Columbia Banking System (NASDAQ:COLB) Q1 2020 Earnings Call

0:00 Thank you for standing by. Welcome to the Columbia Banking System first quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct the question and answer session through the web and telephone. Instructions will be given at that time. If you are on the telephone and should require assistance during the conference, please press star zero. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Clint Stein, President and Chief Executive Officer of Columbia Banking System.

0:39 Thank you, Tamara. 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 is also available at ColumbiaBank.com. I want to begin the call today by thanking our 2,200 bankers who despite tremendous disruption to their professional and personal lives have joined together to support each other and serve our customers, communities, and shareholders as the COVID-19 pandemic has evolved. The Puget Sound region entered into the pandemic earlier than other parts of the U.S. with the first coronavirus deaths reported on February 29th.

1:24 We developed a detailed pandemic plan many years ago and most recently tested it through a bank-wide exercise in December of 2018. It's a phased plan and we began to execute against the first phase in early January. Since then, we've continued to follow our plan, proactively planning for additional escalation at predetermined trigger points. Early on, our bankers were in direct communication with our clients to understand their individual challenges and work through options to provide relief for their businesses and families. We're a community bank at heart, and I believe that our bankers' empathy, compassion and support has and will continue to be our most valuable currency.

2:13 Columbia Bank is well positioned to handle the impact of COVID-19 and its ensuing market disruptions. This is different from the Great Recession of 2008 and 2009, and then it's not a financial crisis but a public health crisis with serious economic ramifications that are still evolving. The strength of our balance sheet, credit profile, liquidity and capital position along with our proactive interest rate risk strategies and sensible expense management will serve us well as we weather the economic consequences of COVID-19. We started off the year with tremendous momentum and you can see the impact throughout our financial statement line items.

2:58 EPS declined by 44 cents on a linked quarter basis due to the related credit loss provision expense of $41.5 million. On a pre-provision basis, this was the fifth best quarter in our history in what is typically our seasonally weakest quarter. While net income and EPS were significantly impacted by the CECL provision expense, Our bankers remained outwardly focused and produced strong loan and deposit growth during the quarter while reducing non-interest expenses. Absent the impact of COVID-19, it would have been an outstanding quarter. On the call with me today are Eric Eyde, who until this past Monday was our Interim Chief Financial Officer, Chris Merrywell, our Chief Operating Officer, and Andy McDonald, our Chief Credit Officer.

3:50 Following our prepared remarks, we'll be happy to answer your questions. Let me 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 SEC filings. At this point, I'll turn the call over to Eric.

4:12 Thank you, Clint. First quarter earnings of $14.6 million and earnings per share of $0.20 included a CECL Day 2 provision for credit losses of $41.5 million. After factoring out the significant provision expense, quarterly pre-tax earnings were our best first quarter on record. Pre-tax pre-provision income was $59.4 million and was $1.3 million higher than the first quarter of 2019. Net interest income for the first quarter was $122.4 million, a decrease of $2.4 million on a linked quarter basis, and an increase of $1.4 million from first quarter 2019. The linked quarter decline in net interest income was due to lower loan income from the reduction in the interest rate environment, one day less of earnings, and an increase in interest paid on FHLB advances. This was partially offset by $1.9 million of interest income and discount accretion related to the early payoff of three securities.

5:07 The increase in short-term funding costs was mostly due to a decline in average deposits, although period-end deposits increased during the quarter. The operating NIM of 4.02% was down 7 basis points on a linked quarter basis, primarily due to lower loan yields. Our cost of deposits continued to be industry-leading at 14 basis points, down 7 basis points on a linked quarter basis. Total deposits ended the quarter at $10.8 billion, up $128 million from year end, primarily due to an increase of $105 million of public funds. Our typical seasonal pattern is for little to no deposit growth in the first quarter. At March 31st, 49% of our loan portfolio was fixed, 16% was at floors, with another $500 million, or 6%, protected by our interest rate caller.

