Columbia Banking System Inc (COLB) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Columbia Banking System's Fourth Quarter and Full Year 2020 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. Please go ahead, sir.

Thank you, Carmen. Welcome, and good morning, everyone, and thank you for joining us on today's call as we review our fourth quarter and full year 2020 results. Our earnings release and investor presentation are available at columbiabank.com.

Amidst the turmoil in 2020 caused by the pandemic, social unrest, turbulent financial markets and contentious election cycle, Columbia achieved another record year. Pretax, preprovision income of over $270 million was our best year yet, eclipsing the record set just last year by $25 million. The pandemic drove our provision expense for credit losses to an all-time high, yet full year net income and EPS were still very strong at $154 million and $2.17, respectively.

During last quarter's call, we mentioned that our pipelines were rebuilding. Our bankers' business development activities during the quarter exceeded expectations, delivering a record $168 million of loan originations, with [deposit sale] to a new high of $13.9 billion.

We're very proud of the resiliency, adaptability and dedication our employees have exhibited during 2020. Our business activities continued in a near-normal capacity, with bankers winning new client relationships and completing important operational initiatives that immediately improved our operating leverage. They accomplished so much more than simply remaining open for business during COVID.

On the call with me today are Aaron Deer, our Chief Financial Officer; Chris Merrywell, our Chief Operating Officer; and Andy McDonald, our Chief Credit Officer. We'll be happy to answer your questions following our prepared remarks. I need to remind you that we may make forward-looking statements during the call. For further information on forward-looking comments, please refer to either our earnings release or website or our SEC filings.

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

Thank you, Clint. 2020 earnings of $154 million and EPS of $2.17 were materially influenced by the economic impact of the pandemic on our net interest margin and credit loss provision. The steep decline in interest [rates] at the end of the first quarter was offset by a higher volume of lower-yielding earnings from PPP loans and investment securities, both funded by the [deposits] imposed during the year.

Interest income is further supported by the interest rate collar implemented at the beginning of 2019. The expenses were carefully managed to $335 million, which was the lowest level since 2017, the year of the Pacific Continental acquisition.

Fourth quarter earnings of $58.3 million and EPS of $0.82 were an increase of $13.6 million and $0.19, respectively on a linked-quarter basis. Quarterly pretax, preprovision earnings increased $8.3 million to $70.4 million, with the rise driven mostly by a combination of accelerated loan fees from the payoff of PPP loans and a recapture of credit loss provisions, though there were other favorable operating trends in the quarter that contributed to the upside and helped to offset continued pressure on core asset yields.

Total deposits ended the quarter at $13.9 billion, up $270 million from September 30 and $3.2 billion over the past year. The quarterly increase was mostly interest-bearing demand and was spread throughout our footprint. The annual increase is attributed to several stimulus, including PPP loans, as well as reduced spending and higher savings by both retail and commercial clients.

Our cost from deposits declined by 1 basis point during the quarter to 5 basis points, which is down 21 basis points in the fourth quarter of 2019. The increase in deposits created additional liquidity, and we moved a significant amount of our excess cash into investment securities during the quarter, and we remain mindful of potential deposit [risk] heading into 2021.

As a result of these investments, our securities portfolio increased $928 million to $5.2 billion. Despite this considerable growth, the composition and duration of the portfolio did not change materially. The investment securities yield declined just 1 basis point to 2.21%, where you should note the fourth quarter yield benefited from the early repayments on 2 Fannie Mae CMBS bonds. Without these onetime payments, yield would have been 2% .

The net interest margin improved 5 basis points on a linked-quarter basis to 3.53%. The increase stems from the acceleration of $4.9 million of PPP loan fees due to paydowns or forgiveness by the SBA. This added 14 basis points to the margin.

On a stand-alone basis, the PPP portfolio yield was 4.46% and benefited the margin by 5 basis points. In addition, the bank had a $1.7 million recovery of interest on a nonaccrual loan that paid off, adding 5 basis points, as well as the 2 early payouts of investment securities I just mentioned that contributed $2.5 million of interest income or 7 basis points to the margin.

For the year, the net interest margin decreased 59 basis points due to decreases in loan and investment yields of 69 bps and 28 bps, respectively, as well as greater liquidity on the balance sheet. PPP loans only contributed 2 basis points of the decline as accelerated fee recognition offset the low 1% interest rate.

Total loans ended the quarter at $9.4 billion, down $261 million from September 30, driven by $302 million of payoffs in the PPP portfolio. Excluding PPP loans, balances rose $40 million to $8.8 billion. New loan production was brought on at an average tax-adjusted coupon rate of 3.36%, which, compared to the overall portfolio, excluding PPP loans, of 4.05%.

Noninterest income increased $1.1 million on a linked-quarter basis to $23.6 million, due largely to higher mortgage banking revenues stemming from strong volumes, improved sales execution and a onetime benefit of roughly $1 million from a change in our sale methodology.

