Columbia Banking System, Inc.
Q3 2019 Earnings Call Transcript

Published: 26 Oct 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System’s Third Quarter 2019 Earnings Conference Call. 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 web. Instructions will be given at that time. [Operator Instructions]As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System.

[Hadley Robbins:]

Thank you, Mike. Good morning, everyone. And thank you for joining us on today’s call as we review our third quarter 2019 and year-to-date results, which we released before the market opened this morning. The earnings release and a supplemental slide presentation are available at columbiabank.com.I am pleased with our third quarter results. Earnings exceeded $50 million for the second straight quarter and on a year-to-date basis, net income was up 16% over 2018 results to $148 million. During the third quarter, our bankers did an excellent job in focusing on those things that they directly control.Loans were up $109 million on strong production of $383 million. Credit quality continued to strengthen and deposits expanded by $644 million, a portion of which is an increase in public funds that Greg Sigrist, our Chief Financial Officer will discuss in his comments.Our succession plan is a key component of sustaining our business model and I am happy to report that the CEO succession process now underway is going very smoothly. Our employees, investors and a broad spectrum of other stakeholders have expressed strong support and appreciate the thoughtful continuity of leadership.Clint is a talented banker with 25 years of experience, including 14 spent growing Columbia Bank. I am proud to pass the torch on to Clint and I am confident he will lead Columbia Bank successfully into the future.On the call with me today are Greg Sigrist, our Chief Financial Officer, who will provide details about our earnings performance; Clint Stein, our Chief Operating Officer and incoming CEO, who will review our production activity and highlight the status of some of our digital investments; Andy McDonald, our Chief Credit Officer, who will review our credit quality information; and Chris Merrywell, our incoming Chief Operating Officer. Following our prepared comments, we will be happy to answer your questions.It’s important that I remind you that we will 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 turn the call over to Greg to talk about our financial performance.

[Greg Sigrist:]

Thank you, Hadley. Third quarter earnings of $50.7 million and EPS of $0.70 per diluted share was the second best quarter in our history after the second quarter of 2019. As you know, we have been working diligently since the latter half of 2017 to put protections in place to defend our NIM and net interest income, should interest rates decline.As a reminder, the three primary interest rate risk management tools we have been using have been to increase the duration of our assets, selectively grow the balance sheet by borrowing short-term to fund the purchase of securities that would respond well in a rate down environment and the derivative strategy utilizing a zero cost collar.Since 2017, fixed rate loans have increased from 38% to 47% of the portfolio and our derivative strategy remains in place with a $50 million notional amount. We entered the third quarter with approximately $50 million in our security strategy.We did increase our security strategy in the third quarter by selectively increasing public funds by approximately $300 million as an alternative to using FHLB advances with corresponding increase in the securities portfolio. The decision to use public funds this quarter is in line with our contingency funding plan and desired periodically to test some of the alternative funding sources available to us.Our security strategy now stands at approximately $800 million and along with increased loan duration and the derivative strategy we will provide protection in the event of further declining rates.After considering the $4.9 million of loan interest recoveries in the second quarter, net interest income did increase $2.2 million quarter-on-quarter. Thanks in part -- thanks in large part to an increase in net interest earning assets and loan growth during 2019.As you will recall, the interest recoveries also added 17 basis points to the second quarter NIM. When we factor that NIM, the remaining decline in the third quarter operating NIM of 9 basis points was driven by the extra insurance we took out in the form of increasing the security strategy.Cost of deposits did increase modestly, given our decision to selectively increase participation in public funds, as part of our overall interest rate risk management strategy. If you exclude the public funds, which are boastful in nature, our cost of deposits was unchanged.Non-interest income was $28 million for the quarter, which was up $2.4 million on a linked-quarter basis and up $7 million compared to the third quarter of 2018. While each quarter benefited from one-time items, we are seeing positive trends in loans, cards and financial services revenues, as we continue to focus on generating non-interest income.Third quarter expense of $87.1 million includes $1.9 million of expense that is directly tied to our digital efforts. We remain focused on closely managing our expense run rate and anticipate non-interest expense, excluding digital to continue in the mid-80s range. The year-to-date impact to our digital initiatives was $5.9 million. We anticipate a full year impact of $9 million to $10 million.As we go on to the first year to digital journey, we have focused on foundational projects that create capacity in the front and back offices, and we are on schedule to meet the three-year strategic roadmap laid out a year ago. We expect a similar level of digital investment in 2020, with the full year impact in the $8 million to $10 million range.Our effective tax rate was 19.6% for the quarter and 19.2% year-to-date, both within our target range of 19% to 20% range.We actively repurchased shares during the third quarter as part of our capital strategy and we will continue to do so provided we feel will benefit our shareholders. As we have shared in prior calls, we have a strong capital position and we will continue to balance buybacks with the special dividends and strategic opportunities.Lastly, the team has been working hard on the implementation of new current expected credit loss or CECL accounting standards. Based on our current portfolio and forecasted macroeconomic conditions, we estimated day one impact on the allowance for credit losses or ACL ranging from a decrease of 10% to an increase of 5%. This reflects an indicative range from the five quarter look-back we performed, with forecasted macroeconomic variables contributing to quarter-on-quarter variations.No material impact to our capital levels is anticipated. While it does continue to refine and validate our CECL models and the ultimate impact will depend on characteristics of the loan portfolio and the macroeconomic environment at the adoption date.At this point, I’d like to turn the call over to Clint.

