Columbia Banking System, Inc.
Q1 2019 Earnings Call Transcript

Published: 27 Apr 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System First Quarter 2019 Earnings Release Presentation. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session through both the telephone and the web. Instructions will be given at that time. [Operator Instructions]. As a reminder, the conference is being recorded. I would now like to turn the call over to our host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System.

[Hadley Robbins:]

Thank you, Natalie. Good morning, everyone, and thank you for joining us on today's call to review our first quarter 2019 results, which released before the market opened this morning. The earnings release and a supplemental slide presentation are available at columbiabank.com. We had a strong first quarter. As many of you know, we have a seasonal pattern to our performance. First quarter is typically our weakest during the year. We're very pleased with our results and see positive momentum building across our footprint. Loan production was a new first quarter record. The mix of our core deposit base remains stable and deposit cost were well managed. The total cost of deposits was 18 basis points, which continues to provide us with an important low-cost funding advantage. Our credit profile remains healthy, and our loan portfolio is well-positioned for navigating the economic cycle. Total capital is well above regulatory targets, and when coupled with the dependable earnings stream, we have the flexibility to exercise a number of alternatives in deploying capital, including funding organic growth, ordinary dividends, special dividends, share repurchases, and investing in our business. On the call with me today are Greg Sigrist, our Chief Financial Officer, who will provide details about our earnings performance and an overview of our share repurchase plan; Clint Stein, our Chief Operating Officer, who will review our production activity and highlight the status of some of our digital investments; and Andy McDonald, our Chief Credit Officer, who will review our credit quality information. Following our prepared comments, we'll be happy to answer your questions. It's important that I remind you that we'll be making forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filings, and in particular, our 2018 SEC Form 10-K. At this point, I'd like to return the call to Greg to talk about our financials.

[Greg Sigrist:]

Thank you, Hadley, and good morning, everyone. First quarter earnings of $45.9 million and EPS of $0.63 per diluted share was an increase from the fourth quarter 2018 and an increase of $0.08 compared to the first quarter 2018. First quarter net income was the second best quarterly earnings performance in our history. During the quarter, total loans increased by 6% on an annualized basis. Much of the growth occurred near the end of the first quarter, so we will expect to see a positive impact to earnings in subsequent quarters. The operating net interest margin of 4.33% was essentially flat to the prior quarter, as an uptick in asset yields from the late December rate increase was offset by a modest increase in deposit rates and a seasonal shift in funding. In previous quarters, we had discussed our asset sensitivity and our long-term approach to reducing our exposure to falling rates. We feel our interest rate strategy is prudent and better positions us to mitigate an eventual decline in rates. The trade-off is a modest NIM headwind but overall, has improved bottom-line performance and protects earnings should rates decline. After removing the effect of acquisition cost that did impact the 2018 results, non-interest expense decreased $1.8 million on a linked-quarter basis due in large part to items subject to timing differences. Compensation and employee benefit expense was up mostly due to the discretionary 401(k) employer contribution and increased employer payroll taxes as caps reset. Excluding acquisition cost of $4.3 million in the first quarter of 2018, non-interest expense is up $3 million or roughly 3.5% on a year-over-year basis. In the first quarter, we incurred $600,000 of expenses that was directly related to our digital initiatives. As more projects come online in the coming quarters, we will provide you with the appropriate visibility to discern between our operating run rate and the expense impact of our digital investments. We do expect to invest somewhere between $9 million and $12 million in digital initiatives over the balance of 2019, though some of that will be capitalized rather than hitting expenses directly. So it is difficult to tell you the quarterly expense impact in advance. We expect our non-interest expense from ongoing operations to continue in the mid-80s. We believe we have appropriately balanced the continued investment in our franchise with our long-standing commitment through a disciplined approach to expense management. Increases in our expense base over the past year are directly related to higher production and asset levels. Our effective tax rate was 19% for the first quarter, which is down modestly from the prior quarter and is in the range we would expect for a full-year, which is 19% to 20%. As Hadley mentioned, and you may have seen in our 2018 SEC Form 10-K, our Board approved the share buyback plan that authorizes the company to repurchase up to 2.9 million shares. We do intend to incorporate share buybacks into our capital strategy when it is advantageous to our shareholders to do so. Our ability to buy back shares when it makes sense would also impact the level of our special dividend going forward. We are very pleased to have this additional capital management tool available to us. At this point, I would like to turn the call over to Clint.

