Q3 2020 Columbia Banking System Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome.

Welcome to Columbia banking systems third quarter Twentytwenty earnings release Conference call. At this time, all participants are in a listen only mode.

Later, we'll conduct a question and answer session through both the telephone and web instructions will be given at that time.

If you are on the telephone and should require assistance during the conference. Please press star zero.

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.

Thank you Tamra welcome and good morning, everyone. Thank you for joining us on todays call as we review our third quarter results, which we released before the market opened this morning.

Earnings release, and Investor presentation are available on the banks Dot com.

We saw momentum continue to rebuild in the third quarter as evidence by the growth in deposits core earnings and our loan pipeline.

[noise] from the onset of the pandemic or bankers have remained externally focused with the mindset that the current environment could be with us well into 2021.

The team continues to be creative implementing new real time solutions for our clients and our employees.

<unk> is our highly successful pass it on campaign.

We standing up the P.P.P. loan and forgiveness portals for providing resources for parents, who are juggling work and distance learning for the children.

Out of the box thinking it's valuable in a time like this and our teams' ingenuity is paying dividends.

In the midst of it all we opened our newest neighborhood and Boise, expanding our commitment to southern Idaho.

On the call with me today are earned here, our Chief Financial Officer, Chris Murray, well, our Chief operating Officer, and Andy Mcdonald, Our Chief Credit Officer.

Following our prepared remarks, we will be happy to answer your question.

Let me remind you that we may make forward looking statements during the call.

Further information on forward looking comments, please refer to either our earnings release, a website or our FCC filing.

At this point I'd like to turn the call over to Aaron to review our financial performance.

Uh huh.

First quarter earnings of 44.7 million EPS of 63 cents for an increase of 8.2 million, an 11 cents, respectively on a linked quarter basis.

Quarterly pretax pre provision earnings of 62.1 million were down 16.2 million due to the nonrecurring second quarter gain on sale of a portion of our visa class B restricted stock.

Right up with the remaining shares that contributed 16.4 million to that quarter.

Total deposits ended the quarter at 13.6 billion up 469 million from June Thirtyth. This supported a further reduction in FHLB borrowings and an increase in earning assets, which together drove net interest income up by 2.9 million when compared to the second quarter.

Excess liquidity from the deposit enforcers, mostly invested in lower yielding mortgage backed securities.

Well, we're going to go into another factors there's.

Resulted in a 17 basis point drop in the net interest margin to 347.

No P to P loans weighed on the margin by about nine basis points, given the rate environment that outlook, we anticipate great pressure to continue that we have taken measures to mitigate this pressure, including targeted adjustments for deposit pricing purchases of agency securities with reduced prepayment risk and having floors to new loan production.

Our industry, leading cost of deposits dropped by one basis 0.6 basis points.

I'll also note that just last week were terminated our 500 million notional value interest fleet color effectively locking in the gain on that color to benefit the margins from February 2024.

Total loans ended the quarter at 9.7 billion down 80 20 million from June Thirtyth loan production was like for third quarter 279 million. However, production volumes increased sequentially throughout the quarter.

Excluding PPP new loan production is brought on it with an average tax adjusted coupon rate of 3.86%, which compares to the overall portfolio was 4.14%.

Noninterest income of 22.5 million was a decrease of 14.8 million after.

After factoring out the onetime gains of 16.4 million on the visa class B restricted stock and 875000 from the disposal volumes in the second quarter non interest income was actually up 2.5 million or 13%.

Increased transaction volume from the relaxation of shelter in place orders from card revenue isn't deposit service fees up by 755000, and 566000, respectively and blown revenue increased by 1 million, mostly from new mortgage loans originated and sold.

Non interest expense was 85.1 million in the third quarter, which was an increase of 4.3 million on a linked quarter basis compensation and benefits expense increased by 9.1 million principally due to the deferral of loan origination costs related to the P.T. loan program in the second quarter. This was offset.

I have 2 million reduction in the provision for unfunded loan commitments included in other non interest expense.

Each of the remaining 2.8 million noninterest expense variance was due to systems legal and professional and other various costs incurred in the second quarter to set up the TPP program and respond to the pandemic.

Our non interest expense ratio remained at 2.13% for the quarter and are operating great efficiency ratio increase about a point for 56%.

Specter quarterly noninterest expense run rates remain in the mid Eightys for the fourth quarter, our effective tax rate for the quarter was 18.2% and should remain in the 18% to 19% range for the full year.

I'll turn the call over to Chris.

Thank you Aaron and good morning, everyone. Our production teams have been actively engaged across our footprint, securing new business and partnering with our clients to ensure they have what they need to run their businesses any.

In addition, our operations teams have been diligent and creative solutions to support our relationship bankers Britney organization to the client when needed well still complying with regulations and maintaining physical and distance in the midst of both Colgate and the unusual fire season in Europe.

Print over the past months.

Additionally, our team members have stepped into support each other when time is needed to assist with cobot issues evacuations and heavy smoke. We're very proud of our excellent team of bankers feel this continues to set us apart.

The highlight of the quarter was continued strong deposit growth largely stemming from a combination of new client relationships economic stimulus and reduced spending by businesses and consumers.

Coming off a record second quarter deposits grew by another 469 million in the third quarter with growth evenly split it between existing and new accounts.

The deposit mix shifted from 59% business and 41% consumer as of June thirtyth to 62% business and 38% consumer at September Thirtyth.

The increase in business deposits is attributed to normal seasonality.

On the consumer side account balances were essentially flat that was because we saw an increase in debit card transactions transactions as cope with restrictions were relaxed consumers resumed more normal spending habits.

Or product perspective deposits as of September thirtyth.

