Columbia Banking System Inc (COLB) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking Systems First Quarter 2021 Earnings Update. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Clint Stein, President and Chief Executive Officer of Columbia Banking System.

Thank you, Michelle.

Welcome, and good morning, everyone, and thank you for joining us on today's call as we review our first quarter results, which we released before the market opened this morning. The earnings release and accompanying investor presentation are available at columbiabank.com. During our past few earnings calls, I've commented on our bankers remaining externally focused despite the pandemic. They continued to show up in person and operate within the confines of a post-COVID world. Their determination allowed us to attract new clients and deepen existing relationships.

The momentum that was building at the end of last year accelerated in the first quarter, which is typically our seasonal weakest. The core team dedicated to Round 2 of the Paycheck Protection Program was extremely efficient, which limited the time our bankers were not able to dedicate their full attention to supporting our clients. As a result, excluding PPP, we achieved the first quarter record for new loan originations, we had another quarter of impressive deposit inflows, and our financial services group revenues were a new quarterly high surpassing old record set just last quarter.

Our performance is the outcome of a very deliberate strategy and focus on continuing to build our business throughout the pandemic, while at the same time, ensuring the safety of our employees and clients. We activated our well-tested pandemic response plan early, which gave our teams more time to shift resources in response to changing state mandates and new federal stimulus programs. At the same time, we continue to support all of our clients, ensuring that their immediate needs were met and longer-term plans could move forward.

The benefits of this strategy are evident in our loan production and deposit growth as well as in the strength of our loan pipeline. We cannot be more proud of every one of our employees. As a team, we expanded relationships with clients and each other and improved our operating leverage while meeting the challenges of a very unique economy.

On the call with me today are Aaron Deer, our Chief Financial Officer; Chris Merrywell, our Chief Operating Officer; and Andy McDonald, our Chief Credit Officer. Following our prepared remarks, we'll open the line and take your questions.

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 time, I'll turn the call over to Aaron.

Thanks, Clint, and good morning, everyone. During the quarter, Columbia generated net income of $51.9 million or $0.73 per share. Pretax pre-provision income of $63.6 million was down $6.8 million from the fourth quarter of 2020, primarily due to lower net interest income stemming from a combination of lower asset yields, less income from interest recoveries and security prepayments.

Compared to the first quarter of 2020, pretax pre-provision income rose $4.2 million due to reduced funding costs, stronger mortgage banking activity and lower expenses. Total deposits ended the quarter at $14.8 billion, which was an increase of $898 million from year-end. The inflows were largely in noninterest-bearing accounts and were spread throughout our footprint. The increase is attributed to federal stimulus, including Round 2 of PPP as well as new relationships and tempered spending and investment by our clients.

Our cost deposits dropped 1 basis point linked quarter to 4 basis points, matching our all-time low. Total loans ended the quarter at $9.7 billion, which was an increase of $249 million from year-end. First quarter loan production was $895 million, including Round 2 PPP production of $511 million. Loan balances, excluding PPP loans, increased slightly to $8.8 billion.

New loan production, excluding PPP, was brought on at an average tax-adjusted coupon rate of 3.70%, which compares to the overall portfolio, also excluding PPP, of 3.98%. The net interest margin of 3.31% was down 21 basis points on a linked-quarter basis. There were a number of factors behind the drop, but the most impactful was lower coupon rates and loans, which contributed 11 basis points of decline. Much of the remaining drop stemmed from less interest income on the early repayment of certain CMBS and a large interest recovery on a nonaccrual loan in the prior quarter, which together, contributed about 10 basis points of pressure.

Noninterest income was down slightly on a linked-quarter basis to $23.2 million, though this was up $2 million from the first quarter of 2020. The modest linked quarter decline was mostly due to seasonally lower mortgage banking income, but we were actually pleased with how well mortgage volumes held up.

Noninterest expense of $83.6 million was down just slightly when compared both on a linked quarter and prior year basis. Notably, our compensation expense in the first quarter benefited from the favorable impact of capitalized origination costs for Round 2 PPP loans. This benefited the quarter by $5.5 million that was partly offset by $923,000 of data processing costs for Round 2 originations. In addition, we recorded a $1.5 million provision for unfunded commitments.