5:54 The result is 71% of our loan portfolio is protected from further rate declines. Our liquidity position continues to provide us balance sheet capacity to meet funding needs. Overall, we have access to $4.5 billion of liquidity, primarily through our $3.5 billion investment portfolio, of which $3 billion are investment grade, readily marketable, and not pledged on any borrowing base. Additionally, we have $1.5 billion unused borrowing capacity with Fed, Federal Home Loan Bank, and Forth Funded Banks. Non-interest income of $21.2 million was down $600,000 from prior quarter, principally due to decrease in deposit account and other fees partially offset by an increase in loan fees. Compared to first quarter 2019, non-interest income was down $489,000, primarily due to lower deposit account fees and net securities gains offset by higher loan fees.

6:47 Non-interest expense was $84.3 million in the first quarter, which was a decrease of $2.7 million on a linked quarter basis. on a year-over-year basis, non-interest expense was actually down $429,000. We anticipate our expense run rate to continue in the mid-'80s as we handle expenses associated with COVID and continue to invest in our future. Our core non-interest expense ratio was 2.41% for the quarter, down from 2.53% in the fourth quarter. Our expense ratio compares favorably to the 2.60% reported in the first quarter of 2019. Our effective tax rate for the quarter was 18.1%, which compares to 20.5% on a linked quarter basis and 19% for first quarter 2019.

7:36 At this point, I'd like to turn the call over to Chris.

7:40 Thank you, Eric, and good morning, everyone. To echo Clint's opening comments, we have shifted the way that we work to serve the immediate and critical needs of our clients and communities, while at the same time keeping our employees, clients, and communities safe. as they worked around the clock to assist clients with payment forbearance and other relief programs, including the SBA Paycheck Protection Program. The teams have had to pivot very quickly as the regulations have evolved and have been successful in guiding our clients through the process. As a result, we believe that Columbia is positioned to participate in the Paycheck Protection Program at levels that are far in excess of our relative market share.

8:26 First quarter saw solid loan and deposit growth in spite of the economic shutdown. Deposits rose by $128 million during the quarter, and the mix remained at 59% business and 41% consumer. The increase was predominantly in the public funds and on the retail side. We experienced our typical deposit seasonality as retail clients withdrew funds to pay down credit and other expenses and then built them back up towards the end of the quarter. Our cost of deposits of 14 basis points continues to be lower than our peers, reflecting the strength of our non-interest-bearing deposit base. On the interest-bearing side, we immediately moved to reduced rates after the 150 basis point Fed interest rate drop in March.

9:14 And deposit rates are back at levels last seen in 2017. We continue to believe that our relationship-based approach is a key differentiator and our clients rely on this as much as on any deposit interest rate available in the market. Loan balances grew by $190 million on an annualized increase of 9%. New loan production was $341 million and increased line utilization was $120 million during the quarter. In line with the industry's first quarter's increase in line utilization, was predominantly in the CNI revolving lines, increasing from 49% at year-end 2019 to 51.6% at the end of the first quarter. New loan production was mostly centered in CRE, 39%, or $128 million, and CNI, 38%, or $126 million.

10:13 with approximately one-third in the real estate rental leasing sector followed by the construction, healthcare, hospitality, and agricultural sectors. This was similar to the first quarter of 2019 where production was centered in the same sectors as well as public administration. It's worth noting that agriculture is now presented separately in our financial statements. Previously, it was a component of CNI loans. Agriculture New Production for the quarter was $32 million. Term loans comprised 78% of the production, whereas lines were 22% of the total. The quarterly production mix was 68% fixed, 28% floating, and 4% variable.

11:01 The overall portfolio mix is now 49% fixed, 34% floating, and 17% variable. Due loan production throughout the quarter was booked at an average tax-adjusted coupon rate of 4.32%, which is lower than the overall portfolio rate of 4.44% as of quarter end. The overall portfolio rate declined 25 basis points during the quarter, with CNI down 39 basis points and CRE down 11 basis points. We are continuing to invest in the business. As we have said in prior calls, we expect improvements in our peer-to-peer and bank-to-bank money transfer capabilities, online deposit account opening, and back-office small business lending capabilities to go online later this year or in early 2021.

11:54 Now I will turn the call over to Andy to review our sector.

11:59 Thanks, Chris. The increase in provision under CECL of $41.5 million is primarily due to a deteriorating economic forecast resulting from the COVID-19 pandemic. We use IHS market for our economic forecast, and when compared to the estimate at the beginning of the year, as you can imagine, it has changed quite a bit. In general, our forecast anticipates an annualized reduction in gross domestic product in the second quarter approaching 28 to 30 percent. Relatively flat performance after that with the following quarter beginning to see a rebound. Therefore, the change in the forecast accounted for about 34 million of our provisions and the rest was due to negative migration that occurred in the portfolio.