Were 51% demand in other noninterest bearing and 49% interest bearing.

Our bankers have been busy rebuilding the pipeline that's the pandemic and they generated new loan production as mentioned to $279 million during the quarter, which included 9 million of additional PCP loans brought on in early July.

Most of the new production was in Cnine in theory, followed by one to four family AG and construction loans.

Loans overall decreased by 83 million during the quarter to 9.7 billion.

Originations were offset by net payments on existing loans of 84 million payoffs at 66 million and a reduction in line utilization of 33 million.

The remaining decline was mostly due to loan prepayments.

Our line utilization rate declined from 47.5% at the end of the second quarter to 46.8, driven by declines in construction followed by consumer cannot.

P.P.P. loans gross of deferred fees were 970 million at quarter end, representing 10% of total loans, but should decline from here as we opened our forgiveness portal in mid August and began receiving forgiveness payments from the F.T.A. in early October.

Excluding the P.P.P. loans, a quarter production mix was 45% fixed 42% floating and 13% variable.

The overall portfolio mix is now 10% PPP loans.

45% non P.P. fixed.

31% floating and 14% variable.

Residential mortgage activity accelerated in the third quarter, driving noninterest phone revenue higher by $1 million on a linked quarter basis. This has been a bright spot given the lower interest rate environment.

As a reminder, Columbia bank originates and generally sells its conventional production and portfolios the jumbos.

Deposit service charges and card revenue increased by a combined 1.3 million.

From a return to normalized transaction activity levels. After the second quarter LOE <unk> caused by state government mandated shelter in place orders.

We are continually offer optimizing our delivered strategy and have been proactive and consolidating branches over the past several years expanding each branch of service coverage area, given local market conditions and projected growth.

In the past five years, we have consolidated 20 branches, representing approximately 20, 12% of our network with 13 of those in the past three years.

As part of our ongoing branch rationalization process, we announced the consolidation of two branches in the fourth quarter.

In our coastal region consolidated this past weekend and the other in our Puget Sound region will occur in the next two weeks.

As Clint indicated we also opened our newest neighbor hub style branch in Boise at the end of September which has been well received by the community.

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

Thanks, Chris the provision under Cecil up 7.4 billion reflects the strong Q3 rebound negated by increased uncertainty going into 2021.

Consistent with my comments last quarter, the momentum and path of the recovery will continue to be threatened by the Corona Pirates pandemic.

In general our forecast anticipates, a second contraction in 2021 attributed to uncertain consumer reaction to rising case count within the United States as we head into winter.

Certainly the events that are currently on holding in Europe, Germany, France, Italy, and Spain, and what if any future government stimulus may look like will impact us.

Therefore, our modeling continues to reflect a more protracted recovery with slower GDP growth.

An unemployment rate that remains elevated in 2021.

As a reminder, we use I just market for our economic forecasts.

[noise] annualized gross domestic product is anticipated to decline in the fourth quarter of 2020 by 6.3%.

Followed by a rebound in the fourth quarter of 2021, where GDP growth, 4.6% as the economy begins to slowly exit the pandemic.

[noise], while the unemployment rate has retreated from its high in Q2, we anticipate ending 2021 at close to 11% due to the lasting effects of the Kuroda virus.

We also added an overlay to this quarter, what we consider high risk commercial real estate.

Basically hospitality office and retail.

Downstream potential impacts of permanent job losses had a significant northwest employer.

These amounted to a combined 5 million in additional reserves for the quarter.

We ended the quarter with a provision relative to period end loans of 1.62%.

Adjusting for the PPP loans, the allowance period end loans increases to 1.8.

[noise] empty age for the quarter were relatively unchanged at 29 basis points.

However, I feel adjusting for Pvp loan well.

Loans provides a more consistent comparison as we move forward into 2021.

With this adjustment is due increase but only by two basis points, so again relatively unchanged.

I would like to remind folks mpsvs are still comprised of credits whose issues predate the pandemic.

Past due loans for the quarter were 15 basis points compared to 21 basis points last quarter.

Net charge offs annualize were eight basis points for the quarter versus 16 last quarter.

Our impaired capital ratio rose modestly from 23.5% to 25.3% so as alluded to earlier your standard credit metrics for the quarter were relatively stable.

On the risk rating fraud loans rated watch or below was unchanged at just around 1 billion 85 billion.

We saw watch loans increased 7 million going from 386 million to 393 million.

Special mentioned loans declined to 32 million to 355 million.

And substandard loans saw an increase of 23 million and are now around 336 million in total.

These changes increased our watch and below risk ratings from 11% to 11.1% of total loan again very stable metrics.

Okay, let's move on to deferrals.

At the beginning of the quarter, we had close to 1.6 billion an active loan referrals at the close of the quarter, We had a 114 billion in active deferral.

Most of the deferrals today or in the hospitality portfolio, which accounts for 62 million of the active deferral.

Approximately two thirds of this amount represents loans in their second deferral period.

As mentioned before this is consistent with our strategy relative to this sector and does not cause us to be any more concerned than we were when we entered the first deferral with these borrowers.

At the end of the quarter the portfolios, we had identified as being some of the first to be impacted by the pandemic, which includes our hotel retail restaurants aviation and dental and healthcare portfolios amounted to a little over 2.4 billion or roughly 25%.

Of our loan portfolio.

If we exclude the dental and healthcare portfolios, which we are feeling much better about these days it falls to about 1.3 billion or 13% of our loan portfolio.

The largest portfolio wide, we identified again was our dental portfolio.

As previously discussed we believe the impact on this portfolio isn't was truly transitory.

Today. These practices are generating revenue at around 82% to 85% of prepaid demick levels.

