portfolio to discuss. The next largest segment, which we have identified as having a high risk relative to the economic disruption caused by COVID-19 is our retail portfolio. We have approximately $498 million in retail-related exposure split between commercial real estate and commercial business loans. This represents about 5.6% of our loan portfolio. The largest part of our retail exposure is comprised of commercial real estate loans with approximately $416 million in total. It's evenly spit -- split, boy, I'm really struggling here, between Washington and Oregon, as you would expect, centered in the Portland and Seattle MSAs. The average loan size is $344,000. And the largest component is building materials and garden center types of businesses representing about 23%, next is auto vehicle and parts dealers at around 20%, followed by food and beverage stores at 20% as well.

Using at-origination values, the average loan-to-value for the portfolio is 54%, with 85% of the portfolio having a loan-to-value less than 65% based on originations. We have stress tested this portfolio for an equivalent decline in value as seen in the Great Recession. The average loan-to-value rises to 66% with about 50% of the properties having a loan-to-value less than 65%. On a stressed basis, 92% of the properties have a loan-to-value less than 85%. For the entire retail portfolio, 85% is pass, 6% is watch, 6% is special mention and 3% substandard. We have also seen minimal requests for payment deferrals to date in this portfolio.

Hotels is the next area I would like to address. We have $326 million in hotel loans, representing about 3.6% of our loan portfolio. About 38% is in major markets, which would include the Portland and Seattle MSA. However, we also have about 17% of the portfolio or $52 million of exposure out on the Oregon Coast. To give you an idea of the type of hotels we finance, most have one of the following flags: Holiday Inn, Best Western, Marriott and Radisson. These would be good examples of the types of flags of properties we finance. In total, flag properties comprise 84% of the portfolio. The average loan size is $1.8 million. To date, we have granted 44 deferral requests for about $110 million.

Similar to the retail commercial real estate loans, we did some stress testing on this portfolio as well. The average loan-to-value for the portfolio based on originated appraised value is 52%, with 80% of the portfolio having a loan-to-value less than 65%. On a stressed basis, about 48% of the portfolio has a loan-to-value less than 65%, with 87% having a loan-to-value less than 85%.

Nondental health care is about $245 million in total. Approximately $85 million is veterinary, and another $122 million are physician practices of varying kinds, and we also have $38 million of other health care providers, such as chiropractors, physical therapists and counseling services. The average loan size is $335,000. Today, 98% of the portfolio is pass rated, with 1% on watch and 1% rated substandard. We have granted a 124 deferral requests for about $41 million in total in this segment.

Similar to the dental space, we see this sector rebounding when the economy opens up, as folks are once again able to see the orthopedics, dermatologists, optometrists and so on.

Okay, restaurants and food services. We have approximately $183 million in this portfolio, with an average loan size of $299,000. Today, 84% is pass rated, 12% watch, and the balance is substandard. We have granted 101 deferrals for about $44 million in this portfolio. Today, 84% is pass rated, 12% is on watch and 4% is substandard. The average credit had a debt service coverage of 1.56%, with a loan-to-value of 46%. On a stressed case scenario, loan-to-value rises to 56%.

The last portfolio I'm going to discuss is our aviation portfolio. It's comprised of both direct exposure to domestic airline carriers as well as entities that lease airplanes to airline carriers. In total, the portfolio is about $150 million, with about $100 million being direct exposure to U.S. domestic airlines and the remaining $50 million exposure to lessors of airplanes. Today, essentially, the entire portfolio, though, is rated special mention, with the exception of 1 credit rated substandard.

As you know, during the week of April 13, the domestic airline carriers began entering into formal agreements with the U.S. Treasury regarding receipt of funds via the CARES Act. We believe this government funding will help them recover from COVID-19 impact, along with the billions of dollars of capital raised in the past few weeks by many industry participants.

As for the lessor portfolio, 49% of the exposure is in Asia, 23% in Europe and 9% in North America. The rest is in South America and the Middle East. The majority of the portfolio consists of narrow-body aircraft with an average age of 6.5 years. We view these younger, more fuel-efficient aircraft to be more in demand post the pandemic. Based on origination values, our average loan-to-value for the lessor portfolio is 74%. However, based on what we believe today's values are, the loan-to-value is closer to 83%.

Okay. I'll now turn it back to Clint.

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [6]

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Thanks, Andy. I want to take a moment to welcome Aaron Deer, our new CFO, to the Columbia Bank family. Many of you know, Aaron, as he has covered financial institutions for nearly 20 years. Aaron officially started on Monday, and we are delighted to have him on board. Aaron now gets to experience these calls from this side of the table. We also announced our regular quarterly dividend of $0.28. This quarter's dividend will be paid on May 28 to shareholders of record as of the close of business on May 14.

