This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Ladies and gentlemen, thank you for standing by and welcome to Columbia Banking Systems' fourth quarter and full year 2020 earnings update. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session through both the telephone and web. To ask a question over the phone, simply press star 1. 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. 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.
spk06: Thank you, Carmen. Welcome and good morning, everyone. And 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 at columbiabank.com. Amidst the turmoil in 2020 caused by the pandemic, social unrest, turbulent financial markets, and contentious election cycle, Columbia achieved another record year. Pre-tax, pre-provision income of over $270 million was our best year yet, eclipsing the record set just last year by $25 million. The pandemic drove our provision expense for credit losses to an all-time high, yet full-year net income and EPS were still very strong at $154 million and $2.17 respectively. During last quarter's call, we mentioned that our pipelines were rebuilding. Our bankers' business development activities during the quarter exceeded expectations, delivering a record $468 million of new loan origination with deposits up to a new high of $13.9 billion. We are very proud of the resiliency, adaptability, and dedication our employees exhibited during 2020. Our business activities continue in a near normal capacity with bankers winning new client relationships and completing important operational initiatives that immediately improved our operating efforts. They accomplished so much more than simply remaining open for business during COVID. On the call with me today are Aaron Deer, our Chief Financial Officer, Chris Meriwell, 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, our website, or our SEC filings. At this point, I'll turn the call over to Aaron to review our financial performance. Thank you, Glenn. 2020 earnings of $154 million and EPS of $2.17 were materially influenced by the economic impact of the pandemic on our net interest margin and credit loss provision. The steep decline in interest rates at the end of the first quarter was offset by a higher volume of lower-yielding earnings from PPP loans and investment securities, both funded by our small deposit imposed during the year. Interest income was further supported by the interest rate collar implemented at the beginning of 2019. Expenses were carefully managed at $345 million, which was the lowest level since 2017, the year of the Pacific Continental acquisition. Fourth quarter earnings of $58.3 million and EPS of $0.82 were an increase of $13.6 million and $0.19, respectively, on a linked quarter basis. Quarterly pre-tax pre-provision earnings increased $8.3 million to $70.4 million with the rise driven mostly by a combination of accelerated loan fees from the payoff of PPT loans and a recapture of credit loss provisions. Though there were other favorable operating trends in the quarter that contributed to the upside and helped to offset continued pressure on core asset yields. Total deposits ended the quarter at $13.9 billion. up $270 million from September 30th and $3.2 billion over the past year. The quarterly increase was mostly interest-bearing demand and was spread throughout our footprint. The annual increase is attributed to federal stimulus, including PPP loans, as well as reduced spending and higher savings by both retail and commercial clients. Our cost of deposits declined from one basis point during the quarter to five basis points, which is down 21 basis points in 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 that were making mindful of potential deposit outflows heading into 2021. 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 million, I should note the fourth quarter yield benefited from an early repayment on two Fannie Mae CMBS bonds. Without these one-time payments, the yield would have been 2%. The net interest margin improved five basis points on a linked quarter basis to 352. The increase stemmed from the acceleration of 4.9 million of PPP loan fees due to pay downs or forgiveness by the SBA. This added 14 basis points to the margin. On a standalone basis, the PPP portfolio yield was 4.46% and benefited the margin by five basis points. In addition, the bank had a $1.7 million recovery of interest on a non-accrual loan that paid off, adding five basis points, as well as the two early payoffs of investment securities I just mentioned that contributed $2.5 million of interest income, or seven basis points to the margin. For the year, the net interest margin decreased 59 basis points due to decreases in loan and investment yields of 69 bits and 28 bits, respectively, as well as greater liquidity on the balance sheet. DPP loans only contributed two basis points due to decline as accelerated fee recognition 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 in 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 excluding PPP loans of $405. Non-interest income increased $1.1 million in a linked quarter basis to $23.6 million due largely to higher mortgage banking revenues