Noninterest expense decreased to $815,000 on a linked-quarter basis to $84.3 million, largely due to a $1.3 million recapture provision for unfunded loan commitments. Our noninterest expense ratio declined to 2.05% for the quarter, and our operating efficiency ratio decreased 3 points to 53%. We expect our quarterly noninterest expense run rate to be in the mid- to upper 80s in 2021.

The provision for income taxes increased $6.8 million on a linked-quarter basis to $16.8 million, representing a 22.3% effective rate, which was elevated due to the higher level of taxable income in the final quarter of the year and to true-up our full year effective rate to 19.8%. We expect our 2021 tax rate to be in the range of 19% to 21%.

And with that, I'll turn the call over to Chris.

Thank you, Aaron, and good morning, everyone. As Clint noted, fourth quarter loan production of $468 million was a new quarterly record propelling full year production, excluding PPP loans to $1.4 billion.

Total loans declined from $9.7 billion to $9.4 billion, mostly due to the payoff of PPP loans. Line utilization remained stable during the quarter at 46.6%. When comparing to the end of 2019, total loans increased by $684 million, primarily due to open PPP loans of $662 million as of the end of 2020.

During a year of unprecedented challenges, our bankers' focus on relationships with our clients resulted in loan levels consistent with those before the pandemic. This is a win, and credit goes to everyone throughout the company for pulling together to move our clients' businesses forward in a time of significant need.

Excluding the impact of the PPP portfolio, loans grew by $40 million during the quarter. Growth was centered in the C&I and CRE portfolios, which increased $64 million and $35 million, respectively, during the quarter.

Record production in both portfolios was offset by payoffs and continued low line utilization, CRE growth in warehouse and retail segments and C&I growth in rental and leasing and public administration segments were offset by declines in agricultural loans. Mortgage loans increased by $46 million, mostly due to the purchase of a $50 million portfolio at the end of the quarter.

Residential mortgage activity continued at an accelerated pace during the fourth quarter, driving noninterest loan revenue higher by $1.3 million on a linked-quarter basis. The quarterly production mix was 55% fixed, 41% floating and 3% variable. The overall portfolio mix now stands at 7% PPP loans, 48% non-PPP fixed rate loans, 32% floating rate and 13% variable.

PPP loans were $652 million at the end of the year with over $300 million of payouts and paydowns since the forgiveness portal opened in mid-August. If that wasn't enough, we've opened our new portal for round 2 of the program on January 19 and once again experienced a large volume of applications. Our bankers and back-office teams are actively working with our clients to ensure that loans are funded as quickly as possible, and we are seeing great results.

Deposits grew by $270 million during the quarter and $3.2 billion during the year to end the year at $13.9 billion, as Aaron mentioned. The deposit mix shifted from 62% business and 38% consumer as of September 30, back to our typical 60%, 40% business/consumer split at December 31. The decline in business deposit is attributed to our normal seasonality.

From a product perspective, deposits as of December 31 were evenly split between noninterest-bearing and interest-bearing. As part of our branch strategy, we completed the consolidation of 2 branches during the quarter, and we continue to evaluate our distribution system as we move forward.

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

Thanks, Chris. This quarter's ACL totaled $149.1 million, a reflection of $7.8 million from the third quarter, comprised of net charge-offs totaling $3.1 million and a provision release of $4.7 million. The lower required allowance was the result of an improved economic outlook, offset by management adjustments for COVID-related exposure in the commercial real estate segments of the portfolio, specifically [impacting the lines of] office, retail and hotels.

Consistent with my comments last quarter, the momentum and path of the recovery will continue to be threatened by the coronavirus pandemic. While downside risk has narrowed, numerous risks still remain, such as the fourfold increase in COVID cases throughout Q4, the slow rollout of the vaccine, flat to decline in GDP over November and December and continuing localized lockdowns in our footprint.

Our model assumes annualized gross domestic product to decline in the first quarter of 2021 by 2.8% before rebounding and ending 2021 with a fourth quarter increase of 3.2%. The unemployment rate is predicted to end 2021 at 6.6%. As a reminder, we use IHS Markit for our economic forecast.

As I noted previously, we continue to apply an overlay this quarter of what we consider high-risk commercial real estate and downstream potential impacts of permanent job losses at the significant northwestern Florida. These amounted to a combined $11 million in Q4, an increase from $5 million in Q3.

Much of this thought process is driven by the lockdowns, which occurred during the fourth quarter in our footprint. We ended the quarter with an allowance relative to period-end loans of 1.58%. Adjusting for the PPP loans, the allowance to period-end loans increases to 1.7%.

NPAs for the quarter were relatively unchanged at 21 basis points. However, as you know, I like to adjust for PPP loans, and I agree this provides a more consistent comparison as we move forward. With this adjustment, NPAs did not increase, but declined by 2 basis points. So again, relatively unchanged.

