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Columbia Banking System Inc (COLB)
Q4Â 2018 Earnings Conference Call
Jan. 24, 2019, 4:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System's Fourth Quarter and Full Year 2018 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answers 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 S. Robbins -- President and Chief Executive Officer
Thank you, Omar. Good afternoon, everyone, and thank you for joining us on today's call to review our fourth quarter and 2018 full year results, which we released before the market opened this morning. The earnings release and a supplemental slide presentation are available on our website at columbiabank.com.
2018 was a landmark year for Columbia Bank. It was a year in which we celebrated our 25th anniversary, and completed the integration of Pacific Continental, which has been our most significant acquisition to-date. Through the hard work of everyone across the organization, 2018 was a year of record net income and record levels of loan production.
Overall, our business model performed well. We did face stiff headwinds with regard to net loan growth. Record production for 2018, a $1.4 billion was offset by unusually high levels of paydowns and prepayments during the year. This activity related to loans $2 million and above, was led by business sales and the sale of commercial real estate. Loans exited or charged down for credit reasons. Competitive pricing or structure requests outside our parameters followed by payouts type non-bank competitors namely Credit Union's and the Farm Credit Administration. We also saw a more pronounced seasonal reduction in line utilization in the fourth quarter. Looking into 2019, economic fundamentals continue to support the expectation for favorable business conditions in the Northwest. Nonetheless, we have noticed that the pace of economic activity has started to moderate. Business owners remain challenged in finding workers due to tight labor market and are concerned about the future trajectory of interest rates, trade relations, and the growing risk or recession.
The recent government shutdown has created additional uncertainty. At this time the impact of the shutdown on most businesses in our footprint is anticipated to be temporary and small relative to the overall economy. I'll consider continue to believe economic conditions in 2019 will support positive loan demand and expect solid levels of production in the coming year.
However, our 2019 outlook for net loan growth is tempered by uncertainty related to the volume of future pay-off activity, which has declined modestly over the last two quarters. During 2019, we expect to generate meaningful levels of capital. Our total capital today is robust at nearly 14%. Capital generated in excess of the amount required to support organic loan growth will be available to invest in technology, increased dividends, potentially fund share buybacks, or the allocated strategic M&A should the right opportunity arise.
At this time, we're pleased to increase our regular dividend to $0.28 per share and maintain our special dividend at $0.14 per share.
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, who will review our production activity 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 2017 SEC Form 10-K.
This point, I'd like to turn the call over to Greg to talk about our financial performance.
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Thank you. Hadley, and good afternoon, everyone. 2018 was a strong year for us, as a record full year earnings of $172.9 million and EPS of $2.36 shows. We did see the benefit of both the larger interest earning balance sheet from our Pacific Continental acquisition and the rising rate environment. As you know, our deposit beta has held up quite well. Given the seasonality, we typically experience across loans, deposits and our expense base. The full year really tells the story of our ability to effectively deliver increases in shareholder value. We also reported fourth quarter earnings of $44.7 million and EPS of $0.61. Pretax acquisition related expenses of $493,000 in the fourth quarter, an $8.7 million for the year, negatively impacted EPS by $0.01 and $0.12, respectively.
The net interest margin was essentially flat on a linked quarter basis as our leverage strategy mitigated the benefit of the fed's rate increase at the end of September. Our leverage strategy is an important component of our broader balance sheet management strategy, which is intended to reduce our exposure to falling interest rates. On a year-over-year basis, tax equivalent net interest income increased by $107 million or 28% due to the full year impact of the Pacific Continental acquisition and the rising rate environment.
The cost of interest bearing deposits rose by 5 basis points on a linked quarter basis and is up 12 basis points for the year, driven by selected repricing of interest bearing deposits. We are actively managing our deposit product offering, balancing market pressures and client relationships, our deposit mix remained stable with 6% in non-interest bearing products. This structural advantage kept our cost of total deposits very low at 15 basis points.
Non-interest income declined by $617,000 in the fourth quarter given lower levels of prepayment penalties. We also saw modest increases in deposit account fees and financial services revenue. Card revenues were essentially flat on a linked quarter basis and came in as expected due to Durbin Amendment interchange rate caps implemented effective July 1st. As we mentioned earlier, acquisition-related costs in the quarter were $493,000, which compares to $1.1 million in the prior quarter.