At this level of revenue generation most of these practices are operating above breakeven.

This is further evidenced by deferrals in this portfolio declining from 7.6, 78.6% of the portfolio to less than 1% of the total portfolio during the quarter.

Again, the combination of deferrals and Pvp laws are allowing these practices to move forward with little impact on the bank's balance sheet.

Similar to last quarter, 95% of the portfolio is rated path.

4% watch and the remaining 1% is evenly split between special mention and substandard.

The next largest segment, we identified as having a higher risk relative to the economic disruption caused by COVID-19 is our retail portfolio.

We have approximately $568 million in retail related exposure, which is essentially unchanged from the prior quarter.

It's split between commercial real estate and commercial business loans and represents about 5.8% of the total loan portfolio.

The largest part of our retail exposure is comprised of commercial real estate loans, which account for approximately 441 million of the total.

It is evenly split between Washington, and Oregon, and as you would expect centered within the Portland and Seattle M.S.A.

The average loan size is 427000.

Give you an idea of the types of retail properties refinance.

The most common or small four to five days strip centers located in suburban communities.

We also do a fair amount of Standalone single tenant properties, which would be characterizes autopart companys home and garden, the slash building retailers as well as food and beverage stores also call convenience stores, along with gas stations sporting goods and furniture stores.

In addition, the portfolio contains grocery anchored centers and mixed use property.

We are not in large downtown core metropolitan areas, nor do we fans regional malls.

Using at origination values, the average loan to value for the portfolio is 52% with 97% of the portfolio, having a loan to value less than 75%.

We have stress tested this portfolio for an equivalent declined in value as seeing during the great recession.

The average loan to value rises to 64%.

With about 72% of the properties, having a loan to value less than 75%.

For the entire retail portfolio, 89.7% is pass rated.

Which is a slight improvement over last quarter with 86% was pass rated.

For the balance of the portfolio at quarter end, 5% as watch.

4% of special mention and 2% is substandard.

This breakdown is essentially unchanged from the first quarter.

Deferrals in this portfolio declined from 16.4% of the entire portfolio.

Less than 1% of the portfolio.

Obviously, we are pleased with how this portfolio is performing but we remain cautious and our expectation is that we would see weakening in this portfolio as PPP funds become exhausted and deferral benefits subside.

This segment would greatly benefit benefit by another round of stimulus in my opinion.

Yeah.

Okay, let's discuss hotel.

$335 million in hotel loans, representing about 3.4% of our loan portfolio.

About 38% is in major markets, which would include the Portland, and Seattle and say.

However, we also have about 16% of the hotel portfolio for $55 million at exposure out on the Oregon Coast.

To give you an idea of the type of hotels refinance.

I just have one of the following flag.

Holiday and thus western choice Marriott and Wyndham.

In total flag properties comprise 84% of the portfolio.

The average loan size is $1.5 million.

Today, we have about 62 million on deferral, which is down from last quarter with approximately $179 million on deferral.

Many of the loans on deferral today are on their second deferral, which is consistent as I mentioned before with our strategy for this portfolio.

We anticipate the recovery in the hotel sector to be prolonged.

With this in mind, we are working on a number of occupancy for our clients, which include U.S.D.A. program. The main street lending program, along with more conventional solutions as well.

Many of these plans were crafted in concert with our borrowers during the first deferral period.

We are now using the second deferral period to effectuate upon these strategies.

Similar to the retail commercial real estate loans, we continue to do stress testing on this portfolio as well.

The average loan to value for the portfolio based on originated appraised value is 52% with 95% of the portfolio, having a loan to value of less than 75%.

On a stressed basis about 69% of the portfolio has a loan to value less than 75%.

Non dental health care is about $299 million in total.

Similar to the dental portfolio, we saw the impacts of the pandemic here to be transitory as well.

As individuals are once again able to see their orthopedists dermatologists optometrist and so on.

In addition, elective surgeries such as hip replacements knee replacements cataract are again being performed along with blood test MRI Sonograms UK.

The break out of the portfolio is as follows approximately $95 million as veterinary.

Another 152 million our physician practices are very encouraging.

53 million is other types of health care providers, such as chiropractors, physical therapists and counseling services.

The average loan size is 317000.

As of June Thirtyth, 98% of the portfolio is pass rated with 1% on watch and 1% rated sub standard.

We had a deferral requests for about $107 million in total in this segment or roughly 36% of the portfolio as as of June Thirtyth.

Today, we have 381000 on deferral or less than 1% of the portfolio.

As I mentioned earlier, we are feeling good about this portfolio.

Okay restaurants, and food services, we have approximately 211 million in this portfolio with two thirds comprising commercial real estate loans.

The average loan size is 269000.

Today, 86% is pass rated 5% walks, 3% special mention and the balances substandard.

We granted a 157 deferrals for about $66 million in this portfolio.

But today, we have 16 on deferral or roughly $16 million.

Similar to the hotel and retail segments, we see this area, taking some time to heal and while we are pleased with the performance of the portfolio, we remain cautious here as well.

Outside dining and such had a significant impact for many of these businesses, but the colder months ahead will make it difficult for these revenue generating options to remain viable.

As such we anticipate additional stress in this segment in the months to come.

We do stress testing on the theory portion of this portfolio at a pre pandemic basis. The average loan to value was 58% with 93%, having a loan to value of less than 75%.

Again on a pre pandemic basis.

Under our stress test scenario average loan to value rises to 72% with only 54%, having a loan to value less than 75%.

Again, the last portfolio I'm going to discuss is our aviation portfolio.

It is comprised of both direct exposure to domestic airline carriers as well as it is at least airplanes and engines to airline carriers.