12:55 NPAs clicked up a bit to 34 basis points However, this was not related to COVID-19 impact. The increase was in non-accrual loans represented by borrowers who had been under stress well before COVID-19 issues and related impacts came to fruition. Pass-through loans for the quarter were 23 basis points and net charge-offs annualized were also 23 basis points for the quarter. Therefore, your standard credit metrics for the quarter were very acceptable. On the risk rating front, loans rated watch or below increased approximately $450 million during the quarter.

13:41 We saw watch loans increase $126 million, going from $184 million to $310 million. Special mention loans increased $265 million. to $317 million, and substandard loans saw an increase of $65 million and are now around $304 million in total. These changes increased our watch and below risk ratings from 5.4% to 10.4% of total loans. Many of these downgrades occurred in portfolios that we believe will be quickly impacted by COVID-19 measures.

14:30 Clearly, these are unprecedented times. The rapidly changing environment we are operating in today has dramatically changed the bank's assessment of credit risk. As with the Great Recession, we believe it is in the best interest of all of our stakeholders for us to get out in front of this by focusing on the industries we believe will be some of the first to exhibit stress. As such, it is only prudent to acknowledge these risks, and we believe the provision taken in the quarter and the assessment of risk ratings undertaken prior to quarter end demonstrate our resolve in doing so. We have also granted 2,600 requests for payment deferrals, amounting to about $1.2 billion in total loans through April 24.

15:24 We believe these deferrals are in the best interest of our stakeholders as we try to work our way through this pandemic. Most of the deferrals, about 1,400 or roughly 580 million, were granted to clients in our dental portfolio. Roughly 770 were for small businesses, which accounted for another 300 million in loan deferrals. With that, I would now like to give you some color on the portfolios we believe will be some of the first to be impacted by the pandemic. For Columbia, that includes hotels, retail, restaurants, aviation, and of course, our dental and healthcare portfolios.

16:12 In aggregate, these industries account for about 2.2 billion loans, or roughly 25% of our portfolio. The largest portfolio impacted by COVID-19 is our dental portfolio. I'm sure most of you are aware most states have directed dental practices to cease operation with the exception of emergency type procedures. So effectively, dental offices are closed and are not expected to reopen until sometime in May. As of March 31st, we had $812 million in dental-related loans representing approximately 2,100 notes for an average note size of 382,000. Therefore, it's a very granular portfolio.

17:04 As I said, today we have processed payment referrals for approximately two-thirds of this portfolio. As such, most will not be required to resume making payments until August of this year. We believe the impact on this portfolio is truly transitory, and by working with these clients, we will be able to minimize the impact of COVID-19 on their businesses as well as the bank's balance sheet. We anticipate a large number of these clients will also participate in the Paycheck Protection Program, which will assist them with working capital needs as they reopen their businesses. Before I move on, I would like to share a few credit metrics with you concerning this portfolio.

17:52 As of March 31st, approximately 95% of the portfolio was rated Pass. Pass dues were minimal at 17 basis points. I would also highlight that deferrals did not affect this number, as deferrals were only granted to customers in good standing. Said another way, they made their March payment. We also have approximately $4 million in non-accrual dental loans. However, these loans were already on non-accrual prior to the COVID-19 outbreak. So excluding the dental portfolio, we have another $1.4 billion or 16% of our portfolio to discuss. The next largest segment, which we have identified as having a high risk relative to the economic disruption We have approximately 498 million in retail related exposure split between commercial real estate and commercial business loans.

18:57 This represents about 5.6% of our loan portfolio. The largest part of our retail exposure is comprised of commercial real estate loans with approximately 416 million total. is evenly split between Washington and Oregon, as you would expect, centered in the Portland and Seattle MSAs. The average loan size is $344,000. The largest component is building materials and garden center types of businesses, representing about 23%. Next is auto vehicle and parts dealers at around 20%. followed by food and beverage stores at 20% as well.

