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spk08: This is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. Thank you. Thank you. Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you are on the telephone and should require assistance during the conference, please press star zero. As a reminder, this conference is being recorded. I will now turn the call over to your host, Clint Stein, President and Chief Executive Officer of Columbia Banking System.
spk06: Thank you, Raquel. Welcome and good morning, everyone, and thank you for joining us on today's call as we review our second quarter results, which we released before the market opened this morning. The earnings release and investor presentation are available at ColumbiaBank.com. Second quarter performance was outstanding as we continued to build upon the momentum generated by remaining open, and externally focused over the past 17 months. Excluding PPP, our teams generated record quarterly loan production exceeding $600 million for the first time in our history and shattering the previous record set in the fourth quarter of last year. Moreover, deposit inflows remained robust and well above our expectations. Our financial services group and trust company are having a breakout year and credit quality is exceptional. Making a great quarter even better, we announced our entrance into the Northern California market with the signing of a definitive merger agreement with Sacramento-based Bank of Commerce Holdings. Our success this quarter was due to the forward focus of all of our employees. Throughout the pandemic, we remained safely open and available to existing and prospective clients. Our bankers continue to cultivate relationships and win new business by deploying their solutions-based approach to meeting individual client needs, and the benefits of their efforts over the past year are evident in our year-to-date balance sheet growth and earnings performance. On the call with me today are Aaron Deer, our Chief Financial Officer, Chris Meriwell, our Chief Operating Officer, and Andy MacDonald, our Chief Credit Officer. Following our prepared remarks, we'll open the line and take your questions. As a reminder, 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 time, I'll turn the call over to Aaron. Thank you, Clint, and good morning, everyone. During the quarter, Columbia generated net income of $55 million, or $0.77 per share. Adjusted for $510,000 of acquisition-related costs, pre-tax, pre-provision income of $66.3 million was one of our best quarters on record. The strong performance was driven by solid fundamentals. Earning assets increased, our cost of deposits remained among the best in the industry, and non-interest income was, again, a solid contributor. Total deposits increased by $578 million, or 16% annualized during the quarter, to $15.3 billion at June 30. Our cost of deposits held steady at just four basis points. Total loans increased modestly to $9.7 billion at June 30th. Net of PPP, our loan balance has increased by $219 million, or 10% annualized, and surpassed $9 billion for the first time in our history. The increase was driven by record production. During the quarter, we originated $657 million of new loans, which includes $52 million of PPP loans. New loan production, excluding PPP, was brought on at an average tax-adjusted coupon rate of 314, which compares to the overall portfolio rate, also excluding PPP, of 390. Our investment securities portfolio was $6.2 billion as of June 30th, which was a linked quarter increase of $718 million, driven by $942 million of purchases. During the quarter, we transferred securities with a fair value of $2 billion from the available for sale classification to the held to maturity classification. Because the intent is to hold these investments to maturity, the securities are no longer subject to valuation adjustments connected to interest rate changes, and that should reduce the related volatility in equity and book value. The net interest margin decreased 15 basis points linked quarter to 316, However, net interest income increased by $1.5 million linked quarter as we deployed more of our deposit growth into loans and investment securities. The deposit inflows and larger investment portfolio were key factors behind the margin pressure in the quarter, as higher securities balances and lower yields on those balances together contributed 10 basis points to the margin decline. The remaining decline was primarily due to a reduction in loan yields. mostly due to a drop in amortized fees from the PPP portfolio, but also from lower coupon rates on new loans. Noninterest income was down slightly on a linked quarter basis to $22.7 million. The drop was centered in loan revenue stemming from lower mortgage banking income, but most of that pressure was offset by strength in other business lines. Notably, card revenues, mostly driven by interchange fees, increased by $1 million, while financial services and trust revenue rose by $864,000 and deposit and treasury management fees increased by $343,000. Non-interest expense of $84.1 million included professional services costs of $510,000 related to the pending merchant's bank of commerce transaction. Excluding these acquisition costs, non-interest expense of $83.6 million was essentially flat when compared to the first quarter. Compensation and benefit costs increased in the first quarter mostly due to higher capitalized loan origination costs in the first quarter when compared to the second quarter. That said, even in the second quarter, we continued to benefit from a high level of capitalized loan origination expense. Meanwhile, the other expense line decreased in the first quarter due to $1.3 million of less provision for