[Clint Stein:]

Thank you, Greg. Good morning, everyone. Throughout our history, we've been successful in retaining our top-performing talent as well as recruiting highly experienced bankers in all of our major markets. Over the last several quarters, we've had the opportunity to add more depth by bringing new bankers onto our team, and we are certainly seeing the results of their activities. Deposits continue to be one of our differentiating strengths, with 49% in non-interest-bearing products. Our total cost of deposit is just 18 basis points. We experienced our typical seasonality with average demand deposits declining $217 million during the quarter. However, consistent with prior years, period-end balances rebounded and were down only $89 million at quarter end. As I stated in the earnings release, our bankers are doing an outstanding job of winning new deposit relationships, resulting in a nice pipeline of prospective business. As Hadley mentioned, loan production for the quarter was $366 million, which is our best first quarter on record. It is worth mentioning that, historically, first quarter tends to be the low production point in the year. Production for the last four quarters is over $1.5 billion, and our loan pipeline remains to our satisfaction. Term loans represented $254 million of new production, while new lines accounted for $112 million. The mix of new production was balanced in terms of loan size. With respect to geography, 53% of their production was generated in Washington; 27% in Oregon; 5% in Idaho; and the remaining 15% in other states. We had a late spring this year, resulting in line utilization remaining at seasonal lows at quarter end. Prepayments and payoff activity has continued to moderate from their elevated levels in 2018. It's too early to call it a trend, but first quarter prepayments were in line with our normalized historical experience. The quarterly average tax adjusted coupon rate for new loan production was in line with the portfolio rate of 4.99%. Average coupon rates on new loan production were lower this quarter as we selectively chose to fund some public administration loans that were priced very competitively due to their credit profiles. During the first quarter, C&I production was 58% or $220 million of the total production, which, on a percentage basis, is consistent with prior quarters. The C&I portfolio grew by $71 million to $3.5 billion, with the strongest growth in the public, retail, and health care sectors. Commercial and multifamily real estate loans were up $71 million on $112 million of new production. The growth was spread across the multifamily, warehouse, condo, and hospitality sectors. Overall, we are pleased with the growth in loans, especially given the weather-related delay and our seasonal uptick in line utilization. We recently announced the consolidation of three branches

[Andy McDonald:]

Thanks, Clint. Our first quarter provision for loan and lease losses of $1.4 million compared favorably to the $1.8 million in the prior quarter. This included provisions of $1.2 million for the originated portfolio, $150,000 for Pacific Continental, and $100,000 for West Coast. Offsetting these provisions was a release from the Intermountain portfolio of $75,000. The provision for the quarter was principally driven by net charge-offs and to a lesser extent, loan growth. Problem loan migration was minimal, and loss rates were essentially unchanged. As of March 31, 2019, our allowance to total loans was also essentially unchanged. As always, we like to remind folks that this ratio is impacted by our acquisition and associated loans that were recorded at fair value. Embedded in those valuations is approximately $24 million of net discount, for which approximately $17 million is associated with the Pacific Continental portfolio, $5 million with the West Coast portfolio, and $2 million with the Intermountain portfolio. While net charge-offs drove the allowance for the quarter, they were relatively modest and were centered in the originated and Pacific Continental portfolios. Across these portfolios, charge-offs remain centered in commercial business loans. The charge-offs were fairly granular with no systemic issues or industry concentrations. In summary, it was a nice stable quarter. Pretty much all of our metrics, past dues, nonperforming loans and problem loans all remained essentially the same. So while we are obviously pleased with the performance of the portfolio, we remain cognizant of the fact that we are well into one of the longest economic recoveries in history and as such, we must remain diligent. With that, I will now turn the call back to Hadley.

