Columbia Banking System, Inc. (COLB) CEO Clint Stein on Q1 2021 Results - Earnings Call Transcript

Columbia Banking System, Inc. (NASDAQ:COLB) Q1 2021 Earnings Conference Call April 29, 2021 1:00 PM ET

Company Participants

Clint Stein - President & Chief Executive Officer

Aaron Deer - Executive Vice President & Chief Financial Officer

Chris Merrywell - Executive Vice President & Chief Operating Officer

Andy McDonald - Executive Vice President & Chief Credit Officer

Conference Call Participants

Jeff Rulis - DA Davidson

Matthew Clark - Piper Sandler

David Feaster - Raymond James

Jon Arfstrom - RBC Capital Markets

Jackie Bohlen - KBW

Andrew Terrell - Stephens

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's First Quarter 2021 Earnings Update. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, 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, Clint Stein, President and Chief Executive Officer of Columbia Banking System.

Clint Stein

Thank you, Michelle. Welcome and good morning everyone and thank you for joining us on today's call as we review our first quarter results which we released before the market opened this morning. The earnings release and accompanying investor presentations are available at columbiabank.com

During our past few earnings calls, I've commented on our bankers remaining externally focused despite the pandemic. They continue to show up in-person and operate within the confines of a post-COVID world. Their determination allowed us to attract new clients and deepen existing relationships.

The momentum that was building at the end of last year accelerated in the first quarter which is typically our seasonal weakest. The core team dedicated to round two of the Paycheck Protection Program was extremely efficient which limited the time our bankers who are not able to dedicate their full attention to supporting our clients.

As a result, excluding PPP we achieved the first quarter record for new loan originations. We had another quarter of impressive deposit inflows and our financial services group revenues for a new quarterly high surpassing the old record set just last quarter.

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

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

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

However, I need to remind you that we may make forward-looking statements during the call. For further information on forward-looking comments, please refer to either our earnings release, our website or our SEC filings.

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

Aaron Deer

Thanks, Clint. And good morning, everyone. During the quarter, Columbia generated net income of $51.9 million or $0.73 per share, pre-tax, pre-provision income up $63.6 million, was down $6.8 million in the fourth quarter of 2020, primarily due to lower net interest income stemming from a combination of lower asset yields, less income from interest recoveries and security prepayments. Compared to the first quarter of 2020, pre-tax pre-provision income rose $4.2 million due to reduced funding costs, stronger mortgage banking activity and lower expenses.

Total deposits ended the quarter at $14.8 billion, which was an increase of $898 million from year-end. The inflows were largely a non-interest-bearing accounts and were spread throughout our footprint. The increase is attributed to federal stimulus, including round two of PPP, as well as new relationships and tempered spending and investment by our clients. Our cost of deposits dropped one basis point linked quarter to four basis points matching our all-time low.

Total loans ended the quarter at $9.7 billion, which was an increase of $249 million from year-end. First quarter loan production was $895 million including round two PPP production of $511 million.

Loan balances excluding PPP loans increased slightly to $8.8 billion. New loan production excluding PPP was brought on at an average tax adjusted coupon rate of 3.70%, which compares to the overall portfolio, also excluding PPP of 3.98%.

The net interest margin of 3.31% was down 21 basis points on a linked quarter basis. There were a number of factors behind the drop, but the most impactful was lower coupon rates on loans, which contributed 11 basis points of the decline. Much of the remaining drop stemmed from less interest income on an early repayment of certain CMBS and a large interest recovery on non-accrual loan in the prior quarter, which together contributed about 10 basis points of pressure.

Non-interest income was down slightly on a linked quarter basis to $23.2 million. So this was up $2 million from the first quarter of 2020. The modest linked quarter decline was mostly due to seasonally lower mortgage banking income, but we were actually pleased with how well mortgage volumes held up. Non-interest expense of $83.6 million was down just slightly when compared both on a linked quarter and prior year basis.

Notably, our compensation expense in the first quarter benefited from the favorable impact of capitalized origination costs, the round two PPP loans. This benefited the quarter by $5.5 million that was partly offset by $923,000 of data processing costs for round two originations. In addition, we recorded a $1.5 million provision for unfunded commitments. We look for our quarterly expense run rates return to a mid to upper 80s run rate for the remainder of the year.