In total the portfolio is about 142 million.

With 98 million being direct exposure to U.S. domestic airlines or the remaining 44 million and exposure to less orders.

Today most of the portfolio is rated watch which is an improvement over last quarter.

Most of the upgrades have been centered in the domestic airline segment. Thanks to the significant amount of capital our borrowers have raised year to date.

Of the domestic airlines, we have exposure to they have raised over 43 billion in additional capital to assist them through this pandemic.

Just this past quarter, they raised an additional 10 billion.

We have secured agreements with the U.S. treasury for additional funding if needed.

As such this additional capital combined with expense reduction efforts results in all of our borrowers having over 24 months a burn rate now.

This increase in burn rate was the primary driver for the upgrade from special mentioned to watch as it gives the airlines two years to adjust their business models relative to the impacts the pandemic is placed on this.

Most of our domestic airline exposure is secured by aircraft with a pretty stressful on the value of 70% and.

At a current loan to value, we believe closer to 74%.

On a stress test basis, the loan to value rises to 89%.

That's for the leasing portfolio, 49% of the exposure is in Asia, 23% Europe at 9% North America.

The majority of the portfolio consists of narrow body aircraft with an average age of 6.8 years.

We view the younger more fuel efficient aircraft as being the most in demand post pandemic.

Based on origination values, our average loan to value for the portfolio is 77%.

However, based on what we believe is today's value the loan to value was closer to 83% and on a stress test basis, the loan to value rises to 97%.

Okay with that back to Clynt, Thanks, Andy given our strong earnings stream and total capital of 14.2% yesterday, our board of directors approved a new share repurchase program for up to 3.5 million shares.

In addition to share repurchases, we have a full menu of options for deploying excess capital, including further investment in our business special dividends and should the right opportunity arise strategic M&A.

We announced our regulatory regular quarterly dividend of 28 cents. This morning. This quarter's dividend will be paid on November 25th to shareholders of record as of the close of business on November 11th.

This concludes our prepared comments as a reminder, Andy Chris and Aaron are with me to answer your question.

And now you Tamra, we will open the call for questions.

At this time to ask a question via the web with the Q and a button on the lower left hand corner of your screen type. Your question in the open area and click submit to ask a question via the phone line. Please press star one on your telephone keypad to withdraw your question press the pound team.

Okay via the phone line you have a response from the line of David Best Sir. Please go ahead.

Hey, good morning, everybody.

David.

I just wanted to get.

Seems to the competitive dynamics and thoughts on loan growth originations are down a bit just curious your appetite for new loans the competitive landscape. The pulse of your clients and maybe just how your pipelines trending and just any thoughts you might have going forward.

I'll start and then I'll turn it over to Chris to.

Fill in some gaps and.

Chris and I have traveled extensively throughout our footprint met with bankers and.

Our client and.

And Andy has as well and every time, we come back.

Much more optimistic.

We see the things that are going on that the opportunities that our bankers are getting a look at there is some disruption thats occurring within our market.

With some of the things that some of the large national banks or are doing and thats, creating opportunities for us as well.

I think from a from a production standpoint.

We saw you know.

In terms of what it was down it was on a percentage basis pretty similar to what we experienced in the second quarter.

But what we've seen with the pipeline is consistent in terms of the rebuilding their with the things that I just mentioned that our that our bankers are getting a look at and so it gives us.

A lot of optimism.

It's still a tough and very competitive environment.

The yield curve is.

Definitely unfavorable and and and things of that nature, but.

But the team of of Chris.

Aaron and Andy.

Our working very hard with.

All of our focus on making sure that were.

Capturing new.

New business at four.

Deepening the relationships that we have and that.

More importantly that we're finding a home for all of that liquidity that is.

Found its way to our balance sheet in the last six months and that will step back and let Chris provide his perspective.

Thanks, Good morning, David.

Yeah, I would say that the to echo thanks.

Thanks comments that the pipeline is moving in the right direction.

Sure I would say cautiously optimistic in with everything that Andy talked about it and what potentially is down the road, we have to be very cautious in looking at the looking at credits and what we can on we're comfortable bringing on.

But the good news is as with all of that considered in the extra time that it takes an adequate overlay.

We are cautiously optimistic and it is moving in the right direction.

You know the environment in of itself you can see the the new loan yields and what they come on that.

I expect that to probably continue lists.

The yield curve, where it's at and just the environment in general with excess liquidity.

New loan volume is Paramount for for everybody and I think we were winning our fair share and again cautiously optimistic as we move forward.

Okay.

Thats helpful. And then I know you've only got two out there and one we just implemented but how do you think about the performance of the neighbor hubs in what's the plan for growth of this content going forward. I mean is this a good way for organic market expansion and kind of beta take the market potentially backfill with lift outs or M&A or and just can.

Capitalize on some of this disruption that you're talking about or just how do you plan to use the this concept gulfport.

Yeah. Thanks for the question.

The concept in and of itself, we're talking about branches that are less than typically 1800 square feet.

Different concept within its not built around transactions first it's been it's built more around solutions and consultation and sharing some of the digital options that are out there and available.

The two have been well received in the areas that they are it certainly is a lot easier to go into a new market at 800 square feet than what you would have seen in a traditional manner.

Manner, you know years ago, and we'll continue to look at that for where we're at the concept hits with the community rooms, and things of that nature to draw people in into that space you do need some population centers and all that but I think the best thing about them is we're using the concept to then.

How do we use that to get into our traditional branch network, where maybe we have a 3000 4000 square foot branch and how can we downsize at how can we do other things using the same the same model. We have a few of those out there that are being piloted right now.