[Hadley Robbins:]

Thanks, Andy. We're pleased to announce our regularly quarter dividend of $0.28 and special dividend of $0.14, which together constitute a payout ratio of 67% for the quarter and a dividend yield of 4.81% based on the closing price of our stock on April 24, 2019. This quarter's dividend will be paid on May 22 to shareholders of record as of the close of business on May 8, 2019. I'd like to end by recognizing our employees' commitments in all the communities we serve, this week is Columbia Bank's annual Melanie Dressel Community Commitment Week, and our employees are out, of course, across all three states volunteering at nearly 60 different organizations. This commitment is at the root of our heritage and a source of pride for all Columbia bankers. This concludes our prepared comments this afternoon. And as a reminder, Greg, Clint and Andy are here to answer your questions. And now, Natalie, we'll open the call.

[Operator:]

Certainly. [Operator Instructions]. And our first question comes from the line of Jeff Rulis. Your line is open.

[Jeff Rulis:]

I think the new call time, the new early call time.

[Hadley Robbins:]

So are we.

[Jeff Rulis:]

Okay

[Hadley Robbins:]

So are we. So I wanted to follow up on the expense side. Greg, I appreciate the detail on the digital spend. You said the remainder for '19, what was that figure again?

[Greg Sigrist:]

We're expecting another $9 million to $12 million of investment in 2019. But again, not all of that will drop to the bottom line as we are still going through the chartering, our internal governance processes in -- figuring and negotiating with vendors, so some of that will get capitalized as well, Jeff, but that is the total investment level.

[Jeff Rulis:]

So you said the $600,000 in the quarter, was that, I mean, maybe earmarked, or there were some offsets? Is that -- would that be appropriate percentage of, I guess, what will fall to the bottom-line, and maybe that's tough to say, but was Q1 indicative? Or is this just going to be a lumpy item?

[Greg Sigrist:]

Well, I think for the balance of 2019, I would expect that $9 million to $12 million, a fair chunk of that will hit the bottom-line. So I think it's -- probably somewhere between 70% to 80% will hit the bottom-line over the next three quarters. But it's going to be lumpy over the quarters, Jeff, is the way I'm thinking about it. This is really a quarter for us to go through our internal governance and really start to hone in on who our long-term partners are going to be. And until you really start to work with contracts with those partners and -- it's really going to take a bit of time before we can get more granularity until we've done that.

[Jeff Rulis:]

Got it. So the -- I'm just trying to do the math, this could be $2 million to $3 million a quarter for the rest of the year. So that's going to increase meaningfully from $600,000 this quarter?

[Greg Sigrist:]

Yes. I mean, versus the $600,000 this quarter, I do expect it to flow it up over the balance of the year. And as we get into next year, we're going to start to see the benefits of the digital both in terms of -- right now, as we go through this, and I think we've talked about this before, for some of the platforms, we're paying for the existing platform, at the same time we're investing in the new platform. So we're going to start to see the benefits of that migration next year and then just some of the more direct benefits as well.

[Clint Stein:]

Jeff, this is Clint. I'll just add that I think you hit the nail on the head when you said it's just going to be one of those items that's going to be lumpy, and it's similar to when we go through an acquisition, and we have acquisition expense to hit. We have an idea, and we forecast it until we actually get there. So what we really want to focus on is making sure that we provide you and others with what our operating run rate is and then what that lumpiness created by these digital investments end up being.

[Hadley Robbins:]

We'll do that a quarter at a time.

[Jeff Rulis:]

Yes. Like you said, you gave us the guidance on the mid-$80 million. So that's baked into the guidance there?

[Greg Sigrist:]

Well, we'd say the mid-80s, again, it's really our operating run rate. I think you should think about digital being incremental to that. So I think to Clint's point, we're really going to try and focus you on our run rate, which we feel is quite stable and directly proportionate to our ability to generate loan production. I -- So I think we're comfortable to give you guidance on that basis, and then to Hadley's point, we'll continue quarter-on-quarter to give you some outlook going forward.