This concludes our prepared comments. As a reminder, Andy, Chris and Eric are with me to answer your questions. And now, Tamara will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) On the phone, we have a response from Jeff Rulis.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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First question on the margin. Before I get to that, the percent of floors I wanted to -- it went through pretty quick. But I think you said 71% of the portfolio was protected from rate moves, which is 49% fixed loans. But could you walk through the percent of loans with floors and those that are at floors?

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Eric J. Eid, Columbia Banking System, Inc. - Executive VP and Chief Digital & Technology Officer [3]

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Yes. Let me pull it up here. Let's just do it right here. So we have -- 49% are fixed, we have -- 16% are at the floors, and then we have the notional collar, $500 million notional collar of the -- offset 6% of our 1-month LIBOR. So when you add all that up, that's how you have -- come up with the 71%.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay. Got you. So the 6% is the notional collar? Is that roughly...

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Eric J. Eid, Columbia Banking System, Inc. - Executive VP and Chief Digital & Technology Officer [5]

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Yes.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Yes. So looking -- taking a step back on margin, I guess the biggest risk that you all see, is that loan yields? Security yields? Or sort of lack of ability to lower deposits given the already pretty low deposit level?

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Eric J. Eid, Columbia Banking System, Inc. - Executive VP and Chief Digital & Technology Officer [7]

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Probably all of those to some extent. I think in the short run, with the PPP program, we're going to probably actually see yields increase over the next couple of quarters as loans are forgiven and we take that deferred fee income into spread. Longer run, obviously, for the loans that we carry on our balance sheet, that's going to have an impact on our spread. Margins are going to continue to be under pressure. Forecasting right now is a little bit of a challenge. We're seeing dislocation between LIBOR and Fed funds, and so we're getting our arms around that. But I think we're going to see continued pressure on the NIM for sure.

Clint, you want to add anything?

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [8]

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Well, I think just looking at it a slightly different way might help. So between the fixed part of the portfolio, the roughly $1.5 billion of floating rate loans that are at their floor already, and then when we think about loans that won't reprice within the next year, there's about $6.5 billion of the $8.9 billion in the portfolio that's not going to face that repricing pressure. I think that it is -- Eric mentioned the difficulty with NIM. And for modeling purposes, it is a bunch of just-originated loans with a 1% coupon. So -- but looking at our core business dynamics, you have a significant part of the loan book that's not going to reprice. Part of our interest rate risk strategies that we put in place was purchasing securities in advance through much of last year that perform well in a down rate environment. So I don't think that you're going to see us necessarily aggressively reinvesting into the securities book at this time. We'll be opportunistic about that. So I think that gives us some defense.

Asset mix, that's the big unknown. We don't know when the economy reopens, how quickly things return to normal. We had a tremendous amount of momentum through January and February in terms of our organic growth, and we saw some asset mix shift in the -- on the balance sheet, shifting a little more towards loan to deposits as the loan-to-deposit ratio ticked up. So those are kind of all the factors that we're taking into account as we think about looking forward. And as Chris mentioned, our deposit fund -- cost of deposits are near their historic lows, but we still have some fine-tuning that we can do in that space as well.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [9]

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Okay. And Clint, just another question on the capital side. In terms of -- you had a high payout ratio going in that included the special. Safe to say that you would maybe table the special and maybe buybacks, but kind of focus on maintaining the regular. Any thoughts on capital here?

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [10]

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Yes. We repurchased I think it was right around 731,000 shares during the quarter under our 10b5-1 plan, and wound that down in late March when we hit the $20 million that we had allocated for that. We don't have any intentions right now of doing buybacks in the -- for the foreseeable future. In terms of the special dividend, that's always been a tool that we've used to manage our capital ratios down. We still have a pretty healthy TCE ratio of 10.7%. But I think there's so much uncertainty out there that our primary focus is maintaining the regular dividend, and then I think -- and then we'd be content to let those capital ratios drift upward.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Got it. And one quick last one. The reserve level, if you were to include credit marks relative to that $137 million of loans stated, what would that be trued up?

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [12]

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So if we add back the discounts on the acquired portfolios, is that the question?

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [13]

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Yes.

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [14]

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Yes. I haven't done that math. I don't think Andy has either. He's been focused on...

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [15]

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Just the amount, the discount amount?

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [16]

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Yes. We can follow up with you after the call.

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Operator [17]

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Your next response is from Gordon McGuire.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [18]

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So Clint, you had mentioned January, February production being pretty record levels. I was wondering if you could provide what -- how those trended month by month. I guess how big was the drop-off in March? And what does the pipeline look like heading into the next quarter? And I guess just your overall outlook for the rest of this year?