unfunded commitments. Lastly, the provision for income taxes increased $2 million on a linked quarter basis to $14.5 million, representing a 20.9% effective rate. We continue to expect our 2021 tax rates to remain in the range of 19% to 21%. With that, I'll turn the call over to Chris. Thank you, Aaron, and good morning, everyone. Throughout the economic turbulence of the past 17 months, we have focused on what we can control in order to take care of our employees, clients, and communities. We continue to invest in our people, relationship training, and banking systems. Our bankers have responded by keeping the pipeline full and providing custom solutions to meet the needs of existing and new clients. Following this business-as-usual mindset positioned us to capitalize on high-quality credits and win new business during the quarter. While still in the background during the second quarter, the pandemic is no longer the lead story. The bank continued to originate PPP loans through the program's end on May 4th, and in the final tally for both rounds of PPP, approximately 9,300 loans were originated, which infused over $1.5 billion into the Pacific Northwest economy. Forgiveness for both rounds is now underway as the Round 2 platform opened for our clients on July 7th. Net of unearned income PPP loans were $692 million at the end of the second quarter. We have received over $820 million of payoffs and paydowns related to round one of the program, and we have received over 2,000 applications for forgiveness of round two loans since the portal opened. As Clint noted, excluding round two PPP loans, we achieved a new loan production record of $605 million. which was notably higher than the prior quarter record of $468 million set during the fourth quarter of 2020. Production was especially strong in CRE, and CNI was diversified with good growth in real estate lending and leasing, healthcare, construction, and the agriculture sectors. Line utilization was flat at 44.6%. but we saw absolute dollar increases in CNI and construction lines. Excluding PPP, the quarterly production mix was 58% fixed, 34% floating, and 8% variable. The composition of the loan portfolio remained relatively unchanged, and the overall portfolio mix is now 7% PPP loans, 49% non-PPP fixed, 33% floating and 11% variable. As was mentioned, deposits grew by $578 million during the quarter and by over $2 billion over the past 12 months. The quarterly inflows were split between non-interest and interest-bearing with the majority from business customers. Over half of the increases from new accounts, with the remainder attributed to delayed spending and investment by existing business clients and consumers. Approximately 60% of the quarterly increase came from our Puget Sound region, with approximately 35% from Oregon and the Columbia Gorge clients. The deposit mix increased slightly to 61% business and 39% consumer. We continue to drive exception rates down, maintaining our industry leading costs of deposits. Although residential mortgage activity slowed on a linked quarter basis, other fee income categories were up during the quarter as we benefit from our relationship focus and higher quality referrals. CB Financial Services and Columbia Trust Company have both had a tremendous year, achieving record revenues and assets under management. Card revenue was up $1 million on a linked quarter basis and deposit service fees increased by $343,000. As part of our ongoing branch rationalization process, we recently announced the consolidation of three branches scheduled to occur during September and October of this year. We are continually optimizing our delivery strategy and have been proactive in consolidating branches over the past decade. expanding each branch of service coverage area given local market conditions and projected growth. Continuing to expand our delivery strategy, on July 12th, we relocated our Tigard, Oregon branch and opened a new financial hub. It joins our Ballard and Boise neighbor hubs, which are specifically designed to support a relationship-based approach to helping our clients achieve their financial goals. Now I will turn the call over to Andy to review our credit performance. Thank you, Chris. This quarter's allowance for credit losses totaled $143 million, a reduction of $5.3 million from last quarter. Net recoveries of about $200,000 led to a provision release of $5.5 million for the quarter. It should also be noted that the release from the provision was muted by over $215 million in loan growth net of PPP during the quarter. Our IHS market economic forecast assumes full year GDP growth at 6.7% for 2021 and 4.7% for 2022, with the unemployment rate predicted to end 2021 at 4.2% and end 2022 close to pre-pandemic levels. This forecast is an improvement over last quarter when GDP was forecasted at 5.7% for 2021. The improved forecast is counterbalanced by the continued stress in our loan portfolio as borrowers continue to be impacted by the lingering effects of the pandemic and related lockdowns. As such, we continue to apply an overlay 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 10 million in Q2 reserves, a decrease from 11.7 million in Q1. Our adjustment is driven by the continuing impacts of the pandemic affecting hospitality shifting dynamics in office and retail, and business closures and labor challenges in the restaurant industry. We ended the quarter with an allowance relative to period-end loans of 1.48%. Adjusting for PPP loans, the allowance to period-end loans increases to 1.59%. MPAs for the quarter improved to 14 basis points. The decline in NPAs was principally due to paydowns and payoffs, with a modest amount returning to accrual status. Most of our remaining NPAs are assets that gained