[Jeff Rulis:]

Great. And then the loan growth, in a -- I think the previous guidance was loaded mid single-digit; you kind of crushed the first quarter number. Does that adjust your expectations for the full-year; is that more towards the high-end?

[Andy McDonald:]

Well, you know, Jeff, the former guidance was based on trends that we saw with prepay and payoff. And we never really had concerns about our level of production, which is something that we control. But as we see trends kind of shifting away from the headwinds we have, it'll take a couple of quarters, I think, before we're satisfied with that -- that kind of trend is behind us, so I don't know, Clint, what do you think?

[Clint Stein:]

I agree. The headwinds we talked about for most of last year have minimized this quarter. But I'm cautiously optimistic that it's the start of a trend, but I want more than 1 quarter behind us before I'm ready to stick that stake in the ground and say that that's where we're at. From a production standpoint, though, we're very satisfied.

[Jeff Rulis:]

Okay. And too early to tell of that lessened payoff activity, is it checking the temperature of -- in kind of business community. Could you just point to anything that said, well, maybe it was wider or just sort of timing and it's too early to say?

[Andy McDonald:]

It's too early to say. I'll give you one counterpoint to the normalized payoff activity, is one of the themes that we hear from our customers is that they're cautiously optimistic about their own businesses. But they worry about the economy and where we're at this late in the cycle. And so that type of concern could cause some consolidation in additional sales that we've experienced really since we got out of the downturn. And so we didn't see as much of that this first quarter. It could pick up in the ensuing quarters or maybe not.

[Operator:]

And our next question comes from the line of Matthew Clark. Your line is open.

[Matthew Clark:]

Just on the payoffs, could you quantify what they were this quarter?

[Clint Stein:]

In terms of dollar amount, is that what you're looking for or --

[Matthew Clark:]

Yes. I think they were -- and I think -- yes, dollars. I think they were $267 million last quarter.

[Clint Stein:]

Well, it was -- in the current quarter, what I'd call prepayment activity, was -- just under $119 million. Relative to the fourth quarter, that number was $161 million. And when we look at a year-over-year basis, first quarter of 2018, prepayments were about $144 million. If we look at it as a percentage of the portfolio, we're actually, this quarter, lower than what we were in 2017 and 2018 by about 20 basis points. So I think that that's part of the cautious -- cautiously optimistic statement I made to Jeff's question is that it's actually lower than where we were. And so it could be a bit of a timing issue. We did have some significant weather during the quarter that tended to slow things down. I don't know to the extent that it impacted this number as well.

[Matthew Clark:]

Okay. And then I think you mentioned line utilization was still around seasonal lows. Can you just -- do you happen to have that percentage as well?

[Clint Stein:]

Yes, I think it's about 49%. It's pretty much flat with where we were at, at the end of the year.

[Matthew Clark:]

Okay. And then just on the core NIM, if we exclude the purchase accounting accretion, when you think about the seasonality on the funding side that occurred this quarter, you get some of that core funding back, maybe pay off some of the borrowings. Is your expectation that you might see a little release in the core NIM here in 2Q before stabilizing again or some modest pressure?

[Greg Sigrist:]

No, I think you're thinking about it right, especially with the seasonality on the funding side. And a lot of the production we had in the first quarter closed late in the quarter. And just with the strong pipelines, I would expect that, combined with the line utilization coming back with the weather, to be good upward lift. And as you know, we've been able to manage our deposit cost very closely. So I'm cautiously optimistic over the next couple of quarters.

[Operator:]

And our next question comes from the line of Jon Arfstrom. Your line is open.

[Jon Arfstrom:]

A couple of questions for you. Just go back to the loan growth number, the period end loan growth. Were you guys surprised at all with that number? It just seemed unusually strong, not being critical at all, but it just seems like it's a really, really solid number for you.