We look for our quarterly expense run rates to return to a mid- to upper 80s run rate for the remainder of the year. Provision for income taxes decreased $4.2 million on a linked-quarter basis to $16.8 million, representing a 19.5% effective rate. 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. We have worked hard, partnering with our clients to help them and their businesses remain viable and healthy over the past year. This has resulted in deeper relationships and upward momentum, which is evident in the tremendous deposit flows and strong loan production in what is typically our seasonal low quarter. While Round 2 PPP loan production has been a major focus, we have also emphasized business as usual, and this approach has allowed us to win new business during a tough year and to create new opportunities as communities begin to exit the economic crisis.

As Clint noted, excluding Round 2 PPP loans, we achieved a new first quarter loan production record of $384 million. This was the sixth highest production quarter ever, and follows the quarterly record of $468 million set during the fourth quarter of last year. Loan production was offset by a decline in utilization of 2% during the quarter and 7% in the past year, which was a headwind of $92 million and $326 million, respectively. The decrease is partly due to typical seasonal agricultural paydowns, a shift in funding from existing lines to PPP loans as well as delayed investment from uncertainty within the economy.

Nonetheless, we continue to be pleased with the momentum of loan production and are optimistic with a healthy pipeline that is expected to generate quality loan production in the months to come.

As of March 31, our Round 2 PPP loan production supported over 4,100 clients, and we received more applications in this round than we did in Round 1, where we funded all qualified loan applications. We are proud to support our communities by providing critical funding in support of both existing and new clients.

Excluding PPP, quarterly production mix was 63% fixed, 33% floating and 4% variable. Overall, the portfolio mix is now 9% PPP loans, 48% non-PPP fixed, 31% floating and 12% variable. The composition of the loans in the first quarter benefited from the favorable impact of -- oops -- our compensation -- portfolio remained relatively unchanged with a small increase in C&I due to additional Round 2 PPP loss.

Gross of unearned income, PPP loans were $915 million at the end of the first quarter. Since we opened the forgiveness portal in mid-August, we have received over $550 million of payoffs and paydowns, all related to Round 1 of the program. Deposits grew by $898 million in the quarter and at an unprecedented 37% or $4 billion over the past 12 months to $14.8 billion as of March 31. The deposit mix remained at 60% business and 40% consumer.

Over half of the increase during the quarter was in demand deposits. And as of March 31, the deposit base was evenly split between noninterest-bearing and interest-bearing. We continue to drive exception rates down, and as was mentioned, our cost of deposits declined to an industry-leading 4 basis points. Fee activity remained robust during the quarter, with financial services and trust revenue at a new high, up 10% over first quarter 2020.

And although residential mortgage activity slowed on a linked-quarter basis, it drove loan revenue up by 61% or $2.8 million when compared to the prior year quarter. This offsets declines in deposit account fees from the increased liquidity on customer balance sheets.

At the end of March, we announced the move of our Tigard Oregon branch to a new financial hub location. Just like our Ballard and Boise NeighborHubs, the Tigard financial hub will offer the same banking experience geared towards helping our clients achieve their comprehensive financial goals, including investments, trust services and other financial considerations. The Tigard financial hub is scheduled to open in July.

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

Thank you, Chris. This quarter's ACL totaled $148.3 million, a reduction of almost $850,000 from year-end. Net charge-offs of only 47,000 led to the provision release for the quarter. Our forecast assumes annual growth domestic product to increase to 5.7% for 2021, with the unemployment rate predicted to end 2021 at 6.2%, an improvement from the 6.6% last quarter.

As noted before, we use IHS Markit for our economic forecast. The improved forecast is counterbalanced by continued stress in the travel and leisure industries, which are showing signs of stabilizing. 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 $11.7 million in Q1, an increase from $11.1 million in.

Our adjustment is driven by the continuing impact of the pandemic affecting hospitality, shifting dynamics in office and retail, and business closures and capacity restrictions in the restaurant industry.

We ended the quarter with an allowance relative to period-end loans of 1.53%. Adjusting for the PPP loans, the allowance to period-end loans increases to 1.69%. NPAs for the quarter were relatively unchanged at 20 basis points. However, I always like to adjust for PPP loans, as I believe it provides a more consistent comparison as we move forward. With this adjustment, NPA did not increase much, only 1 basis point to 21 basis points.

Past due loans for the quarter were 11 basis points compared to 28 basis points last quarter. Net charge-offs, as noted earlier, were essentially 0 versus 13 basis points last quarter, and our impaired capital ratio was 29.4%.

Problem loans, which we define as loans rated watch or worse, declined from $955 million last quarter to $920 million as of March 31, 2021. We did see migration downward from watch and special mention to substandard during the quarter, which also impacted our allowance for credit losses. Aviation, hospitality and restaurants were categories where we saw the negative migration.