Past due loans for the quarter were 28 basis points compared to 15 last quarter. And net charge-offs were annualized at 13 basis points for the quarter versus 8 last quarter. Our impaired capital ratio improved modestly from 25.3% to 23%, thanks to a decline in substandard assets. In summary, while our credit metrics improved for the quarter, I would still characterize them as stable.

On the risk-rating front, loans rated watch or worse declined $129 million during the quarter. We saw our watch loans decline $57 million, going from $393 million to $336 million. Special mention loans declined $57 million to $297 million, and substandard loans saw a decline of $15 million. At year-end, we had approximately $321 million in substandard loans. These changes decreased our watch and below-risk ratings from 11.1% to 10.1% of total loans, again, very stable metrics.

Okay. Deferrals. At the close of the quarter, we had $147 million in active deferrals or roughly 1.7% of our portfolio, excluding PPP loans. This is up modestly from $114 million deferrals at the end of the third quarter. I would note that about 23% of these loans are criticized, classified assets.

The deferral bucket is comprised of $50 million in clients with first deferrals and $97 million of clients with second deferrals. Approximately 45% or $44 million of the second deferrals are related to an Oregon State deferral program. Unique to our footprint and others doing business in Oregon is a statute that allows borrowers with loans secured by real estate in Oregon to obtain a deferral simply because they have real estate domiciled in Oregon.

This statute expired December 31. So these borrowers will begin making payments again this month, unless the Oregon legislature amends and extends the statute. But also, the deferrals continue to be in the hospitality portfolio, which accounts for $39 million of the active deferrals. As mentioned before, this is consistent with our strategy relative to the sector and does not cause us to be any more concerned than when we entered the pandemic.

The remaining balance of deferrals are really spread out across a wide variety of businesses. The portfolios we've identified back in April of 2020 as being some of the first being impacted by the pandemic, which includes our dental, retail, hotel, health care, restaurants and aviation portfolios, amounted to about $2.4 billion as of December 31, 2020, or roughly 24% of our loan portfolio.

If we exclude the dental and health care portfolios, this number drops to $1.2 million or 13% of our portfolio as of December 31, 2020. The largest portfolio we identified, again, was our dental portfolio. As previously discussed throughout 2020, we believe the impact on this portfolio to be truly transitory. When we look at the credit metrics for this portfolio, that story bears out.

Past loans represent 97% of the portfolio. Special mention and substandard loans actually declined in the fourth quarter. We have only one loan on deferral for $715,000. Past dues are only 1 basis points, and nonaccruals are 2 basis points. We will likely be removing this of a pandemic-impacted portfolio for our 2021 report.

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

We have approximately $512 million in retail-related exposure, excluding PPP loans. It's comprised of commercial real estate and commercial business loans and represents about 60% of our total loan portfolio. The largest part of our retail exposure is comprised of commercial real estate loans, which account for approximately $452 million of the total, or roughly 88%. Again, to give you an idea of the types of retail properties we finance, the most common are small 4- to 5-day strip centers located in suburban communities and stand-alone single-tenant properties.

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

We are not in large downtown core metropolitan areas, nor do we finance regional malls or big box retailers. For the entire retail portfolio, 95% is tax rated, of which 5% is watch, which we also categorize as a past category.

We did a slight improvement over last quarter and continues a positive trend. While this trend is encouraging, we remain cautious, given government-mandated COVID closures and government-mandated deferrals. Okay. Deferrals in this segment are up slightly from the third. Quarter from 1% to about 1.3%, with half on their first deferral and the other half on their second control. However, it is still a significant improvement from earlier in the year than deferrals accounted for 16.4% of the portfolio.

Using ad origination values, the average loan-to-value for the portfolio is 50%, with 98% of the portfolio having loan-to-value less than 75%. We have stress tested this portfolio for an equivalent decline in value as seen during the Great Recession.

The average loan-to-value rises to 63% and with about 76% of the properties having a loan-to-value less than 75%. Obviously, we're pleased with how this portfolio is performing, but we remain cautious. And our expectation is that we will see weakening in this portfolio throughout 2021.

Let's discuss hotels next. We had $327 million in hotel loans, representing about 3.5% of our loan portfolio. Again, to give you an idea of the type of hotels we finance, most have one of the following flags: Holiday Inn, Best Western, Choice, Marriott and Lynden.

In total, flagged properties comprised 77% of the portfolio. The average loan size is $1.5 million. Today, we have $39 million of deferral, which is down from last quarter when approximately $62 million was on deferral. However, $31 million of the $39 million is on its second deferral. For us, this is not surprising as we are executing on longer term strategies. We do expect deferrals will continue to decline in this category.

For the fourth quarter, we actually saw some healing in this portfolio. Loans rated special mention and substandard declined from $180 million to $145 million as the leisure travel properties performed well in 2020. It appears that since folks do not go to Hawaii, Puerto Rico or Europe, they chose to go to the Pacific Coast, national parks in Idaho and Oregon as well as other recreation areas in the Northwest.