[Clint Stein:]

It's a very solid number. And I think that if we rewind a lot of the discussion that we had last year regarding the headwinds that we had. Some of it was the delayed closing of Pacific Continental and the time that it takes to rebuild the pipelines there. The -- we already addressed the prepayment headwinds. The new teams that we're able to bring on selectively in some of our key markets and getting their pipelines built. And then the ability or the opportunity that we had to bring in some fresh talent with some departing bankers, and we've seen all of those things come to fruition in the first quarter.

[Jon Arfstrom:]

Okay. Good, only good numbers. On the digital programs that you're talking about for 2019. I think we understand the spending piece of it, and it's hard to pin down. But you talked about 2017 program starting to show success. When you look at the six programs you lay out for 2019, which one or two do you think are the most critical or most important for you to complete?

[Clint Stein:]

Well, all of us probably want to jump in. And so I'll start with the easy one, and then as it gets more difficult to differentiate between them, I'll kick it over to Hadley. Our business online banking version to me is the most critical. As a commercially oriented organization, what we see the capabilities of that platform and when we layer in what we've experienced to date with the consumer online banking platform, which is one of the ones that I mentioned in my prepared remarks. I think that not only is it a critical application for retaining our existing client base, deepening those relationships but also our ability to go out and compete for middle-market business.

[Hadley Robbins:]

Well, I'll agree. I think it's -- treasury management conversion that we go -- that we're going forward with is a critical one because it creates a very contemporary product set for our key depositors. And at the same time, it offers us an opportunity to provide a higher level of treasury management services to our small business clients, which we'd like to build going forward in a more direct way. We also have some payment technology that's coming forward, which is important to us. We're going to introduce Zelle, and I think that, that will certainly help our customer base feel as though we're bringing the products that they need to them. And some of the projects that are going on that don't have the application sizzle to them are the hard work that's going on behind the scenes to position the bank's operations to be much more customer-focused and frictionless as we work through creating efficiencies and at the same time, making our services faster and more -- less complex for our customers. So those are the initiatives that are kind of unfolding. And they'll take a while to get introduced and stabilize, but I'm very convinced that they'll help our performance long-term.

[Greg Sigrist:]

And the only one I would incrementally add because I think we all have our own favorite, is we really work to strengthen the internal capabilities and really set the foundation for all the digital operations. I think that as we roll through 2019 and into 2020 is also incredibly critical.

[Hadley Robbins:]

Yes. We'll also start working and be very close to completing, before the end of the year, our online account opening and hopefully, in 2020, our online small business capabilities as well.

[Jon Arfstrom:]

Okay. And then just last follow-up on that. We -- you've talked about the $9 million to $12 million, Greg. But longer-term, do you feel like there are potential expense offsets, maybe change the role of some people to be more revenue generating? Does this take some of the burden off the back office?

[Greg Sigrist:]

Yes. I mean, I think that the spend itself combined with increased capacity that helps with either generating revenues or reducing, to your point, some of the friction. We're also, just broadly speaking, focused on operational efficiencies, John. So we absolutely see opportunity to have a meaningful return on that investment as we head into next year.

[Clint Stein:]

And I'll just add that we've consistently reinvested in our business over our 25-plus-year history. Its -- that's continuing, it's just the nature of the investment is different. Other than investing and expanding brick and mortar locations, it's really into more the digital area. And we're -- we are able to optimize our branch footprint and achieve some offsets. And as I mentioned on the start of the call, we have three pending branch consolidations right now. And as the expense levels and branch traffic counts continue to change, we'll find that balance, but in general, it's not a huge spend story, I think it's continuation of what we've been doing, it's just a different type of expense, it's migrating from the occupancy. And in some cases, there will be some efficiencies on the personal side as well into more of a digital spend.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Jackie Bohlen. Your line is open.

[Jackie Bohlen:]

I wanted to turn to capital management. Just given the discussion of the buyback and then the specific highlighting in the press release, I know that the special dividend policy has been more what you've looked for in the past. And I wanted to get your thoughts on how those two will play together. If you might lower special dividend and repurchase shares. If you might switch more to a buyback, if it's going to be very specifically driven by stock price. Just how you're thinking about those 2 together?