Okay, deferral. At the close of the quarter, we had $71 million in active deferrals or less than 1% of our portfolio, excluding PPP loans. This is down from the $147 million deferrals at the end of last year. Deferrals for the most part continue to run off as expected. We continue to classify our retail, hospitality, restaurant and aviation portfolios, as portfolio was subject to an elevated level of risk due to the pandemic. In aggregate, these portfolios account for about $1.3 billion or 13.1% of our loan portfolio.

As alluded to for the past few quarters, we have removed our dental and health care portfolios from this classification. Both of these portfolios exhibited stable metrics throughout 2020. Problem loans remained very modest in this segment. There were no past dues in either portfolio, and deferrals were less than $1 million or less than 1 basis point on a combined portfolio of $1.1 billion as of quarter end.

Okay, so for those that we still classify. Retail is the largest segment at $574 million in loans outstanding at the end of the quarter. While we remain concerned over the pandemic impacts on this portfolio, problem loans are actually down year-over-year. We had no past dues in this segment. Nonaccruals were only 3 basis points, and no retail loans were on deferral as of March 31.

PPP loans have certainly made a difference for our borrowers in this portfolio. While the statistics are all positive, we continue to be cautious, however, given the colloquial evidence we see in our footprint. Hospitality at $336 million has shown a mixed bag of results. In total, problem loans in this segment declined during the quarter and now represent about 56% of the portfolio, down from 66%. However, we did see substandard assets increase to 26% of the portfolio from 23% a year ahead.

There is clearly a bifurcation in the portfolio between those which are leisure-oriented and those which are business-oriented. Leisure properties have weathered the pandemic much better than our original expectations, while business-oriented properties continue to struggle. Leisure travel accounts for about 69% of our portfolio, while business accounts for 31%. Restaurants, which account for about $227 million, saw a modest amount of negative migration during the quarter.

Problem loans increased from 21% to 23% and criticized, classified assets increased from $29 million to $33 million. We had about $7 million in deferrals in this portfolio at quarter end. Similar to the retail businesses, PPP loans have had a meaningful impact for restaurant operators. As of March 31, 57% of our restaurant operators were at 50% occupancy. However, with rollbacks put in place by governors in both Oregon and Washington, that has dropped to 39% as of today, thus, demonstrating the fickle nature of this pandemic and the economic recovery as we move forward for this industry.

However, with the summer months arriving, outdoor dining will be returning to our footprint. This, combined with the increasing number of people becoming vaccinated, all bode well for the restaurant industry in the Pacific Northwest.

Finally, the aviation portfolio at roughly $137 million, down by about $25 million from a year ago, was relatively stable during the quarter. As in past quarters, no loans are past due. All customers continue to pay as agreed, and no loans were on deferral. Almost all the news in this area has been positive with some airlines projecting to be cash flow positive by the end of this quarter.

With that, I'll turn the call back over to Clint.

Thanks, Andy. As noted in our 2021 proxy statement, Columbia Bank's commitment to social responsibility is in full alignment with our corporate values. To learn more about our efforts in this area, we invite you to visit our new ESG page found in the Investors section of our website. There, you'll find information supporting our commitment to sound environmental, social and corporate governance principles.

Our regular quarterly dividend of $0.28 was announced this morning. This quarter's dividend will be paid on May 26 to shareholders of record as of the close of business on May 12. This concludes our prepared comments.

As a reminder, Andy, Chris and Aaron are with me to answer your questions. And now Michelle, we'll open the call for questions.

(Operator Instructions)

Our first question comes from Jeff Rulis with D.A. Davidson.

A question on the margin. Might date myself here on the -- Clint, I recall back in the day, sort of you pegged a 4.25%, now the bank was probably half the size and a different interest rate environment. But I guess longer-term, we've got quite a bit of liquidity. But is that a tangible mark over time to climb back to? Just trying to kind of longer term peg a margin.

Yes. I mean there's a lot of different ways that we could respond to that. And you're right, Jeff, you've been with us for a long period of time. And throughout the history of our company and the different rate environments and business cycles, that has been the range that we've kind of gravitated towards. But gosh, the liquidity that's come on to our balance sheet the past year, that's really, I think, a lot of what's driving the compression.

