Q4 2020 Columbia Banking System Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to Columbia banking system fourth quarter and full year 'twenty 'twenty earnings update at this time all participants are in a listen only mode. Later, we will conduct a question and.
I'm, sorry sessions through both the telephone and web to ask a question on the phone simply press star one.
To ask a question via the web click the Q&A button on the lower left hand corner of your screen type. Your question in the open area and click the submit button.
Yes.
As a reminder, this conference is being recorded I would now like to turn the call over to your host Dean Stein, President and Chief Executive Officer of Columbia Banking system. Please go ahead Sir.
Thank you Carmen.
Welcome and good morning, everyone.
Thank you for joining us on today's call as we review our fourth quarter and full year 2020 results.
Our earnings release, and Investor presentation are available on Columbia Bank Dot com.
But most of the turmoil in 2020 caused by the pandemic social unrest turbulent financial markets and contentious election cycle Columbia achieved another record year free.
Pretax pre provision income of over $270 million was our best year yet.
Eclipsing the record set just last year by 25.
The pandemic drove our provision expense for credit losses to an all time high full.
Full year net income and EPS were still very strong at 154 million and two.
Dollars and 17 cents respectively.
During last quarters call, we mentioned that our pipelines are rebuilding.
Our bankers business development activities during the quarter exceeded expectation.
On a record 168 million dwelling origination with deposits.
A lot of $13 9 billion.
We're very proud of the resiliency adaptability and dedication of our employees because it is here in 2020.
Business activities continue and a near normal capacity with bankers, winning new client relationships and completing the important operational initiatives that immediately improves our operating leverage.
They accomplished so much more than simply remaining open for business during COVID-19.
On the call with me today are Aaron Deer, our Chief Financial Officer.
Chris Mary well, our Chief operating officer, and Andy Mcdonald, our Chief Credit Officer.
We'll be happy to answer your questions following our prepared remarks.
I need to remind you that we may make forward looking statements during the call.
For further information on forward looking comments, please refer to either our earnings release or website or our SEC filings at this point I'll turn the call over to Eric to review our financial performance. Thank you.
On.
2020 earnings of 154 million and EPS of $2.17 per materially influenced by the economic impact of the pandemic on our net interest margin and credit loss provision steeped.
The steep decline in interest rates at the end of the first quarter self said cash higher volume of lower yielding earnings from PPP loans and investment Securities. That's funded by our Splunk deposits in total during the year.
Interest income was further supported by the interest rate color implemented at the beginning of 2019.
We're carefully manage to 305 million, which was the lowest level since 2017 per year.
So that's all acquisition.
First quarter earnings of $58 3 million and EPS of <unk> 82 cents for an increase of $13 6 million or 19 cents, respectively on a linked quarter basis quarterly pretax pre provision earnings increased $8 3 million to 74 million with the was driven mostly by a combination of accelerated loan fees from the payer.
Off with P. P T loans and the recapture of credit loss provisions.
There were other favorable operating trends in the quarter that contributed to the upside and helped to offset the continued pressure on core asset yields.
Total deposits ended the quarter at $14 9 billion up 270 million from September 30th on $3 2 billion over the past year.
Quarterly and Christmas most of the interest bearing demand low spread throughout our footprint. The annual increase is attributed to federal stimulus, including P. P. P loans as well as reduced spending and higher savings so both retail and commercial clients.
Cost of deposits declined one basis point during the quarter to five basis points, which has been on 21 basis points from the fourth quarter of 2019.
The increase in deposits created additional liquidity and we moved a significant amount of our excess cash into investment securities during the quarter.
Mindful of potential deposit that was heading into 'twenty and 'twenty one as a result of these investments our securities portfolio increased 928 million to $5 2 billion.
Despite this considerable growth the composition and duration of the portfolio did not change materially the investment securities yield declined just one basis point to 221, but I should note. The fourth quarter you benefited from early repayments on to Fannie may see MBS bonds without these one time payments field would've been two per se.
The net interest margin improved five basis points on a linked quarter basis to $3 50 to the.
The increase stems from the acceleration of $4 9 million of PTT loan seems due to pay downs or forgiveness S. P. A.
Added 14 basis points to the margin on a standalone basis. The P. P. P portfolio yield was $4 four 6% and benefited the margin by five basis points. In addition, the bank had a $1 7 million recovery of interest on non accrual loan that paid off in five basis points as well as the two early pay offs of investment securities.
Just mentioned that contributed $2 5 million of interest income or seven basis points to the margin for.
For the year, the net interest margin decreased 59 basis points due to decreases in loan and investment yields up 69 bps 28.
Secondly, as well as greater liquidity on the balance sheet.
<unk> contributed two basis points decline is accelerating she didn't ignition to offset the low 1% interest rate.
Total loans ended the quarter at $9 4 billion down $261 million from September 30th driven by $302 million of payoffs on the PPP portfolio.
Excluding PPP loans balances rose 40 million to $8 8 billion new loan production was brought on at an average tax adjusted coupon rate of 336, which compared to the overall portfolio executing on PPP loans of four or five.
Noninterest income increased $1 1 million on a linked quarter basis to $23 6 million due largely to higher mortgage banking revenues stemming from strong volumes improved sales execution and a onetime benefit of roughly $1 million from a change in our sales methodology.