[Greg Sigrist:]

Yes. I mean, let me start, and Hadley can jump in as he sees fit. But obviously, any buybacks are dependent upon the price point and making sure that the execution is at a level that makes sense for our shareholders, quite frankly. So one of the challenges in thinking about it is, even with that forward look in terms of what's going to happen to the share price and ability to transact at levels that make sense. To the extent that we are able to buy back shares, though I do think directionally, it would cause us to look at that overall level of special dividends. At the end of the day, our payout ratio for the quarter between the regular and the special dividend was, I believe, 67%, in that neighborhood. We don't want to be in a position where we're taking that payout ratio above 100% over a longer horizon, Jackie. So we're absolutely going to be looking to see what our experience is on the buybacks and using it calibrate the special going forward.

[Jackie Bohlen:]

Okay. So more information, I guess, on the future as we see how pricing levels are and how that unfolds.

[Greg Sigrist:]

We have quarter-on-quarter conversations, certainly, internally. And I would expect us to have the conversation with you as well.

[Jackie Bohlen:]

Okay. And then a question, from a loan perspective, it sounds like most of the pruning that took place last year is now complete. Is that a fair assessment?

[Hadley Robbins:]

Well, I think it's an ongoing discipline. Yes, it's something that we're always looking at the portfolio, making decisions about it. And I'm pretty comfortable with the activities that have taken place, and we haven't seen a systemic move of any kind within the portfolio with regard to risk migration. But I'll turn it over to Andy.

[Andy McDonald:]

Yes. I would just echo Hadley's comments that we certainly saw a lot of institutions being aggressive in the marketplace in terms of trying to build assets on their balance sheets. And so we felt that was a good opportunity for us. And so some of the pruning activity may have been a little bit higher than normal, I don't think it was substantially higher. Our bankers here, the things that I always say, the biggest key to credit quality is who we choose to bank. Second thing is we need to monitor those that we choose. And then thirdly, which is not the fun part of the business, but we do have to actively prune clients that, for whatever reason, choose to take their businesses in directions that we're not comfortable with, or their performance is one that we are uncomfortable with. So in that case, we hope to part amicably. It's just business.

[Jackie Bohlen:]

Okay. And then just one last one. In terms of the advertising expense line, I know you gave good color on how you expect the digital spend to go and then outside of that, just operating expenses. But how are you -- from that line item in particular, how are you expecting that to go in the next quarter or so, just given past seasonal trends?

[Greg Sigrist:]

Yes, I'll maybe start and if Hadley wants to jump in. I mean, I would just say as we roll out our digital initiatives, Jackie, there's certainly going to be an element of digital marketing associated with it. Off the top of my head, I'm not sure there's really a range or any incremental thought I would give you other than the fact that it is going to be part of our digital strategy going forward.

[Hadley Robbins:]

Yes. We'll have some quarter-by-quarter calls on that, but overall, I'd look to last year for the guidance on where we land with marketing.

[Operator:]

Our next question comes from the line of Gordon McGuire. Your line is open.

[Gordon McGuire:]

So Clint, the new production yields of 499 basis points, you mentioned those was lower because of the public administration funding. Is there any way you could strip out what the yields might have been if those hadn't funded? Just trying to get a sense of new production outside of those.

[Clint Stein:]

Yes. Yes, we can. I don't have the detail in front of me to do that. I think it was about $60 million of the production that accounted for that. But we can certainly follow-up with you offline and give you the number or the -- what the coupon rate was excluding the public finance.

[Gordon McGuire:]

Great. That would be great. And then it looks like you completed the securities leverage strategy early this quarter. Do you have the total balances that you added from that? And maybe what the duration and the average yields on those purchase were?