And we're pleased with the results now I wouldn't say that we're we're rushing out to put a bunch of brand new branches into areas, but we're certainly looking at it as part of the strategy, where we can support our commercial teams and or other relationship bankers and we're having great success driving loan volume.

And what will really take that into the next level. This full commitment of a regional branch.

And I'll just add onto that that with the first neighbor hub that we opened a little over two years ago, and then and then.

With the one in Boise, they're learning labs, and Thats really what Chris was getting at is is how can we take some of the technology Theres a staffing model is different and how can we learn from that and apply that to our existing network and so even though the physical facility.

May not change.

We can drive some efficiencies through.

True.

Learnings from these neighborhood shops, and I think that that.

That's probably our greatest opportunity.

Over the next two to four years on our with our retail banking group.

Is this apply.

Applying that across the entire network.

The actual changing of the physical footprint of the branch is much more complex, especially fleece.

So the there's there there is theres a lot of different I guess dynamics at play here.

But I.

I think it's much more than just having a concept that in certain markets I think that the bigger potential is what we do with the learnings from that.

Okay. That's helpful and just kind of following up on that I mean, you know weve talked in the past the cost savings is really just a part of your DNA. It sounds like this might play into that just wanted to get your thoughts on expenses and how this concept.

Digitally downsizing some branches in.

Using other various initiatives that you might have to kind of combat the revenue headwinds and inflationary pressures.

How do you think about expenses going forward.

We're all looking at each other because that question was a pretty dynamic one and it touches many different aspects and and.

In terms of of we'll let Aaron here in a minute talk about what he's thinking for the run rate.

But but I think that.

Kind of building off on our response to the to the last question.

Really you know.

People and occupancy are are our two largest line items and when we think about the neighbor hub and out staff versus a traditional retail branch model, where a lot of the activities there are paying and receiving.

The neighborhood staffing concept is really geared towards.

Sales and consulting and.

And we think that with the digital tools, we have available today and the things that we've invested in and the things that are.

We'll come down.

Through our pipeline in the next.

Six to 18 months.

As well as the acceleration that occurred as a result of Cove, it and stay in place orders we.

We think that will help accelerate that transition from that pain and receiving function.

To that sales and consulting function. So you have fewer people that are.

Better able to I guess fueled a wider variety of things and that equals less downtime if that makes sense.

[music].

And and that's where I think that the.

The real opportunity lies in terms of just from a staffing standpoint, the technology piece.

And this is split Chris alluded to earlier, we're piloting in some of our higher.

Volume branch.

Locations as it works great in a de Novo branch fits that.

Building its customer base.

If we add thousands and thousands of transactions daily transactions onto that process did break and that's what we're testing now and challenging our our folks to.

To do and how do we take that technology and simple things like dual custody and Theres. Some things we've done with the neighborhood of that that has given us some efficiencies there actually given social distancing requirements in our branches. It's.

It's been great to know that we have a different process, where you don't have to have two people counting money two feet apart from one another Chris.

Chris did I'm sure I missed a lot in that that.

That response.

I think you captured it pretty well and and data you captured it pretty well in the beginning of the set as part of our DNA and its consistently is something that we're looking at and evaluating all the time.

And and that's why you've seen the progress over the over the years and it may be in it it is consistent notes.

We evaluate its not a big rash decision or anything like that it's part of our ongoing strategy around our values and what we bring to the table for our clientele by being there for them and the neighborhood in the concept within it is equipping our bankers to be more outbound.

And turning that from.

They are de Novos. There, obviously is not as many transactions that are walking in the door. So how are they turn in that and be more outbound into reaching out to clients sharing with them. All the things. We do you know you've seen the results in the in the mortgage group right now because.

The rate environment level, reaching our clients, making sure that they know we do do mortgages.

Our financial services and trust apartments, and many of the other things were much more proactive in that aspect and I think thats, where you look down the down the road to work when we accomplish in those areas to help offset some of the stuff that we've.

We've already done also that we will continue to do and I'll, let in at and now some run rate and as such.

Yes, it's.

Hopefully we continue to see the provision for unfunded commitments.

The drip down in the right direction heading into the fourth quarter.

I could see some project costs it might tick up a little bit and Theres always kind of some year end true ups and things but.

So feeling pretty good about that that mid eightys run rate, even if it might tick up but.

Where we were this quarter.

And.

Heading into next year.

We'll probably look to give some guidance on that next quarter, but.

Yes, I think what you're going to continue to see is just as we continue to find ways to streamline certain areas. We will look to redirect those resources and more revenue generating areas and.

And.

Try to increase our overall productivity over time.

Okay. That's helpful great color and great quarter. Thanks, everybody.

Thanks, David.

Thank you. Your next response from the line of John off from please go ahead. Thanks.

Thanks, Good morning, everyone.

Hi, Jeff.

You talked a little bit about you approach on reserves. It seems like you've built them quite a bit of conservatism.

Worsening 2021, and some of the over was that you put in maybe Andy for you, what what would need to happen to drive the need for more reserves. It feels like you're adequately reserved at this point what would need to materially change for the reserve levels that have to go up again.

Well I think the biggest.

Wildcard is the pandemic still.

And if our footprint goes back into.

A situation where businesses get shut down.

You know I think.

You know there are places across the country like El Paso for example.

And then you look at what's occurring in Europe.

You know there are chunks in the portfolio that I alluded to that.

That seemed to have weathered the first store.

But.

To whether another storm back to back would be very difficult.

That's probably the biggest wildcard.

Is how the pandemic.

Continues to fall.

Okay.

But it seems like you've built in some of that thinking.

The overlay that you put in place is that fair.