Noninterest expense decreased to 815000 on a linked quarter basis to $84 3 million largely due to a $1 3 million recapture provision for unfunded loan commitments, our noninterest expense ratio declined to 2.05 per cent for the quarter and our operating efficiency ratio decreased three points to <unk> 53 per cent.
We expect our quarterly noninterest expense run rate to be in the mid to upper eighties on 2021.
Provision for income taxes increased $6 8 million.
100 basis, $16 8 million, representing a 22 three per cent of effectively which was elevated due to the higher level of taxable income in the final quarter of the year to true up our full year effective rate to $19 eight per cent.
Our 2021 tax rate to be in range of 19% to 21% and with that I'll turn the call over to Chris.
Thank you Erin and good morning, everyone.
Clinton noted fourth quarter volume production of 468 million was a new quarterly record propelled full year production, excluding PPP loans to one 4 billion.
Total loans declined from $9 7 billion to $9 4 billion, mostly due to the payoff PTP loss.
Line utilization remained stable during the quarter at 46, 6%.
When compared to the end of 2019 total loans increased by $684 million, primarily due to open PPP loans of $662 million. After the end of 2020.
During a year of unprecedented challenges our bankers focus on relationships with our clients resulted in loan levels consistent with those before the pandemic.
This is a win on credit goes to everyone throughout the company for pulling together to move our clients' businesses forward anytime on significant need.
Excluding the impact of the PPP portfolio loans grew by $40 million during the quarter.
Growth was centered in the C&I, and CRE portfolios, which increased $64 million and $35 million respectively. During the quarter.
With good production in both portfolios was offset by payoffs you continued low line utilization.
CRE growth in warehouse and retail segments, and C&I growth in rental and leasing on public administration statements were offset by declines in agricultural loans.
Mortgage loans increased by $46 million, mostly due to the purchase of a $50 million portfolio at the end of the quarter.
Residential mortgage activity continued at an accelerated pace during the fourth quarter noninterest alone revenue higher by $1 3 million on a linked quarter basis.
The quarterly production mix was 55% fixed 41% floating and 3% variable.
The overall port, Florida portfolio mix now stands at 7% PPP loans, 48% non PPP fixed rate loans, 32% floating rate and 13% variable.
PPP loans were $652 million at the end of the year with over $300 million of payoffs and Paydowns since the forgiveness portal opened mid August if.
If that wasn't enough we've opened our new portal for round two of the program on January 19th.
We once again experienced a large volume of applications.
Our bankers and back office teams are actively working with our clients to ensure that loans are funded as quickly as possible.
Seeing great results.
Deposits grew by $270 million during the quarter and $3 2 billion during the year to end the year at $13 9 billion as Aaron mentioned.
There's a positive mix shifted from 62% business on 38% consumer as of September 30th back to our typical 60%, 40% business consumer split.
At December 31, which.
Such as client and business positive.
Attributed to our normal seasonality.
From a product perspective deposits as of December 31 were evenly split between noninterest bearing an interest free.
As part of our branch strategy, we completed the consolidation of two branches during the quarter and we continue to evaluate our distribution system as we move forward.
And now I will turn the call over to Andy to review our credit performance.
Thanks, Chris.
This quarter's ACL totaled $149 1 million.
On a certain point 8 million from the third quarter comprised of net charge offs totaling $3 1 billion at a provision release of $4 seven.
The lower required allowance was too low.
On improved economic outlook offset by management adjustable for Covid related exposure in the commercial real estate portfolio.
Specific.
Office retail and hotels.
Consistent with my comments last quarter the momentum in the path of the recovery will continue to be threatened by the coronavirus pandemic.
Downside risk has narrowed numerous risks still remain such as low a fourfold increase in COVID-19 cases throughout Q4.
Low rollout of the vaccine.
The decline in GDP over November and December and continuing localized lockdowns in our footprint.
Our model assumes annualized gross domestic product to decline in the first quarter of 2021 by two 8% before rebounding and ending 2021 with a fourth quarter increase of three two per se.
The unemployment rate is predicted to end in 2021 at six six per sold.
As a reminder, we use IHS markit for our economic forecast.
As I noted previously we continue to apply an overlay this quarter of what we consider high risk commercial real estate and downstream potential impacts of permanent job losses at a significant northwest in Florida.
[noise] amounted to a per by $11 million in Q4, an increase from $5 million in Q3.
Much of this thought process is driven by the Lockdowns, which occurred during the fourth quarter in our footprint.
We ended the quarter, which on the allowance relative to period end loans of 158 percentage.
Adjusting for the PPP loans, the allowance to period end loans increased one seven.
N P. Eight for the quarter were relatively unchanged at 21 basis points.
However, as you know I like to adjust for PPP loans and I believe this provides a more consistent comparison as we move forward.
With this adjustment M. P. As you got increase but declined by two basis points, so again relatively unchanged.
Past due loans for the quarter were 28 basis points compared to 15 last quarter and net charge offs were annualized 13 basis points for the quarter versus paid last quarter.
On a per capital ratio improved modestly from 25, 3% to 23% thanks to a decline in sub standard assets.
In summary, while our credit metrics improved for the quarter I would still characterize them as stable.