19:45 Using at origination values, the average loan-to-value for the portfolio is 54% with 85% of the portfolio having a loan-to-value less than 65% based on origination. We have stress tested this portfolio for an equivalent decline in value as seen in the Great Recession. The average loan-to-value rises to 66%, with about 50% of the properties having a loan-to-value less than 65%. On a stress basis, 92% of the properties have a loan-to-value less than 85%. For the entire retail portfolio, 85% is pass, 6% is watch, 6% is special mention, and 3% substandard.

20:41 We've also seen minimal requests for payment deferrals to date in this portfolio. Hotels is the next area I would like to address. We have $326 billion in hotel loans, representing about 3.6% of our loan portfolio. About 38% is in major markets, which would include the Portland and Seattle MSA, However, we also have about 17% of the portfolio, or 52 million of exposure, out on the Oregon coast. To give you an idea of the type of hotels we finance, most have one of the following flags. Holiday Inn, Best Western, Marriott, and Radisson.

21:28 These would be good examples of the types of flags the properties we finance have. In total, Flag Properties comprise 84% of the portfolio. The average loan size is $1.8 million. Today, we have granted 44 deferral requests for about $110 million. Similar to the retail commercial real estate loans, we did some stress testing on this portfolio as well. The average loan-to-value for the portfolio based on originated appraised value is 52%, with 80% of the portfolio having a loan-to-value less than 65%. On a stress basis, about 48% of the portfolio has a loan-to-value less than 65%, with 87% having a loan-to-value less than 85%.

22:28 Non-dental healthcare is about 245 million in total. Approximately 85 million is veterinary and another 122 million are physician practices of varying kinds. And we also have 38 million of other healthcare providers such as chiropractors, physical therapists, and counseling services. The average loan size is 335,000. Today, 98% of the portfolio is mass rated, with 1% on watch and 1% rated substandard. We have granted 124 deferral requests, or about $41 million in total, in this segment. Similar to the dental space, we see this sector rebounding when the economy opens up, as folks are once again able to see their orthopedists, dermatologists, optometrists, and so on.

23:26 Restaurants and Food Services. We have approximately 183 million in this portfolio with an average loan size of 299,000. Today, 84% is pass rated, 12% is on watch, and the balance is substandard. We have granted 101 deferrals for about 44 million in this portfolio. Today, 84% is pass rated, 12% is on watch, and 4% is substandard. The average credit had a debt service coverage of 1.56 with a loan-to-value of 46%. On a stress case scenario, loan-to-value rises to 56%. The last portfolio I'm going to discuss is our aviation portfolio.

24:16 It's comprised of both direct exposure to domestic airline carriers as well as entities that lease airplanes to airline carriers. In total, the portfolio is about $150 million, with about $100 million being direct exposure to U.S. domestic airlines and the remaining $50 million exposure to lessors of airplanes. Today, essentially the entire portfolio is rated special mention, with the exception of one credit rated substandard. As you know, during the week of April 13th, the domestic airline carriers began entering into formal agreements with the US Treasury regarding receipt of funds via the CARES Act. We believe this government funding will help them recover from COVID-19 impacts along with the billions of dollars of capital raised in the past few weeks by many industry participants.

25:15 As for the lessor portfolio, 49% of the exposure is in Asia, 23% in Europe, and 9% in North America. The rest is in South America and the Middle East. The majority of the portfolio consists of narrow-body aircraft with an average age of six and a half years. We view these younger, more fuel-efficient aircraft to be more in demand post the pandemic. Based on origination values, our average loan-to-value for the lessor portfolio is 74%. However, based on what we believe today's values are, the loan-to-value is closer to 83%. Okay. I'll now turn it back to Clint.

26:02 Thanks, Andy. I want to take a moment to welcome Aaron Deer, our new CFO, to the Columbia Bank family. Many of you know Aaron, as he has covered financial institutions for nearly 20 years. Aaron officially started on Monday, and we are delighted to have him on board. Aaron now gets to experience these calls from this side of the table. We also announced our regular quarterly dividend of $0.28. This quarter's dividend will be paid on May 28 to shareholders of record as of the close of business on May 14. This concludes our prepared comments. As a reminder, Andy, Chris, and Eric are with me to answer your questions. And now, Etamara, we'll open it up for questions.