Provision for income taxes decreased $4.2 million on a linked quarter basis to $16.8 billion, representing a 19.5% effective rate. We expect our 2021 tax rate to be in the range of 19% to 21%.

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

Chris Merrywell

Thank you, Aaron. And good morning, everyone. We worked hard partnering with our clients to help them and their businesses remain viable and healthy over the past year. This has resulted in deeper relationships and upward momentum, which is evident in the tremendous deposit flows and strong loan production in what is typically our seasonal low quarter.

While round to PPP loan production has been our major focus, we have also emphasized business as usual and this approach has allowed us to win new business during a tough year and to create new opportunities as communities begin to exit the economic crisis.

As Clint noted, excluding round two PPP loans, we achieved a new first quarter loan production record of $384 million. This was the sixth highest production quarter ever and follows the quarterly record of $468 million set during the fourth quarter of last year.

Loan production was offset by a decline in utilization of 2% during the quarter and 7% in the past year, which was a headwind of $92 million and $326 million respectively. The decrease is partly due to typical seasonal agricultural paydowns, a shift in funding from existing lines to PPP loans, as well as delayed investment from uncertainty within the economy.

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

As of March 31, our round two PPP loan production supported over 4,100 clients and we received more applications in this round than we did in round one, where we funded all qualified loans applications.

We are proud to support our communities by providing critical funding in support of both existing and new clients. Excluding PPP, quarterly production mix was 63% fixed, 33% floating and 4% variable. Overall, the portfolio mix is now 9% PPP loans, 48% non-PPP fixed, 31% floating and 12% variable.

The composition of the loans in the first quarter benefited from the favorable impact of books - our compensation - portfolio remain relatively unchanged with a small increase in C&I due to additional round two PPP loans.

Gross of unearned income, PPP loans were $915 million at the end of the first quarter. Since we opened the forgiveness portal in mid-August, we have received over $550 million of pay-offs and pay-downs, all related to round one of the programs.

Deposits grew by $898 million in the quarter and at an unprecedented 37% or $4 billion over the past 12 months to $14.8 billion as of March 31. Our deposit mix remained at 60% business and 40% consumer. Over half of the increase during the quarter was in demand deposits and as of March 31, the deposit base was evenly split between non-interest bearing and interest bearing. We continue to drive exception rates down and as was mentioned our cost of deposits declined to an industry-leading four basis points.

Fee activity remained robust in the quarter. The financial services and trust revenue at a new high, up 10% over first quarter 2020 and although residential mortgage activity slowed on a linked quarter basis, it drove loan revenue up by 61% or $2.8 million when compared to the prior year quarter. This offsets declines in deposit account fees from the increased liquidity on customer's balance sheets.

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

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

Andy McDonald

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

As noted before, we used IHS Markit for our economic forecast. The improved forecast is counterbalanced by continued stress in the travel and leisure industries, which are showing signs of stabilizing.

As I noted previously, we continue to apply an overlay this quarter for what we consider high risk commercial real estate and downstream potential impacts of permanent job losses at a significant Northwest employer. These amounted to a combined $11.7 million in Q1, an increase from $11.1 million in Q4.

Our adjustment was driven by the continuing impact of the pandemic affecting hospitality, shifting dynamics in office and retail and business closures and capacity restrictions in the restaurant industry. We ended the quarter with an allowance relative to period-end loans of 1.53%. Adjusting for the PPP loans, the allowance to period-end loans increases to 1.69%.

NPAs for the quarter were relatively unchanged at 20 basis points. However, I always like to adjust for PPP loan as I believe it provides a more consistent comparison as we move forward. With this adjustment NPAs have not increased much only one basis point to 21 basis points.

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

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

Okay, deferral. At the close of the quarter we had $71 million in active deferrals or less than 1% of our portfolio, excluding PPP loans. This is down from the $147 million in deferrals at the end of last year. Deferrals for the most part, continue to run off as expected.

We continue to classify our retail, hospitality restaurant and aviation portfolios as portfolio subject to an elevated level of risk due to the pandemic. In aggregate these portfolios account for about $1.3 billion or 13.1% of our loan portfolio.

As alluded to, for the past few quarters, we have removed our dental and healthcare portfolios from this classification. Both of these portfolios exhibited stable metrics throughout 2020.