On the risk weighting for other loans rated watch or worse declined $129 million during the quarter.
We saw a watch loans declined $57 million going from $393 million at $336 million.
Special mention loans declined 57 billion to $297 million.
And sub standard loans saw a decline of $15 million.
At year end, we had approximately 321 billion sub standard loans.
These changes decreased on are watching below risk rating from 11, 1% to 10, 1% of total loans.
Again very stable vessels.
Okay deferrals at the close of the quarter, we had $147 million impacted deferrals or roughly one seven per cent of our portfolio. Excluding PPP loans. This is up modestly from $114 million in deferrals at the end of the third quarter.
I would note that about 23 percentage of these loans are criticized classified assets.
The deferral bucket is comprised of $50 million and clients with first deferrals and 97 million of clients with second deferrals.
Approximately 45% or $44 million of the second deferrals are related to an Oregon State deferral program.
Unique to our footprint and others doing business in Oregon is a statute.
That allows borrowers with loans secured by real estate in Oregon to obtain a deferral simply because they have real estate domiciled in Oregon.
This statute expired on December 31.
So these borrowers will begin making payments again this was in line.
Last the Oregon legislature amended extends the statute.
Most of the deferrals continue to be in the hospitality portfolio, which accounts for $39 million would be active deferrals.
Mentioned before this is consistent with our strategy relative to the sector and does not cause us to do any more concerned than when we entered the pandemic.
The remaining balance of deferrals are really spread out across a wide variety of businesses.
The portfolio has identified back in April of 2020 as being some of the first to be impacted by the pandemic, which includes our dental retail hotel health care restaurants, and aviation portfolios amounted to about $2 4 billion as of December 31, two.
20, or roughly 24 per cent of our loan portfolio.
If we exclude the dental and health care portfolios. This number dropped to $1 2 billion or 13% of our portfolio as of December 31 2020.
The largest portfolio wide, we identified again with our dental portfolio.
As previously discussed throughout 2020, we believe the impact on this portfolio to be truly transitory.
When we look at the credit metrics for this portfolio that story bears out.
Pass loans represent 97 per cent of the portfolio.
Special mention and sub standard loans actually declined in the fourth quarter.
We have only one loan on deferral for 715000.
Past dues are only one basis points and non accruals on a two basis point.
We will likely be removing this pandemic impacted portfolio for our 2021 reported.
The next largest segment, we identified as having high risk relative to the economic disruption caused.
Caused by COVID-19, as our retail portfolio.
We have approximately $512 million in retail related exposure, excluding PPP loans.
Comprised of commercial real estate and commercial business loans and represents about 6% of our total loan portfolio.
The largest part of our retail exposure is comprised of commercial real estate loans, which accounts for approximately 452 million of the total or roughly 88 per se.
Again to give me an idea of the types of retail properties. We financed the most common are small four to five day strip centers located in suburban communities and Standalone single tenant properties.
In addition, the portfolio contains grocery anchored centers and mixed use properties.
We're not in large downtown core metropolitan areas.
Nor do we financed regional malls or big box retail.
For the entire retail portfolio, 95% as tax weighted.
Of which 5% is what which we also categorized as they pass category.
It is a slight improvement over last quarter and continues a positive trend.
While this trend is encouraging we remain cautious given government mandated COVID-19 closures and government mandated deferrals.
Yes.
Okay deferrals in this segment are up slightly from the third quarter from 1% to about one 3%.
With half on their first deferral and the other half on their second deferral.
However, it is still a significant improvement from earlier in the year when deferrals accounted for $16 four per cent of the portfolio.
Using added origination values the average loan to value for the portfolio was 50%.
With 98 per cent of the portfolio, having loan to value less than 75 per cent.
We have stress tested this portfolio for equivalent declined in value you have seen during the great recession.
The average loan to value rises to 63% with about 76% of other properties, having a loan to value less than 75 zone.
Obviously, we're pleased with how this portfolio is performing but we remain cautious in our expectation is that we will see weakening in this portfolio throughout 2020 low.
Let's discuss hotels net.
We have $327 million in hotel loans, representing about three five per cent of our loan portfolio.
Again to give you an idea of the type of hotels, we fit most have one of the following flag.
Holiday Inn, best Western choice, very hot and wisdom.
And total flagged properties comprise 77 per cent of the portfolio.
The average loan size is $1 5 million.
Today, we have $39 million on deferral, which is down from last quarter when approximately $62 million was on deferral.
However, $31 million up to $39 million is on its second deferral.
For us this is not surprising as we are executing on longer term strategy.
We do expect deferrals will continue to decline.
In this category.
For the fourth quarter, we actually source and healing in this portfolio loans rated special mention and sub standard declined from 180 million to 145 million as the leisure travel properties performed well in 2020.
It appears that since folks did not go to Hawaii, Puerto Rico or Europe.
Those to go to the Pacific Coast, Nashville, parts of Idaho, and Oregon, as well as other recreation areas in the northwest.
Similar to the retail commercial real estate portfolio, 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 54% with 97 per cent of the portfolio, having a loan to value of less than 75 per se.
On a stressed basis.
<unk> 55 per cent of the portfolio has a loan to value less than 70 call it per se.