26:49 Thank you. To ask a question via the web, click the Q&A button on the lower left corner of your screen. Type your question in the open area and click submit. To ask a question via the phone line, please press star one on your telephone keypad. To withdraw your question, press the pound key. On the phone, we have a response from Jeff Rulis. Please go ahead.

27:15 Thanks. Good morning.

27:17 Great job.

27:18 First question on the margin.

27:21 Before I get to that, the percent of floors I wanted to, that went through pretty quick, but I think you said 71% of the portfolio was protected from rate moves, which is 49% fixed loans, but could you walk through the percent of loans with floors and those that are at floors?

27:42 Yeah, let me pull it up here. I'll just do it right here. So we have 49% are fixed. We have 16% are at the floors. And then we have the notional caller, 500 million notional caller that offset 6% of our one month LIBR. So when you add all that up, that's how you have come up with the 71%. OK. So the 6% is the notional caller, is that roughly? So looking, taking a step back on margin, I guess the biggest risk that you all see is that loan yields, security yields, or sort of a lack of ability to lower deposits given the

28:44 already pretty low deposit level.

28:50 Probably all of those to some extent. I think in the short run with the PPP program, we're going to probably actually see yields increase over the next couple of quarters as loans are forgiven and we take that deferred fee income into spread. Longer run, you know, obviously for the loans that we carry on our balance sheet, that's going to have an impact on our spread. You know, margins are going to continue to be under pressure. Forecasting right now is a little bit of a challenge. You know, we're seeing dislocation between LIBOR and Fed funds, and so we're getting our arms around that. But I think we're going to see continued pressure on the NIM for sure. Clint, do you want to add anything?

29:40 Well, I think just looking at it as... slightly different way might help. So between the fixed part of the portfolio, the roughly $1.5 billion of floating rate loans that are at their floor already, and then when we think about loans that won't reprice within the next year, there's about $6.5 billion of the $8.9 billion in the portfolio that's not going to face that repricing pressure. I think that it is, Eric mentioned, you know, the difficulty with NIM and for modeling purposes is, you know, a bunch of us have just originated loans with a 1% coupon.

30:33 But looking at our core business dynamics, you have a significant part of the loan book that's not going to reprice. Part of our interest rate risk strategies that we put in place was purchasing securities in advance through much of last year that perform well in a down rate environment. So I don't think that you're going to see us necessarily aggressively reinvesting into the securities book at this time. We'll be opportunistic about that. I think that gives us some defense. Asset mix, that's the big unknown. We don't know when the economy reopens, how quickly things return to normal.

31:23 We had a tremendous amount of momentum through January and February in terms of our organic growth, and we saw some asset mix shift in the on the balance sheet shifting a little more towards loan-to-deposits as the loan-to-deposit ratio tipped up. So those are kind of all the factors that we're taking into account as we think about looking forward. And as Chris mentioned, our deposit fund costs of deposits are near their historic lows, but we still have some fine-tuning that we can do in that space as well.

32:06 Okay, and Clint, just another question on the capital side. You know, in terms of you had a high payout ratio going in that included the special, safe to say that it may be tabled as special and maybe buybacks, but kind of focus on maintaining the regular. Any thoughts on capital here?

32:30 Yeah, we... We repurchased, I think it was right around 731,000 shares during the quarter under our 10B51 plan and wound that down in late March when we hit the 20 million that we had allocated for that. We don't have any intentions right now of doing buybacks for the foreseeable future. In terms of the special dividend, that's always been a tool that we've used to manage our capital ratios down. We still have a pretty healthy TCE ratio of 10.7, but I think there's so much uncertainty out there that our primary focus is maintaining the regular dividend and then would be content to let those capital ratios drift upward.

33:41 Got it.

33:42 And one quick last one. The reserve level, if you were to include credit marks relative to that 137 of loans stated, what would that be trued up? Okay.

34:00 So if we add back the discounts on the acquired portfolios, is that the question?

34:10 Yep.

34:13 Yeah, I haven't done that math. I don't think Andy has either. He's been focused on... Just the amount?

34:19 Do you have the discount amount?

34:23 Yeah, we can follow up with you after the call.

34:27 Okay. All right.

34:28 Thank you.