stemming from strong volumes, improved sale execution, and a one-time benefit of roughly $1 million from a change in our sale methodology. Non-interest expense decreased to $815,000 on a linked quarter basis to $84.3 million, largely due to a $1.3 million recapture of provision for unfunded loan commitments. Our non-interest expense ratio declined to 2.05% for the quarter, and our operating efficiency ratio decreased three points to 53%. We expect our quarterly non-interest expense run rate to be in the mid to upper 80s in 2021. The provision for income taxes increased $6.8 million on a linked quarter basis to $16.8 million, representing a 22.3% effective rate, which was elevated due to the higher level of taxable income in the final quarter of the year and to true up our full year effective rate to 19.8%. We expect our 2021 tax rate to be in the range of 19% to 21%. And with that, I'll turn the call over to Chris. Thank you, Aaron, and good morning, everyone. As Clint noted, fourth quarter loan production of $468 million was a new quarterly record, propelling full-year production, excluding PPP loans, to $1.4 billion. Total loans declined from $9.7 billion to $9.4 billion, mostly due to the payoff of PPP loans. 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 as of 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 and credit goes to everyone throughout the company for pulling together to move our clients' businesses forward in a time of significant need. Excluding the impact of the PPP portfolio, loans grew by $40 million during the quarter. Growth was centered in the CNI and CRE portfolios, which increased $64 million and $35 million respectively during the quarter. Record production in both portfolios was offset by payoffs and continued low line utilization. CRE growth in warehouse and retail segments and CNI growth in rental and leasing and public administration segments 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, driving non-interest loan 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 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 payouts and paydowns since the forgiveness portal opened in mid-August. If that wasn't enough, we've opened our new portal for round two of the program on January 19th, and 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, and we are 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. The deposit mix shifted from 62% business and 38% consumer as of September 30th back to our typical 60%, 40% business-consumer split at December 31st. The decline in business deposits is attributed to our normal seasonality. From a product perspective, deposits as of December 31st were evenly split between non-interest-bearing and interest-bearing. 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 totals $149.1 million, a reduction of $7.8 million from the third quarter, comprised of net charge costs totaling $3.1 million, and a provision release of 4.7. The lower required allowance was the result of an improved economic outlook offset by management adjustments for COVID-related exposure in the commercial real estate segments of the portfolio, specific to restaurants, office, retail, and hotels. Consistent with my comments last quarter, the momentum and path of the recovery will continue to be threatened by the coronavirus pandemic. While downside risk has narrowed, numerous risks still remain, such as the fourfold increase in COVID cases throughout Q4, the slow rollout of the vaccine, black 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 2.8% before rebounding and ending 2021 with a fourth quarter increase of 3.2%. The unemployment rate is predicted to end 2021 at 6.6%. As a reminder, we use IHS market for our economic forecast. As I noted previously, we continue to apply an overlay this quarter for what we consider high-risk commercial real estate and downstream potential impacts of permanent job losses at a significant Northwest employer. These amounted to a combined $11 million in Q4 and 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 with an allowance relative to period-end loans of 1.58%. Adjusting for the PPP loans, the allowance to period-end loans increases to 1.7. NPAs 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, NPAs do not 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 at 13 basis points for the quarter versus eight last quarter. Our impaired capital ratio improved modestly from 25.3% to 23% thanks to a decline in substandard assets. In summary, While our credit metrics improved for the quarter, I would still characterize them as stable. On the risk rating front, loans rated watch or worse declined $129 million during the quarter. We saw watch loans decline $57 million going from $393 million to $336 million. Special mentioned loans declined $57 million to $297 million. and substandard loans saw a decline of $15 million. At year-end, we had approximately $321 million in substandard loans. These changes decreased our watch and below risk ratings from 11.1% to 10.1% of total loans. Again, very stable metrics. Okay, deferrals. At the close of the quarter, we had 147 million in active deferrals, or roughly 1.7% of our portfolio, excluding PPP