Let's move on to the non dental healthcare portfolio, which is about $254 million in total excluding PPP loans similar to the dental portfolio. We saw the impacts of the pandemic here to be transitory.
Problem loans have remained steady at around one four per cent of the portfolio for the last three quarters and this is down from two 1% at year end 2019.
Past dues are consistent at 10 basis points and payment deferrals have declined from $107 million to 250000, which really only represents one client.
Next up is restaurants and foodservice is.
This of course is a portfolio that has been very impacted by government actions attempting to control the COVID-19 pandemic.
After having been forced to close in the spring of 2020, and then again in the late fall early winter of 2020, we anticipate further weakening in this portfolio throughout 2040 low.
We have approximately $173 million in this portfolio and.
In this portfolio, excluding PPP loans excuse me folks.
With two thirds, comprising commercial real estate loans today, 82% as watch or better.
Down from 86% at the end of the third quarter.
Just watch and worse loans increased $5 million 35 billion.
In absolute terms, not big numbers, but directionally it demonstrates the effects of governmental action.
We granted 157 deferrals for about $66 million in this portfolio.
Today, we have 12 payment deferrals for about $8 million.
Last quarter this portfolio at 16 million and deferrals.
Similar to the hotel and retail segments, we see this area, taking some time to heal and we are not surprised by the negative migration.
Certainly the current round of PPP funding will greatly benefit this cycle.
We do stress testing again on this portion of the portfolio and on a pre pandemic basis. The average loan to value was 58%, 94%, having a loan to value less than 75 per se.
Again on a pre pandemic basis.
Under our stress test scenario average loan to value rises to 73 per se with only 55%, having low loan to value less than 75 per cent.
The last portfolio Im going to discuss is our aviation portfolio.
Relative to both direct exposure to domestic airline carriers as well as entities that lease airplanes and engines to airline carriers.
In total the portfolio it was about $140 million.
About 96 million being direct exposure to U S. Domestic airlines on the remaining $44 million of exposure to lessors.
Today, most of the portfolio was weighted watch which is consistent with last quarter.
Given the longer duration for a recovery in this segment risk ratings are highly dependent on borrower's liquidity and run rate or as we call. It <unk> burn rate position.
Of the domestic airlines, we have exposure too they have raised over 53 billion in additional capital to assist them through this pandemic.
As such this additional capital combined with expense reduction efforts results at our borrowers having between 18 to 35 months of burn rate.
This does not include six and acted on even.
More that was recently announced an additional payroll support agreement with the U S Treasury Department.
Based on the current burn rate.
With the majority of our exposure has sufficient liquidity to get them into the fourth quarter of 2022.
Most of the domestic airline exposure is secured by aircraft with a free stress loan to value of 69 per se.
On a current loan to value would be really closer to 74, however on our stress test basis, the loan to value rises to 89 per se.
As for the leasing portfolio, which again is only $44 million 50.
<unk> 50 per cent of the exposures in Asia, 26 in Europe, and Asia and South America.
The rest is in North America, and the Middle East.
The majority of the portfolio consists of narrow body aircraft with an average age of eight seven years.
Yes.
View is younger more fuel efficient aircraft is the most in demand post pandemic.
Based on origination values, our average loan to value for this portfolio was 74 per se.
Based on what we believe each day.
Value probably closer to 78 per cent.
And on our stress cases, it rises to $91 per se.
Similar to the domestic airlines many of the lessors have been able to access the bond market and securitize unencumbered assets to bolster their liquidity position.
We estimate our lots or do have raised over 3 billion in liquidity.
Well through the third quarter.
So while decline back to profitability and more importantly positive cash flow from this industry will be protracted.
You used to attract the necessary capital to bridge them through a return to profitability, which we do not.
Anticipate until 2023, a day earlier.
With that I'll turn the call back to the club.
Yes.
The challenges of 2020.
We remain focused on supporting our communities throughout the year.
Standard or community impact on paper and our efforts to meet the unique challenges of the yield.
And finally on anything company contributions and important division generated nearly $400 economic support across our footprint.
As a testament to our employees' dedication to the communities slightly north of one.
I'm, particularly proud of the $315000 day rates for Walmart.
Drive during the holiday season.
Nearly $1 $5 million has been raised to support more than 60 shelters over the July six year history.
Our teams also supported community through a pass it on program are repaid more than 350 small businesses over $600000 to provide a service for someone in that community was impacted by COVID-19.
The economic downturn.
These are just a few examples of the ways our team express their dedication to our communities on 2020.
I'm proud of their continued support on the commitment they demonstrate in the midst of a very challenging year.
Lastly, we announced our regular quarterly dividend of <unk> 28. This morning.
Moving to pivotal moving on February 20.
To shareholders of record.
As of the close of business on February 10.
This concludes our prepared comments and as a reminder, Andy Chris and Eric are with me to answer your questions.
Carmen we will open the call for questions.
Thank you and as a reminder, ladies and gentlemen to ask a question via the telephones simply press star one.
So what are your question press the pound key.
To ask a question via the web. Please state your question button on the lower left hand corner of your screen type. Your question in the open area Inc.
Thank you.
Once again to ask a question over the phone plans Taiwan.
Our first question comes from Jeff <unk> with D. A Davidson your question. Please.
Thank you good morning.
I wanted to check.
Check back in on the.
Just the expenses.