Similar to the retail commercial real estate portfolio, we continue to do stress testing on this portfolio as well. The average loan-to-value for the portfolio based on originated appraised value is 54%, with 97% of the portfolio having a loan-to-value less than 75%. On a stress basis, about 55% of the portfolio has a loan-to-value less than 75%.

Let's move on to the non-dental health care portfolio, which is about $254 million in total, excluding PPP loans. Similar to the dental portfolio, we saw the impact of the pandemic here to be transitory.

Problem loans have remained steady at around 1.4% of the portfolio for the last 3 quarters, and this is down from 2.1% at year-end 2019. The past dues are consistent at 10 basis points, and payment deferrals have declined from $107 million to $250,000, which really only represents one client.

Next up is restaurants and food services. This, of course, is a portfolio that has been very impacted by government actions attempting to control the COVID-19 pandemic.

After having been forced to close in the spring of 2020 and then, again, in the late fall and early winter of 2020, we anticipate further weakening in this portfolio throughout 2021. We have approximately $173 million in this portfolio in this portfolio, excluding PPP loans -- excuse me, folks, with 2/3 comprising commercial real estate loans.

Today, 82% is watch or better, down from 86% at the end of the third quarter. Thus, watch and worse loans increased $5 million to [$35 million]. In absolute terms, not big numbers, but directionally, it demonstrates the effects of governmental actions. We granted 157 deferrals for about $66 million in this portfolio. Today, we have 12 payment deferrals for about $8 million.

Last quarter, this portfolio had $16 million in deferrals. Similar to the hotel and retail segments, we see this area taking some time to heal, and we are not surprised by the negative migration. Certainly, the current round of PPP funding will greatly benefit this segment. We do stress testing again on this portion of the portfolio.

And on a pre-pandemic basis, the average loan-to-value was 58%, with 94% having a loan-to-value less than 75%, again, on a pre-pandemic basis. Under our stress test scenario, average loan-to-value rises to 73%, with only 55% having a loan-to-value less than 75%.

The last portfolio I'm going to discuss is our aviation portfolio. Investments comprised to both direct exposure to domestic airline carriers as well as entities that lease airplanes and engines to airline carriers.

In total, the portfolio was about $140 million, with about $96 million being direct exposure to U.S. to most domestic airlines and the remaining $44 million in exposure to lessors. Today, most of the portfolio is rated watch, which is consistent with last quarter.

Given the longer duration for recovery in this segment, risk ratings are highly dependent on borrowers' liquidity and run rate, or as we call it, burn rate positions. Of the domestic airlines we have exposure to, they have raised over $53 billion in additional capital to assist them through this pandemic.

As such, this additional capital, combined with expense reduction efforts, results in our borrowers having between 18 to 35 months of burn rate. This does not include $6.5 billion more that was recently announced in additional payroll support agreements with the U.S. treasury department. Based on the current burn rate, the airlines with the majority of our exposure have sufficient liquidity to get them into the fourth quarter of 2022.

Most of the domestic airline exposure is secured by aircraft, with a prestressed loan-to-value of 69% and a current loan-to-value, we believe, closer to 74%. However, on a stress test basis, the loan-to-value rises to 89%.

As for the leasing portfolio, which, again, is only $44 million, 50% of the exposure is in Asia, 26% in Europe and 8% in South America. The rest is in North America and the Middle East. The majority of the portfolio consists of narrow-body aircraft, with an average age of 8.7 years. We view the younger, more fuel-efficient aircraft as seeing the most in demand post pandemic.

Based on origination values, our average loan-to-value for this portfolio is 74%. However, based on what we believe to be today's value, it's probably closer to 78%, and on a stressed basis, it rises to 91%.

Similar to the domestic airlines, many of the lessors have been able to access the bond market and securitize unencumbered assets to bolster their liquidity positions. We estimate our lessors to have raised over $3 billion in liquidity as -- through the third quarter. So while the flying back to profitability and, more importantly, positive cash flow for this industry will be protracted, it continues to attract the necessary capital to bridge them to return to profitability, which we do not anticipate until 2023 at the earliest.

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

Thank you, Andy. Despite the challenges of 2020, we remain focused on supporting our communities throughout the year. We extended our community impact by favoring our efforts to meet the unique challenges of the year. Combining fundraising, company's contributions and employee dividend generated nearly [$4 million] in economic support across our footprint.

This is a testament to our employees' dedication to the communities, where they live and work. I'm particularly proud of the $315,000 they bring for our Walmart's winter drive during the holiday season. Nearly $1.5 million has been raised to support more than 60 shelters over the drive's 6-year history.

Our teams also supported communities through our Pass It On program, where we saved more than 350 small businesses and over $600,000 to provide a service for someone in the community who is impacted by COVID-19 or the economic downturn.

These are just a few examples of the ways our team expressed their dedication to our communities in 2020. I'm proud of their continuous support and the commitment they demonstrated in the midst of a very challenging year.