Problem loans remained very modest in this segment. There were no past dues in either portfolio and deferrals were less than $1 million or less than one basis points on the combined portfolio of $1.1 billion as of quarter end. Okay, so for those that we still classify.

Retail is the largest segment at $574 million in loans outstanding at the end of the quarter. While we remain concerned over the pandemic impact on this portfolio, problem loans are actually down year-over-year. We have no past dues in this segment. Non-accruals were only three basis points and no retail loans were on deferral as of March 31.

PPP loans have certainly made a difference for our borrowers in this portfolio. While these statistics are all positive, we continue to be cautious, however, given the colloquial evidence we see in our footprint.

Hospitality at $336 million has shown a mixed bag of results. In total problem loans in this segment declined during the quarter and now represent about 56% of the portfolio, down from 66%. However, we did see substandard assets increased to 26% of the portfolio from 23% a year end. There is clearly a bifurcation in the portfolio between those, which are leisure oriented and those which are business oriented.

Leisure properties have weathered the pandemic much better than our original expectation, while business-oriented properties continue to struggle. The leisure travel accounts for about 69% of our portfolio, while business accounts for 31%.

Restaurants, which account for about $227 million saw a modest amount of negative migration during the quarter. Problem loans increased from 21% to 23% and criticized classified assets increased from $29 million to $33 million. We have about $7 million in deferrals in this portfolio at quarter end.

Similar to the retail businesses, PPP loans have had a meaningful impact for restaurant operators. As of March 31, 57% of our restaurant operators were at 50% occupancy. However with rollbacks put in place by governors in both Oregon and Washington, that has dropped to 39% as of today, thus demonstrating the cyclical nature of this pandemic and the economic recovery as we move forward for this industry.

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

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

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

Clint Stein

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

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

This concludes our prepared comments. As a reminder, Andy, Chris and Aaron are with me to answer your question.

And now, Michelle will open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeff Rulis with DA Davidson. Your line is open.

Jeff Rulis

Good morning.

Clint Stein

Good morning.

Jeff Rulis

Question on the margin. Might date myself here on the - Clint, I recall back in the day, sort of you pegged a 4.75, now the bank is probably half the size and different interest rate environment. But I guess longer term, we've got quite a bit of liquidity, but is that a tangible mark overtime decline back to as just - just trying to kind of longer term, peg a margin. Thanks

Clint Stein

Yeah. I mean, there is - there's a lot of different ways that we did respond to that. And you're right, Jeff. You you've been with us for a long period of time. And throughout the history of our company and the different rate environments and business cycles that has been the range that we've kind of gravitated toward.

But gosh, you know, the liquidity that's comes onto our balance sheet in the past year, that's really, I think a lot of what's driving the compression. What, I guess - if I'm in your shoes, I have to think about what do I assume in terms of that liquidity being absorbed with long demand, now that the yield curve steepening, the Fed meeting this week and this inflation continue to - pressures continue to mount.

Yeah, there is a lot of variables there and that's why we've really been focused on growing net interest income, because we think that that's something that our direct efforts and the production that Chris has talked about in his prepared remarks and some of the things and Aaron and his team have done in terms of deploying excess liquidity.

But I think if the business environment normalizes and the rate environment starts to look something like what we've seen pre-pandemic and say over the past prior seven or eight years, our bankers are doing a lot of great things and so I think that we'll work through that liquidity and the loan to deposit ratio will come up and I think you'll start to see the margin behave in a manner that's consistent with maybe what you've seen in prior cycles. I don't know if Aaron has anything?

Aaron Deer

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

Jeff Rulis

Okay, appreciate it guys. I would imagine the strategy is a little more NII focused than an actual margin figure, but I appreciate it. Maybe if I - another big picture, Clint. I just wanted to check in on M&A. You've been on the sidelines for a while, sort of internally focused or investing in the business and wanted to see if - as we've evolved here, if you've inched toward looking at any opportunities acquisition-wise or is it still more lending teams, any update on that front would be helpful. Thanks.

Clint Stein

You know, I think, we've always - as we've said M&A is in our DNA. We - in the investor deck that was updated and put out on the website this morning, we have standing chart which shows our M&A history and many of the individuals that have been part of those past transactions in terms of evaluating and integration, are still part of our team today.