I.
Aaron.
Mid to upper eighties run rate, but.
Just kind of thinking about the mix of that in catching up to where.
You sit on kind of investment versus management of expenses and and.
I'm, just kind of the intricacies I know that it's an ongoing investment, but just trying to get to where anything new you're launching or the spend you've had.
Years past, just trying to catch up with them.
That dynamic thanks.
It kind of touches several areas.
I'll, let Eric get into.
And to the.
The details of it net adds appropriate Chris might jump in but just.
To start with one other things and I think you changed your question in this in this fashion is set.
We never stopped investing.
And our business in the future of our franchise.
Net investment can be anything from.
Additional technology can be we opened.
In the quarter R. R.
Our newest neighborhood that we see.
That's an investment in that community.
Also there is a fair amount of.
Disruption.
It occurred.
Across <unk>.
Across our three state footprint.
And it's with some of the large national banks that are our consolidated operations.
I think COVID-19 and remote work has has.
Then on dynamics.
Cause folks to maybe reconsider.
The companies that they work for and we continue to remain an employer of choice broadly across our markets and so.
The opportunity to look at new teams.
<unk>.
As those opportunities present themselves.
We will continue to.
Take a long term view and make the investments that we think will drive additional returns down the road for our shareholders instead I'll step back in the end.
Is.
Details.
Yes, Jeff.
As you saw on the press release, we did have the $1 3 million recovery book provision from side commitments in the fourth quarter. So that's obviously something to keep in mind, when you're thinking about where the run rate.
Guidance is for next year. In addition, there is on.
It's kind of normal year end true ups.
On a variety of kind of ins and outs on that front one of the larger so we had a.
700000 reversals on medical accrual in the fourth quarter. So.
That obviously won't carry into the first and then.
As you know you're always kind of have.
Some higher accruals generally on the comp side FICA costs, thus far.
So things heading into the new you're on.
Also just as a year over year reference they.
Recall that in the early part of 2020, we recognized $2 2 million.
Credits for FDIC assessments.
Benefits of obviously gone away.
And then as the year goes on we are hoping that we can.
Our our bankers.
We're excited to get back out in front of clients and also on zoom calls and so we could see some increase in travel and entertainment costs and that sort of thing.
As Clint said, we're always investing in new personnel and new technology is just kind of an ongoing part of our business.
Chris has anything to add in terms of kind of special items on that front no probably just more of the Jeff you've followed us for a long time and know that we have.
Pretty consistent methodical process around.
Our branch system and other parts of the.
The network and we've been backing down square footage for free.
For years for decades, and will continue to look at that it will continue to do it.
There's a piece now thats been brought into play with all of the consolidations in the industry or the closures.
We're looking at that from an opportunistic standpoint, and what does that mean.
We're seeing business that we've been able to pick up so there's a revenue play on this side too from these branch consolidations.
Especially on and more of the world communities and things of that nature. So again, we'll look at that we'll look for opportunities but I.
I wouldn't see us changing from our current direction of.
Consistency asking them to go on that as far as people.
There's certainly disruption in the industry.
When mass consolidations are announced and things like that.
Creates anxious employees.
And we're an employer of choice as Clint mentioned and so we'll continue to look at.
Where those folks come available and if the investment.
Makes sense from an opportunity is there we will certainly continue down that path, but.
It's been a very disciplined approach.
Over.
On the history on the of the bank and I don't see that changing.
I appreciate it that's good coverage one last one just maybe per client it's been a while on the acquisition front and some of that certainly by design, but also perhaps by the market.
<unk>.
Update on on your appetite.
We can add on my guess is it more storage.
Steer towards.
I can lift outs and other but.
Maybe give us an update on where you think how you're thinking about acquisition.
Going forward.
Okay.
It's still very much a part of our DNA.
When we look at the <unk>.
Individuals that have been part of our.
Acquisition and integration teams over.
On the last.
10, or 12 years I would say that we've had some folks that have retired but I'd say that a lot of our key leaders and those types of activities.
Probably 80% to 85 per cent of them are still with us. So it's definitely a skill set that we still possess.
Been a lot of time.
<unk>.
On modernizing our platforms and things over.
Last few years and in <unk>.
Really started looking towards.
What the M&A market might might hold.
About this time last year, and then Covid hit and.
Kind of shut everything down.
I just say that.
Our history of Av.
<unk> been active in M&A.
Is.
Still part of part of our strategy.
And.
I think that there's just.
Nothing specific but I just think in general.
And visitors.
There's some pent up demand and I think there is an increased sense of urgency.
Relative to the rate environment.
To improve operating leverage.
And grow revenue and so I think that that's going to accelerate as we get further beyond the pandemic.
And our global as always to leased.
Part of the conversation.
On somebody and breaches the point, where they're ready to find a partner.
Our goal is always to at least have haven't picked up the phone and give us a call. So I don't know if thats helpful. But.
Yes.
Alright excellent.
Thank you and I'm, Sorry reminder, ladies and gentlemen, if you have a question simply press star one on your on California can withdraw your question press the pound nor has.
Our next question is from Jon <unk> with RBC capital markets. Your question. Please.
Hey, good morning, everyone afternoon, I guess.
For example.
That means I get to ask two questions by the way.