loans. This is up modestly from 114 million deferrals at the end of the third quarter. I would note that about 23% of these loans are criticized classified assets. The deferral bucket is comprised of 50 million in 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 December 31st. So these borrowers will begin making payments again this month unless the Oregon legislature amends and extends the statute. Most of the deferrals continue to be in the hospitality portfolio, which accounts for $39 million of the active deferrals. As mentioned before, this is consistent with our strategy relative to the sector and does not cause us to be 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 portfolios were identified back in April of 2020 as being some of the first to be impacted by the pandemic, which includes our dental, retail, hotel, healthcare, restaurants, and aviation portfolios amounted to about $2.4 billion as of December 31, 2020, or roughly 24% of our loan portfolio. If we exclude the dental and healthcare portfolios, this number drops to $1.2 billion, or 13% of our portfolio as of December 31, 2020. The largest portfolio we identified again was our dental portfolio. As previously discussed throughout 2020, we believed the impact on this portfolio to be truly transitory. When we look at the credit metrics for this portfolio, that story bears out. Past loans represent 97% of the portfolio. Special mention in substandard loans actually declined in the fourth quarter. We have only one loan on deferral for $715,000. Past dues are only one basis points and non-accruals are two basis points. We will likely be removing this as a pandemic impacted portfolio for our 2021 reporting. The next largest segment we identified as having high risk relative to the economic disruption caused by COVID-19 is our retail portfolio. we have approximately 512 million in retail-related exposure, excluding PPP loans. It's 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 account for approximately 452 million of the total, or roughly 88%. Again, to give you an idea, of the types of retail properties we finance. 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 are not in large downtown core metropolitan areas, nor do we finance regional malls or big box retailers. For the entire retail portfolio, 95% is tax rated, of which 5% is watch, which we also categorize as a tax category. It is a slight improvement over last quarter and continues a positive trend. While this trend is encouraging, remain cautious given government-mandated COVID closures and government-mandated deferrals. Okay, deferrals in this segment are up slightly from the third quarter from 1% to about 1.3% with half on their first referral and the other half on their second deferral. However, it is still a significant improvement from earlier in the year when deferrals accounted for 16.4% of the portfolio. Using added origination values, the average loan-to-value for the portfolio is 50%, with 98% of the portfolio having loan-to-value less than 75%. We have stress-tested this portfolio for equivalent decline in value as seen during the Great Recession. The average loan-to-value rises to 63%, with about 76% of the properties having a loan-to-value less than 75%. Obviously, we're pleased with how this portfolio is performing, but we remain cautious, and our expectation is that we will see weakening in this portfolio throughout 2021. Let's discuss hotels next. We have $327 million in hotel loans, representing about 3.5% of our loan portfolio. Again, to give you an idea of the type of hotels we finance, most have one of the following flags. Holiday Inn, Best Western, Choice, Marriott, and Wyndham. In total, flagged properties comprise 77% 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 of the $39 million is on its second deferral. For us, this is not surprising as we are executing on longer-term strategies. We do expect deferrals will continue to decline in this category. For the fourth quarter, we actually saw some healing in this portfolio. Loans rated special mention and substandard 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, they chose to go to the Pacific Coast, national parks in 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% of the portfolio having a loan-to-value less than 75%. On a stress basis, about 55% of the portfolio has a loan-to-value less than 75%. 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 impact of the pandemic here to be transitory. Problem loans have remained steady at around 1.4% of the portfolio for the last three quarters, and this is down from 2.5% at year-end 2019. Past dues are consistent at 10 basis points, and payment deferrals have declined from 107 million to 250,000, which really only represents one client. Next up is restaurants and food services. 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 and early winter of 2020, we anticipate further weakening in this portfolio throughout 2021. We have approximately $173 million in this portfolio, excluding PPP loans, with two-thirds comprising commercial real estate loans. Today, 82% is watched or better. down from 86% at the end of the third quarter. Thus, watch and worse loans increased $5 million to $35 million. 