What -- I guess, if I'm in your shoes, I have to think about what do I assume in terms of that liquidity being absorbed with loan demand, the yield curve steepening, the Feds meeting this week, and this inflation continues -- pressures continue to mount. Yes, there's a lot of variables there. And that's why we've really been focused on growing net interest income because we think that, that's something that our direct efforts and the production that Chris has talked about in his prepared remarks and some of the things that Aaron and his team have done in terms of deploying excess liquidity. But I think if the business environment normalizes and the rate environment starts to look something like what we've seen pre-pandemic, and say, over the past -- prior 7 or 8 years, our bankers are doing a lot of great things. And so I think that we'll work through that liquidity and the loan-to-deposit ratio will come up. And I think you'll start to see the margin behave in a manner that's consistent with maybe what you've seen in prior cycles.

I don't know if Aaron had anything to add.

Yes. I guess I would just add, our new loan production has a coupon of 3.70%, right? So sure, there's fees to be had on top of that. But the reality is right now the environment that we're in that's -- the 4.25% is inconceivable. But as Clint said we start getting some of this liquidity deployed back in the loans to get a better rate environment. And absolutely, we should at the very least be heading back in that trajectory.

Okay. Appreciate it, guys. I would imagine the strategy is a little more NII-focused than an actual margin figure, but appreciate it.

Maybe if I -- another big picture, Clint. I just wanted to check in on kind of M&A. You've been on the sidelines for a while, sort of internally focused or investing in the business, and I wanted to see if, as we've evolved here, if you've inched towards looking at any opportunities acquisition-wise? Or is it still more lending teams? Any update on that front would be helpful.

Well, okay, I think we've always -- as we've said, M&A is in our DNA. We -- in the investor deck that was updated, put out on the website this morning, we have a standing chart, which shows our M&A history. And many of the individuals that have been part of those past transactions in terms of evaluating and integration are still part of our team today. So we still have that expertise. A lot of the work that we did over the past year -- and I kind of touched on it briefly in terms of the proactive approach that we really felt like we were able to take throughout, especially the early months of the pandemic because of our pandemic response plan that we had -- have in place, and the fact that we had tested that plan and we activated it in early January of 2020. It really put us in a position to spend the back half of last year focused on continuing to make progress on operational efficiencies, continuing to look at opportunities to grow our business, and some of those are organic. But also we feel like that there's going to be consolidation.

And I won't use the word significant consolidation within our industry, but I just look at the rate environment, the pressures that all banks face. And I think it's going to force some to reevaluate and seek out a bank to partner with. And so our goal is to make sure that when they reach that point, that we're on the shortlist of who they call. I can't really get into much more detail than that, but I do think that M&A chatter is picking up, and we're starting to see some things on a national level, new announcements that have come out in the quarter. And I would expect that you're going to see that trend continue, and you'll probably see some of that activity within our marketplace.

Our next question comes from Matthew Clark with Piper Sandler.

I want to start on the margin as well. Can you give us the new security yields you experienced this quarter in terms of purchases? I think it was 1.26% last quarter. Maybe start there.

Sure. Yes, with the list in the curve that we saw towards the longer end of that, we did see some benefit in our new purchases. So that number came up to about 1.46% for the first quarter. And we actually had a few purchases that were over 2%, which is the first time I saw that in a while. So things are moving in the right direction there, but, obviously, we've got more liquidity to deploy. And as PPP loans are forgiven that's going to give us more liquidity to work with. So I would expect there's more to be done on that front. But as you noted, it should be coming on at a little better yield. It's not the mix necessarily that you want -- need to have, but that's -- but it should be positive to net interest income.

Okay. And then on the new loan coupons at 3.70%, I think that's up 34 basis points from last quarter. How much of that was kind of driven by mix change? Or did you start to experience maybe a little bit of better pricing given the steepness -- steeper curve?

Yes, Matt, this is Chris. I'd say it's a little bit of both. Some of it depends on, obviously, the mix of what comes in during the particular quarter, size of deal, credit aspect of it and things of that nature. So it is a bit of a moving target. I think that the steepening of the curve certainly helps us, and we'll continue to monitor and pay attention to that.

Okay. And then, Aaron, do you happen to have the core margin in the month of March? I guess what I'm trying to get at is where your margin might be headed. And it seems like if you just use the incremental rates on securities and loans, maybe layering in some additional fees, you're kind of headed toward kind of a 290-ish core margin longer term. But obviously, remixing assets would help mitigate that to some degree. So just wondering if you had the -- if you would agree with that. And if not, why? And then if you had the monthly NIM in March from a core basis that would be helpful.

I don't have the March number in front of me. The -- I would say that -- your 290 number seems a little extreme. But what that really comes down to is how long are we down in effectively 0 interest rate environment, right? So it's not to mention the mix changes that we just talked about, but I would say that a more pessimistic view than I would have. But maybe we'll see what happens with the Fed and with rate.