Transition and retention agreements were responsible for most of these costs. As of December 31st, all Pacific Continental acquisition costs have been expensed and overall were $4.3 million or 14% less than our original forecast. In addition, we achieved our projected cost saves ahead of schedule.
After removing the effect of acquisition related expenses, our core non-interest expense was up $4.8 million on a linked quarter basis. Implementation and consulting costs related to our digital strategy contributed $1.4 million of the increase. We also saw an $840,000 increase in our self-funded group insurance, driven by elevated medical claims experience and the $600,000 increase driven by an additional day of payroll in the fourth quarter.
Looking ahead, we do typically see seasonal increases in the first quarter related to bonus payouts, including a discretionary 401(k) employer match and increased employer payroll taxes as caps reset. We would expect our non-interest expense, inclusive of our anticipated digital spend to be in the high 80's in the first quarter. Although, we do expect elevated spend on digital going forward, we believe that spend is manageable in relation to our ability to generate earnings and accrete capital. Many of the decisions that will frame the exact amount and timing of that spend lie ahead of us. We will continue to update you each quarter.
Our quarterly core non-interest expense ratio, which excludes the acquisition related costs was 2.67% compared to 2.55% on a linked quarter basis. And for the full year it was 2.61%, which improved from 2.67% in 2017. Our operating efficiency ratio was 58.1% as compared to 54.8% on a linked quarter basis. For the full year, the operating efficiency ratio was 56.6%, up from 56.1% in 2017. Our effective tax rate was 19.3% for the fourth quarter as compared to 19.7% in the prior quarter and our effective tax rate is in the range we would expect for a full year, which is 19% to 20%.
At this point, I would like to turn the call over to Clint to talk about our production activities.
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Thank you, Greg. Good afternoon, everyone. We experienced our normal cyclical behavior for both loans and deposits during the fourth quarter. The decline in deposits was due to our typical fourth quarter seasonality as we did not experienced any material balance reductions due to pricing. Loan balance is also declined during the quarter, but were up slightly for the full year.
Loan production in the fourth quarter was $388 million which is second only to the record set just last quarter and has propelled us to a new annual record of $1.4 billion. However, prepayments and payoffs along with the decline in line utilization offset the new production. Line utilization declined by 2.4%, which is a bit higher than normal for the fourth quarter.
Quarterly average tax adjusted coupon rate for the new production was 5.35% compares favorably to 5.23% last quarter and the portfolio rate of 4.96%. The bankers continue to do an excellent job expanding existing relationships, as well as developing new ones. We feel production is within our control and resulted in our bankers setting another production high mark for 2018.
We only have limited control over pre-payments and pay-offs which were 65% higher in 2018, when compared to 2017. During the year, we did some credit pruning in the portfolio and maintained our pricing and structure disciplined. These activities lowered loan growth substantially, but we felt they were prudent for long-term -- that we felt they were prudent long-term decision. The good news is that prepayment activity appears to be slowing on a linked quarter basis, down 8% in the third quarter and another 4% in the fourth quarter. This volume is a hopeful, sign but it is still elevated from historic levels. So at this point remains a headwind for bottom line portfolio growth. C&I represents 41% of our loan portfolio, which is substantially higher than most of our peers. This result in more seasonal and business cycle variability and portfolios with a higher concentration real estate loans.
Our loan pipeline continues to meet our expectations, but remember, our volume generally build throughout the year with the first quarter typically being the lowest production quarter. The other first quarter dynamic is the timing of when our seasonal line utilization kicks in. Historically, it is very late in the first quarter or early in the second quarter and in the ag book the timing is determined by weather conditions.
New production in the quarter continues to be predominantly centered in C&I, in commercial and multifamily real estate loans. Term loans represented $218 million of total new production, our new lines accounted for about $170 million. New C&I production was $211 million, which is similar to last quarter. However, total C&I declined during the quarter due to line utilization and pay-offs.