He was late behind me, so I'll start but.
Anyway.
Maybe Andy a question for you <unk>.
Appreciate all the commentary on the stress portfolio as a few of the consolidated.
All of that.
Are you.
More optimistic slash less pessimistic or do you still have.
Things that keep you awake wake at night, it feels like things are better on and kind of looks like that from a from your economic factors in your reserving, but give us a big picture of your consolidated thoughts on that.
Yeah, So I think obviously, the dental and health care portfolios.
Played out like we thought and so we feel very good about those the hotel portfolio has performed exceptionally well I would say and I think that has to do with the fact that we have more leisure related hotel exposure than we do business travel.
And we did that in my comments.
And then yeah I have to be pretty happy with the rest of the portfolio, but the two that I continue to be concerned with on.
This is consistent as restaurants and retail.
It really has to do with the government closures in our footprint.
Many of those are small businesses.
And I think it will.
We will have a.
A very detrimental.
There's so many of them got closed early in the year they.
They got closed at the end of last year and they remain closed now or or if theyre open is very limited.
No.
<unk> 25 per cent of what they could do prior to so those two segments are the ones that I continue to have I guess more focus on and concerned in the other segments, which I think is performing quite well.
Okay. Okay.
The power on.
Maybe this is the right.
Here on Andy question, but.
The path to get back to maybe where the reserve was as a percentage of loans earlier in the year.
Is that just the natural evolution of the economy, and vending and things getting more comfortable.
Yeah, I mean, obviously under the CSO model.
We.
Aside.
On a larger amount of reserves on the first half of 2020.
And.
As I have discussed earlier, our provision I think was really relatively unchanged.
As we go throughout 2021, you know I don't see a whole.
You know like any really big.
Changes in that other than I see that charge offs materializing in the latter half of the year and into 2022 and that will bleed down.
The reserve.
We won't necessarily have to replenish that if the economy continues to move on a positive direction.
So to your point, yes, it will be a natural evolution of how the reserve works.
Okay.
Aaron maybe one for you.
You put a little bit of cash to work.
On this quarter in securities.
I understand that but.
Talk to us a little bit about what you expect on the margin some of the puts and takes on the core margin I think was your new loan yields are you, suggesting continued modest pressure, but maybe with some of these loan growth production numbers the potential to outrun that so maybe kind of walk us through what we should think about in terms of how we model it.
Sure.
John.
We reported a $3 52.
Margin for the fourth quarter.
On the PTT impact of that in the quarter all in.
Yes.
So the interest earned on those the normal amortization amounts and the accelerated amortization of.
She's is included in that.
On that five basis point benefit.
We also had <unk> five basis point benefit from the.
Interest recovery that we had on on non accrual loan of $1 7 million and then does this to see MBS prepays that added about seven basis points.
So you can kind of take out all of that to I guess get some some measure it maybe with the core would do that I wouldn't say that it's not entirely uncommon to have some some prepaid.
Benefits on the.
The portfolio just given that we do have a number of portfolios to kind of match those characteristics, but.
As you noted.
Going forward to be.
The rate we're at new <unk>.
<unk> is coming on relative to the portfolio.
B.
Detrimental to the margin.
Third quarter, excluding other kind of PPP noise.
The rates on the loan portfolio was $4 15.
The fourth quarter that dropped down to four or five.
New production coupons are around $3 40.
So.
Theres going to be a continued headwind there similarly on the securities portfolio.
Excluding the benefit of those prepays the yield on that book was right at 2%.
Just as in the portfolio and we had a very busy.
Quarter on that front as you noted with <unk>.
Brought about $1 1 billion in new Securities.
The yield on that was $1 two 6%.
So again, it's going to do.
<unk> continued to weigh on things going forward.
So long as we continue to remain in this extremely low rate environment.
Hopefully.
We have seen a little bit of lift and in the 10 year recently and hopefully that sticks and continues to build in and hopefully with the.
Ultimately, we get higher rates on the on the short end as well if we continue to progress through the.
Economic recovery is as expected, but but we're not counting on any benefit from that.
Anytime soon but I think it would be kind of take where COVID-19.
New stuff is coming on in <unk>.
That should give you a sense of the kind of pressure that will probably likely to continue to see through the year notwithstanding all of the additional noise that we're going to see from them from PTP.
Okay Alright.
Thanks, a lot.
Thank you. Our next question comes from Matthew Clark with Piper Sandler Your question. Please.
Hey, good morning, everyone.
On the new new money yields per.
On site at $3 40, I guess I'm, a little surprised at how low. They are is that just a mix issue this quarter.
Where we might see a little bit higher rate going forward or what.
Or is that just kind of.
The new.
That's where the competition is.
Yeah, Matt this is cash.
They're kind of side of it and tells me that we're all kind of thinking the same way maybe.
On a lot of it is the competitive environment.
Massive amounts of liquidity are out there.
The challenges when you find good credit is it's extremely competitive and so we steer away consistently from anything that involves structures that we're uncomfortable with terms that we're uncomfortable with but we're gonna have to compete on rate.
Sometimes in that and so some of it also is the mix now you bring on some larger deals during the quarter those come on at a little little lower rate generally.
And going forward I would anticipate that.
It will probably be looking at this for a while and it's going to take a little sorting out as.