Understood. No worries. And then just on the pipeline, the loan pipeline. It sounds strong. Can you give us kind of order of magnitude how much it might be up linked quarter? I assume year-over-year comps are a lot easier and less meaningful. So...

Yes, Matt. As far as quarter-to-quarter, it continues to improve. Some of that is based on what the throughput is, how much comes through in any one quarter. I would tell you that the -- while the pipeline is strong, we certainly have high expectations for our ability to go to market and the things we can do, and we're not disappointed.

And so I think that we're seeing our approach over the second half of -- certainly the second half of 2020 is certainly paying dividends. We're seeing more opportunities. Our approach with the second round of PPP is taking dividends on new relationships. And so we're getting plenty of that, and it all comes down to structure and pricing and things of that nature. But we're very pleased with where we're at, and we'll see how the -- if we get any rollbacks here in the pandemic, and how that might affect things. But it appears that people are getting back and engaged, taking advantage of a low interest rate environment, but also actively investing in their businesses, which is all a good thing for us.

Okay. And then just on the PPP-related stuff. The FAS 91 benefit this quarter, I think in the release, you mentioned most of the decline in comp was related to that. But can you quantify the dollar number there?

And then can you also just confirm how much you have in the way of Round 1 PPP net fees left and Round 2 net PPP fees and the amortization schedule too?

Sure. So yes, the FAS 91 related to PPP was about $5.5 million. I'd also point out that we had some technology fees related to PPP. There was about $900,000. And the other kind of material item in the quarter was we reported a $1.5 million provision for unfunded commitments. So I would think about each of those and what that looks like going forward as you're modeling out.

Also going forward, we tend to have a big lift in FICA and 401(k) contributions in the first quarter, some of which will go away in the -- as we head into the second quarter and through the year. The -- in terms of the remaining unearned income related to PPP, that's about just shy of $21 million at March 31.

And how much of that came from Round 2, just so we can amortize that over -- I assume, 5 years? How much you're assuming something different?

So the -- yes, I guess if you were to assume that the straight-line amortization, and yes, the 5 years although I wouldn't think about it that way myself. But the -- but there was -- let me put it this way, so at year-end we had $9.9 million in unearned income, and of that amount related to PPP 1, we had $4.4 million remaining at March 31. So that should give you a sense of how much we added during the first quarter with Round 2.

Okay. Got it. And the FAS 91 benefit, I just want to make sure I heard you correctly. You said $5.5 million of originated deferred fees?

That's correct.

Our next question comes from David Feaster with Raymond James.

I wanted to start on the record non-PPP production for our first quarter. I'm just curious where the growth came from. How much do you think is kind of from an improved economic outlook, just given your clients' more confidence in investing versus new client acquisition from the PPP program or the new hires? And maybe just kind of whether we started to see any real contribution from the NeighborHub concepts at all?

Look, David, I'll just start with a statement. And then I'll step back and let Chris actually give you some numbers for context. But pre-pandemic, the biggest single comment that we would hear from our clients was they could grow their business 20%, 30% or more. But labor was a constraint for them. They just simply couldn't find enough labor or the right skill set of available labor.

And then I would say the conversation with the clients that I've been in contact with has returned to that dynamic. There's going to be pockets, as Andy talked about, the hospitality sector and things, but a lot of our business clients are very, very busy, and they just simply can't get enough people to continue to keep up with all the opportunities that they have in front of them.

So I do think there's a lot of optimism out there. We do feel like the PPP has helped thousands of businesses within our market area. But also there's a lot of liquidity that's still there. And the other thing that I don't know that we really had spent any time talking about is the disruption in supply chain. So things like the chip shortage and how that ripples through, and not necessarily directly with our clients, but in terms of things they invest in. If they're looking for a new piece of machinery or something, and if that production is idled or delayed because they simply can't get the chips to manage the electronic components. So I think those are some of the things that will start to break loose as we go forward and will create additional opportunities for our industry and for us and for the clients. So I'll step back and let Chris add his context.

Yes. David, I don't have the exact numbers on the mix on that, but I can tell you that it's pretty well diversified. It's coming from all over the footprint. It's coming from all of the concepts or the efforts that you've talked about, probably most notably picking up business because of the approach of being open where we're taking advantage of situations where other institutions have closed locations and clients are migrating because of that approach. And as far as the NeighborHub, both NeighborHubs that we currently have, they certainly support our commercial banking opportunities, and they're performing at or above expectations. But they're really more of a -- they're a support to what's happening. They do drive some small business production certainly, and -- but the bigger benefit is how they support the overall network and support our bankers in total.