So we still have the expertise. A lot of the work that we did over the past year and I kind of touched it on briefly in terms of the proactive approach that we really felt like we were able to take throughout, especially the early months of the pandemic, because of our pandemic response plan that we have in place and the fact that we tested that plan and we activated it in early January of 2020.

It really puts us in a position to spend the back half of last year, focused on continuing to make progress on operational efficiencies, continuing to look at opportunities to grow our business and some of those are organic, but also, we feel like that there is going to be consolidation.

And I won't use the word significant consolidation within our industry, but I just look at the rate environment. The pressures that all banks face and I think it's going before some to re-evaluate and seek out a bank to partner with.

And so our goal is to make sure that when they reached that point that we're on the shortlist of who they call. I can't really get into much more detail than that. But I do think that M&A chatter is picking up, and we're starting to see some things on a national level, new announcements that have come out in the quarter. And I would expect that you're going to see that trend continue and you'll probably see some of that activity within our marketplace.

Jeff Rulis

Great, thanks. Thanks for the thoughts.

Clint Stein

You bet.

Operator

Our next question comes from Matthew Clark with Piper Sandler. Your line is open.

Matthew Clark

Hey. Good morning, everyone.

Clint Stein

Morning.

Matthew Clark

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

Clint Stein

Sure. Yeah, with the list and the curve that we saw towards the longer end of that, we did see some benefit in our new purchases. So that number came up to about 1.46% for the first quarter and we actually had a few purchases that were over 2%, which is the first time I saw that in a while.

So things are moving in the right direction there. But - and obviously we've got more liquidity to deploy. And as PPP loans are forgiven that's going to give us more liquidity to work with. So, I would expect there is more to be done on that front. As you noted, it should be coming on at a little better yield. It's not the mix necessarily that we want to, if you have. But that's - but it should be positive to net interest income.

Matthew Clark

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

Chris Merrywell

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

Matthew Clark

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

Aaron Deer

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

Matthew Clark

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

Clint Stein

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

And so I think that we're seeing our approach over the second half, so certainly the second half of 2020 is certainly paying dividends. We're seeing more opportunities. Our approach with the second round of PPP is taking dividends on new relationships and so we're getting plenty of that, and then it all comes down to structure in pricing and things of that nature.

But we're very pleased with where we're at and we'll see how the - if we get any rollbacks here in the pandemic and how that might affect things. But it appears that people are getting back and engaged, taking advantage of a low interest rate environment, but also actively investing in their businesses, which is all good thing for us.

Matthew Clark

Okay. And then just on the PPP related stuff. The FAS 91 benefit this quarter, I think in the release you mentioned, most of the decline in comp was related to that. But can you quantify the dollar number there. And then, can you also just confirm how much you have in the way of round one PPP net fees left and round two net PPP fees and the amortization schedule too?

Clint Stein

Sure. The FAS 91 is related to PPP was about $5.5 million. I'd also point out that we had some technology fees related to PPP. There was about $900,000 and the other kind of material item in the quarter was recorded at $1.5 million provision for unfunded commitments.

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

Matthew Clark

And how much of that came from round two, just so we can amortize that over, I assume five years, unless you're assuming something different.

Clint Stein

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

Matthew Clark

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

Clint Stein

That's correct.

Matthew Clark

Okay. Thank you.

Operator

Our next question comes from David Feaster with Raymond James. Your line is open.

David Feaster

Good morning, everybody.

Clint Stein

Good morning, Dave.

David Feaster

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

Clint Stein

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

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

So, I do think there is a lot of optimism out there. We do feel like the PPP has helped thousands of businesses within our market area. But also there is a lot of liquidity that's still there.

And the other thing that - I don't know that we really have spent any time talking about it, the disruption in supply chain. So, things like the chip shortage and how that ripples through and not necessarily directly with our clients. But in terms of things they invest in. If they are looking for a new piece of machinery or something and with that production is idled or delayed because they simply can get the chips to manage the electronic components.

So I think those are some of the things that will start to break loose as we go forward and create additional opportunities for our industry and for us and for the clients. So, I'll step back and let Chris add his context.