[Clint Stein:]

Thank you, Greg. Good morning, everyone. We have always focused on driving long-term value for our stakeholders. This quarter’s solid performance embodies the outcomes of our long-term thinking. Our bankers continue to build relationships on both sides of the balance sheet as evidenced by the growth in loans and deposits.We continue to evaluate how we allocate resources. The gain on the sale leaseback transaction during the quarter is an example. In the coming years, we will reinvest a small portion of the gain into a contemporary replacement facility that better suits our needs and those of our clients. The remainder can be reallocated to growing other parts of our business.Without the noise created by the increase in public funds, deposits still grew by approximately $344 million or 13% annualized during the quarter. As a result, the deposit mix shifted slightly from 61% business and 39% consumer.Third quarter loan production was $383 million, exceeding $1.1 billion on a year-to-date basis, even with this record setting production pace, our bankers have been busy generating new leads resulting in a solid loan pipeline.Term loans comprised 65% of the production, whereas lines were 35% of the total. The quarterly production mix was 56% fixed, 39% floating and 5% variable. The overall portfolio mix is now 47% fixed, 36% floating and 17% variable.New loan production throughout the quarter was booked in an average tax adjusted coupon rate of 4.77%, which is lower than the overall portfolio rate of 4.82%. The decline as the result of higher yielding repayments in the construction and CRE space, coupled with re-pricing and variable rate loans.Prepayments of $146 million in the current quarter were stable and consistent with the prior quarter amount of $153 million. While stable on a linked-quarter basis, current prepayment activity is down about 10% from third quarter 2018.During the quarter, C&I production was 44% or $169 million of the total production and commercial and multi-family real estate production was 42% or $161 billion of the total.C&I loans were up $63 million, driven by seasonal activities in the ag book along with increases in the finance and insurance sectors.Commercial and multi-family real estate loan totals were up $62 million during the quarter, driven by increases in the warehouse, land, office space and recreational sectors.As part of our ongoing branch rationalization process, we finalized the consolidation of three branches during the quarter, two in our Puget Sound market and one in our Portland region. One additional branch consolidation is underway and scheduled for completion during the fourth quarter.We continue to advance our digital program. In the third quarter, we completed the rollout of our new Commercial Online Banking and Treasury Management system, and we implemented our new Human Capital Management platform improving operational and talent management efficiencies across our employee base.We currently have multiple projects underway. We will improve our peer-to-peer money transfer capabilities, digitize deposit account opening, enhance our small business lending capabilities and drive efficiencies through increased automation across the company. We view our digital efforts as an ongoing journey rather than a destination. The primary pillars are in place, the roadmap is laid out and we are moving well down the path.I want to take a moment to thank Hadley for his leadership, friendship and contribution to building our franchise over the past seven years. The entire team wishes Hadley a long and happy retirement.Now, I will turn the call over to Andy.