Okay. That's good color. And then just kind of following up on your comments, Clint, on the supply chain. I'm just curious what you guys are seeing on the C&I side. It sounds -- utilizations have continued to come down, but do you think we've hit a trough yet? I guess just as clients start needing to build inventory and just an improved economic outlook, do you think that we're kind of at trough levels here? Or I guess as you talk to clients, do you think they'll -- they'd prefer to use their excess cash before starting to draw on lines? Just curious what your thoughts are there.

Well, I'll start with -- first quarter is historically our seasonal trough, and where we end up and where that picks up sometimes just depends on do we have an early spring or a late spring, and in particular, with some of our cultural clients. And we've had a late spring. Everything here seems to be about 5 weeks behind where we typically would be in terms of weather conditions now. While spring is strong, we did have a stretch of 80-degree weather followed by a stretch of 48 and rain. But today, it's sunny, and so definitely starting to see that seasonal -- seasonally-driven activity pick up.

There's other components in terms of what the C&I book that also lead to demand besides your comment around clients using their own liquidity, but in some different business verticals that we're in. Sometimes as their markets heat up or cool down, their line utilization also changes. So I'm optimistic about your comment about is this the bottom of the trough, but it's not a typical year. We're still in the last, what I hope are the last grips of the pandemic as vaccination rates improve and things.

But as Andy mentioned, various counties within our footprint have backslid or on the cusp of backsliding into various components of restrictions, not like what we saw at this time a year ago. But certainly, it's just another data point to cause us to pause and say, "Well, the second quarter is not going to be necessarily the same as what our seasonal activity in the past might have been." Outside of some of those things that are very much driven by the weather and the time of the year that it is. And with that, I'll pause and see if Chris has anything he'd like to add.

What I would add to that is I think that where we're at is somewhat unprecedented. And so thinking forward of are we at or near a trough is probably -- it's what we're all looking towards, it's what we're optimistic that those things start to change. There's a lot of liquidity still on the sidelines. I'm optimistic that we're starting to see some of that liquidity be invested into traditional securities markets. And I think that's shown in the results that we're seeing in our financial services, and trust division of some of that money is now moving to other areas, starting to look for additional yield or return on it.

I think the piece around right now the liquidity if you're certainly sitting on lots of cash at a low interest rate, it certainly makes sense to pay down the line. But as we start picking up on our production and we're seeing that fixed production once that kind of starts working through the system, you'll start seeing some more opportunistic types of things as we exit the pandemic. And then, of course, I would just echo and reiterate that the late spring certainly has an impact.

Okay. That's good color. And then look, the key really to getting back -- the margin back to where we've talked about is putting on new earning assets. It's great to hear the increase in the rates on new production. I'm just curious whether you're interested or are you increasingly willing to be maybe more competitive on rate in order to drive growth? Or do you think you can hold the line on rate and still drive the growth that you need to deploy that liquidity? And conversely, is there any appetite for some potential loan purchases to supplement that, deploy liquidity quicker?

David, I can talk about the production side, and then I'll let Aaron pivot to the second part of that question. If we're given a choice, I would much rather -- we would much rather compete on rate than on structure. And certainly, that is a long-term aspect of who we are and what we would do. I think that several things are at play there. Our value proposition around relationships, doing more than a simple transaction and our process and ability that we stayed open can certainly help, in some situations, drive a little higher yield, a little higher coupon. But it all depends on the relationship. And as long as we continue to show value and bring other things to table, we can command a bit higher coupon on that.

Now with that said, I will also say there's some very competitive opportunities out there, and we'll look at all of those from a credit aspect first. And if it passes through that aspect, then we will sharpen our pencil if necessary, if it makes sense, if it's right in our backyard and things of that nature. And so we will compete on price selectively. It's probably the best way to say it.

I think in terms of loan purchase, I mean obviously, we -- our preference is to use our lending teams to drive our own organic production, which has fantastic track record, and I think we're feeling really optimistic about where things are moving going forward.

We've very selectively made, say, for example, some mortgage purchases or something like that to kind of backfill paydowns or something in that book when our own production isn't quite matching what we want to carry on the balance sheet. But ideally, what we're going to do is drive our own originations and loan growth. And if something came along that seemed particularly attractive, yes, we'll take a look. But buying loans of big premiums right now doesn't necessarily make a lot of sense to me.