Lastly, we announced our regular quarterly dividend of $0.28 this morning. This quarter's dividend will be paid on February 24 to shareholders of record as of the close of business on February 10.

This concludes our prepared comments. And as a reminder, Andy, Chris and Aaron are with me to answer your questions. Now Carmen, we will open the call for questions.

(Operator Instructions) Our first question comes from Jeff Rulis with D.A. Davidson.

But I'm kind of thinking about the mix I wanted to check back in on the -- just the expenses, and I know that got Aaron's sort of guide of mid- to upper 80s run rate. But kind of thinking about the mix of that and catching up to where you sit on kind of investment versus management of expenses and is kind of the intricacies. I know that it's an ongoing investment, but just trying to get to where anything new you're launching or what the spend you've had in years past, just trying to catch up with that dynamic?

That kind of touches several areas. I'll let Aaron get into the details of it, and then it's appropriate Chris Mike to jump in.

But just to start with, one of the things that I think you changed your question in this fashion is that we've never stopped investing in our business and the future of our franchise. And that investment can be from additional technology can be -- we opened in the quarter. Our newest NeighborHub in Boise, that's an investment at community.

Also, there's a fair amount of disruption that occurred across the -- across our 3-state footprint. And it's with some of the large national banks that are consolidating operations. I think COVID and remote work has been a dynamic that has caused folks to maybe reconsider the companies that they work for, and we continue to remain an employer of choice, broadly, across our markets.

And so we've had the opportunity to look at new teams. So as those opportunities present themselves, we'll continue to take a long-term view and make the investments that we think will drive additional returns down the road for our shareholders.

And so now I'll step back and let Aaron's -- add his details.

Yes. Thanks, Jeff. As you saw in the press release, we did have the $1.3 million, to pick provision front side commitments in the fourth quarter. So that's obviously something to keep in mind when you're thinking about where the run rate guidances for next year. In addition, there's always kind of normal end true-ups. There were a variety of kind of ins and outs on that front.

One of the largest, though is we had a $700,000 reversal of a medical accrual in the fourth quarter. So that, that obviously won't carry into the first. And then as you know, you always kind of have some higher accruals, generally in the comp side, FICA costs, those sorts of things heading into the new year.

Also just as a year-over-year reference, recall that the early part of 2020, we recognized $2.2 million in credits for FDIC assessments. Those benefits have obviously gone away. And then as the year goes on, we're hoping that our bankers are excited to get back out in front of clients and off of Zoom calls. And so we could see some increase in travel and entertainment costs and that sort of thing.

As Clint said, we're always investing in new personnel and new technology is just kind of an ongoing part of our business. I don't know if Chris has anything to add in terms of kind of special items on that front?

No, probably just more of Jeff, you've followed us for a long time. And now that we have a pretty consistent methodical process around our branch system and other parts of the network, and we've been walking down square footage for years, for decades, and we'll continue to look at that. We'll continue to do it.

There's a piece now that's been brought into play with all of the consolidations in the industry or the closures. We're looking at that from an opportunistic standpoint? And what does that mean? And we're seeing business that we're able to pick up so there's a revenue play on the side, too, from these branch consolidations, especially on more of the world communities and things of that nature.

So again, we'll look at that. We'll look for opportunities, but I wouldn't see us changing from our current direction of consistency, if you will, on that. As far as people, there's certainly disruption in the industry. When mass consolidations are announced and things like that, it creates anxious employees. And we're an employer of choice, as Clint mentioned.

And we're -- where those folks come available in the investment makes sense and an opportunity is there, we'll certainly continue down that path. But it's been a very disciplined approach over the history of the bank, and I don't see that changing.

Appreciate it. That's good coverage. One last one, just maybe for plant. It's been a while on the acquisition front and some of that, certainly by design, but also perhaps by the market.

Any update on your appetite within that. And my guess is it's more store steer towards like lift-outs and other. But maybe give us an update on where you how are you thinking about acquisition going forward?

Okay. It's stills very much a part of our DNA. When we look at the individuals that have been part of our acquisition and integration teams over the last 10 or 12 years, I'd say that we've had some folks that have retired. But I'd say that a lot of our key leaders in those types of activities kind of probably80% to 85% of them are still with us.

So it's definitely a skill set that we still possess. We spend a lot of time modernizing our platforms and things over the last few years, and really started looking towards what the M&A market might hold, about this time last year and then COVID hit and kind of shut everything down.

I'd just say that our history of being active in M&A is still part of our strategy. And I think that there's just nothing specific, but I just think, in general, with -- amid -- there's some pent-up demand. And I think there's an increase in urgency relative to the rate environment and the need to improve operating leverage and grow revenue. And so I think that, that's going to accelerate as we get further beyond the pandemic.

And our global is always to at least be part of the conversation. So when somebody reaches the post where they're ready to find a partner, our goal is always to at least have them pick up the phone and give us a call. So I don't know if that's helpful, but that's kind of how we view it.

(Operator Instructions) Our next question is from Jon Arfstrom with RBC Capital Markets.