[Clint Stein:]

Well, I would say, we really kind of filled up the bucket late into last year and into this year, and we're at the level we would expect to be, which is roughly $500 million. And it's really, I think, as you get -- it's borrowing overnight and then investing into securities products that'll perform well in a rate-down environment. The rate over -- I don't actually have the rate overnight with me, I can tell you the differential between the overnight borrowing rate and maybe you can back into it and what we're earning on those assets. It's about $1 million of net interest a quarter that drops to the bottom-line.

[Gordon McGuire:]

Okay. And just on the securities balances from here, would you expect that to decline over time as you -- if you need them to deploy liquidity into loan growth? Or do you think you can still kind of build the balance sheet growth out of those?

[Greg Sigrist:]

Well, I think that's a great question and one -- it's a discussion we're having internally. And as we sold securities kind of late in the first quarter, it was consciously to fund loan growth, to be honest. So you would've seen our loan-to-deposit ratio tick up a little bit to 82%, I believe, for the end of the quarter. So I think part of the conversation is around what happens with the seasonal deposit flows. And over time, I think we would be comfortable seeing that loan-to-deposit ratio move up a little bit.

[Gordon McGuire:]

Okay. And then lastly, just clarification on the $9 million to $12 million investments. That was on a annualized basis, or was it quarterly?

[Greg Sigrist:]

No, that's what we would expect over the balance, the remainder of 2019.

[Gordon McGuire:]

Okay. And how much of that would be more of consulting fees that would be out of the run rate once you're finished with the projects? Or something that kind of stays in the expense base? I'm just trying to figure out what 2020 expense adds from this could look like.

[Greg Sigrist:]

Yes, I'm not sure there's going to be much of a consulting spend in that, quite frankly. A lot of it just gets down to how you negotiate the contracts with the vendors. There'll be some component of it that will be capitalized and then become part of the run rate going forward. But to the extent we're replacing existing platforms, even that to take out of cost were already there. So I think the detail you're looking for is really important, and I think it is part of what we would plan to keep coming back quarter on quarter and give them better transparency on.

[Operator:]

And our next question comes from the line of Aaron Deer. Your line is open.

[Aaron Deer:]

I'm just following up on that point. The -- to the extent that there is cost that are coming out, that -- well, that $9 million to $12 million is a gross spend, right? So it see -- could have either some cost that go away, or maybe there's capitalized software expenses that might be included in that. Anything like that that would add additional noise?

[Greg Sigrist:]

Well -- and I think I talked about it a little bit last quarter, we certainly have a number of platforms including the treasury management platform that Clint and Hadley talked about. What -- we're paying for the existing platform today and as the new platforms come online, we'll start dropping off the run rate associated with the existing platform. I'd have to look back at last quarter's notes, Q&A, to give you the exact number on it. But we certainly expect to see saves of that nature start to filter in, in the fourth quarter of this year and then into next year. And I think to Clint's point, as each digital platform comes online, we do expect to see the benefits downstream and have a return on those investments that really start to trickle in into next year.

[Aaron Deer:]

Okay. And then, Andy sounded pretty pleased with the credit position but given the very wet spring that the Pacific Northwest had this year. Has any -- is there an opportunity to kind of check in with some of your ag producers? And any crop types or anything that are causing you any concern at this point?

[Andy McDonald:]

Yes. The late spring is going to cause some issues just like they are in the Midwest. The farmers are getting into the ground later. So it's certainly going to impact potatoes and onions, especially potatoes there contractually have to be taken out of the ground so that the world doesn't run out of french fries. So that means that the potatoes are going to be smaller because they won't have as much time to grow. And so yields will be down, so we're analyzing that relative to farmers' budgets. The -- also, the cold weather in the Snow Lake is going to impact cherries and apples, simply because those trees now are kind of behind the curve as well. Key with cherries is you always try to get them into the grocery stores for the 4th of July, red, white and blue and all that. So we would anticipate that the ag portfolio, which started to show some healing, say, two, three quarters ago will probably migrate back to where it was, that won't be a material change for us. But we will have to continue to deal with it.