Our next question comes from Jon Arfstrom with RBC Capital Markets.

A couple of cleanup questions here. Just on the loan production numbers, it feels like you're saying this and your peers are kind of saying this as well is that the economic activity is picking up, but it's not quite there yet. And I'm just curious, Clint, some of your earlier comments about your bankers are less burdened with PPP now and they're looking forward. And I guess the big picture question is, are you just taking share in terms of your production? Or is this increased economic activity that's driving it?

Jon, it's Chris. I would tell you, it's both. Economic activity is certainly starting to increase. But as you mentioned, it is not where it was in 2019. I think the fact that we opened forgiveness back in August of last year and have moved considerably through the first round bodes really well for and in our approach in the second round with the technology that we had available was pretty seamless. And so it was a much easier process for us. We expect to see that on the backside of the second round PPP forgiveness as well.

And so that has really kept our bankers from working on that and being all hands on deck too. We've got a very streamlined process. It still requires people, but nowhere near as many as what we experienced last year. And so our teams are out and about capitalizing on the opportunities in the markets. And it would tell you that's broad-based. It's all 3 states. It's all of our regions, and there's a real sense of now is a great time for us to be out in talking about our approach.

And again, being open has paid fantastic dividends. And the teams are excited. So they're out and about trying to win business. So that leads to your part of -- yes, there's some share that's being acquired.

Okay. Andy, a question for you. How concerned are you about deterioration in some of the stressed sectors, and that leading into higher nonperformers? I mean your numbers are -- look very clean. But I'm just curious on your thoughts on that topic.

Well, I'm obviously surprised at how well all of the segments that we've identified have performed. So hospitality would be the first one that I have concerns with in terms of migration into nonperforming assets, and that would be the business traveler segment that I talked about before. If we look historically, we can see that business travel takes an extended period of time relative to leisure to rebound. So that would be the area that I have concern.

The retail and restaurants continue to just surprise me. As I mentioned before, retail is better now than it was a year ago. And restaurants, relatively speaking, I guess, they're meeting expectations, but they're not deteriorating into a nonperforming loan yet.

But why I would put hospitality first, I said I'd probably put restaurants next. So those would be the 2 segments that I think we will see some migration into nonaccruals. And ultimately, there could be a modest amount of charge-offs there as well.

Okay. And then I guess this is another bigger picture question. But just on the reserve level. What you guys were for day 1 CECL, I think, was maybe a little above 1%. And I know that there's plenty of stuff to be concerned about, but can you migrate back there over time? Is that the right level to think about longer term?

I think that with CECL, it's difficult to say where that migrates longer term. I think in terms of our behavior for this year, it's pretty consistent with what I've talked about before, where it's going to kind of bounce around a little bit, and we'll have some modest releases as we continue to move forward.

I certainly think that you're going to see it migrate down. It's just really difficult with a new model to say 1% is the long-term, given the volatility of economic forecast. Now as we continue to get more stable economic forecasts, and in this case they're stable to slightly improving, we are seeing that the model behaves in a more stable manner. And to that extent, yes, you would have the ability to migrate down to 1.25% and possibly 1% if you continue to have that stable economic forecast.

Our next question comes from Jackie Bohlen with KBW.

I wanted to start on capital. You obviously have really healthy levels. So I just wanted to get a refresher on how you're thinking about the -- I know you used to do a variable special dividend. So if that comes up in conversations, and I'm guessing lower appetite for buyback still, but just an update would be great.

Yes. We still haven't changed our view on -- in terms of our long-term targets. And for many years, we've stated that TCE of 8% and total capital ratio of 12% is kind of what we think makes sense for us in terms of giving us flexibility to do some things opportunistically, and we are well above those levels.

But I think that as we progress through 2021, some of the conversations that we'll have with our Board of Directors will be around the direction those ratios will continue to -- expect will continue to build. And what uses -- or what tools do we have available to us to start to shift those closer to that -- those long-term targets. And there are some things on the horizon that obviously have maintained our regular dividend. As you noted, special dividends have been a tool that we've used many times over the years in that regard, and so I wouldn't rule that out.

Buybacks, we have an authorization in place, but we'll be opportunistic and use discretion in terms of -- to the extent that we engage in buybacks. There's also, as we talked earlier, and I think it was in response to Jeff's question and my comments around -- we do expect that M&A activity in our region will pick up at some point in the coming year. And so I guess it's a long-winded way of saying that our traditional uses of capital are still on the table. But the one that we know today, we're comfortable with being above those long-term targets.