On competitors.
We're entering or maybe pulling back on the market based on how their portfolios perform.
But I would expect that the competition continues especially for high quality credit deals.
Okay. It makes sense and then on the.
As it relates to the disruption in your markets.
At the point, where you've already started to identify.
Individuals or teams or is that still a ways out.
You cut out a little bit there so it was quite.
And we identify teams on ones that we brought on new talent.
Yes have you already identified teams at this stage and if so are you looking for.
Type of specialty lenders or is it just.
Your general commercial.
Commercial banker.
With season books of business.
Sure.
<unk> always in process and we go with the philosophy of when we're recruiting all the time you never know when somebody is going to be ready to make that move and so if we know the individuals we know the markets that they're in we got a good idea of their books and what they do then we'll be opportunistic on.
When the time is right now.
Now there are.
Got it.
Specialties and things of that nature that are certainly.
To the core.
On how we operate and if we can if we can locate somebody.
They're interested in joining us and they bring a new niche absolutely interested in that.
If somebody that fits into an existing niche that maybe we've been competing against.
All of them with respect them.
We know the quality bankers, we will add them into that piece some of our markets were pretty widespread between metropolitan.
Areas and rural areas.
Farther away from the Metropolitan area is you tend to get more generalists.
And some of them however, do it.
Sure.
So that's kind of a long way around as we are open to Ian on and we're constantly looking.
Okay, and then can you just remind us how much you have on the way of net P. P. P related revenue to come through from round one.
What was remaining at December 31.
Yes.
It was $9 9 million.
Remaining.
Net she used to be amortized.
<unk>.
Our next question.
From Jackie Bohlen with U K B W Quest.
Question. Please.
Hi, good morning, everyone.
Okay.
I was just curious on the driver of the low loan purchase.
Quarter with Baxter on bi.
Looking to some of them run off or was it just an attractive portfolio that came across your desk.
Kind of growth, it's more we have a portfolio of mortgage.
And it's.
A fair bit of that obviously is.
Paying down given given where rates are so it was a little bit of reselling of that but.
And I would just highlight we're also producing.
Producing a great deal and what we're producing doesn't always necessarily match, what we want to hold on on our own balance sheet. So the amount of debt. We purchased is certainly far below what we actually produced and sold during the quarter on a Christian.
Chris has anything to add to that but.
Okay.
One thing kind of overall.
Competition within that portfolio with the driver.
Yes.
Okay.
And then touching back on you on.
On the M&A topic I'm, just wondering if you could provide us a refresh on what youre looking for in terms of a partner in terms of maybe how small or how big you might be looking to go and also if northern California still remains of interest channel.
Yes.
It's.
Okay.
Yeah.
We say, it's got to be a cultural fit and we've said that.
It's been one of our criteria.
Let me start with the balance sheet.
And look at their business model because.
It's a very different business model than what we have.
It's probably going to be culturally to be very hard to bring the two organizations together.
There's the size thing is a bit of a.
Moving target if you will.
Because I think it depends on.
But if it.
A bank that has a really good niche debt.
It's additive to what we do.
It could be on the smaller side.
And that would give.
And we could look at and build upon.
An example.
And not that from a size standpoint that Pacific continental fit into this but.
Pacific Continental had the national Health care platform.
So it's very complementary we felt at the time in three years later, it's proven proven itself out that it's very complementary to what we were doing in the health care Scott.
And our existing market. So if there's a bank thats on the smaller side.
Has something like that that would be of interest if it to fill in and there are some.
Joleon opportunities within our existing footprint.
That might cause us to.
Look towards the smaller side of it.
B.
Yes.
Obviously ones, where you have a lot of market overlap in.
Get better operating leverage in but those are going to typically be on the larger inc.
Yes.
<unk>.
And then as it relates to all of those things.
If it provides entry into a new market.
That's also something that we would evaluate it has to be the cultural fit first and foremost, but then what else does it bring to us.
Going into a new market.
Something that would take a very very.
Very close to book that.
And specific to northern California.
We've been.
<unk> been studying that market for several years now.
We like that.
And about the market.
It's very similar on a lot of ways to parts of the Willamette Valley and and.
And even.
Even as you get into the more.
Metro areas.
Not necessarily San Francisco proper, but in and around the Bay area and.
In those markets.
They're pretty similar to Portland and Seattle.
No.
So it is something that on.
We think is it's still of interest and we'll continue to just learn more as much as we can about about the market.
Quality bankers are in that market.
Great. Thank you Glenn that was a great overview.
Exactly.
Thank you and our last question comes from David <unk>.
Raymond James Your question please.
Good morning, everybody.
It's great to see the acceleration in originations in the quarter I'm, just curious where you're seeing growth from existing clients that are continuing to investigate is it new clients from the PPP program or the new one buyers or even the neighborhood concept and just.
Just kind of a pulse of your clients as we enter 2020 'twenty 'twenty. One do you kind of get the sense that they are ready to invest in expansion Capex and we could see accelerating growth throughout the year or clients, it's still a bit cautious just given the uncertainty.
Yeah, David This is Chris.
So it's a mix in there.
And get some of our markets and they haven't had.
Governmental cultures and things of that nature. So there are often operating margin difference the originations are purely across the footprint.
And even companies that.