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 had 16 million in 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 segment. We do stress testing again on this portion of the portfolio. And on a pre-pandemic basis, the average loan-to-value is 58%, with 94% having a loan-to-value less than 75%, again, on a pre-pandemic basis. Under our stress test scenario, average loan-to-value rises to 73%, with only 55% having a loan-to-value less than 75%. The last portfolio I'm going to discuss is our aviation portfolio. is comprised of both direct exposure to domestic airline carriers, as well as entities that lease airplanes and engines to airline carriers. In total, the portfolio is about 140 million, with about 96 million being direct exposure to U.S. domestic airlines, and the remaining 44 million in exposure to lessors. Today, most of the portfolio is rated watch, which is consistent with last quarter. Given the longer duration for recovery in this segment, risk ratings are highly dependent on borrowers' liquidity and run rate, or as we call it, burn rate positions. Of the domestic airlines we have exposure to, 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 in our borrowers having between 18 to 35 months of burn rate. This does not include 6.5 billion more that was recently announced in additional payroll support agreements with the US Treasury Department. Based on the current burn rate, the airlines with the majority of our exposure have sufficient liquidity to get them into the fourth quarter of 2022. Most of the domestic airline exposure is secured by aircraft, with a pre-stressed loan devalued of 69%, and a current loan devalued would be closer to 74. However, on a stress test basis, the loan devalued rises to 89%. As for the leasing portfolio, which again is only 44 million, 50% of the exposure is in Asia, 26 in Europe, and 8 in 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 8.7 years. We view the younger, more fuel-efficient aircraft as being the most in demand post-pandemic. Based on origination values, our average loaded value for this portfolio is 74%. However, based on what we believe to be today's value, probably closer to 78%. And on a stress basis, it rises to 91%. 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 positions. We estimate our lessors to have raised over $3 billion in liquidity through the third quarter. So while the climb back to profitability and more importantly positive cash flow for this industry will be protracted, it continues to attract the necessary capital to bridge them through return to profitability, which we do not anticipate until 2023 at the earliest. Okay, with that I'll turn the call back to Clint. Thank you, Hank. Despite the challenges of 2020, we remain focused on supporting our communities throughout the year. We extended our community impact by tailoring our efforts to meet the unique challenges of the year. Combined fundraising, company contributions, and employee giving generated nearly $400 in economic support across our program. This is a testament to our employees' dedication to the communities where they live and work. I'm particularly proud of the $315,000 they've raised for our Warm Hearts Winter Drive during the holiday season. Nearly $1.5 million has been raised to support more than 60 shelters over the derived six-year history. Our teams also supported communities through our Pass It On program, where we paid more than 350 small businesses over $600,000 to provide a service for someone in the community who was impacted by COVID-19 or the economic downturn. These are just a few examples of the ways our team expressed their dedication to our communities in 2020. I'm proud of their continued support and the commitment they demonstrated in the midst of a very challenging year. Lastly, we announced our regular quarterly dividend of 28 cents this morning. This quarter's dividend will be paid on February 24th to shareholders of record as of the close of business on February 10th. This concludes our prepared comments And as a reminder, Andy, Chris, and Aaron are with me to answer your questions. Now, Carmen, we will open the call for questions.
spk07: Thank you. And as a reminder, ladies and gentlemen, to ask the questions via the telephones, simply press star 1. To withdraw your question, press the pound key. To ask a question via the web, click the Q&A question button on the lower left-hand corner of your screen. type your question in the open area and click the submit button. Once again, to ask a question over the phone, press star one. Our first question comes from Jeff Rulish with DA Davidson. Your question, please.
spk05: Thank you. Good morning. I wanted to check back in on just the expenses and I got Erin's sort of guide of mid-to-upper A's run rate. But kind of thinking about the mix of that and catching up to where you sit on kind of investment versus management of expenses and just kind of the intricacies. I know that, you know, it's an ongoing investment, but just trying to get to where anything new you're launching or the spend you've had in, you know, years past, just trying to catch up with – that dynamic. Thanks.