Okay. And then just thinking about M&A. I feel like we're in a really fluid environment with a lot of moving pieces. So just a refresh on how you think about potential targets in terms of size and geography would be great.

No, Jackie, I'm not going to give you the playbook.

A playbook would be great, Clint, if you could just do that. Just broadly, I'm trying to get at if you would look at something obviously much larger than you were when you were doing deals in the past. And so I'm trying to get at, to the extent that you're not able to -- that there's not an available target that really moves the needle for you, if you would take a look at something strategic, but small.

Yes. That's the exact word that I would use and that I had on the tip of my tongue is this -- the strategic rationale. That's when we talk about M&A internally, that's the question we always ask is what's the strategic rationale and does it makes sense, what does it bring to us that we don't have, how is it additive to our franchise and not dilutive to what we've built over the last 28 years.

And we tend to think about it more along those lines as opposed to absolute size. There's -- I mean you've seen our growth in terms of deposits over the past quarter and the past year. And so it'd be easy to say, "Geez, there's this minimum size where we just wouldn't even consider M&A because our organic growth just outpaces or we could do it over a certain time horizon."

But I think that's a little shortsighted and needlessly confines the institution to thinking about that strategic rationale. And there's things whether it's a tech platform, whether it's a certain niche expertise that we could gather from it. And -- but all things being equal, it does have -- it does take a larger target to move the needle than what it did for us, say, 10 years ago or pre Great Recession. So I don't know if that's helpful for you, but that's kind of how we think about it.

Fine. No, it is. It's very helpful.

Our next question comes from Andrew Terrell with Stephens.

So I wanted to ask just on the deposit growth front. So we obviously saw a tremendous amount of deposit growth this past quarter. It's impressive to see noninterest-bearing mix still being so high. I was hoping you could speak to just any kind of early trends you're seeing in the month of April just in terms of deposit flows. Does it feel like things are slowing down, with less stimulus being put into the economy? I mean can you maybe just update us on how you're thinking about deposit growth throughout the year?

So I guess this is the theme of the day. I'll start, and then let Chris and Aaron add some comments. In respect to the question around line utilization, I talked about seasonality. And that's something that we also have seasonality in -- historically in our deposit portfolio. And typically, the first half of the year, in any given year, we have little or very little deposit growth or sometimes we actually go backwards. And then much of our deposit growth will occur in the third and fourth quarters.

And so for us to have a quarter like what we had last -- this past quarter is definitely an outlier from our historical seasonality that we would experience. I don't have a crystal ball to necessarily know where we'll be when we talk after the second quarter here in July. But I can certainly say that the first quarter performance was definitely a dramatic departure from what our historical expectations would be for first quarter or second quarter.

And with that, I'll step back and see if Chris or Aaron have anything they'd like to add.

Yes, Andrew, what I'd add to it is if you take into consideration the amount of the growth, and then you take in that, again, our investment teams had record production in the first quarter, there's a lot of money moving throughout the system. And even with that production that went into our investment teams, and we still had the deposit growth. And so I think it's driven from a few sources. And then obviously, PPP is part of it. There's also a lot of businesses within our regions that are doing phenomenally well, and they continue to deposit their money as well.

And so I think as people start moving through the second quarter, travel starts picking up, things of that nature -- we've seen travel pick up, it hasn't had a major impact in the first quarter. We'll see how that kind of moves out throughout the second quarter into the summer.

You may see some of that liquidity start being deployed now. Typically what seems to take place is our client may deploy the liquidity, but also somebody else's clients deploying more liquidity, and it ends up in one of our business accounts. And so there's a little bit of movement around in how the money is trading hands. And I think until you start finding ways that, that liquidity leaves the system, this may be a little bit of an abnormal year for us, especially in the first half.

But again, we're seeing more money being deployed into investment assets and things of that nature, but it hasn't had a tremendous impact yet.

Okay. That's very helpful. And then maybe, Aaron, do you have how much in PPP income is included in the loan fee disclosure that's made at the bottom of the margin detail in the release? I think the total loan fee dollar was $8.3 million.

So in the first quarter, we -- on our PPP program, we had earned interest of just over $2 million. We had fees of a little shy of $3 million, and we had accelerated fees a little over $4 million. So all in, you're looking at about $9 million, and the PPP loan yield in the quarter was $446 million.

There are no further questions. Please proceed with any closing remarks.

Well, thank you again for joining us. We look forward to continuing our conversation throughout the second quarter and reporting our second quarter results to you in July. Take care.

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.