Yeah, we believe that the model itself, you know still realized to a certain degree on historic numbers.

You got to go a long way back where we had losses and so your loss given default.

We have some concerns there for some particular segments that I outlined.

And then of course.

[laughter].

The announcement of the 787, Dreamliner, leaving the Pacific Northwest and growing the South Carolina.

You know, while we don't have necessarily a lot of direct exposure to Boeing it will have a community ripple.

And.

We believe it's prudent for us to acknowledge that and somehow add that into our reserve.

And that is so.

Yes.

Unique and specific to particular part of our footprint its not going to be captured in sort of national GDP and unemployment numbers.

Okay, Okay fair enough and then.

I want to touch on the margin and some of your expectations because you clearly called that out in the release again, Aaron but you talk a little bit about the decision to terminate the call or some of the steps necessary to offset some of the pressure and I guess the bigger picture do you feel like the way you're set up now that you can continue to grow net interest income from here.

Thanks.

Hey, John it's Aaron.

The with respect to the color.

I think thats just reflects our expectation that the benefit to be had there was.

In terms of downgrade risk is kind of wash out.

I really have to see rates go negative to yield an additional benefit there.

Whereas if.

If we do see rates move higher that the gain in that would have diminished. So it just felt like the right time to to lock that in and I would note just to be clear that thats.

That is a.

The benefit of that has been in the run rate and we will then remain in the run rate as a result of having lot settings, so you're not going to see.

An additional benefit from that it is it is in the existing run rate.

In terms of the.

You know that the margin expectations in general.

I would obviously like to to have a more optimistic view.

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Given where the.

Where rates are and the the shape of the yield curve right now I think we're likely to continue to.

See some pressure there at least on a core basis now.

The if you look back over the past couple of quarters, we are effectively down and I'm, just going to kind of use round numbers, but down say 55 basis points.

20 of that is excess liquidity.

He's got 15 from the securities portfolio, another 15 on lower loan yields.

Ppps 10 basis points.

Got some offsetting benefit on the funding side, that's probably five basis points.

The.

The liquidity.

And the PTT.

Should go away over time right.

But as you are getting those.

Those funds redeployed into higher.

Building assets were pulling it out of fed funds, which aren't in Penn and getting that into securities and loans.

At this point most of it is going into the securities portfolio.

And.

You are still looking at sub 1% and so it's you picking something up there, but it's not as though you are going to be getting it back to.

You know the kind of.

That you'd be getting if you're driving that into loans are going at better rate environment.

So.

You know, there's going to be some some volatility and as you.

The PPP stuff pays down both from having the lower yielding an aspect of that go away, but also realizing the fees on that and just to give you a sense of where we are there we've got about $17 million of unearned income on those PPP loans that will be.

Other amortizing and are being recognized as the loans are forgiven.

And so thats, all going to add some volatility access, especially over the next probably.

Two three quarters as those as those forgiveness the bulk of that cuts were given presumably.

So there is theres a lot of noise, but I think underlying.

At all is going to be some continued pressure on the core margin.

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And the the dollar against the dollar amount net interest income.

Feels like you've got some liquidity to deploy.

As well, but you feel we can you can do some level.

That is our objective and and.

I think that given the.

The confidence in that I think you heard Chris talking about in terms of some some building pipelines and and what's happening on that front that.

We should be able to see better loan growth than.

In in that that should be able to help us.

Help us hit that target.

I'll just add that you know there and went through kind of the the items that.

Impact the margin and and all the variables that are that are included in that.

It makes it.

Challenge to zero in on and tell you you know that we expect three basis points of expansion or contraction or anything of that nature.

And so as we have conversations internally and at our Alco and with our our key line of business leaders.

Our conversations are really centered around net interest income.

And with those targets look like and what the opportunities.

For expanding.

Net interest income.

Our and and I think that that's the the the bright spot as Aaron mentioned, you know, we're getting 10 basis points on overnight funds.

As we move those into it even if it is the securities book, there's a pickup in and and I. So that's very much our focus.

Given the current rate environment and the current amount of liquidity that we have.

I agree I agree with.

More important number so thanks for the help everyone appreciate it.

Thanks, Sean.

Thank you. Your next response from the line of Jeff Rulis. Please go ahead.

Thanks, Good morning.

Just to follow on perhaps I mean, it strikes me as a bigger question maybe for the industry to is just due to liquidity.

In the system and then.

In your discussions Clint you kind of touched on it a bit.

Maybe.

Interested in the outlook of the outflow of liquidity and timing in 21 years.

Is this are we going to be stuck with this for a while or kind of.

The the piece of that money.

Liquidity surplus.

Any thoughts that you guys have shared internally about.

How that trend how that plays out at 21.

[laughter] that.

The 2.6 billion dollar question for Us and.

It's a great tool.

Great question, we've spent a lot of time over the last couple of quarters thinking about.

That and the stickiness of it and then for US it's compounded because.

You know, we typically have a seasonal inflow of deposit growth that occurs in the back half of of any given year and so really trying to bifurcate between what's what are surged deposits and what are normal.

Growth.

And you know I mentioned some of the activities of our bankers and they're.

They're out a winning new business and some of the some of that business are very very significant deposit relationships and so.

So we have that noise that gets added in and of course, we have all the details, but you can't get there from.

Just seeing that growth number year to date or quarter over quarter.

But that picking this is something that.

We.

We've we've challenged ourselves to think about and walk through.

You know, we talked about PPP forgiveness.

Well in order to get forgiveness, they had to spend the money.

And so when we think about almost $1 billion. So.

Of those deposits it could be related to TPP and it's actually.

A few hundred million more than that because we have depositors that obtained PPP elsewhere and put the money.