this classification due to reasons not related to the pandemic. However, with that said, the pandemic has, in some cases, impacted the business's ability to rebound. Nevertheless, at 14 basis points, NPAs are very manageable at this point. Fast new loans for the quarter were 17 basis points compared to 11 basis points last quarter. Net charge-offs, as noted earlier, posted a small recovery of about $200,000. Problem loans, which we define as loans rated watch or worse, declined from $920 million last quarter to $804 million as of June 30, 2021. When compared to a year ago, when problem loans were about $1.1 billion, you can see there has been a meaningful amount of healing within the portfolio. This is principally within the hospitality, transportation, food and beverage, and retail portfolios. Okay, deferrals. At the close of the quarter, we had $40 million in active deferrals, or less than 1% of our portfolio, excluding PPP loans. This is, of course, very different from this time last year when we had $1.6 billion. The majority of these deferrals are roughly 75% are on their first referral. It can be found in our hospitality and restaurant portfolios along with some urban parking lots. Deferrals for the most part continue to run off as expected. We continue to classify our retail, hospitality, restaurant, and aviation portfolios as portfolios subject to an elevated level of risk due to the pandemic. In aggregate, these portfolios account for about $1.2 billion in loans, or 13% of our loan portfolio. Retail is the largest segment at $572 million in loans outstanding at the end of the quarter. While we remain concerned over the pandemic's impact on this portfolio, problem loans are actually down year over year, as well as from last quarter. In fact, this portfolio has now exhibited improving credit trends for four consecutive quarters, and problem loans are half of what they were a year ago. We had no past dues in this segment, non-accruals were only four basis points, and no retail loans were on deferral as of June 30th. As mentioned before, PPP loans have certainly made a difference for our borrowers in this portfolio. While these statistics are all positive, we continue to be cautious here given the colloquial evidence we see in our footprint along with conditions seen in the labor market. Hospitality at 331 million has shown a mixed bag of results. In total, problem loans in this segment declined during the quarter and now represent about 53% of the portfolio down from 70% a year ago. As discussed last quarter, there is clearly a bifurcation in the portfolio between leisure oriented and business oriented properties. Leisure accounts for about 69% of our portfolio, while business accounts for 31%. Leisure properties have weathered the pandemic much better than our original expectations, while business oriented properties, which make up most of the substandard assets in this portfolio, are taking longer to recover. About half of the hospitality portfolio's $169 million of problem loans are substandard, or roughly $89 million. It does appear that this level of classification in substandard hospitality loans has leveled off. For most of these hotel properties rated substandard, we have put into place long-term action plans Restaurants, which account for about $217 million, remained consistent this past quarter. Problem loans were stable at roughly 22% of the portfolio. We had about $2.6 million in deferrals in this portfolio at quarter end. Similar to the bank in general, deferrals this time last year amounted to $66 million, so a dramatic reduction year over year. Again, PPP loans have had a meaningful impact for restaurant operators. As of June 30th, 100% of our restaurant operators were clear to open at 100% occupancy, which of course is great news. However, the new issue affecting these operators is finding enough employees to support 100% occupancy. So it's a good news, bad news scenario for restaurant operators. Finally, the aviation portfolio at roughly $117 million, down by about $32 million from a year ago, was stable during the quarter. As in past quarters, no loans were past due, all customers continued to pay as agreed, and no loans were on deferral. This industry will take time to recover, mostly due to business travel, which, as of yet, has not rebounded as dramatically as leisure travel. There is a lot of pent-up demand on the leisure side, as seen by the TSA traffic, with July traffic averaging 80% of 2019 levels. Grandparents are excited to go visit their grandchildren, and many families are finally taking that long-awaited trip to Hawaii. However, headwinds continue with low demand for business travel, as noted before, and an unequal global recovery. Despite the slow recovery due to these continued headwinds, many U.S. airlines are projecting a return to positive cash flow within the next few quarters and have begun using their liquidity to retire debt and deleverage their balance sheet. I will now hand the call back over to Clint. Thanks, Andy. We're excited to have Bank of Commerce Holdings join the Columbia family and are still on target for a fourth quarter close. Randy Eslick and his team have been working closely with their Columbia counterparts to ensure a seamless closing and integration of the merger. The partnership will bring together two community-focused banks with complementary business models and cultures. This morning, we announced our regular quarterly dividend of $0.28. This quarter's dividend will be paid on August 25th to shareholders of record as of the close of business on August 11th. This concludes our prepared comments. As a reminder, Andy, Chris, and Aaron are with me to answer your questions. And now, Raquel, we will open the line for questions.