That means I get to ask 20 questions, by the way. I mean the queue is light behind me. So I'll start. But any way, maybe, Andy, a question for you. Appreciate all the commentary on the stressed portfolio.

If you had to consolidate all of that, are you more optimistic less pessimistic? Or do you still have things that keep you awake at night? It feels like things are better and it kind of looks like that from your economic factors in your reserving, but give us a big picture of your consolidated thoughts on that?

Yes. So I think, obviously, the dental and health care portfolios played out like we thought. And so we feel very good about those. The hotel portfolio has performed exceptionally well, I would say, and I think that has to do with the fact that we have more leisure-related hotel exposure than we do business travel. And I leave with that in my comments.

And then, yes, I have to be pretty happy with the rest of the portfolio. But the 2 that I continue to be concerned with, and I think this is consistent as restaurant and retail. And that really has to do with the government closures and our footprint.

And many of those are small businesses. And I think it will have a very decrement -- because so many of them got closed early in the year. They got closed at the end of last year, and they remain closed now. Or if we're open, it's very limited 25% of what they could do prior to -- so those 2 segments are the ones that I continue to have, I guess, more focus than concerned in the other segments, which I think are performing quite well.

Okay. Okay. The path on -- maybe this is an Aaron and Andy question. But the path to get back to maybe where the reserve was as a percentage of loans earlier in the year, is that just a natural evolution of the economy mending and things getting more comfortable?

Yes. I mean, obviously, we're under the CECL model. We put aside a large amount of reserves in the first half of 2020. And as I have discussed earlier, our provision, I think, was really relatively unchanged. As we go throughout 2021, I don't see a whole, like, any really big changes in that other than I see that charge-offs materializing in the latter half of the year and into 2022, and that will bleed down the reserve.

We won't necessarily have to replenish that if the economy continues to move in a positive direction. And so to your point, yes, it will be a natural evolution of how the reserve works.

Okay. Good. Aaron, maybe one for you. You put a little bit of cash to work this quarter in securities, and I think you understand that. But talk to us a little bit about what you expect on the margin, some of the puts and takes on the core margin. I think with your new loan yields, are you suggesting continued modest pressure, but maybe with some of these loan growth production numbers, the potential to outrun that. So maybe kind of walk us through what we should think about in terms of how we model it?

Sure. Sorry, Jon, we -- as you saw, we reported that a 3.52% margin for the fourth quarter. The PPP impact of that in the quarter, all in, in both the interest earned on those, the normal amortization amounts and the accelerated amortization of fees is included in that 5 basis point benefit.

We also had a 5 basis point benefit from the interest recovery that we had on a nonaccrual loan of $1.7 million. And then there's 2 CMBS prepays that added about 7 basis points. So you can kind of take out all that to, I guess, get some measure maybe where the core would be.

But I wouldn't say that it's not entirely uncommon to have some prepay benefits on the portfolio, just given that we do have a number of portfolios that kind of match those characteristics. But as you noted, going forward, the rate where new production is coming on relative to the portfolio is detrimental to the margin.

In the third quarter, excluding all the kind of PPP noise, the rates on the loan portfolio was 4.15%. In the fourth quarter, that dropped down to 4.05%. New production coupons are around 3.40%. So it's -- there's going to be a continued headwind there.

Similarly, on the securities portfolio, excluding the benefit of those prepays, the yield on that book was spread at 2%, just as in the portfolio. And since we had a very busy quarter on that front, as you noted, with -- having brought about $1.1 billion in new security, the yield on that was 1.26%. So again, it's going to continue to weigh on things going forward, so long as we continue to remain in this extremely low rate environment.

Hopefully, yes, we have seen a little bit of lift in the tenure, recently. And hopefully, that sticks and continues to build. And hopefully, if the -- ultimately, we get higher rates on the short end as well, if we continue to progress through the economic recovery as expected, but we're not counting on any benefit from that anytime soon.

But I think we kind of take where the new stuff is coming on and that should give you a sense of the kind of pressure that we're probably likely to continue to see through the year, notwithstanding all the additional noise that we're going to see from PPP.

Our next question comes from Matthew Clark with Piper Sandler.

On the new money yield on the loan side at 3.40%, I guess I'm a little surprised at how low they are. Is that just a mix issue this quarter? Where we might see a little bit higher rate going forward? Or was that just kind of the new -- that's where the competition is?

Yes, Matt. This is [Chris] here. Your kind of sigh right at the end tells me that we're all kind of thinking the same way, maybe. A lot of it is the competitive environment, the massive amounts of liquidity that are out there. The challenges of when you find good credit is -- it's extremely competitive. And so we steer away consistently from anything that involves structures that we're uncomfortable with, terms that we're uncomfortable with, but we're going to have to compete on rates sometimes in that.