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Christopher M. Merrywell, Columbia Banking System, Inc. - COO & Executive VP [19]

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Gordon, this is Chris, and I can tell you that the drop-off was pretty significant. As we moved into the phase of things starting to be shut down, businesses being closed, we tabled, Andy had a pretty extensive review of the dental portfolio, so I'll use that as an example, is we have requests that we put on hold from the standpoint of businesses being closed and things of that nature. So I can get the actual figure month by month, but it was pretty significant for the last month. We were on pace to set a new first quarter record.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [20]

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Okay. So the pipeline is pretty muted. I would assume the outlook is probably more flattish from here?

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Christopher M. Merrywell, Columbia Banking System, Inc. - COO & Executive VP [21]

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The pipeline, we still have a good pipeline. There's some uncertainty around what's going to happen in the economy, and when people reopen, there's some pent-up demand for things. We'll see if those materialize. But that's going to depend on reopening, how quick that happens and how quickly businesses move back to earning revenue. But you're probably directionally correct there, it's certainly going to be more difficult.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [22]

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Okay. And Chris, you discussed PPP a little bit in your prepared remarks, but I'm not sure if I caught total balances. Do you have that? And just how are you guys thinking about funding those balances? I guess with securities not really being reinvested, can you fund a lot of that with deposits? Or are you going to look to outside sources?

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Christopher M. Merrywell, Columbia Banking System, Inc. - COO & Executive VP [23]

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We have the ability to fund. We will look at all available options to include the ability to align, to put those to the federal government as one of the options. As far as discussing totals, since we're in the second quarter, we don't provide guidance on that and don't prepare to discuss the totals, but I will tell you that the team has been hard at work and lots of long hours, nights, days, showing up at 9:00 p.m. to hit 12:00 p.m. East Coast time, reopenings, things of that nature. And as we said, we feel that we'll do more than our aggregate share based on our size. And I would tell you that the demand outstripped our expectations.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [24]

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Okay. I guess Andy, your quote in the release talking about negative credit migration going into a deep dive on the impacted industries. I guess the deep dive was probably warranted by COVID. But I'm wondering how much of the negative migration that you referenced is specific to COVID issues or maybe underlying issues that you might have seen but were identified as a result of the deep dive you took. Or are there any correlated beyond just general COVID issues that you saw?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [25]

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The vast majority of the downgrades were as a result of our -- I guess our dive into specific portfolios. So you look at airlines at $150 million that was all pass rated, it all moved to special mention, that's all COVID related. Quite a bit of the downgrades were in our hotel and retail areas, and that's pretty much COVID related. Were there credits in there that probably have underlying weaknesses? Sure. I mean I can't argue against that. But I would say that because of our focus on those portfolios, those drove the downgrade. So I do believe it's predominantly COVID-19 related.

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Operator [26]

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Your next response is from Jon Arfstrom.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst [27]

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Andy, anything new or notable on the ag portfolio?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [28]

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Anything more notable?

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst [29]

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Yes. New or notable. I mean I know we're focused on these other areas, but can you give us your assessment of how things are performing in ag at this point?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [30]

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Yes. I think that the area that has been a struggle for us for now a couple of years has been the agricultural portfolio. And of course, I'm sure you're all aware, commodity prices, there's certainly -- the great news reports coming out of Midwest, farmers buying things under the ground and dairies pouring milk onto the ground. And so we are concerned about the ag portfolio. We're going to have to see how that plays out. Most of the book came through the 2019 cycle okay. Some still have some products to offload. But for the most part, it's really going to be a function of what do we get in production in 2020, and then do we see any kind of a rebound in commodity prices by the time we bring the 2020 crop to market. Absent that, the one portfolio that's not going to have the ability to enjoy such a calendar or time frame is our cattle book, which is about $150 million in exposure, and we are also watching that very closely.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst [31]

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Okay. Good. That helps. And then the dental deferrals, I think I caught what you were saying, but it sounds like you're -- most of these loans would come off their deferrals in August. Is that -- did I catch that right in your prepared comments?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [32]

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Correct. So our standard deferral programs were 4 months. And that was on purpose to take us into the latter part, if you will, or at least the middle part of the summer to give those offices time to adjust to the reopening of the economy, get some revenue under their belt before they would have to start making payments to us. So again, we think that's the prudent thing to do both for the dental practice and for ourselves.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst [33]

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Okay. And then just maybe a subtle question here more on the P&L, but what are you seeing on the card revenue trends? Are you seeing -- I'm assuming you saw a drop, and it looks like it's down a little bit year-over-year and certainly sequentially. But are you seeing stabilization there or changes in activity trends?