spk06: That kind of touches several areas. I'll let Aaron get into the details of it, and then, as appropriate, Chris might jump in. But just to start with, you know, one of the things, and I think you caged your question in this fashion, is that we've never stopped investing in in our business and the future of our franchise. That investment can be anything from additional technology. We opened in the quarter our newest neighborhood in Boise. That's an investment in that community. Also, there's a fair amount of disruption that's occurred across our three-state footprint, and it's with some of the large national banks that are consolidating operations. COVID and remote work has been a dynamic that has caused folks to maybe reconsider you know, the companies that they work for, and we continue to remain an employer of choice broadly across our markets. And so we've had the opportunity to look at new teams. So as those opportunities present themselves, we'll continue to take a long-term view and make the investments that we think will drive additional returns down the road for our shareholders. And so now I'll step back and Aaron's at his details. Yeah, Jeff, as you saw in the press release, we did have the $1.3 million recovery book provision from funded 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, you know, there's always kind of normal year-end true-ups. A variety of kind of ins and outs on that front. One of the largest, though, is we had a $700,000 reversal of a medical accrual in the fourth quarter so that, you know, that obviously won't carry into the first. And then, as you know, you always kind of have, you know, some higher accruals generally in the comp side, you know, FICA costs, those sorts of things heading into the new year period. Also, just as a year-over-year reference, recall that in the early part of 2020, we recognized $2.2 million in credits for FDIC assessments. Those benefits have obviously gone away. And then as the year goes on, we're hoping that, you know, our bankers, you know, are excited to get back out in front of clients and off of Zoom calls. And so we could see some increase in travel and payment 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. And I don't know if Chris has anything to add in terms of kind of special items on that front. No, probably just more that, Jeff, you've followed us for a long time and know that we have a pretty consistent methodical process around our branch system and other parts of the of the network and we've been walking down square footage for years, for decades and we'll continue to look at that, we'll continue to do it. There's a piece now that's 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're able to pick up. So there's a revenue play on this side, too, from these branch consolidations, especially on more of the rural communities and things of that nature. So, again, we'll look at that. We'll look for opportunities, but I wouldn't see us changing from our current direction of consistency, if you will, on that. As far as people, there's certainly disruption in the industry when people mass consolidations are announced and things like that, it 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 and the opportunity is there, we'll certainly continue down that path. But, you know, it's been a very disciplined approach. over the history of the bank and I don't see that changing.
spk05: I appreciate it. That's good coverage. One last one just maybe per point. It's been a while on the acquisition front and some of that certainly by design but also perhaps by the market. Any update on your appetite within that and my guess is it's more steered towards like lift outs and other but Maybe give us an update on how you're thinking about acquisition going forward.
spk06: It's still very much a part of our DNA when we look at the individuals that have been part of our acquisition and integration teams over the last 10 or 12 years. I'd say that, you know, we've had some folks that have retired, but I'd say that a lot of our key leaders in those types of activities, probably 80 to 85 percent of them are still with us. So it's definitely a skill set that we still possess. We spend a lot of time modernizing our platforms and things over the last few years and really started looking towards what the M&A market might hold about this time last year and then COVID hit and kind of shut everything down. You know, I just say that our history of being active in M&A is still part of our strategy. And, you know, I think that there's just, you know, nothing specific, but I just think in general with MNID there's some pent-up demand and I think there's an increased sense of urgency relative to the rate environment and the need 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 goal is always to at least be part of the conversation. So when somebody reaches the point where they're ready to find a partner, our goal is always to at least have them pick up the phone and give us a call. So I don't know if that's helpful, but that's kind of how we do it.
spk05: All right. Thanks, Clint.
spk07: Thank you. And as a reminder, ladies and gentlemen, if you have a question, simply press star 1 on your telephone. To withdraw your question, press the pound or hash key. Our next question is from John Arfstrom with RBC Capital Markets. Your question, please.
spk04: Hey. Good morning, everyone. Afternoon, I guess.
spk06: Hi, John.
spk04: Yep. That means I get to ask 20 questions, by the way. That means the queue is light behind me, so I'll start. But anyway, maybe, Andy, a question for you. I appreciate all the commentary on the stress portfolios. If you had to consolidate 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 and it kind of looks like that from your economic factors and your reserving, but give us a big picture of your consolidated thoughts on that.
spk06: Yeah, so I think obviously the dental and healthcare 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 and then we do business travel. I alluded to 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, and I think this is consistent, is restaurants and retail, and that really has to do with the government closures in our footprint. And Many of those are small businesses, and I think it will have a very detrimental, because so many of them got closed early in the year. They got closed at the end of last year, and they remain closed now, or if they're open, it's a very limited, you know, 25% 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 concern than the other segments, which I think are performing quite well.