spk08: At this time, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matthew Clark with Piper Sandler.
spk03: Good morning. very strong production this quarter and wanted to get a better sense of the type of commercial real estate production that you're doing assuming that retail office hospitality are still areas of you know some concern in terms of new business just want to get a sense for which row of that the commercial real estate piece of production
spk06: Yeah, just a sec. Let me get it in front of me. I have too much paper. Andy finds the detail in that. I'll just speak in general in terms of the record production for the quarter. And as I noted in my opening comments, it was far surpassed the previous record set in the fourth quarter of last year. And so that's just a continuation of what we saw at the end of the third quarter of last year going into the fourth quarter. And that momentum continued to build in terms of pipeline activity and what we're seeing just broadly is even though there's a lot of liquidity still out there in the market, it's a very competitive atmosphere. We're taking market share and some long-time clients, and that's what you saw that really drove that record production during the quarter. I think Andy has the detail that will respond to your question. Yeah, so most of the growth is actually in owner-occupied CREs, and it's a combination of owner-occupied office warehouse and warehouse-type properties. And then we've also done a little bit in the retail space, but that's pretty modest at $4 million. So it's predominantly owner-occupied.
spk03: Okay. And then... How does the pipeline compare to last quarter coming out of 2Q? Given the production, is it, you know, pipeline, is it down and you feel like you need to kind of backfill? Or I'm just trying to get a sense for the change on a percentage basis from last quarter or even year over year.
spk06: Sure, Matt. And as expected, I would – you would – you would expect that after a record quarter at those levels that the pipeline would pull back some. We're very pleased with where it's at, and our bankers continue to prospect, win new deals, and we're holding on to a lot of our existing loans on the books as well. So, yeah, it's retreated a little, but if you look at it historically, We're very pleased at the level that it's at, and it should lead to future growth for us.
spk03: Okay, and then just on the new coupons at 314, that's down pretty materially from last quarter, I think at 390x PPP. I guess how much of that was related to the mix, and how much of that might be related to just being more competitive on price?
spk06: Yeah, I'll take a start on that, and then Aaron can come in on maybe some more details. It does have to do mostly with the mix. During the quarter, we had the opportunity to participate in some municipal deals that drove some larger balances. Those are highly competitive RFPs. Our approach, our expertise in that space allowed us to win those deals. But those high-quality credits certainly come along at a lower coupon. that skewed the number for the quarter. I think past that, we see more of a return to leveled out numbers and improving numbers. Aaron, is there anything you'd like to add? I just said, Matt, the loan yields during the quarter excluding TPP was 426, and that compares to 428 in the first quarter. Yep. Okay.
spk03: And then just on, I know it's a small piece of the revenue pie, but on the mortgage, the weaker mortgage gain on sale, and I think it's embedded in your loan revenue fee line. Can you give us a sense for how much in the way of loans were sold in the specific gain this quarter versus last?
spk06: So, Matt, I'm not sure we're going to provide the specifics on that, but generally speaking, the volume of sales as well as the gain on sales was not materially different from quarter to quarter. What changed was the pipeline and the value of the pipeline. So that was really what drove the decline sequentially. So it's more of the volume of activity in the business versus the gain on sale amount that drives the change.
spk03: Okay. Thank you.
spk08: Your next question comes from the line of Jeff Rulis with DA Davidson.
spk05: Good morning. Good morning, Jeff. Question on the just trying to ball together the margin and your securities investments. I guess if you could kind of offer any thoughts on go forward, what you think you'd do with that earning asset balance, as well as kind of stabilizing the margin. I know the goal is spread income dollars, but just the interplay and anything you could kind of point to what you think back half.