Industry segments with the highest net C&I loan declined in the fourth quarter include agriculture, wholesalers and finance and insurance, which are all susceptible to seasonality. A bright spot is our native American banking niche, which grew by $52 million during the quarter, due to new and expanded relationships with tribal nations.
We are seeing some impact from the government shutdown, especially in the area of SBA lending. As of January 22nd, our current backlog was 30 loans, 25 of these loans are approved and simply pending final submission to the SBA. In the interim, we are working with lenders to mitigate the client impact by providing bridge funding where appropriate. During 2018, significant compression in the premiums generated by the sale of the guaranteed portion of SBA loans occurred. In the near term, we anticipate holding most of our production on balance sheet until such time as the premiums returned to a satisfactory level. This will have a short-term impact on our non-interest income, but we believe will result in better long-term economics.
As mentioned in last quarter's call, we have begun to accelerate our digital strategy with the vision of giving client the choice of how to interact with us, whether that be in person, through digital channels or some combination of the two.
Over the past four years, we have positioned the bank to remain competitive by deploying front and back office solutions, including a new digital consumer platform, improving sales and servicing with the CRM and marketing analytics. And in early 2019, we are scheduled to roll-out a new business, digital platform. With the help of an outside consultant, we spent much of the fourth quarter validating and refining our roadmap and strategy.
Throughout our history, we have consistently invested in the future of our franchise and feel it is important for you to have the visibility into these investments as they unfold. As Greg mentioned, we will continue to update you on our progress each quarter.
Now, I'll turn the call over to Andy to review our credit performance.
Andy McDonald -- Executive Vice President and Chief Credit Officer
Thanks. Our fourth quarter provision for loan and lease losses of $1.8 million compared favorably to the $3.2 million in the prior quarter. This included provisions of $1.1 million for the originated portfolio and $1.3 million for the Pacific Continental portfolio. Offsetting these provisions were releases from the West Coast portfolio of $450,000 and $50,000 from the Intermountain portfolio and the release of $81,000 from the PCI portfolio.
The provision for the quarter was principally driven by net charge-offs of $2.2 million along with negative migration in the PCBK portfolio offset by positive migration in the originated in West Coast portfolio. As of year end 2018, our allowance to total loans was 0.99% as compared to 0.98% last quarter and it was 0.91% as of December 31, 2017. This ratio is impacted by our acquisition and the associated loans that we recorded at fair value. Embedded in those valuations is approximately $25 million of net discount for which approximately $19 million is associated with the Pacific Continental portfolio.
Net charge-offs for the quarter were $2.2 million with most of it occurring in the originated in PCBK portfolio, $1.6 million and $716,000, respectively. Charge-offs were centered in the ag portfolio for the originated and the dental portfolio for PCBK. The ag charge-offs were associated with longtime problem assets, which are now close to resolution. The dental deals were unique situations and are not considered systemic. For the quarter, non-performing assets decreased $6.9 million, primarily due to a $5.5 million decline in non-accrual loans. All in, the non-performing assets to total assets ratio decreased to 46 basis points, down from 52 basis points last quarter and 63 basis points as of the year end 2017.
In summary, we continue to enjoy above average credit metrics. For this, I have to give credit to our bankers for the hard work they put in over the past several years. It's a team effort by all involved and their diligence and dedication it's clearly reflected in the numbers. Past due loans were 35 basis points, NPA's are 46 basis points, classified loans to total loans is only 2% and our impaired asset-to-capital ratio was only 15%. All thanks to the hard work our bankers put in day-in and day-out.
Okay, Hadley?
Hadley S. Robbins -- President and Chief Executive Officer
Thanks, Andy. As I previously stated, we're pleased to be able to increase our regular dividend this quarter to $0.28 and maintain our special dividend to $0.14, which together constitute a payout ratio of 69% for the quarter and a dividend yield of 4.36% based on the closing price of our stock on January 23, 2019. This quarter's dividend will be paid on February 20, 2019 to shareholders of record as of the close of business on February 6, 2019.
This concludes our prepared comments this afternoon. As a reminder Greg, Clint and Andy and I are here to answer any of your questions. And now Omar, we'll open the call.
Questions and Answers:
Operator
(Operator Instructions) The first question comes from the line of Jeff Rulis. Your line is open.