[Andy McDonald:]

Thanks, Clint. In summary, credit quality is very good. NPAs to total assets were down to 27 basis points, which is the lowest level in 12 years. In addition, we continue to enjoy positive migration in both the criticized and classified loan category.We are, however, carefully watching our clients with respect to macroeconomic condition. If the tariff war persists, it is likely that region will experience negative economic impacts as Washington, Alaska and Oregon are among the top seven states most affected by these tariffs on a GDP basis.We actively monitor this sector and are encouraged by recent trade developments with Japan and ongoing discussions with China. However, we did see an increase in watch rated assets in the quarter by roughly $31 million and this was to help us further monitor trade development impacts on our portfolio.Our third quarter provision for loan and lease losses of $299,000 was again very modest and essentially unchanged from the prior quarter. The quarter benefited from a large level of recovery in both the originated and PCI portfolio.Most of the recoveries for the quarter were related to two relationships dating back to the great recession. The dedication of our special credit team is exemplified by these recoveries. Absent these recoveries, our provision would have been more meaningful.So for the quarter, we had a provision of $1.75 million for the originated portfolio offset by a $1.2 million release for the First Heritage portfolio and a net release of $214,000 for the Columbia River, West Coast and Pacific Continental portfolios.As of September 25, 2019, our allowance to total loans increased by 1 basis point to 94 basis points of total loans. As always, we like to remind you that this ratio is impacted by our acquisitions and the associated loans that were recorded at fair value.Embedded in those valuations is approximately €20 million of net discount, for which approximately €15 million is associated with Pacific Continental portfolio, $3 million with the West Coast portfolio and $2 million with the Intermountain portfolio.With that, I will turn the call back to Hadley.

[Hadley Robbins:]

Thanks, Andy. We are pleased to announce our regular quarterly dividend of $0.28, which constitutes a payout ratio of 40% for the quarter and a dividend yield of 2.95% based on a closing price of our stock on October 23rd. This quarter’s dividend will be paid on November 20 to shareholders of record as of close of business on November 6, 2019.In closing, it’s been a privilege to be part of this company. I have been inspired daily by the way our employees care for each other, our customers and by their unwavering commitment to help build stronger communities.This concludes our prepared comments this afternoon. As a reminder, Greg, Clint, Andy and Chris are here with me to answer your questions.Now, Mike, we will open the call for questions.

[Operator:]

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

[Jeff Rulis:]

Thanks. Good morning.

[Hadley Robbins:]

Good morning, Jeff.

[Jeff Rulis:]

I guess, first one is for Greg. Just to kind of get back into those expenses, your favorite topic. I think the mid-80s range ex the digital is what you had said and have said in the past. I -- the $9 million to $10 million full year digital spend, what is that year-to-date?

[Greg Sigrist:]

Year-to-date I believe I said it in my comments it was $5.9 million year-to-date and that actually did reflect almost $1 million that we were able to capitalize this quarter, which provided the year-to-date range versus what I indicated last quarter.

[Jeff Rulis:]

Okay. Sorry I didn’t hear that year-to-date number. Was it, you said $5.9 million?

[Greg Sigrist:]

Yes. 5 -- it’s $5.9 million, which is a net of approximately $8 million we were able to capitalize. So absent the capitalization it would have been higher.

[Jeff Rulis:]

Got it. Okay. I guess, for the full year, I guess, Q4 are we still looking for a ramp in that spend in addition to the mid-80s guidance?

[Greg Sigrist:]

Incremental to the mid-80s guidance, correct. I mean, we are pretty far along in the year and I think, as Clint has said in his comments, a lot of the cornerstone projects are pretty far along. But, however, I think, over the balance of the year roughly 30 projects we are going to have done. So we are still a little bit that could flip between fourth quarter and first quarter. But, yeah, there would be --- there will be some incremental to the 80 -- mid-80s run rate.

[Jeff Rulis:]

Okay. And if we took kind of that mid-80s base into ‘20, you talked about another $8 million to $10 million added for the additional digital spend. What kind of core expense rate could we assume on the mid-80s number, if you are comfortable discussing that?

[Greg Sigrist:]

Give me there a little bit more time just we are talking on the core.

[Jeff Rulis:]

So, yeah, did you mention $8 million to $10 million in 2020 for additional digital spend?

[Greg Sigrist:]

Right.

[Jeff Rulis:]

Okay.

[Greg Sigrist:]

I mean, I didn’t hear to the -- ex the digital spend, you would probably expect to see 2% to 3% growth. I mean something in line with the rate of inflation. So, I mean, I -- if I were trying to model that, I would try to take it to the rate of inflation.