34:30 Thanks, Jeff. Your next response is from Gordon McGuire. Please go ahead.

34:36 Good morning. Good morning, Gordon. So, Clint, you had mentioned January, February production being pretty record levels. I was wondering if you could provide how those trended month by month. I guess how big was the drop-off in March, and what does the pipeline look like heading into the next quarter, and I guess just your overall outlook for the rest of this year?

35:05 This is Chris, and I can tell you the drop-off was pretty significant. As we moved into the phase of things starting to be shut down and businesses being closed, we tabled. Andy had a pretty extensive review of the dental portfolio, so I'll use that as an example. We have requests that we put on hold. The pipeline is pretty muted. I would assume the outlook is probably more flattish from here? The pipeline, we still have a Thank you. Thank you.

36:29 And Chris, you discussed PPP a little bit in your prepared remarks, but I'm not sure if I caught total balances. Do you have that? And just how are you guys thinking about funding those balances? I guess with securities not really being reinvested, can you fund a lot of that with deposits, or are you going to look to outside sources?

36:49 We have the ability to fund. We will look at all available options to include The ability to align to put those to the federal government as one of the options. As far as discussing totals, since we're in the second quarter, we don't provide guidance on that. I'm not prepared to discuss the totals, but I will tell you that the team has been hard at work and lots of long hours, nights, days, showing up at 9 p.m. to hit 12 p.m. East Coast time, reopenings, things of that nature. and, as we said, we feel that we'll do more than our aggregate share based on our size.

37:34 And I would tell you that the demands outstripped our expectations.

37:41 Okay. I guess, Andy, your quote and release talking about net-of-credit migration going into a deep dive on the impact of industries, I guess the deep dive was probably warranted by COVID, but I'm wondering how much of the negative migration that you reference is specific to COVID issues or maybe underlying issues that you might have seen but were identified as a result of the deep dive you took. Are there any correlated beyond just general COVID issues that you saw?

38:18 The vast majority of the downgrades were as a result of our I guess our dive into specific portfolios. So, you know, you look at airlines at $150 million, that was all pass rated. It all moved to special mention. That's all COVID related. You know, there's quite a bit of the downgrades were in our hotel and details areas, and that's pretty much COVID related. Were there credits in there that probably had underlying weaknesses? Sure. I mean, I can't argue against that. But I would say that because of our focus on those portfolios, those drove the downgrade.

39:10 So I do believe it's predominantly COVID-19 related.

39:16 Okay. Thank you. I'll step back. Thank you. Thank you. Your next response is from John Ofstrom. Please go ahead.

39:27 Thanks. Good morning, guys. Andy, anything new or notable on the ag portfolio? Anything more notable? Yeah, new or notable. I mean, I know we're focused on these other areas, but, you know, can you give us your assessment of how things are performing in ag at this point? Yeah, I think that the area that has been a struggle for us for now, you know, a couple of years has been the agricultural portfolio. And, of course, I'm sure you're all aware of commodity prices. There's certainly, you know, the great news reports coming out of the Midwest of, you know, farmers plowing things under the ground and dairies pouring milk into on to the ground. And so we are concerned about the ag portfolio.

40:26 We're going to have to see how that plays out. Most of the book came through the 2019 cycle okay. Some still have some product to offload. But for the most part, it's really going to be a function of What did we get in production in 2020? And then do we see any kind of a rebound in commodity prices by the time we bring the 2020 crop to market? Absent that, the one portfolio that's not going to have the ability to enjoy such a calendar or timeframe is our cattle book, which is about $150 million in exposure.

41:14 And we are also watching that very closely. Good, that helps. And then the dental deferrals, I think I caught what you were saying, but it sounds like most of these loans would come off their deferrals in August.

41:33 Did I catch that right in your prepared comments?

41:36 Correct. So our standard deferral programs were four months, and that was on purpose to take us into the latter part, if you will, or at least the middle part. of the summer to give those offices time to adjust to the reopening of the economy, get some revenue under their belt before they would have to start making payments to us. So again, we think that's the prudent thing to do both for the dental practice and for ourselves. And then just maybe a subtle question here more on the P&L, but what are you seeing on the card revenue trends? Are you seeing, I'm assuming you saw a drop and it looks like it's down a little bit year over year and certainly sequentially, but are you seeing stabilization there or changes in activity trends?