spk06: Thanks. The margin is going to continue to be a bit of a challenge. There's a lot of factors at play As you noted, we had a very significant increase in investment securities balances during the quarter, and the balances that did come on came on at lower yields. Ultimately, you know, to see that margin kind of rebound is going to take either an improvement in the rate environments or a significant shift back toward loans. So I think, you know, over the next couple quarters, you're going to have the noise of PPP continuing to add to that. We still have $700 million of PPP loans on the balance sheet. My expectation is that much of that will be forgiven over this quarter and next. And so that, you know, that will continue to drive some of the fee income on that and benefit the margin. Underlying that, you're going to see the full quarter impact of the changes that I just discussed with respect to the securities portfolio and lower yields on both the securities as well as on the loan portfolio. So there's going to be some fundamental pressure there that continues. That said, I do think that we're getting closer to where I would expect that to bottom out. And obviously, I'm very hopeful that we get some improvement in the rate environment. The rates this quarter were not ideal. Not only did we see the 10-year come in quite a bit, but the flattening was not ideal. Encouragingly, though, some of the more recent forecasts that I've seen for rates are more suggestive that we could see a good lift by the end of the year. So hopefully the operating environment in terms of rates, you know, shows some improvement from here. And then, you know, with the worst of the kind of balance sheet pressures kind of working through the system, you know, my expectation is that the core margin is closer to a bottoming than not, but we probably still have a little further to go. And I'll just add on to that that You know, to me the wild card around the margin is what happens with deposit growth. And that's really created the liquidity and the shift into, I guess, the airing asset mix shift. And as you know, Jeff, from all the years you followed us, that, you know, in a normal environment, virtually all of our deposit growth comes in the second half of the year. And, you know, we had... another billion five in the first half of this year of deposit growth. So that certainly impacts the margin calculation, and I know that's an important component of your modeling, but we're still at four basis points for cost of funds. And so where I'm really focused and the team is really focused is making sure that we're growing net interest income. And I think that if we continue to have strong deposit growth, while we'll push the loan-to-deposit ratio down and perhaps grow in the short term the size of the securities book, it should result in increased revenue for us.
spk05: Okay. Well, I appreciate the commentary. Maybe one other, just a different angle, on the expense line, You kind of noted some of the PPP impact there, but that's a pretty low number. You guys had talked about a mid-to-upper 80s kind of run rate. Can we adjust that lower? Is it squarely kind of mid-80s if we came in a bit? Just trying to sense if that's come in or if there's significant investment in the second half that we should look for.
spk06: Jeff, I guess I'm just inclined to say guide you lower at this point. That said, I commend the team for doing a great job controlling expenses. And as Chris noted, we're going to be doing a little bit of consolidation here in the back half. That'll help some. But the FAS 91 in the second quarter was still pretty strong. It was probably a couple million of that. And I would expect that that that's going to have much less of a beneficial impact on our expenses in the third quarter. And then we've also got some project costs that I'm expecting are probably going to hit our data processing and software line in the third quarter. So at this point, you know, I think that the prior guidance still stands, particularly as we're seeing a lot more of our folks get out and, you know, while they've been active with clients throughout, I think we're starting to see a little bit more travel and entertainment kind of expenses. And so that's going to probably push that up too. But we're certainly being, you know, very mindful of holding those costs in check.
spk05: Okay. Thank you.
spk08: Your next question comes from the line of Jackie Boland with KPW.
spk07: Your line's open. Sorry. Unmute myself. Hi, everyone. So I'm going to give you a little bit of context for where my question is coming from, so I apologize if this is a little bit wordy, but I want to make sure I make it clear what I'm asking. You know, this is one of the last reporters that I've had, and in looking through other earnings releases, I realize that I've been asking the wrong question, and so I have the opportunity to actually ask you guys the right one, which is, I feel like I've been really focused on line utilization when what I should be focused on is actual line draws. And you had, if I did my math right, excluding PPP, you had balanced growth in the commercial business portfolio. And so I want to see where that's coming from. If it's, you know, if you have a sense whether it's from customers that are actually out there and spending more or whether it's some of the new generation that you were talking about, just, you know, kind of how you think of the momentum going forward.