It didn't experience.
Downturn or things of that nature that are being opportunistic as you said and they're looking to make investments some of it's purchasing their own building.
Of that nature.
It's a mix.
Between.
Current clients and new now we were one of the institutions day in the first round of PPP we.
We did not extend it as a marketing tool and we didn't take on.
Non clients in that manner. However, we are seeing people coming to us.
After the fact and that we.
We are winning during the fourth quarter has come from just our bankers efforts and their continued effort to stay in front of us.
Our prospects.
We brought on some other investment types of things that are ultimately turning into opportunities, which has been good to see.
Dan.
You know as you start looking towards the towards the year I think it's a little bit of a mix there too.
If you look at the second round.
On PPP and what the requirements were.
To enter that Theres a lot of companies out there that are doing very well and are not eligible to reapply theyre going to different op, Inc.
So it's about <unk>.
Adjustments or whatever it might be for their business than those that are reapplying. This go around that really need that stimulus and that support. So we'll have to see how this next round really plays itself out I think the story really is.
The momentum that we had talked about building.
We saw a lot of other kit in the fourth quarter.
Typically always cautiously optimistic that we can continue that.
A lot of our bankers a lot of our back office loan ops things of that nature.
Sleeves rolled up and working extremely hard right now on the second round.
And that's.
That's a distraction, but again, there's also new business that's out there at the same time, so we're really balancing that out and trying to keep.
The momentum from the fourth quarter, going, but but theres a bit of a distraction.
And that's going to continue for a little bit.
Okay.
And then just on the fee income front, you know the counter cyclicality on some of them.
These business lines has been a huge help in the challenging environment. Just curious how you think about fee income a journey did you seem that you'd be interested in expanding into whether organically or through M&A and just how you think about.
Fee income in expanding potentially expand on that fee income contribution.
Yes. This is Eric I'll start just because I do want to highlight that during the quarter we had.
This is on our press release that there was almost 800000.
Fair value adjustments on the mortgage loan pipelines to just.
Set and deliberate about volatility, but and I don't mean to take away from the.
Tremendous activity that we've had in mortgage because that team has just been doing a fantastic job.
But beyond that I will turn it over to Chris to add anything else on the seafront. Yes. I think there is are we looking for other areas Thats always something thats under consideration we've explored a lot of things Havent found anything thats truly a kit that goes to cause a change who we are who we expand.
And with that said.
<unk>.
<unk> financial we have our trust group.
And those teams continue to grow and improve.
2020 was off to a tremendous start and then the pandemic hit and a little bit of a dip in the middle there, but they closed the year strong and what we're seeing in that business is a real demand for people to participate in financial planning and look at possibly.
Business sales and things of that nature as we start to come out of this so.
Optimistic in that area.
On the mortgage group continues to do a great job as Rick mentioned.
It's a little bit more rate contingent.
And as rates start to rise that will certainly change the refinance aspect of that but.
To date, it hasn't that hasn't happened and they continue to come in so optimistic there as well.
I think when you look into some other things like.
Card revenue and some of the other fee based types of situations.
It's a little bit up in the air Stone.
As the economy opens up as the next seasons become more prevalent as people basically where I'm going is as people start to spend money you should see those return just don't know yet if that's going to return to pre pandemic levels or is something going to be different how does consumer behavior changed.
The rest of it's you know I'd say, it's kind of business as usual, we still participate in.
In swaps and other fee sources such as that.
But again always open to looking and considering something that we're not currently doing or how we could possibly expand what we're currently doing in the investment world or something of that nature.
Okay.
That's helpful. And then just could you just talk about your asset sensitivity here you guys are naturally asset sensitive and it it seems like the asset sensitivity might increase.
Increased just given the building liquidity and significant proportion of loans that are repricing here in the next six months, but you also got the impact on floors, but.
Just kind of putting it all together how do you think about that and how do you plan to manage your rate sensitivity, maybe does that give you some confidence to potentially take on some duration in the securities book.
Well, we've done just that actually.
During the quarter, we purchased $1 1 billion.
In securities with net growth.
Over 900 million.
The.
We have put.
And she said we've attempted to put a little more duration on there I think what we purchased.
Six seven years duration on average if I recall correctly.
But it didn't extend the overall.
Portfolio duration that materially we're still below five years there.
And in doing so we arguably have taken some.
Some asset sensitivity off the table too.
Generally a little better interest income on.
Near term rather than letting that will sit in cash but.
I think that's the right decision, we're still we still have an enormous liquidity position and that book alone.
It's going to be throwing off on 600 million a year end cash flows, which we hope to redeploy into higher yielding loans.
As loan growth comes back in in a more material way so.
I would say we are arguably.
A little less asset sensitive today than we were.
Three months ago, but it's.
I think we're extremely well positioned for rising rates I mean, the real.
And free up secret there is as our cost of funds and <unk>.
As you know.
Other deposits are just phenomenal on these kind of very low cost deposits.
And thats going to <unk>.
Serve us extremely well if and when we eventually see some other thing right.
Okay, that's great. Thanks.
And ladies and gentlemen, this concludes our Q&A and program for two day. We thank you for your participation in today's conference and you may now disconnect. Good day.
Yeah.
Yes.
Okay.
Net.
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On the.
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