[Jeff Rulis:]

Okay. That is helpful. I was just trying to get that number down. Other question, I guess, for Andy, just trying to understood that the -- these recaptures and recoveries on past transactions kind of come and go. It seems like we have seen a flurry of them in the last couple of quarters. Is there anything prompting the timing of that or is it just kind of an indeed coming in all in the last couple quarters, anything to read into that?

[Andy McDonald:]

Yeah. I mean, this quarter we had two significant ones, one for about $1.9 million in the originated portfolio. I guess you could classify that one as a bit of a surprise. We had a strategy in place where we were able to encumber assets and the principals finally decided to do something with those assets and that afforded us the opportunity to collect on the money. Yeah, absent them actually taking action to try to create value with the assets we would have been still waiting for some kind of recovery.The $1.2 million in the PCI book was actually a negotiated settlement where the individual actually came in a year ahead of what we expected and what we had agreed to. And again, it was -- they had an investment opportunity that they wanted to take advantage of. So, I guess, kind of a combination of a number of things, but that’s how I would explain the two large recoveries.

[Jeff Rulis:]

Okay. Thanks, and Hadley, congrats on the retirement. I think a commendable job when you stepped in kind of a critical point in the bank’s history, so congrats.

[Hadley Robbins:]

Well, thank you, Jeff.

[Operator:]

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

[Aaron Deer:]

Hi. Good morning, everyone.

[Hadley Robbins:]

Good morning.

[Aaron Deer:]

And extend my congratulations as well Hadley on your retirement and Clinton on your new role, as well Chris to you as well. The -- I guess, following-up on Jeff’s inquiry into the expenses. I am just trying to understand a little bit about the year-to-date versus the full-year guidance. It looks like, you are basically talking about a $3 million to $4 million expense that could hit in the fourth quarter, but I guess, I am expecting some amount of that given the size of it. You must be looking to capitalize or what -- can you give us some breakdown of how that might occur?

[Hadley Robbins:]

Yeah. I mean, I think, the capitalization piece always, it is triggered late in the process once we are able to negotiate contracts and it’s really -- it’s just fall-out of what’s on the piece of paper. And I would say we had better experience negotiating contracts this year than we probably planned and we talked about earlier in the year.Of that $3 million to $4 million range, I am hopeful that something out of that we could capitalize, so we could bring it down to lower end of the range, Aaron. But there’s also a piece of that that could flip into next year, so that’s why there’s a bit of a range there, so.

[Aaron Deer:]

Okay. And I am sorry, what was the amount of that spend that you expect for next year and is it at a similar kind of situation where some of that will end up being capitalized and so won’t fully be recognized in the year?

[Greg Sigrist:]

The range I comment on my prepared remarks was it’s a $1 million for next year. I -- looking at next year’s projects, there’s probably less opportunity to capitalize than we have been able to do in some of the -- what I call the cornerstone projects, given size and scope. But there could be some that could play down to the lower end of range, Aaron. But until we really get into that it’s really hard to predict.

[Aaron Deer:]

Sure. Okay. And then looking at the margins, just given some of the balance sheet strategies that you employed during the quarter, as well as just the change in rate environment, what’s your expectation for the net interest margin as we head into -- here going into the fourth quarter and into next year?

[Greg Sigrist:]

Yeah. Well, again, absent any potential action next week from the Federal Reserve, I think, you are really looking at a flat to down environment, pricings continue to be very competitive. We are always going to have some quarter-on-quarter fluctuation just given our funding mix and its deposits we will have in the first quarter. But, again, absent the change next week, I am -- I think, well, it’s going to be flat to down a little bit. This is a way I am thinking about it.

[Aaron Deer:]

Okay. Great. Thanks for taking my question.

[Hadley Robbins:]

Aaron, you are welcome.

[Operator:]

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

[Gordon McGuire:]

Good morning.

[Hadley Robbins:]

Good morning, Gordon.

[Gordon McGuire:]

And congrats, Hadley and Clint. Greg, I just wanted to clarify, you said the full 9 basis points of operating NIM decline ex the recoveries last quarter. That was all from the security strategy?

[Greg Sigrist:]

Yeah. The security strategy that have a 9 basis point impact, Gordon.

[Gordon McGuire:]

Okay.