Chris Merrywell

David, I don't have the exact numbers on from the mix on that, but I can tell you that it's pretty well diversified. It's coming from all over the footprint. It's coming from all of the concepts or the efforts that you talked about, probably most notably picking up business because of the approach of being open and we're taking advantage of situations where other institutions have closed locations and clients are migrating because of that approach.

And as far as the NeighborHub, both NeighborHubs that we currently have, they certainly support our commercial banking opportunities and they're performing at or above expectations, but they're really more of a - they're a support to what's happening. They do drive some small business production certainly and - but the bigger benefit is how they support the overall network and support our bankers in total.

David Feaster

Okay. That's good color. And then just kind of following up on your comments, Clint on the supply chain. I'm just curious what you guys are seeing on the C&I side. Sounds utilizations have continued to come down. But do you think we've hit a trough here?

I guess just as clients start needing to build inventory and just an improved economic outlook, do you think that we're kind of a trough levels here or I guess as you talk to clients, do you think though they prefer to use their excess cash before starting to draw lines? Just curious what your thoughts are there.

Clint Stein

Well, I'll start with - first quarter is historically our seasonal trough, and where we end up and where that picks up, sometimes this depends on, do we have an early spring or late spring, and in particular with some of our agricultural clients. And we've had a late spring. Everything here seems to be about five weeks behind where we typically would be in terms of weather conditions now. While spring is strong, we did have a stretch of 80 degree weather, followed by stretch of 48 and rain, but today its sunny.

So definitely starting to see that seasonal - seasonally driven activity pick up. There's other components in terms of what the C&I book that also lead to demand, your comment around clients using their own liquidity, but in different business verticals that we're in, sometimes as their markets heat up or cool down, the line utilization also changes.

So I'm optimistic about your comment about this is the bottom of the trough. But it's not a typical year. We're still in the last, what I hope are the last grips of the pandemic, you know, as vaccination rates improve and things. But you know, as Andy mentioned, various counties within our footprint have kind of backslid or on the cusp of backsliding into various components of restrictions, not like what we saw at this time a year ago.

But certainly it's just another data point that cause us to pause and say, well, the second quarter is not going to be necessarily the same as what our seasonal activity in the past might have been, outside of some of those things that are very much driven by the weather in the time of year, that it is. And with that, I'll pause and see if Chris has anything they'd like to add.

Chris Merrywell

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

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

David Feaster

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

Clint Stein

David, I can talk about the production side and I'll let Aaron intervene to the second part of that question. If we've given a choice, I would much rather and we would much rather compete on rate than on structure. And certainly that is a long-term aspect of who we are and what we would do.

I think that several things are at play there. Our value proposition around relationships, doing more than a simple transaction and our process and ability that we stayed open, can certainly help in some situations drive a little higher yield, a little higher coupon, but it all depends on the relationship. And as long as we continue to show value and bring other things to table, we can't command a bit higher coupon on that.

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

Aaron Deer

And in terms of loan purchase, I mean, obviously we - our preferences to use our lending teams to drive around organic production, which have fantastic track record and I think we are currently really optimistic about where things are moving going forward.

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

David Feaster

Okay. All right. Thanks for the color.

Clint Stein

Thanks, David.

Operator

Our next question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.

Jon Arfstrom

Thanks. Good morning, everyone.

Clint Stein

Hi, Jon.

Jon Arfstrom

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

Chris Merrywell

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

And so that is really kept our bankers from working on that and being all hands on deck too. We've got a very streamline process, still requires people, but nowhere near as many as what we experienced last year.

And so our teams are out and about capitalizing on the opportunities in the markets and it would tell you that's broad base. It's all three states. It's all of our regions and there is a real sense of - now it's a great time for us to be out and talking about our approach and again being open. It's paid fantastic dividends and the teams are excited. So they're out and about trying to win business so that leads to your part of - yes, there is some share that's been acquired.

Jon Arfstrom

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

Andy McDonald

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

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

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

Jon Arfstrom

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

Andy McDonald

I think that with CECL, it's difficult to say where that migrates longer term. I think in terms of our behavior for this year, it's pretty consistent with what I talked about before where it's going to kind of bounce around a little bit and we'll have some modest release as we continue to move forward. I certainly think that you're going to see it migrate down. It is just really difficult with a new model to say 1% is the long-term given the volatility of economic forecast.