spk06: Yeah, that's absolutely the right way to think about it, you know, because, you know, especially if you're looking at year over year or even a linked quarter as our bankers are out there originating new commitments and new balances on those commitments, it can skew that utilization ratio. I'm looking at... The line utilization number itself did not change from quarter to quarter, but you're right to be thinking about the, you know, draws have increased just as the commitments have increased. Yeah, I mean, you have some context for that change. Because I think what we're really trying to get at is how much of the, roughly 200 million of growth came from growth and new outstanding lines.
spk07: Yes, just wondering, because my thesis, and I don't know if this is going to play out or not, is that though we're not seeing line utilization change, that's because you're adding new customers, which is drawing the commitment level up, and so it's masking the benefits of some of the draws that you are seeing. Does that sound fair?
spk06: Jackie, I think that's a fair question, and I apologize for not having that right at the tip of our fingers.
spk07: No, I know it's really nuanced. I'm sorry to put you on the spot like that.
spk06: No worries. We'll see if in our information here we do have it, and you can either get back if you have another question, or we'll get back to you afterwards, certainly. It's a great question, and the new balances, the new clients that are coming on are are certainly transferring line balances. And it does mask the the overall aspect of it. So yeah, it's an excellent question.
spk07: Okay, and that I mean, your comments right there, Chris kind of get to the heart of what I'm looking at, which is more just the general momentum that you're seeing more so than an actual dollar figure. And then the second thing I wanted to ask is just related to construction. I know demand is high in the market, but obviously there are constraints relating to supply chains and just availability of land and inventory and everything. And so I'm wondering what you're seeing in that market in terms of growth potential and how projects are moving along.
spk06: Yeah, so referring more to our builder banking group, They're having a fantastic year. Builders are still, they have inventory. They're finding while projects are delayed and taking longer, they're getting through to the end. Sales up into the second quarter were very strong. I think the biggest challenge for us when you look at that segment is houses are selling so quickly that they're not staying around on our books. So the churn of it is pretty robust. Now we're going to move into a season where house sales tend to slow down and things of that nature may give us a little bit of a lift there. But to date, it's been extremely quick other than the delays from the supply chain. Okay.
spk07: Great. Thank you.
spk06: Jackie, this is Aaron. I just pulled up the sequential change. If I'm understanding your question correctly, the sequential increase in revolving lines at the bank increased by about 76 million on a net basis. Okay.
spk07: Okay. Thanks, Aaron. And, again, I apologize for having such a technical question. I was just trying to get kind of a sense of new customer activity and what impact that's having on utilization rates.
spk06: That's a good question.
spk08: Your next question comes from the line of John Ostrom with RBC Capital Markets.
spk02: Thanks. Good morning. Good morning, John. Maybe just back to the question on deposits. You're expecting similar second half deposit growth to maybe what we see historically. In other words, are you seeing some normalization developing in deposit flows, or do we still have some of the excesses out there in the market in terms of money flowing in?
spk06: Wow, that's a forward-looking question that I'd love to have an exact answer for, but historically, yes, you've seen that. I think that it remains to be seen, and there's still a lot of liquidity in the system. We've talked in previous quarters about what's it going to take for that liquidity to exit the system. All things being equal, I think I can't pinpoint that we'll be at the same exact levels, but there is a lot of economic activity. Money is changing hands, and I would expect that our client base will continue to behave as they have. With that said, I think one of the variables could be new client acquisition and what continues to come on in that space, which may be an offset to if normal activity is not there, we may see a pickup in that, which would then offset it. So all that around, I would say, yeah, I would think it's going to be fairly normal, but the components of it may be different. There's one other variable that comes into play, and that's what we do through our CD financial services group. And that's something that as clients begin to maybe look for returns above what we're paying on bank deposit rates, And we see some activity and we've seen that, you know, pre-pandemic, you know, with several hundred million dollars for a couple of quarters that moved off our balance sheet into assets under management with our financial services group. So, you know, we still drive positive economics from that and you can see, Some of that activity is still occurring today, and you see that with that upward trajectory in terms of the fee income that we're driving from that group. So that's something that as we progress through the third quarter, fourth quarter, if that's a significant driver of net deposit balances, and we'll certainly highlight that for you.
spk02: Okay. That was another question I had, so I can scratch it off my list, so I appreciate that. Andy, question for you. One of your quotes in the release is, things are very strong, and I appreciate all the puts and takes in terms of the reserve and provision, but what does it take, what more does it take to keep bringing the reserve down? Is it economic improvement that does it? Is it changing of your factors? And I guess I'm just trying to get a bit of a forward look because of some of these negative provisions that we've seen in the last couple of quarters.