[Aaron Deer:]

Okay. That's helpful. And then lastly, just it sounded like most of the kind of deposit activity that we saw this quarter was more kind of seasonal in nature. But to what extent have you seen any changes in consumer behavior or increased demand for exception pricing or that sort of thing that could cause us to see any sort of sudden increase in deposit cost going forward?

[Clint Stein:]

Yes, we continue to -- throughout the quarter, we continue to have a lot of outreach with our larger customers, and we did make some rate concessions. And I think that later in the quarter, the frequency of things that at least hit my desk slowed, but it's still there, there's still the risk for continued pricing pressure for deposits. But I'll also add that we had a lot of success with winning new relationships, and it's not just -- it's obviously not going out competing on price, but it's our service, the -- our expertise that we bring to the table, our product set, all of those things. So it is -- it's a -- it's very competitive environment. But I think that we have a very solid team of bankers that are not only defending their existing portfolios but also going out and winning new business.

[Operator:]

And our next question comes from the line of Matthew Clark. Your line is open.

[Matthew Clark:]

Just on expenses next year, it does sound like there's some relief coming later this year and into next year. But maybe thinking about it in a different way, do you still expect to achieve that mid-50s efficiency ratio at some point next year?

[Greg Sigrist:]

Yes, I think into next year with everything we've talked about, I certainly think that's the target we're shooting for. We are going to continue to focus on our operational efficiencies, Matt, and I think that's the right target.

[Matthew Clark:]

Okay. And then the tax rate is kind of hung in closer to 19% more recently. Is 19% a good number to use going forward?

[Greg Sigrist:]

I -- maybe blend it with last year's rate or maybe look at last year's average rate for the full year is probably the better barometer, Matt.

[Matthew Clark:]

Okay. And then --

[Greg Sigrist:]

So we are usually in that range -- go ahead. I'm sorry.

[Matthew Clark:]

Yes, yes. Yes, it's in that range. Okay. And then on the business and occupancy tax expense, just bumped up this quarter after being within a tighter range. Is there anything unusual in that item, or is that a good run rate?

[Clint Stein:]

Yes, there was a little bit of unusual activity. So we had a unfavorable interpretation from, I believe, city of Seattle on how we calculated our B&O tax. And so there is a catch-up period, and I don't have the exact number in front of me, but it's probably the majority of that delta that you're seeing there, roughly $400,000.

[Operator:]

And our next question comes from the line of Don Worthington. Your line is open.

[Don Worthington:]

Just had maybe one more and that was what your current thoughts might be on M&A as a way to deploy capital?

[Hadley Robbins:]

Well, it's always in our thoughts. And it's an ongoing part of the strategic thinking that we have. And the way that we're thinking through a lot of M&A-related opportunities is simply we've got a significant amount of investment that we're moving into our existing bank and that -- it's a dedication not only of dollars but a dedication of resource that is applied to that. And so if we're considering M&A, it's going to be a strategic benefit to the shareholders that drives accretion at a level that hopefully is above mid- to-high-single-digits. And so that puts us in a range where we're looking at much larger banks. And there are fewer and fewer M&A opportunities in our existing footprint. Although we will be interested in any that come available, but it seems as though at the current time, those opportunities have yet to arise. And so we'll be prepared when the time comes if we have that opportunity. We have talked about looking at expanding the footprint, thinking of California, particularly Southern California that remains a conversation that we have internally. And we would consider going -- well, excuse me, it's Northern California and moving a bit south in the valley as far as there's reliable water. But it's a more difficult proposition for us simply because we don't have the ability to get the takeouts that you would normally get within a footprint, which makes your ability to provide a price that's competitive with an end market competitor as competitive as they could put on the table. So it's ongoing, it's a conversation, we want to be ready, we're moving our capital at levels that would put us in position to do it, and we have the interest. But one of the things that we think a lot about is the discipline, and we don't want to overpay. So we're thoughtful about it.

[Operator:]

And there are no further questions at this time. And I would like to thank everyone for joining us today, and we hope you found this webcast presentation informative. This concludes our program, and you may now disconnect. Have a great day.

[Hadley Robbins:]

Thank you.