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Christopher M. Merrywell, Columbia Banking System, Inc. - COO & Executive VP [34]

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Jon, I think that there certainly has been a -- we saw a drop. I think you'll start to see, as you said, some stabilization based on it will shift so from in-person purchases to more online purchases, things of that nature. We're also looking and expecting some pent-up demand as things start to become reopened that people will get back out there and want to spend money. But there are certain parts of the industry that through this process has continued to do very well, and those are places where people are using their cards. So it's fairly stable.

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Operator [35]

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Your next response is from Jackie Bohlen.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [36]

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Andy, I apologize if you mentioned this already in your prepared remarks and I just missed it, but the migration from the ag portfolio that went on to nonaccrual in the quarter, what -- which sector is that from?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [37]

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It's primarily from the fishing industry. In the state of Alaska, the last fishing season is primarily what they call the pink salmon, which is a lower quality. A lot of it goes, as they say, slam it in the can. They delayed the opening of that. And so the quality of the fish was less. And so we had a couple of fish processors that -- as a result, they had lower-quality fish, which attracts a lower-quality price, and that puts stress on their business.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [38]

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Okay. And is that what the charge-off in the quarter related to?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [39]

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No. The charge-off was related to a row crop operation in Eastern Washington.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [40]

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Okay. And I would guess that even though it was a little bit elevated in both these metrics in the quarter, it's just kind of normal course of business?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [41]

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Yes. We had 1 charge-off of $4 million, which really drove the charge-offs for the quarter. It was an extraordinary situation with this row crop farmer. And I would not characterize it as normal business strain. I'll just say he grew some stuff he didn't expect them to...

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [42]

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So much more a micro issue than a macro issue.

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [43]

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Yes.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [44]

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Okay. And then also, I wanted to talk a little bit about the press release noted some efficiency initiatives that were ongoing. And I know that you gave a range of where you anticipate expenses to be in just in light of investments and COVID-related costs. But maybe just a little bit of color on what kind of initiatives you're looking at right now from an efficiency standpoint?

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Eric J. Eid, Columbia Banking System, Inc. - Executive VP and Chief Digital & Technology Officer [45]

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Well, with regards to the digital, we're essentially done with our oversized digital spend at this juncture, Jackie, and this has become part of our run rate. That being said, we are going to continue to invest in innovative solutions to keep us competitive and remain relevant with our clients. But some of the things that are coming, Zelle, we've got the small business lending platform coming. And the new account open and fund, they're tracking. And -- but we're just offsetting. I mean it's just part of our run rate right now.

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [46]

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I'll add some of the other things that we've done. It's the combination of the things we've been doing over the past few years and starting to get higher adoption rates. There's -- obviously, some of that has accelerated with people learning how to conduct business differently and through digital channels. But also, it's some of the things that are -- have always been ongoing, and that's what Eric was getting at. It's part of our DNA is looking for how we can do something better. I'd say in the last 6 months, we've taken a look at functionally how we're aligned, and we've been able to eliminate and reduce some redundancy, and that has some efficiency or some improvement in terms of our noninterest expense run rate. There's still some of the things that we've learned actually as we went through the Paycheck Protection Program project, there's some other areas, as we talk with our bankers, they say they've learned how they can do things more efficiently. That's the silver lining in this cloud that we're under now with COVID-19 is that people are finding different ways. And when we come out the other side, I think we're going to leverage some of the spend that we've had, focus that we've had as well as some new opportunities that we've uncovered through this. So that's kind of a high level, 90,000-foot overview of the types of things that we've been working on and will continue to work on.

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Eric J. Eid, Columbia Banking System, Inc. - Executive VP and Chief Digital & Technology Officer [47]

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And I'll provide some color on that, too, Jackie, just with regards to the PPP program. We digitized the whole process from the loan application all the way through fulfillment. And we used existing capabilities that we have, and we did it rapidly. And there's no way we would've been able to keep up with the demand and meet the 10-day funding requirement without having all hands on deck, and that digital background really helped us get this over the finish line.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [48]

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Okay. And understanding that you're not going to provide guidance as to the number of loans or the dollar value, when you did the PPP program, was that open to existing customers? Or was it existing and some potential new relationships?

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Christopher M. Merrywell, Columbia Banking System, Inc. - COO & Executive VP [49]

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Jackie, we chose to follow the process to work with existing clients and not use it as an opportunity to prospect with the demand. And the most important thing we could do is take care of our clients throughout this process.

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Operator [50]

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There are no further questions in the queue at this time.

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Clint E. Stein, Columbia Banking System, Inc. - CEO, President & Director [51]

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All right. Well, thanks, everyone, and good luck. Stay well, and stay safe.

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Operator [52]

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Thank you for joining us today. We hope you found this webcast presentation informative. This concludes our webcast. You may now disconnect, and have a good day.