Jeffrey Allen Rulis -- D.A. Davidson & Co. -- Analyst
Thanks, good afternoon.
Hadley S. Robbins -- President and Chief Executive Officer
Hello, Jeff.
Jeffrey Allen Rulis -- D.A. Davidson & Co. -- Analyst
You guys have alluded to in the past, a portion of loans that you've identified as -- whether it was brought over from Pacific Continental that you kind of actively pushing out of the bank or identified. Is there an update on that balance still yet to go or is that down to zeo?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
I'll jump in, Jeff. This is Clint. What I don't -- I don't have it broke out necessarily by legacy portfolio in front of me. But I do have our -- some numbers that, what I referred to in my prepared remarks as credit pruning, is about $96 million, a little over $96 million for the year that we moved Andy and his team and special assets moved out the bank. I don't know, Andy, if you have additional details on anything left to go with some of the stuff that we didn't think was a great fit from Pacific Continental, or most of that's already out?
Andy McDonald -- Executive Vice President and Chief Credit Officer
Yes. I think that -- again, it wasn't all special credits. It was -- again, as I alluded to before in my comments, it was a team effort. I think there is some residual, but for the most part, that activity has been concluded.
Jeffrey Allen Rulis -- D.A. Davidson & Co. -- Analyst
Okay. And then those loans that you haven't pruned or that have line utilization decline. I guess, where is that business going? Or where you're seeing the most competition on? Is it payoffs or they just straight -- or they leaving for other institutions?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Well, there's a variety of things, and I think that to still have these lines, which in order of magnitude. The big driver of a lot of the additional payoff activity was the sale of businesses, and that was over $125 million of payoff activity in 2018. And we've talked about that not necessarily the number, but that's been the dynamic that we've dealt with for many years, really since we came out of the downturn. There's about another $100 million of things that either we stepped back from because of structure or pricing. And for really good solid deals, we'll sharpen our pencil for pricing. But we've often stated that structure for us, especially at this point in the cycle, we're not going to deviate from that. So there's about $225 million of additional payoffs in addition to the $96 million of credit pruning. That's really the biggest factor. The other things add up and in total, they're less than just the impact from sale of businesses.
Jeffrey Allen Rulis -- D.A. Davidson & Co. -- Analyst
Maybe one last one on the expense side. I think, Greg, you alluded to higher, sort of, seasonal items in Q1. I wanted to match that up with -- you had some seasonal increases in Q4 on the comp, legal and professional fees. So sequentially, I think you're guiding to up from Q4. Is that where we sit?
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Well, to be clear, I think taken one by one, I think the comp -- I'm sorry, the legal and professional is really up, mainly driven by some of the digital spend we've had. Some of that has been around consulting fees and the like. So I wouldn't view that as seasonality as much as -- it was episodic in the fourth quarter around our digital initiatives. On the comp and benefit side, over half or probably closer to two-thirds were the items I alluded to or that I specifically mentioned in my prepared comments, which were also episodic. Medical experience went up, just given the claims of our stop-loss levels and having the additional payroll day in the fourth quarter. But as you know, when you kind of look at our business, quarter-on-quarter, there is seasonality in the first quarter related to our payout -- bonus payouts and the related employer taxes and the like to go with that. And when you get into some of the other smaller items that run through the P&L, there's a lot of smaller offsets from quarter-to-quarter, but they tend to, over the balance of the year, kind of even each other out.
Jeffrey Allen Rulis -- D.A. Davidson & Co. -- Analyst
Got it. Okay. Thank you.
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Your are welcome.
Operator
Next question comes from the line of Matthew Clark. The line is open.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Hey, good afternoon.
Hadley S. Robbins -- President and Chief Executive Officer
Hey, Matt.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Maybe just sticking on expenses. How should we think about the progression of this tech reinvestment systems conversion project as we move throughout the year and maybe even in next year? And maybe if you could also put into context how we should think about the efficiency ratio on an adjusted basis, however you want to measure or it? Or the overhead ratio, if that's easier to guide to and control?