And so some of it also is the mix. You bring on some larger deals during the quarter. Those come on at a little lower rate, generally. And going forward, I would anticipate that we're probably looking at this for a while, and it's going to take a little sorting out as competitors are entering or maybe pulling back from the market based on how their portfolios perform. But I would expect that the competition continues, especially for high-quality credit deals.

Okay. Makes sense. And then on the -- as it relates to disruption in your markets, are you at the point where you've already started to identify individuals or teams? Or is that still a ways out?

You cut out a little bit there. So was the question how we identified teams, and what [were required] on new talent?

Yes. Have you already identified teams at this stage? And if so, are you looking for a certain type of specialty lenders? Or is it just your general kind of commercial banker with seasoned books of business?

Sure. It's always in process, and we go with the philosophy of we're recruiting all the time. You never know when somebody is going to be ready to make that move. And so if we know the individuals, we know the markets that they're in, we've got a good idea of their books and what they do. Then we'll be opportunistic when the time is right.

Now there are -- when you look at specialties and things of that nature, that is certainly to the core of how we operate. And if we can locate somebody, they're interested in joining us and they bring a new niche, we're absolutely interested in that. If it's somebody that fits into an existing niche that maybe we've been competing against, we know them. We respect them. When we know about quality bankers, we'll add them into that piece.

Some of our markets were pretty widespread between metropolitan areas and rural areas. You should get farther away from the metropolitan area as you tend to get more generalists. And some of them, however, do have specialties. And so it's kind of a long way around is we're open to any and all, and we're constantly looking.

Okay. And then can you just remind us how much you have in the way of net PPP-related revenue to come through from round 1?

Sorry, what was remaining at December 31?

Yes.

It was $9.9 million in remaining net fees to be amortized.

Our next question comes from Jackie Bohlen with KBW.

I was just curious on the driver of the loan purchase this quarter. Was that driven by looking to stem off some runoff? Or was it just an attractive portfolio that came across your desk?

Kind of both. It's more -- we have a portfolio of mortgage, and it's a fair bit of that, obviously, is paying down, given where rates are. So it was a little bit of refilling of that. But -- and I would just highlight that we're also producing a great deal. And depending on what we're producing, it doesn't always necessarily match what we want to hold on our own balance sheet.

So the amount that we've purchased is certainly far below what we actually sold -- we have [since sold] during the quarter. I don't know if Chris has anything to add to that. But...

okay. So just balancing kind of overall composition within that portfolio was the driver?

Yes.

Okay. And then catching back on the M&A topic. Just wondering if you could provide us a refresher with what you're looking for in terms of a partner, in terms of maybe how small or how big you might be looking to go and also if Northern California still remains of interest to you?

Yes. It's -- we say it's got to be a cultural fit. And we've said that, that's almost been one of our criteria. We start with the balance sheet and [look] at their business model because it's a very different business model than what we have. It's probably going to culturally be very hard to bring the 2 organizations together. There's -- the size thing is a bit of a moving target, if you will, because I think it depends on if it's a bank that has a really good niche that is additive to what we do.

It could be on the smaller side, and that would give -- it would be something that -- and we could look at and build upon. An example, and not that from a size standpoint, the Pacific Continental fit into this. But the Pacific Continental have the national health care platform. We -- it's very complementary we sold at the time. And 3 years later, it's proven itself out. It is very complementary to what we were doing in the health care front in our existing market.

So if there's a bank that's on the smaller side that has something like that, that would be of interest if it's a fill in, and there are some drilling opportunities within our existing footprint that might cause us to look towards the smaller side of it. The -- yes, there's obviously ones where you have a lot of market overlap and to get better operating leverage and -- but those are going to typically be on the larger end of it.

And then as it relates to all of those things, if it provides entry into a new market. That's also something that we would evaluate and has to be that cultural fit, first and foremost. But then what else does it bring to us? Entry into a new market? It's something we take a very, very close look at.

And specific to Northern California, we've been studying that market for several years now. We like that -- what we've learned about the market. It's very similar in a lot of ways to -- so the [Silver] Valley. And even as you get into the more metro areas of -- not necessarily San Francisco proper, but in and around the Bay area, in those markets, they're pretty similar to Portland, Seattle.

So this is something that we think it's still of interest. And we'll continue to just learn more as much as we can about the -- that market and who the quality bankers are in that market.

And our last question comes from David Feaster with Raymond James.

It's great to see the acceleration in originations in the quarter. I'm just curious where you're seeing growth. Is it from existing clients that are continuing to invest? Is it new clients from the PPP program? Or the new end buyers? Or even a neighborhood concept and just kind of the pulse of your clients as we enter 2020?

2021, you kind of get the sense that they're ready to invest in expansion CapEx, and you could see accelerating growth throughout the year? Or your client is still a bit cautious, just given the uncertainty?

Yes. This is Chris. I can tell you, it's a mix in there. If you look at some of our markets, and they haven't had governmental closures and things of that nature. So they're operating much different.

The originations are purely across the footprint. Those are in [big] companies that didn't experience a downturn or things of that nature. They're being opportunistic, as you said, and they're looking to make investments.