[Greg Sigrist:]

I mean, there are other impacts in the quarter. But when you factor out some of those ups and downs, it really -- you are left with those 9 basis points.

[Gordon McGuire:]

Okay. So it held pretty flat if you back up the interest recoveries?

[Greg Sigrist:]

That’s right.

[Gordon McGuire:]

In the strategy?

[Greg Sigrist:]

That’s right.

[Gordon McGuire:]

And then, just clarifying your last -- your comment on the last question, you said absent the any change or are you just saying absent a rate cut NIM is flat to down or absent a change in the projections for a rate cut?

[Greg Sigrist:]

Absent a rate cut next week and if you just look at where the curve is now, I would expect, and I think, the curve does factor in a cut. But we just hope -- just take a look at the curve as it stands today and go forward into the next quarter, I would look at down to -- flat to slightly down.

[Gordon McGuire:]

Okay. And then, just the impact from the rate cut, is it still what you are talking about last quarter, just the net basis from the protection strategy? Is it still in the same range and can you just kind of update us on?

[Greg Sigrist:]

Yeah. That’s a good question. I mean, it’s fairly consistent. If we have a 25-basis-point cut next week or in the future, let’s say…

[Gordon McGuire:]

Okay.

[Greg Sigrist:]

… we would have an estimated $3 million impact over the next -- the following 12 months and that’s net of $2.5 million of protection from the interest rate risk strategies.

[Gordon McGuire:]

Okay. And then…

[Greg Sigrist:]

They may come in a little.

[Gordon McGuire:]

Sorry.

[Greg Sigrist:]

No. Go ahead.

[Gordon McGuire:]

And I understand there is a lot of moving pieces to the expense base next year. But it’s been a little while since you have talked on this call about the efficiency ratio in the mid-50% target and the rate outlook changed since then. So I am wondering if you could provide an update there?

[Greg Sigrist:]

Yeah. Sure. As you point out, the interest rate environment does impact the efficiency ratio and we did expect that slowed up a little bit this year as we execute on the digital strategy. I think in the longer horizon, so later into next year and then probably into the following year.We do expect that that flow back down and we are really focused on driving operational efficiencies in part due to digital initiatives that -- make that happen. But I think the range we are in is probably the range we are going to be in for the next couple of quarters.If you just also kind of segue and think about the ratio of non-interest expense to average assets, in the quarter that was, I think, 2.59% and that’s really in that range we have been talking about for a while too, which is having that ratio in the 2.50%. So that is the other metric we are keeping a close eye on as well.

[Gordon McGuire:]

Got it. And then just housekeeping, what was the weighted average price of the repurchases this quarter?

[Greg Sigrist:]

You asked one question I don’t have in front of me. I think it was slightly over $35 a share.

[Gordon McGuire:]

Okay. Thank you.

[Greg Sigrist:]

But the math -- once you get the 10-Q the numbers will drop down.

[Gordon McGuire:]

Thanks.

[Greg Sigrist:]

You are welcome.

[Operator:]

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

[Matthew Clark:]

Hey. Good morning.

[Hadley Robbins:]

Good morning.

[Matthew Clark:]

And congrats to Hadley and Clint as well.

[Hadley Robbins:]

Thank you, Matt.

[Matthew Clark:]

Clint as well echo those comments. On the expense outlook, mid-80s layer on 2% inflation. The call it a midpoint of the $8 million to $10 million of digital, it implies an $89 million run rate on average next year. Does that consider maybe modest but the recent branch closings -- closures and the efficiencies that you might gain from some of these dual systems coming off next year?

[Hadley Robbins:]

Yeah. I think it does reflect both of those. What it doesn’t reflect yet is we are still midstream on our budget cycle for next year, which is where we will really start to make a lot of those decisions that foundationally can help us calibrate the number better, Matt. But I would say, at this point, it doesn’t look both of those factors.

[Matthew Clark:]

Okay. And then just on the loan growth outlook, I think, you have conservatively guided to low-single digits in the past. It looks like you are tracking to do around 5% for this year. I guess, how do you feel about the growth outlook as we look into next year and you consider some of the new producers you brought onboard, whether or not that might change your outlook?

[Chris Merrywell:]

Hi, Matt. This is Chris. Let’s say that, despite a very competitive environment, we are seeing sufficient opportunities to match our credit discipline. The pipeline remains full. But we are continuing to monitor prepayment activity, which is difficult to forecast and we stay frequently in contact with our clients to try to stay ahead of that and so, yeah, we are in that range.