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Sure, Matt. I'd be happy to take it. I think you saw, we had $1.4 million of spend in the fourth quarter related to digital. And the total run rate for the first quarter inclusive of what we expect in the first quarter is going to be in the high 80s. I think what you can -- your takeaway from that should be, maybe the $1.4 million starts to head up toward the $2 million range, give or take. I want to give you some comfort that, that number doesn't dramatically expand from there. I think as we think of -- thought about our historic run rate for our digital spend and as we've talked in many forums, it's a journey, it's not a destination. So we clearly have spend in the past. It's just what's different now is the depth and the additional things we're trying to bring on, and more importantly, the strategic benefits we're trying to get out of it. I think when you add that together this year, you might start to see, first our historic levels, some increase, it's probably going to be more magnitude of 30% to 50% of our historic spend, not 200% of our historic spend. So I want to give you some comfort that there's not a tremendous expansion here. But the other thing that's important is on the backside of that, we are going to start to see some cost roll-off because during 2019, for example, we have a number of platforms that we're going to be in the process of replacing. And so you're going to have both the double spend there in terms of paying for the existing platform and then also having to pay for the build. So you're going to start to see some expenses roll off in 2020 related to that. And just based upon the four that I'm thinking of right now, that's roughly 100 -- I'm sorry, $1 million a quarter that at some point in 2020 will start to roll off early in the year. So when I kind of segue from there and I think about the efficiency ratio, historically, I've talked about it in terms of being longer term in the mid-80s -- mid-50s. Thanks. I -- still longer term, especially when you start to normalize for not the double count and you start to see some of the other benefits we expect, I do expect, longer term, it comes back into the mid-50s. I think where we were this quarter is probably not far off where we're going to be over the balance of this year. I do expect it to maybe tick up a little bit with the seasonality in the first quarter and just some of the spend. But keep in mind, the spend is still within our control on the digital. We're still in the chartering process and the approval process and the like. So I'm, again, more focused on the balance of the year for 2019, and then what that looks like into 2020 versus quarter-on-quarter, whether or not we're going to have some lumpiness just based upon some of the decision-making that comes out of that process.
Hadley S. Robbins -- President and Chief Executive Officer
Yes, Matt. This is Hadley. I want you also to have the context of what we're looking at right now. And Greg alluded to it is that we're in the chartering process of a number of the projects. And in that charting process, we're breaking it down into an implementation plan. And with that, we have a budget and we'll be able to break up things much more specifically as it relates to capital expense, et cetera. And we also have a sensitivity to feathering-in these projects at the point in time that they make sense. And we are on a journey and we're going to be investing in the bank. And most investments also have returns to them. And those are downstream, of course, likely 24 months following the implementation and the stabilization. But their returns in the way of revenues and their returns in the way of expense saves restore the cost of the project, plus add incremental revenue. And those are the types of things that we'll be able to share more directly with you as we go forward.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Okay, great. And then on the leverage strategy. Can you just maybe speak to what you specifically added in the quarter and whether or not there is more to do? And what the implications are for the margin outlook?
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Yes. I mean, in reversal order, I think the impact of the leverage strategy on the fourth quarter margin was about 5 basis points. So it was noticeable. The leverage strategy as a whole, we're getting pretty close to where we thought we would be. I wouldn't expect much more based on what we have approved at this point in time. I think you can kind of look at the leverage we've added on the liability side and get a sense of how large that program is. So -- but again, it was 5 basis points in the quarter, and we're pretty close to winding that down. But more broadly, we do think the leverage strategy is just a really important part of how we manage our interest rate risk going forward, just given where we are in the -- with the interest rate environment. I would also add, even though it's 5 bps reduction in the net interest margin, it is accretive to net interest income because we are doing this at a spread to what we're borrowing at overnight. So there are the benefits to it as well.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Okay. And then your deposit deposit betas are still really well behaved. I assume that will continue to some degree. But I guess how do you think about, you think you can -- the margin expansion could resume here is that a fair way to think about it?