Now, as we continue to get more stable economic forecast and, in this case, they are stable to slightly improving, we are seeing that the model behaves in a more stable manner. And to that extent, yes, you would have the ability to migrate down to one of the quarters and possibly one if you continue to have that stable economic forecast.

Jon Arfstrom

Okay. All right. Thanks for the help.

Operator

Our next question comes from Jackie Bohlen with KBW. Your line is open.

Jackie Bohlen

Hi, everyone. Good morning.

Clint Stein

Hey, Jackie.

Jackie Bohlen

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

Aaron Deer

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

But I think that as we progress through kind of 2021, some of the conversations that we'll have with our Board of Directors, will be around the direction - those ratios continue to - we expect those continue to build and what uses or what tools we have available to us to start to ship those closer to that - those long-term targets.

And there are some things on the horizon that - obviously has maintained our regular dividend, as you noted, special dividends have been a tool that we've used many times over the years in that regard. And so I wouldn't rule that out. Buybacks, we have an authorization in place, but we'll be opportunistic and use discretion in terms of - to the extent that we engage in buybacks.

You know, there is also as we talked earlier and I think it is in response to Jeff's question and my comments around, we do expect that M&A activity in our region will pick up at some point in the coming year. And so I guess it's a long-winded way of saying that our traditional uses of capital are still on the table, but knowing what we know today, we're comfortable with being above those long-term targets.

Jackie Bohlen

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

Clint Stein

No Jackie, not going to give you the playbook. But…

Jackie Bohlen

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

Clint Stein

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

And we tend to think about it more along those lines, as opposed to absolute size. There's - I mean, if you've seen our growth in terms of deposits over the past quarter and the past year and so it would be easy to say, there is this minimum size where we could just even consider M&A because our organic growth just outpaces or we could do it over a certain time horizon.

But I think that's a little short-sighted and needlessly confines the institution to thinking about that strategic rationale and there is things whether it's a tech platform, whether it's a certain niche expertise that we could gather from it.

And - but all things being equal, it does have - it does take a larger target to move the needle than what it did for us, say 10 years ago or pre-Great Recession. So I don't know if that's helpful for you, but that's kind of how we think about it.

Jackie Bohlen

Right. No, it is. It's very helpful. Great. Thank you.

Clint Stein

Thanks, Jackie.

Operator

Our next question comes from Andrew Terrell with Stephens. Your line is open.

Andrew Terrell

Hey, good morning.

Clint Stein

Good morning.

Andrew Terrell

Hey. So I wanted to ask, just on the deposit growth front. So we obviously saw a tremendous amount of deposit growth this past quarter. It's impressive to see non-interest-bearing mix still being so high.

I was hoping you could speak to just any kind of early trends you're seeing in the month of April. Just in terms of deposit flows. It feels like things are slowing down, less stimulus being put into the economy and can you maybe just update us on how you're thinking about deposit growth throughout the year?

Clint Stein

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

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

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

Chris Merrywell

Hey, Andrew, what I thought to add to it is, if you take in consideration the amount of the growth and then you take in that, again our investment teams had record production in the first quarter. There is a lot of money moving throughout the system. And even with that production that went into our investment teams and we still had the deposit growth.

And so I think it's driven from a few sources and then obviously PPP is part of it. There is also a lot of businesses within our regions that are doing phenomenally well and they continue to deposit their money as well.

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

Now typically what seems to take place is our client may deploy the liquidity, but also somebody else's clients playing with liquidity and it ends up in one of our business accounts. And so it's a little bit of movement around in how the money is trading hands and I think until you start finding ways that liquidity to leave the system, this may be a little bit of an abnormal year for us, especially in the first half. But again, we're seeing more money be deployed into investment assets and things of that nature. But it hasn't had a tremendous impact yet.

Andrew Terrell

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

Aaron Deer

So in the first quarter we - on our PPP program, we had earned interest of just over $2 million. We had fees of a little shy of $3 million and we had accelerated fees a little over $4 million. So, all in, you're looking at about $9 million and the PPP loan yield in the quarter was 4.46.

Andrew Terrell

Okay, that's helpful. Thanks for taking my questions.

Clint Stein

Thanks, Andrew.

Operator

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

Clint Stein

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

Operator

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