Some of it's purchasing now and building, things of that nature. But I tell you it's a mix between current clients and new. Now we were one of the institutions [set]in the first round of PPP. We did not extend as a marketing tool, and we didn't take on nonclients in that manner.

However, we are seeing people coming to us after the fact and things that we are winning during the fourth quarter has come from just our bankers' efforts and their continued effort to stay in front of prospects. We brought on some other investment types of things that are ultimately turning into opportunities, which has been good to see.

And then as you start looking towards the year, I think it's a little bit of a mix there, too. You've got -- if you look at the second round of PPP and what the requirements were to enter that, there's a lot of companies out there that are doing very well but they're not eligible to reapply. They're going to have different opportunities with it. They've got investments or whatever it may be for their business. Then those that are reapplying just go around that really need that stimulus and that support.

So we'll have to see how this next round really plays itself out. I think the story really is the momentum that we had talked about building. We saw a lot of that hit in the fourth quarter. I'm typically always cautiously optimistic that we can continue that. A lot of our bankers, a lot of our back office loan ops, things of that nature.

Our sleeves rolled up and working extremely hard right now on the second round. And that's a distraction. But again, there's also new business that's out there at the same time. So we're really balancing that out and trying to keep the momentum from the fourth quarter going, but there's a bit of a distraction and that's going to continue for a little bit.

Okay. And then just on the fee income front, the countercyclicality of some of these business lines has been a huge help in a challenging environment. Just curious how you're thinking about fee income. Is there any other fee income that you'd be interested in expanding into, whether organically or through M&A? And just how you think about fee income and expanding -- potentially expanding that fee income contribution?

Yes. This is Aaron. I'll start just because I do want to highlight that during the quarter, we had this high press release that there was almost $800,000 fair value adjustment in the mortgage loan pipeline. So just that set into a little bit of that volatility. But I don't mean to take away from tremendous activity that we've had in mortgage because that team has just been doing a fantastic comp. But beyond that, I'll turn it over to Chris to add anything else on the fee front.

Yes. I think there's -- are we looking for other areas, that's always something that's under consideration. We've explored a lot of things. I haven't found anything that's surely a fit that goes -- to doesn't change who we are, who we've been. And with that said, we have CB Financial, we have our Trust group, and those teams continue to grow and improve. 2020 was off to a tremendous start. And then the pandemic hit, and there was a little bit of a dip in the middle there, but the close to the year was strong.

And what we're seeing in that business is a real demand for people to participate in financial planning and look at possibly business sales and things of that nature as we start to come out of this. So optimistic in that area.

The mortgage group continues to do a great job. As was mentioned, it's a little bit more rate contingent. As rates start to rise, that will certainly change the refinance aspect of that. But to date, that hasn't happened, and they continue to come in. So optimistic there as well.

I think when you look into some of the things like card revenue and some of the other fee-based types of situations, it's a little bit up in the air still. As the economy opens up, as the vaccines become more prevalent, as people, basically, where I'm going is, just really, they'll start to spend money. We should see those return just don't know yet if that's going to return to pre-pandemic levels? Or is it something going to be different? How has consumer behavior changed?

The rest of it, I'd say, it's kind of business as usual. We still participate in and swaps and other fee sources such as that. But again, always open to looking and considering something that we're not currently doing or how we could possibly expand what we're currently doing in the investment world or something of that nature.

Okay. That's helpful. And then just -- could you just talk about your asset sensitivity here? You guys are naturally asset sensitive. And it seems like the asset sensitivity might have increased, just given the build in liquidity and significant proportion of loans that are repricing here in the next 6 months, but you also got the impact of floors.

But just kind of putting it all together, how do you think about that? And how do you plan to manage your rate sensitivity? And maybe does that give you some confidence to potentially take on some duration in the securities book?

Well, we've done just that actually. As in -- and during the quarter, we purchased $1.1 billion in securities, with a net growth of a little over $900 million. The -- and we have put -- I should say, we've attempted to put a little bit more duration on there. I think what we purchased had about 6.7 years duration on average, if I recall, frac rate, but it didn't extend the overall portfolio duration that, materially, we're still below 5 years there.

And in doing so, we arguably have taken some asset sensitivity across the table to be -- to generate a little better interest income near-term rather than letting that all sitting in cash. But I think that's the right decision. We're still -- we still have an enormous liquidity position. And that book alone is going to be throwing off around $600 million a year in cash flows, which we hope to redeploy into higher-yielding loans as loan growth comes back in a more material way.

So I would say we are arguably a little less asset sensitive today than we were 3 months ago. But it's -- I still think we're extremely well positioned for rising rates. And the real secret there is our cost of funds. And our deposits are just phenomenal on the very low-cost deposits. And that's going to serve us extremely well if and when we eventually see some rise in rate.

And ladies and gentlemen, this concludes our Q&A and program for today. We thank you for your participation in today's conference, and you may now disconnect. Good day.