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Well, I mean, broadly, I do feel like, especially with the late December increase in rates. I mean, we have started to -- due to the leverage strategy, we've increased duration on the investment portfolio side. If you look at the balance of 2018, we certainly had a little bit of duration on the loan side. But we're still asset-sensitive. As you think about it from that perspective, there should be some benefit coming through. And since we're kind of near the end of the leverage strategy to really should see the offset. On the deposit side, we continue to benefit from just our structural benefit of having half of the portfolio in non-interest-bearing deposits. And we are, obviously, very attuned to the market dynamics and to our client relationships. I would still be cautious and say -- continue to think that whatever your market, your beta is, assumption is for the banks as a whole, put us at half to two-thirds of what that numbers is, and that's probably a good place to be.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Okay. And then just a quick one, how much did the SBA gains contribute to the fourth quarter fee income, just to make sure we strip it out going forward?
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Yes. I think it's about $150,000.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
In $150,000? Okay.
Hadley S. Robbins -- President and Chief Executive Officer
Yes. I think it's right around that. Historically, it's been roughly $0.5 million. Maybe one quarter, it might be $400,000, the next quarter, it might be $600,000. But what we saw in the second half of the year, the premiums really compressed almost in half, from roughly 12% to about 7.5%. And so in the fourth quarter, we've started winding down our sales activity of that until the fourth quarter was -- I think, it was about $150,000 is what we had in there.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Okay. Thank you.
Hadley S. Robbins -- President and Chief Executive Officer
Thanks, Matt.
Operator
Your next questions come from the line of Jon Arfstrom. Your line is open.
Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst
Thanks. Good afternoon, guys.
Hadley S. Robbins -- President and Chief Executive Officer
Hello, Jon.
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Hello, Jon.
Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst
Hey, a few follow-up questions here. Just Greg, I think you were maybe alluding to this, but I want to clarify it. You are seeing some momentum on the loan yields, so I noticed it was up just a couple of basis points this quarter. But you mentioned the December hike, and I'm just curious if you're seeing a little bit more momentum there? And I think you guys alluded to some higher production yields. Just curious your thoughts on that.
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Yes. I know, I'll start and Clint can weigh in, if he sees fit. But we -- on the -- definitely, the production in the fourth quarter was above the portfolio yields on the coupon side, so you'd expect to see something from that. The other thing that kind of held down the fourth quarter a little bit, quite frankly, was some of the seasonality we saw in line utilization that typically comes from higher-yielding facilities. So there's a bit of NIM attached to that as well. But from what we've seen early stages so far since the rate increase, I do -- would expect a little bit of an uplift as the predominance of our variable rate loans that we priced in the first quarter. I don't know, Clint, do you have anything incremental to add to that on the production side.
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Yes, I think you covered it pretty good, Greg.
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Okay.
Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst
Okay. Well, I'll pick on you then Clint for the next one. You alluded to some slowing prepayment activity in the third quarter and the fourth quarter still elevated, but maybe there is some hope there that, that's slowing. Any specific drivers that you would point to on that?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Well, I think, some of it is, back to our earlier discussion, I think, in response to Jeff's question about the credit pruning that was done and some of the things that were in the Pacific Continental portfolio that we moved off our balance sheet and a lot of that is wound down. The pruning is something we consistently do. I don't -- it's -- it was elevated in 2018. We'll continue to do that, especially as we move closer to the next downturn. But I think that the divot created from it, my expectation won't -- is it won't be as deep going forward. The sale of businesses that's just is something that -- maybe the economy starts to slow a little bit more, maybe that type of activity heading into a downturn will slowdown. I don't see an easing in the non-bank competition, the GSEs and life companies. The credit unions in certain markets have continued to be pretty aggressive. So I do see some of that type of activity. But that's been on the smaller side of what really drove the payoffs. So that's where -- we're optimistic that it's starting to slow, but it still is elevated. I think that's the other key. For 2018, that activity was about $418 million higher than what it was in 2017. I addressed most of that, roughly just under $400 million with things that we've already talked about. But I think that we're still not back to what I would say our normal course of business run rate is.
Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst
Okay. Okay. That -- I misunderstood a couple of those comments, so I apologize for that. But I guess, the other side -- because it just seems like some of this is self-imposed and you're undisciplined and I thought maybe it was the overall market. I guess, the other side of it then would be the loan production. You talked about your record production. You've alluded to typical seasonality in the first quarter. But do you see anything out there in terms of the economy, your staffing, how you're set up? Anything that would change your ability to keep some of this loan production continuing on an upward trajectory?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
I hesitate because I think there's a lot of different levers that -- or inputs that impact that. One of the things that we continued to do and it's been a focus of ours for several years is our capacity and how do we increase the capacity. We've been fortunate that we're viewed as an employer of choice in much of our footprint, and we've been able to attract a lot of good talent. And I think that as we have opportunity to bring folks on that will produce at a higher levels and maybe have a different niche than what our current focuses are, that gives us the potential -- the opportunity to continue to have that upward trajectory in the production area. The other side of it is that, we're -- at year-end, we're only nine months on the other side of the core conversion and integration for the Pacific Continental portfolio, and it takes time. We usually see that it's usually that second year where those pipelines start to rebuild and that production capacity hits full speed. So I think that there's opportunities there that will drive production. When I think about 2019 and knowing what our bankers have in their pipelines and what they can control, I'm very optimistic on the production side. It's the uncontrollable, which our -- the prepayment activities and those elements of that, that we can't control. That's what gives me pause.
Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst
Yes. Okay, all right. Thank you. I appreciate it.
Hadley S. Robbins -- President and Chief Executive Officer
Thanks, Jon.
Operator
Your next question comes from the line of Aaron Deer. Your line is open.
Aaron James Deer -- Sandler O'Neill & Partners LP -- Analyst
Hi, good afternoon, everyone.
Hadley S. Robbins -- President and Chief Executive Officer
Good afternoon, Aaron.
Aaron James Deer -- Sandler O'Neill & Partners LP -- Analyst
Maybe if I can just kind of follow up on that line of questioning with respect to kind of growth and capacity. I think, I saw some recent press releases that suggested that maybe competitor had picked off a few of your bankers. And I'm just wondering, I know there is always kind of churn and on the front line, but to what extent are you guys successfully recruiting new producers and kind of where it is that your capacity stand today relative to, say, a year ago?
Hadley S. Robbins -- President and Chief Executive Officer
Aaron, yes, we've had some attrition. And competition for talent right now is very aggressive, and it's heightened, particularly during disruptions that create uncertainty on an M&A scenario. An important part of the story too is resilience. And I'm very proud of our team members who have stepped up and have ensured that customers impacted by some of the situation and receive the level of support and service that they expect and deserve. We've been very successful on replacing lenders who have left within about 60 days. And have also found that we're able to reallocate account loads among existing relationship managers. And that translates into a reduction in the number of replacement officers that are required. Right now, I believe we have 4, 5 open positions. And in those positions, particularly in Portland, customers are aligned with existing PCB officers who have relationships with them. And so there's an ongoing connection. We've been pretty successful overall in being able to quickly attract the people we need in the scenario. So I feel pretty confident that we can stabilize any disruption that has occurred and might occur.
Clint E. Stein -- Executive Vice President and Chief Operating Officer
I'll just add that, along those lines, we look at where we recruited talent, who joined us from -- in 2018, and even here in early 2019. You can pretty much pick any large national bank or super regional that's operating in our footprint, and we've been able to bring folks over from there. And pretty quickly, I think Hadley alluded to under 60 days. We had the team in the Portland, just outside the Portland metro area. Matt did a great piece on that, I thought, if you have access to it. We replace that group from day one to them hitting the ground here in less than 45 days. And so I think it's not only that we're able to attract the talent, but we're also able to do it pretty rapidly. And that's a credit to really our internal recruitment team as well as just our folks that are in the market and reputation they have, and we have these individuals who want to come in and work alongside the talented individuals that we have in all of our markets.
Aaron James Deer -- Sandler O'Neill & Partners LP -- Analyst
Sure. That's great. And Hadley, I might have missed it, I jumped on the call little late, but I'm not sure if just in terms of your general outlook. Did you provide any sort of guidance in terms of growth expectations for 2019?