spk04: Okay. The path on, maybe this is an Aaron-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 a natural evolution of the economy mending and things getting more comfortable?
spk06: Yeah. I mean, obviously, under the CECL model, we put aside a large amount of reserves in the first half of 2020. And as I have discussed earlier, our provision, I think, was really relatively unchanged. As we go throughout 2021, I don't see any really big changes in that other than I see that charge-off 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 in a positive direction. And so to your point, yes, it will be a natural evolution of how the reserve works.
spk04: Okay, good. Aaron, maybe one for you. You put a little bit of cash to work this quarter in securities, and I think you 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 with your new loan yields, you're suggesting, you know, 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.
spk06: Sure. John, as you saw, we reported a 352 margin for the fourth quarter. The PPP impact of that in the quarter all in both the interest earned on those, the normal amortization amounts and the accelerated amortization of fees is included in that five basis point benefit. We also had the five basis point benefit from the interest recovery that we had on a non-accrual loan of $1.7 million, and then those two CMBS prepays that added about seven basis points. So you can kind of take out all that to, I guess, get at some measure of maybe what a core would be, but I wouldn't say that it's not entirely uncommon to have some pre-paid benefits on the portfolio, just given that we do have a number of portfolios that kind of match those characteristics. But as you noted, going forward, the rate where new production is coming on relative to the portfolio would be detrimental to the margin. In the third quarter, excluding all the kind of PPP noise, the rates on the loan portfolio was 415. In the fourth quarter, that dropped down to 405. New production coupons are around 340. So it's, you know, there's going to be a continued headwind there. Similarly, on the securities portfolio, excluding the benefit of those prepays, the yield on that broker is right at 2%. in the portfolio and we had a very busy quarter on that front, as you noted, with having bought about $1.1 billion in new securities. The yield on that was 1.26%. So again, it's going to continue to weigh on things going forward so long as we continue to remain in this extremely low rate environment. Hopefully, you know, we have seen a little bit of lift in the tenure recently, and hopefully that sticks and continues to build. And hopefully, you know, ultimately we get higher rates on the short end as well if we continue to progress through the economic recovery as expected. But we're not counting on any benefit from that, you know, anytime soon. But I think we kind of, you know, take where, you know, the new stuff is coming on and, that should give you a sense of the kind of pressure that we're probably likely to continue to see through the year, notwithstanding all the additional noise that we're going to see from PPP. Okay.
spk04: All right. Appreciate the help. Thanks a lot.
spk07: Thank you. Our next question comes from Matthew Clark with Piper Sandler. Your question, please.
spk02: Hey. Good morning, everyone. On the new money yields on the loan side at 340, I guess I'm a little surprised at how low they are. Is that just a mixed issue this quarter where we might see, you know, a little bit higher rate going forward, or is that just kind of the new, you know, that's where the competition is?
spk06: Yeah, Matt, as Chris said, your kind of side of the idea tells me that we're all kind of thinking the same way maybe. A lot of it is the competitive environment, the massive amounts of liquidity that are out there, the challenges of when you find good credit, 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 going to have to compete on rates sometimes in that. And so some of it also is the mix. You know, you bring on some larger deals during the quarter. Those come on at a little lower rate generally. And going forward, you know, I would anticipate that we're probably looking at this for a while, and it's going to take a little sorting out as competitors or competitors entering or maybe pulling back from the market based on how their portfolios perform. But I would expect that the competition continues, especially for high-quality credit deals.
spk02: Okay, makes sense. And then as it relates to the disruption in your markets, are you at the point where you've already started to identify individuals or teams, or is that still a ways out?
spk06: You cut out a little bit there. So was the question, have we identified teams and have we brought on new talent?
spk02: Yeah. Have you already identified teams at this stage? And if so, you know, are you looking for a certain type of specialty lenders, or is it just, you know, your general commercial banker, you know, with seasoned books of business?