Yes.

And so then it's trying to peel back the layers of the onion and figure out how much of that is just customers.

Greening up how much of it is that they're they're having great years. Some of them are doing very very well and they are just sitting on the cash because either for their own investment purposes for reinvestment in their business. They want more certainty. So it's a very complex.

Issue and that's.

Been part of the struggle that that Aaron and the team have had in terms of how much put back into.

Into the bond market.

And Paul I'll, let Aaron and Chris jump in and add their perspective, because I know that this is a.

Not quite daily, but almost daily conversation between between the tool.

Yeah, it's a stress and it is almost day.

Hey, guys a couple of things that I would add to that that remains to be seen and some of it is is there is there another round of stimulus and deposits have accumulated through basically lower spending that as Clint mentioned some of the businesses are what I would describe is thriving.

Do they choose to make an investment at some time today.

So they pull those funds out and put them somewhere else than an investment aspect. We're always trying to encourage them with us a track record for that but we'll see how that part of the plays out and then on the other side of that of people, who are maybe down a little bit more intervene very conservative.

Because they're not sure what the winter holds form or what is the crystal ball, saying they may start to spend some of that money just to sustain.

To stay in business and things of that nature. So I think another round of stimulus would tell us a lot about what's going to happen there would be more comfortable if I knew what was coming.

What has been announced and obviously thats a little stickier.

But I think you're in between those two things and and as of today and their continued conversations we continue to see it.

Remains to be sticky and then so you see the results from the second quarter and grew outside of our normal seasonal activities and with that I'll, let Karen add anything.

No I would just say that we continue to do a lot of analysis and try to understand the depositor behavior.

I think Chris did a good job kind of summing it up.

Appreciate the thoughts there.

My other question.

I mean, who knows variety again, but Andy if you touched on the revenue.

The winter months and given your northwest exposure.

The hospitality side, the restaurants, maybe hotels as you talk to borrowers and they prepare for the colder months I guess is that you get the sense that that's that's indeed, a tougher environment.

Versus a group that's maybe a little more adept at managing a new norm owners as they change their business practices trying to get a sense for.

At some point, it's a black or white being outsourced outside or indoors, but.

Can they whether that.

Indeed, the into the winter and what are borrowers saying to that.

Yeah, I think that the easiest example to kind of talk about is the portfolio.

Hotels out on the Oregon Coast.

With people not able to travel to.

Places over CVD or.

We're not comfortable getting on an airplane or go to Hawaii, but my two week vacation is stuck in quarantine.

A lot of those folks had what turned out to be record summer.

Certainly back in spring it looks a lot worse when everybody was canceling but in the end they people flocked to the to the Oregon Coast and we saw that.

Same consistent behavior with where we have hospitality properties for example in bend.

Helane and some of the more vacation type places.

Well now the key is did they generate enough liquidity to get to the next summer season.

Because one of the things that will be different this winter.

Is that out on the Oregon coast, they would still have.

Business meetings, they would have different.

Organizations that would get together people, who collect barbie dolls or collect coins or have an interest in you know something right. They get together have a convention.

Well those meetings aren't going to occur this winter and so that incremental cash flow won't be there. So the amount of liquidity that they.

Accumulated coming out of what was a very successful summer season, we now have to project out to see if that's going to be sufficient to get them to the next summer season.

That's exactly what we're working with our borrowers on.

And.

No business owners are Jeremy.

Generally optimistic people.

So, they're they're feeling pretty good, especially where they're coming out of.

And again as Clint mentioned lot of us have traveled around the footprint and it has been very encouraging to see how businesses have already adapted to a lot of these challenges.

So I always come back feeling a lot better, but nevertheless, right now the story is still how much liquidity you have and if you generated that liquidity because you had record attendance at your hotel occupancy during the summer or if you were able to boost your revenues with outside dining did you.

Do it enough to get you through those cold winter months.

Thats you know the conversations that we're having and of course those conversations are ongoing and we'll know more as we get to the end of the fourth quarter.

Because we'll be able to assess that and that's why I remain cautious in those segments.

Yes that helps and that's it for me thanks, guys.

Thanks, Jeff.

Thank you your next responses from Jackie Boland. Please go ahead.

Hi, good morning, everyone.

Hi, Jeff.

Hi, good trends, so far and what you've been submitting for forgiveness.

And kids to be able to get higher than some of the other conversations ive been having just curious what you and I know that there's.

There's a lot of interpretation, but just curious as to what you think the timing making for getting recent forgiveness for some of the portfolio this quarter.

Versus 21.

Yeah, Jackie this is Chris.

We've had good response to we opened up our portal backend in August and we.

Actually had about a third.

Of the as far as numbers show that have applied to forgiveness, and we've had a little over 1400 if applied.

Just a couple of hundred million dollars and we don't expect should probably get that level on.

Back this year so some of it most likely in energy alluded to it earlier, probably looking into the first or second quarter next year and maybe some the trail even into the third quarter, but they're starting to trickle in.

I wouldn't say that it's fast by any means and we're seeing again, we're seeing that about a third of the borrowers. If you will on have applied for forgiveness already.

Okay. Okay. Thank you thats helpful.

And then it it was very interesting comment you had in both the press release and I think it was part of the prepared remarks as well in terms of just working to retain talent during a challenging environment given what people have going on in their personal lives.

Hi, Rick.

Pension Ben now versus how it was a year ago.

Retention at say is actually been pretty good we're finding creative ways to work around issues distance learning things of that nature. So we can be a little bit flexible other team members are stepping into house and it so we've been able to a minimum.

It's a little bit of that turnover I think I'm, probably more optimistic the talent that we're starting to see that is wanting to come to work with us.