42:32 Well, John, I think that, you know, there certainly has been a, we saw a drop. I think you'll start to see, as you said, some stabilization based on it will shift, so from in-person purchases to more online purchases, things of that nature. We're also looking and expecting some pent-up demand as things start to become reopened that people will get back out there and want to spend money. Thank you. Your next response is from Jackie Bolin. Please go ahead. Hi. Good morning, everyone.

43:25 Andy, I apologize. Hi. Andy, I apologize if you mentioned this already in your prepared remarks and I just missed it, but the migration from the ag portfolio that went on to non-incrual in the quarter, what sector is that from?

43:43 It's primarily from the fishing industry. In the state of Alaska, The last fishing season is primarily what they call the pink salmon, which is a lower quality. A lot of it goes, as they say, slam it in the can. They delayed the opening of that, and so the quality of the fish was less. And so we had a couple of fish processors that, as a result, They have lower quality fish, which attracts a lower quality price, and that puts stress on their business.

44:29 Okay. And is that what the charge off in the quarter related to?

44:34 No, the charge off was related to a row crop operation in eastern Washington.

44:44 Okay. and I would have guessed that even though it was a little bit elevated in both these metrics in the quarter, it's just kind of normal course of business.

44:53 Yeah, we had one charge off of $4 million which really drove the charge offs for the quarter. It was an extraordinary situation with this row crop farmer and I would not characterize it as normal business strain. I'll just say he grew some stuff I didn't expect him to.

45:23 So much more a micro issue than a macro issue.

45:26 Yes.

45:28 Okay. And then also I wanted to talk a little bit about the press release noted some efficiency initiatives that were ongoing and I know that you gave a range of where you anticipate expenses to be in just in light of investments and COVID-related costs. but maybe just a little bit of color on what kind of initiatives you're looking at right now from an efficiency standpoint.

45:54 Well, with regards to the digital, we're essentially done with our oversized digital stand at this juncture, Jackie, and it's just become part of our run rate. That being said, we are going to continue to invest in innovative solutions, keep us competitive and remain relevant with our with our clients. But some of the things that are coming, Zelle, we've got the small business lending platform coming, and the new account opening fund, they're tracking. But we're just offsetting. I mean, it's just part of our run rate right now.

46:37 I'll add some of the other things that we've done. Combination of the things we've been doing over the past few years and starting to get higher adoption rates. Obviously some of that has accelerated with people learning how to conduct business differently and through digital channels. But also it's some of the things that have always been ongoing and that's what Eric was getting at as part of our DNA is looking for how we can do something better I'd say in the last six months we've taken a look at functionally how we're aligned and we've been able to eliminate and reduce some redundancy and that has some efficiency or some improvement in terms of our non-interest expense run rate.

47:32 There's still some of the things that we learned actually as we went through the Paycheck Protection Program project There's some other areas as we talk with our bankers, they say they've learned how they can do things more efficiently. That's the silver lining in this cloud that we're under now with COVID-19 is that people are finding different ways, and when we come out the other side, I think we're going to leverage some of the spend that we've had, focus that we've had, as well as and some new opportunities that we've uncovered through this. So that's kind of a high-level 90,000-foot overview of the types of things that we've been working on and will continue to work on.

48:25 Yeah, it provides some color on that too, Jackie, just with regards to the PPP program.

48:31 We digitized the whole process from the loan application all the way through We used existing capabilities that we have, and we did it rapidly. There's no way we would have been able to keep up with the demand and meet the 10-day funding requirement without having all hands on deck. That digital background really helped us get this over the finish line.

48:59 Understanding that you're not going to provide guidance as to the number of loans or the dollar value, You know, when you did the PPP program, was that open to existing customers or was it existing and some potential new relationships?

49:16 We chose to follow the process to work with existing clients and not use it as an opportunity to prospect, help with the demand, and the most important thing we could do is take care of our clients throughout this process. Okay.

49:33 Great. Thank you all very much. Thank you. There are no further questions in the queue at this time.

49:39 All right. Well, thanks, everyone, and good luck. Stay well and stay safe. Thank you for joining us today. We hope you found this webcast presentation informative. This concludes our webcast. You may now disconnect and have a good day.