spk06: Sure. It's always in process, and we go with the philosophy of we're recruiting all the time. You never know when somebody's going to be ready to make that move. And so if we know the individuals, we know the markets that they're in, we've got a good idea of their books and what they do, then we'll be opportunistic when the time is right. Now, we look at specialties and things of that nature. That is certainly to the core of of how we operate, and if we can locate somebody they're interested in joining us and they bring a new niche, we're absolutely interested in that. If it's somebody that fits into an existing niche that maybe we've been competing against, we know them, we respect them, we know the quality bankers, we'll add them into that piece. Some of our markets were pretty widespread between metropolitan areas and rural areas. You know, as you get farther away from the metropolitan areas, you tend to get more generalists. And some of them, however, do have specialties. And so, you know, it's kind of a long way around is we're open to any and all, and we're constantly looking.
spk02: Okay. And then can you just remind us how much you have in the way of net PPP-related revenue to come through from round one?
spk06: What was remaining at December 31st?
spk02: Yes.
spk06: It was $9.9 million in remaining net fees to be amortized.
spk02: Thank you.
spk07: Our next question comes from Jackie Bolin with KBW. Your question, please.
spk01: Hi. Good morning, everyone. I was I was just curious on the driver of the loan purchase this quarter. Was that driven by looking to stem off some runoff, or was it just an attractive portfolio that came across your desk?
spk06: Kind of both. It's more, you know, we have a portfolio of mortgage, and it's, you know, a fair bit of that obviously is paying down given how rates are, so there's a little bit of refilling of that. And I would just highlight that we're also producing a great deal, and what we're producing doesn't always necessarily match what we want to hold on our own balance sheet. So the amount that we've purchased is certainly far below what we actually produced and sold during the quarter. I don't know if Chris has anything to add to that.
spk01: Okay, so just balancing kind of overall composition within that portfolio with the driver.
spk06: Yes.
spk01: Okay. And then touching back on the M&A topic, I'm just wondering if you could provide us a refresher with what you're 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 to you.
spk06: Yeah. We say it's got to be a cultural fit, and we've said that. That's always been one of our criteria. We start with the balance sheet and look at their business model, because if it's a very different business model than what we have, it's probably going to culturally be very hard to bring the two organizations together. You know, the size thing is a bit of a moving target, if you will, because I think it depends on, you know, if it's a bank that has a really good niche that is additive to what we do, it could be on the smaller side, and that would give – you know, it would be something that then we could look at and build upon. You know, an example, and not that from a size standpoint that Pacific Continental fit into this, but Pacific Continental has a national healthcare platform. That's very complimentary. We felt at the time, and, you know, three years later it's proven itself out that, It's very complementary to what we were doing in the healthcare front in our existing market. So if there's a bank that's on the smaller side that has something like that, that would be of interest. If it's a fill-in, and there are some fill-in opportunities within our existing footprint, that might cause us to look towards the smaller side of it. There's obviously ones where you have a lot of market overlap and you get better operating leverage, but those are going to typically be on the larger end of it. 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 that cultural fit first and foremost, but then what else does it bring to us? It's entry into a new market, something we take a very close look at. Specific to Northern California, we've been studying that market for several years now. We like what we've learned about the market. It's very similar in a lot of ways to parts of the Willamette Valley. And even as you get into the more metro areas of not necessarily San Francisco proper, but in and around the Bay Area and those markets, they're pretty similar to Portland, Seattle. So this is something that we think is still of interest, and we continue to just learn more as much as we can about the market and who the quality bankers are in that market.
spk01: Great. Thank you, Clint. That was a great overview.
spk06: Thanks, Jackie.
spk07: Thank you. And our last question comes from David Pfister with Raymond James. Your question, please.
spk03: Good morning, everybody. It's great to see the acceleration and originations in the quarter. I'm just curious, you know, where you're seeing growth. Is it from existing clients that are continuing to invest? Is it new clients from the PPP program or the new lenders or even a neighborhood concept? And just kind of the pulse of your clients as we enter 2021, do you kind of get the sense that they're ready to invest in expansion CapEx and we can see accelerating growth throughout the year, or are your clients still a bit cautious, just given the uncertainty?