[Matthew Clark:]

Okay. And did you happen to have the loan payoffs in the quarter, I think, you spoke to prepays, but not the overall payoffs.

[Clint Stein:]

Yeah. Matt, this is Clint. I actually had that number in the script and I took it out, because I just considered payoffs as you know kind of a good thing. It’s part of what we expect when we make loans and it’s the prepayments that create the variance. Let me come back to…

[Matthew Clark:]

Okay. No problem.

[Clint Stein:]

… what I have guided in the report in here. I can follow-up offline also, because it’s just the report that we pull the prepayments from the same report. So we can get you the number.

[Matthew Clark:]

Okay. And then just last one on the interest recoveries, last quarter $4.9 million, some reason we have been able to find this quarter, what they were?

[Andy McDonald:]

Matt, this is Andy. Interest recoveries this quarter were not anything out of the norm and so we didn’t highlight. The recoveries last quarter were far and above what we normally enjoy.

[Matthew Clark:]

Okay. Thanks.

[Hadley Robbins:]

Thanks, Matt.

[Operator:]

Your next question comes from the line of Jon Arfstrom. Please go ahead.

[Jon Arfstrom:]

Hi. Thanks. Good morning, everyone.

[Hadley Robbins:]

Good morning.

[Jon Arfstrom:]

Good morning. A few follow-ups, maybe Greg for you first, in terms of call an asset liability management. You talked about the collars. You talked a little bit about the securities and public fund strategy. What more do you think you need to do, are you just satisfied where things were at today in terms of when you look at the forward curve and the rate environment, do you feel like you are set or might we see some more changes in the next few quarters?

[Greg Sigrist:]

It’s -- Jon, honestly, it’s not something we ever stop looking at. I mean, we have a very active dialogue around our asset/liability management and pricing on both sides of the balance sheet, and obviously, mix comes into play as well. So we are not resting on where we are at this point. We are absolute still intending to actively manage and protect our NIM, as well as to actively manage our net interest income.

[Jon Arfstrom:]

Okay. I think, is the expectation with some of the loan growth that you guys have talked about, expectation is even with maybe some incremental margin pressure you still feel net interest income growth is in the cards for 2020?

[Greg Sigrist:]

It’s hard to figure things at this point. I mean, as I have mentioned, we are still looking at the budgeting process. So I hate to give you any leading indicators on that, Jon.

[Jon Arfstrom:]

Yeah.

[Greg Sigrist:]

But, as Clint commented on, we feel comfortable with the pipeline and it’s still something that we are going to continue to work through as we get into next year.

[Jon Arfstrom:]

Okay. Chris, for you follow-up on loan growth, this -- this is like a high class problem but you had your second best quarter in terms of new originations. It’s below what you have last year but still a healthy number. Are you seeing any changes in the pipelines or any part of your commercial or commercial real estate where optimism or pipelines might be fading a bit or do you feel like this is all pretty consistent?

[Chris Merrywell:]

I’d say it remains pretty consistent. The pipeline is full, and again, as Clint said, we are seeking plenty of opportunities that need our disciplined credit philosophy. So, at this time, I would say it remains consistent.

[Jon Arfstrom:]

Okay. And then, last follow-up, the -- give us a little more details on the sale leaseback if you can and then what kind of potential branch consolidations there might be on the horizon coming in 2020? Thanks.

[Clint Stein:]

Hi, Jon. This is Clint. The sale leaseback was a facility in the Bellevue market that, obviously, with all the growth that’s happening there and in the period of time that we have owned the location. It’s a fairly dated branch facility and on a very valuable piece of dirt.And so as we looked at what we wanted to do not just with branch consolidations, but just the branch footprint generally, because in my prepared remarks, I mentioned, we will reinvest in a more contemporary location in the coming years.We have got up to three years or so that we can evaluate where we are going to be in that same part of town. We have talked in the past about our NeighborHub concept and I expected that you will see a facility like that replace this specific location.But we also have some other places within our footprint where we feel like that, additional branch locations would be beneficial to serving our clients and helping our bankers generate new relationships.So that’s the reinvestment component of it. The rationalization part in the deck that we put out on our website this morning, we have what we have done in that regards over the last 10 years or so that’s ongoing.And I don’t -- we have never been fans of putting in a target or a number out there, because we have really look at how branch traffic is changing, how the different channels that customers are using and that really drives what we see as potential additional consolidations or foreclosures. So it’s more than just simply reducing the number of branches.So you won’t see a ton of new branches. I don’t want you to think that we will get a branch expansion strategy by any means. But it’s a very, very dynamic process as we go through. Chris and I have worked in our current capacity very closely on it for several years and I am pretty excited to see what Chris does with it as we move forward.