spk06: Right. Well, for Columbia, we still have $400 million plus in substandard loans. And so we need to continue to work through and help those borrowers recover. And that will have a meaningful impact on our level of allowance for credit losses. I think as the economy stabilizes and we do not see dramatic changes in economic forecasts, the economic forecast will be less of a driver and more traditional levels of problem loans, charge-offs, and those kinds of activities will be driving the provision. Does that answer your question? I mean, I'm trying to be, I guess, a little bit more specific to Colby.
spk02: Yeah, that does help, I guess. You know, from an outsider's point of view, I still see the reserve levels as relatively high, particularly relative to your NPA. So I just kind of wanted to get a flavor for, you know, what we should expect in terms of the quarterly impact on the P&L. Okay. Yeah, okay. Last question, maybe for you, Clint. It just, on this loan production and growth issue, numbers that you've been seeing. It just feels like something's different in your model in a positive way. And you guys always highlight expenses to average assets. And, you know, we've touched a little bit on expected deposit growth, so that brings up assets as well. But I'm just curious what kind of capacity you feel like you have to add assets without a lot of hiring and spending. In other ways, what kind of leverage do you have in your business model, and is it different than a couple years ago?
spk05: You're still there?
spk08: Ladies and gentlemen, this is the operator. Please stand by. Thank you. Thank you. Thank you. Please resume. All right. Do you hear me? John, that was the best answer I've ever given. Unfortunately, nobody heard it.
spk02: I think you put me on mute and started hysterically laughing, and you hit disconnect instead.
spk06: Well, I'm trying to decide if it was Andy or Chris that kicked something under the table.
spk02: Did you hear my question?
spk06: I believe so. Do you want to repeat it just to make sure?
spk02: I'm just curious about the operating leverage in your business, because I'm looking at the loan production is going up, and you always highlight the – operating leverage piece of the business. And I'm just curious, is the business model a little bit different, meaning you have the capacity to add assets without hiring a lot of new lenders? And is there the potential for longer-term improvement in operating leverage based on some of the changes you made over the last couple of years?
spk06: Yeah, the short answer is yes to both of those. But it's more nuanced in terms of... Internal capacity in particular in our ability to handle additional loan volume is something that we've worked on for the past several years. And even with the things that we've discussed over the past year where, you know, when we say that our bankers remained externally focused and we continued throughout the pandemic in a near normal operating capacity, Well, that also included moving forward on internal initiatives in the back office, process improvement, increased automation, and all of those types of activities, as well as just the collaboration amongst our various teams and groups and getting the right banker in front of the client. And that's resulted in relationships on both sides of the balance sheet, you know, driving activity to Columbia Trust Company as well as CB Financial Services. And that's always been the goal is to have that type of activity and volume be able to scale our business. So we have been working on it. And I think that The results of our participation in both rounds of the PPP program, where we booked over 10,000 PPP loans for about $1.6 billion, just demonstrated the capabilities and the progress that we've made on that. If you think it wasn't too long ago that This PPP alone from a volume standpoint was about double the number of loans that we would typically do in a year and then equated to what our annual production was just a couple of years ago. To be able to do that and in the midst of that have two of our top three quarters of production. do it in a very controlled manner. It wasn't, you know, other than the first part of PPP, which was all hands on deck effort. Everything else was handled in essentially a business as usual fashion. That's the long-winded way of saying yes, we can do more with the existing talent and infrastructure that we have, but I think it's also important to note that there's some disruption that's occurring with some of the large national banks in terms of how they serve their clients, and that's creating some dissatisfaction at the client level that we're benefiting from, but also they have some really good bankers. And if we have the opportunity to bring in good bankers, we'll make room on the bus for them.
spk02: Okay, good. It's a long game, so I appreciate all that. And I think it was a good quarter, so thank you. Thanks, Dawn.
spk08: As a reminder, to ask a question, you will need to press star 1 on your telephone. Your next question comes from the line of Andrew Terrell with Stevens.
spk04: Hey, good morning. Hey, Andrew. Hey, maybe just to start, Aaron, can you remind us just what the approach you're taking from a duration perspective to investing in the securities portfolio is? It seems like you might be buying at a bit longer duration just given where the overall portfolio duration turned this quarter.