spk06: Yeah, I think this is Chris. I can tell you it's a mix in there. You look at some of our markets, and they haven't had governmental closures and things of that nature, so they're operating much different. The originations are purely across the footprint. You know, those are in companies that... didn't experience a downturn or things of that nature. They're being opportunistic, as you said, and they're looking to make investments. Some of it's purchasing their own building and things of that nature. But I tell you, it's a mix between current clients and new. Now, we were one of the institutions that In the first round of PPP, 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 we are winning during the fourth quarter has come from just our bankers' efforts and their continued effort to stay in front of prospects. We brought on some other investment types of things that are ultimately turning into opportunities, which has been good to see. And then as you start looking towards the year, I think it's a little bit of a mix there too. If you look at the second round of PPP and what the requirements were to enter that, there's a lot of companies out there that are doing very, are not eligible to reapply, they're going to have different opportunities to seek out investments or whatever it may 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 it hit in the fourth quarter. I'm 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 are sleeves rolled up and working extremely hard right now on the second round. And, you know, 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 there is a bit of a distraction, and, you know, that's going to continue for a little bit here.
spk03: Okay. And then just on the fee income front, you know, the counter-cyclicality of some of these business lines has been a huge help in a challenging environment. Just curious how you think about fee income. Is there any other businesses that you'd be interested in expanding into, whether organically or through M&A, and just how you think about fee income and potentially expanding that fee income contribution.
spk06: Yeah, this is Aaron. I'll start just because I do want to highlight that during the quarter we had this in our press list that there was almost $800,000 fair value adjustment on the mortgage loan pipeline. So just that fit into a little bit of that volatility. But I don't mean to take away from it. you know, tremendous activity that we've had in mortgage because that team has just been doing a fantastic job. But beyond that, I'll turn it over to Chris to add anything else on the C front. Yeah, I think there's, you know, are we looking for other areas? That's always something that's under consideration. We've explored a lot of things. I haven't found anything that's truly a fit that goes to, doesn't change who we are, who we've been. And with that said, you know, we have, CD 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 the close feet are strong. And what we're seeing in that business is a real demand for people to participate in financial planning and and look at possibly business sales and things of that nature as we start to come out of this. I'm optimistic in that area. The mortgage group continues to do a great job as was mentioned. It's a little bit more rate contingent. As rates start to rise, that'll certainly change the refinance aspect of that, but to date, That hasn't happened, and they continue to come in so optimistic there as well. You know, I think when you look into some of the things like card revenue and some of the other fee-based types of situations, it's a little bit up in the air still. You know, as the economy opens up, as the vaccines become more prevalent, as people basically where I'm going is as people start to spend money, we 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 has consumer behavior changed? The rest of it, you know, I'd say is kind of business as usual. We still participate 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.
spk03: Okay. That's helpful. And then just, could you just talk about your asset sensitivity here? You guys are naturally asset sensitive, and it seems like the asset sensitivity might have 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 of floors. But You know, just kind of putting it all together, how do you think about that and how do you plan to manage your rate sensitivity and maybe does that give you some confidence to potentially take on some duration in the securities book?
spk06: Well, we've done just that, actually. During the quarter, we purchased $1.1 billion in securities with net growth of a little over $900 million. The And we have put, I should say we've attempted to put a little more duration on there. I think what we purchased had about 6.7 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. In doing so, we arguably have taken some asset sensitivity off the table to generate a little better interest income near term rather than letting that all sit in cash, but I think that's the right decision. We still have an enormous liquidity position, and that book alone It's going to be throwing off around $600 million a year in cash flows, which we hope to redeploy into higher yielding loans as loan growth comes back in a more material way. I would say we are arguably a little less asset sensitive today than we were three months ago. I still think we're extremely well positioned for rising rates. I mean, the real secret there is our cost of funds. And, you know, our deposits are just, you know, phenomenal on these very low-cost deposits. And that's going to serve us extremely well if and when we eventually see some rising rates.
spk03: Okay. That's great. Thanks. Thanks.
spk07: Ladies and gentlemen, this concludes our Q&A and program for today. We thank you for your participation in today's conference, and you may now disconnect. Good day.
Disclaimer