From all the disruption that is going on and the things that you've seen out. There. There are there are very high quality bankers that are calling us and we engage in conversations and that's always a positive.

Okay and that will have.

I'll just add a couple of points early early on in the pandemic. The first few months.

We saw a small uptick in folks that were at or beyond what you would consider a normal retirement age that elected to retire.

I think the uncertainty and strain of of coming to work in a pandemic environment was.

Was more than they want it to deal with so we we did see a little bit of of of that and it was it was understandable.

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I think as Chris mentioned some of the things that we're seeing in terms of of outreach.

From.

Other bankers across our footprint one of the biggest challenges said that as a management team that we have been very focused on is maintaining our culture and.

And that's challenging when you're in a remote work environment and and I think that.

We've done a really good job as a team.

Of maintaining that culture, and keeping folks connected to our organization and I think thats what were seeing with other organizations that may be a struggle.

In that regard.

And we're starting to get that outreach from some of their employees and so thats an encouraging.

I guess, an encouraging sign from our perspective in terms of what we think we'll be able to do from an organic standpoint, as we move forward.

Okay. No. That's that's great and you actually answered the second part of my question I was that was that Okay. And then I guess, just lastly, and that two branches that you're closing in the fourth quarter is that included in the count of 20 or just that bump that up to 22.

And with that up to 21.

21.

Great. Thank you.

Thanks Jackie.

Thank you. Your next response is from Matthew Clark. Please go ahead.

Hey.

Good morning, guys.

Well.

[noise] on maybe just on the deposit growth its.

Been fairly robust here still and I.

I just wanted to get a sense for where it's coming from and how much of its kind of existing customers versus new and.

And.

Whether or not there was anything unusual this.

This quarter.

I can't tell you it's unusual for the fourth quarter, but for the third quarter is pretty much a mix between new business as pointed mentioned some of our bankers are flooding since a significant.

Yes, and just existing clients.

Clients increased some of that is the seasonal.

And some of it's just the beauty spending habits on the consumer side as I mentioned, we saw a lot.

More of a return to normal for protein back to normal with some card spend and things of that nature. So at most of its been commercial.

It's a bit of them, it's a mix in that.

And again, we watch it almost day, we watch it daily and then talk about a sequentially during the week and.

There hasn't been anything yet that's that's come out where I see a big run off or something of that nature.

[noise] well seasoned by wants to add anything to that but.

Yes, I would just say there.

Well I would certainly characterize a lot of what's happening on the deposit front as unusual.

Nothing that was.

Yes.

Out of.

Character, we didn't add any.

Well first or something like that that could bump that number up.

Okay.

Then just on the pipeline I think.

I'm not sure if you quantified that during your prepared comments, but.

Any color on the size of the pipeline either linked quarter year over year, and whether or not the expectation is you know you might be able to show net loan growth X X AG.

We don't typically share to get them out of the pipeline I can tell you that yes. Its mitre building on a year over year comparison, we're not where we were in previous years.

But thats understandable based on the environment. The positive is its rebuilding and say were cautiously optimistic into the fourth quarter of what that looks like it's on some timing may come into play up into your closures and things of that nature.

Okay, and then just on capital management wanted to touch on the buyback and M&A conversations I guess, how how aggressive might you get with the buyback.

And what if you could also give us an update on.

Any comments.

Commentary around M&A in terms of active conversations whether or not they picked up.

[noise] yeah.

Well.

You know the.

The buyback has.

Then.

One of the tools that we've used for capital management for a long period of time and then we had the plan that.

That expired in May and and.

And we wanted to just let some time pass and see how things played out with the pandemic and and.

Before we decided on on.

What a new plan might look like and.

No. We're looking at our current capital levels, and we're very comfortable with those very comfortable with.

All the various scenarios, we've done from a capital stress testing point of view.

Our our expectation around the performance of the loan portfolio going forward.

Our current.

Ill level.

And then when we look at the market volatility that it's there.

We just wanted that flexibility and felt like it was the appropriate time to bring that tool.

Back into the.

Into the mix.

And.

So I can't give you any specifics around a lot.

Levels or frequency or anything like that with it but I think you you followed us for a very long period of time and you know that we've been good stewards of capital and and that.

We've used the combination of our regular dividend and M&A and special dividend and share repurchases.

Managed those capital levels and.

And we're still significantly higher than the 12% long term goal that we have for total capital or 8% TCV.

So we'll be strategic with it and when it when it.

Is.

Appropriate, we'll we'll use that tool.

With respect to M&A.

You know I think everybody is starting to kind of.

They were hunkered down for much of the second quarter and I think as the third quarter went on.

And their own businesses started to stabilize and we started to get clarity on the outlook for.

The rate environment, and the difficult operating environment that the industry is going to be faced with for the next two to four years.

I think that folks started.

Reconnecting, if you will so not necessarily what I'd call.

M&A robust.

Robust M&A conversations, but definitely staying in touch with one another and just seeing.

Seen if.

As we progress through the tail end of the pandemic and.

Credit ripple that comes from that.

And all the challenges.

There's a lot of banks that I think I don't have the scale that they need to drive the value for their shareholders.

With that.

That will be expected and so I think there will be opportunities for M&A anything just from.

From an industry perspective, I really think theres going to be some pent up demand and and I think we'll start to see that play out in the coming year.

Okay. Thanks for the color.

You bet.

There are no further questions in the queue at this time do you have any closing remarks.

Well. Thank you everyone and we look forward to speaking with you again after the fourth quarter.

Thank you again for joining US today, we hope you found this webcast presentation informing this concludes our webcast you may now disconnect and have a good day.

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