[Jon Arfstrom:]

Okay. Great. And echo the comments, Hadley congratulations and Clint and Chris long runway ahead. So best of luck.

[Hadley Robbins:]

Yeah. Thank you.

[Clint Stein:]

Thank you.

[Chris Merrywell:]

Thanks.

[Operator:]

[Operator Instructions] And the next question is from Jackie Bohlen. Your line is open.

[Jackie Bohlen:]

Hi, everyone. Good morning.

[Hadley Robbins:]

Hi, Jackie.

[Clint Stein:]

Good morning, Jackie. Welcome back.

[Jackie Bohlen:]

Thank you. Just wanted to touch base on -- make sure I understood the comments regarding on the security strategy and the positive impact that has had. So, Greg, you were saying, if we were to have a rate cut next week then that would be approximately a $3 million decline in income over 12 months and that net of a $2.5 million benefit from the strategy you have undertaken. Do I properly understand that?

[Greg Sigrist:]

Yeah.

[Jackie Bohlen:]

Okay. So, is it fair to assume then, I think, you kind of alluded to this that if we are to have environment where we have continued cut you would actively look at the potential benefit for continuing those strategies, is that fair?

[Greg Sigrist:]

We would dynamically continue to reassess the entire really interest rate risk management strategy. That’s correct.

[Jackie Bohlen:]

Okay. Okay. Thank you. And then, Andy, question for you, just given some concerns that you are seeing from your customer base over the possible impact of tariffs and what that might do the businesses. Has this changed anything within how you think about your reserve methodology, understanding, of course, that we are about to enter CECL?

[Andy McDonald:]

Yes. And CECL will save us all I guess. So that will be a wonderful thing. Well, certainly, from a qualitative standpoint, it does impact our economic outlook as we look forward. So when we are calculating our reserve, we are very cognizant of what’s occurring especially with trade wars, Brexit and other economic indicators to look at manufacturing over the last several quarters it’s been on a decelerating basis.So those kinds of issues are always part of our methodology when we are looking at our allowance. And then, of course, as we would see those things, if it were to materialize on the quantitative side of the model, we would ease off on those qualitative assumptions.

[Jackie Bohlen:]

Okay. And then, I would assume that the introduction of CECL methodology and given a lot of the political noise that we have that could increase volatility…

[Andy McDonald:]

Yeah. I mean, if you could think of...

[Jackie Bohlen:]

…up there?

[Andy McDonald:]

I think that’s a very key observation on your part. If you just think about the economic environment in the fourth quarter of ‘18 through the first quarter of ‘19 and to where we are now today, you can see a quite a bit of volatility in economic data and forecasts.

[Jackie Bohlen:]

Fine. And that, the guidance you provided and thank you very much for that, for a CECL range of minus 10% to up 5%, is that based on where we stand today?

[Greg Sigrist:]

That range really does reflect the entire range, Andy, just talked about. So we just wrapped up a five quarter look back. I would say the high end of the range absolutely reflects where we are today.

[Jackie Bohlen:]

Okay. Okay. Thank you. And I would be remiss if I didn’t echo everyone’s comments and congratulations on this management shifts, and Hadley, I hope you have a lot of fun. Thanks, Clint.

[Hadley Robbins:]

Well, I do. Thank you, Jackie.

[Operator:]

At this time, we have no further questions on the phone.

[Clint Stein:]

Before we conclude the call, Matt, I will circle back on your question regarding payoffs during the quarter that were $62 million, so prepayments of $146 million, payoffs of $62 million, it got us to our $208 million total.

[Hadley Robbins:]

Okay. Thank you. That concludes our call for the day. Appreciate it.

[Operator:]

Thanks to all of our participants for joining us today. We hope you found this webcast presentation informative. This concludes our webcast and you may now disconnect. Have a good day.