spk06: Yeah, we have gone a little bit further on the curve. I don't think we're going to extend beyond where we've been buying. You know, the overall duration in the portfolio is inched up. We're now right about five years. And as you noted, we split the portfolio between an AFS and an HTM portfolio, so there's a little bit of differential between those two. The AFS is at about 4.7, and the held in maturity is about 5.8. The new purchases in the quarter were right around six. So as I said, we have gone at some, but we're also being pretty thoughtful with what we're buying. So we're buying things that have lower likelihood of prepay. We're buying things that have pretty good upfront cash flows so that to the extent that we are seeing continued strong loan growth, if deposit flows aren't keeping up, that we have those cash flows to reinvest into the loan growth. We're being really mindful about what we're doing and of course you know that we tend to stick with very high quality type of purchases. So it's a very deliberate process that we go through obviously with the size that the book is going to be. We need to be very thoughtful about how we're managing that and we're doing so. But I would not expect that you're going to see that portfolio duration extend materially from here.
spk04: Okay, great. That's helpful. Thank you. Apologies for maybe the back-to-back kind of technical questions, but looking at page 10 of the slide deck, about half of the loan book is variable and about 40% of that is currently at a floor rate right now. Just for those loans currently at floor rates, how many rate hikes do you think we would need to see before breaking past kind of the average loan floor?
spk06: I don't have that offhand, but it's, you know, there's, it's a mix where there's, you know, there's some that are going to lift pretty quickly and there's others that are going to take a little longer. So we'll, you know, we actually looked at this inter quarter and it's something that we're going to, I think, start providing some better disclosure for because our hope, obviously, is that rates are going to be moving higher, not lower. And so I think we can start providing you with some additional context that will help with that.
spk04: Great. That would be very helpful. And yeah, let's hope so on the rate side. OK, that's it for me. Thanks for taking the questions.
spk08: Your next question is from the line of Matthew Clark from Piper Sandler.
spk03: Hey, just had a few follow-ups. Just to circle the wagons on the deposit-related question, you know, kind of a traditionally stronger second half in terms of growth. I assume you're also expecting that $700 million of PPP loans, you know, a lot of that likely translates into deposits as well, which is just going to cause that phenomenon to continue here in the second half. Is that fair?
spk06: I think that's a fair assumption because, you know, you know, to qualify for forgiveness if they've already spent the money.
spk03: Yep. Okay. And then just on the securities purchases, can you give us the weighted average rate on what you bought this quarter? And, yeah, that's my second question, I guess.
spk06: Yeah, so the rate on the new purchases was $159,000. And which is actually up from the first quarter where we were at 146. So despite the drop in rates through the quarter, the average purchase on that actually improved. So I was pleased to see that. And particularly given the volume that we added during the quarter. We've had about 942 million of purchases. My expectation is that we won't be buying in that volume again going forward, but hopefully that answers your question.
spk03: Yeah, and I guess the follow-up part of that question was related to what the curve has done. It's kind of gone against you and everybody else. So I guess what are your thoughts on, I guess, if you were to buy something today, what is kind of the blended rate on that? knowing the volume of what you're going to purchase this coming quarter is going to probably obviously be lower?
spk06: Well, I mean, we are continuing to purchase. I don't mean to make it sound like we're suspending that because we're going to have cash flows and things will need to be reinvested. But I would say that of the purchases that I have seen of late, they are a little below where the average was in the second quarter. But, you know, we'll see what happens through the quarter. We're still pretty early, so I can't tell you directionally what's either going to happen with rates or with purchases. But, you know, at this point, I guess we're down a little bit from where we were in the second quarter, but hopefully that turns.
spk03: Okay. And then just finally on the loan purchases, I think you mentioned it earlier, earlier on in your comments, but I didn't catch it. Can you give us the amount of loans purchased and what specifically you bought and what's your appetite to do more of that going forward?
spk06: Not sure, Richard. We did not make any loan purchases during the quarter.
spk03: Okay. I know you did last quarter. I just wasn't sure if I heard you did more of it this quarter. So I assume no more single-family resi purchases.
spk06: Periodically, if it makes sense, given paid ends in the portfolio, we might do some topping up of that, but that's work done in the second quarter.
spk03: Okay. Thank you.
spk08: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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