Hadley S. Robbins -- President and Chief Executive Officer
I didn't provide specific expectations other than I thought that 2019, the economic backdrop looks pretty good still. Although, there are some things on the horizon that create concern for our business owners. The things that I hear when I'm out talking with our clients is that they want a little more clarity about where rates are headed. Everybody thinks that Fed's backed off a bit, but we need some time to go by to validate that. Concerned about the ability to attract the employees they need to increase their revenue streams. So there's a very tight job market, as you know. There's more conversation, frankly, about how deeply we are in the business cycle. And that there's concern with the government shutdown and the volatility in the stock market and potential for recession. So those things I hear pretty consistently. However, the fundamentals still look pretty good. We've got inbound migration. Our unemployment rates are pretty low. And business activity is still good. And so I want to think optimistically. And that I would think that we would have the add backs that we need to create the levels of production that would drive net loan growth favorably in the coming year. But I have to temper that with, we have had a lot of prepayment activity, some of it self-imposed and some of it driven by the market. And it has eased a bit, but it's higher than it has been in the past. And I have that in the back of my mind as well. And so those are the things that I can share with you. Hopefully, that gives you the color you need.
Aaron James Deer -- Sandler O'Neill & Partners LP -- Analyst
No, I appreciate that. And then maybe just one last question on the deposit side. Your cost of deposits are still just impressively low. And even within the interest-bearing categories, it seems like you really haven't faced a whole lot of pricing pressure yet. Are you still able to kind of manage this on a one-off kind of basis, or are you -- you find it necessary to start kind of leveling up some of these different account types?
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Yes. I think as we've talked about over time, I mean, we've been in pretty much constant dialogue, especially with our larger clients and really just trying to be in tune with the needs on that side as well as the market dynamics. And as a result, we've been doing some of the exception pricing over time. But I think when you kind of look in market we were -- we all had a moving this up in the fourth quarter. But since the December rate hike it's been fairly muted in terms of rate movement in the market so far to this point. So again we're trying to stay tuned and I don't foresee any large increases from here but again, I think we're trying to match what the market does.
Aaron James Deer -- Sandler O'Neill & Partners LP -- Analyst
Okay, terrific. Thank you for taking my questions.
Operator
Your next question comes from the line is Jackie Bohlen. Your line is open.
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
Hi, good afternoon, everyone.
Hadley S. Robbins -- President and Chief Executive Officer
Hi, Jackie.
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
Most of my questions have been answered, but I have a few left, little ones. I'm just wondering with the increase in fundings in the Native American space, does that provide you with deposit gathering opportunities as well?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Yes. Actually, it's a great source of deposit gathering opportunities. And so I don't have that number in front of me on what we've brought in, in terms of the fourth quarter. But it's pretty substantial.
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
And I would guess a lot of non-interest bearing accounts?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Yes, there is non-interest-bearing. I mean, there's a lot of -- I mean, essentially, a whole array of products that we can take advantage of, our treasury management, services, their operating accounts, it's a -- when we bank a tribe, it's generally the full relationship.
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
And is there anything that's shifted in terms of the increase here? Or is it just a continued focus on your part?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
No, I think that, first, we have a group that's been focused on this for over a decade. They are well established and well-known in this space. Our ability to execute is critical. And where we really saw an uptick was with the Dakota Access Pipeline, and a lot of the tribes really stepped away from anybody that was involved in that financing. And that opened up some doors for us and that continues to have a ripple effect in terms of access to different tribes.
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. Clint, That's helpful. And then just one last one. In terms of the -- I know that it was very small and not systemic. But dental loans that was charged-off in the quarter, was that related to the local portfolio or the national portfolio?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
The national portfolio.
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
And was it -- I guess, do you see any other loans within that portfolio with similar characteristics, or was it just very specific to the one borrower?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
It was multiple borrowers, and they were really just -- I mean, very unique instances that, one would never expect. One is somewhat public because he was on YouTube on a hoverboard, practicing. That didn't work out so well. So I would say that that's not a systemic issue on our portfolio.
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
Hopefully not. Okay that takes care of my question. Thank you.
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Thanks, Jackie.
Operator
(Operator Instructions) Your next question comes from the line of Matthew Clark. Your line is open.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Hey, just a quick follow-up. Hadley, on your growth commentary and also in the context of the payoff activity. I mean, is -- for the loan growth outlook, is low single digits on average for the year the right way to think about it? And maybe you could do a little better if payoffs were to continue to subside, is that the right way to think about it or not?
Hadley S. Robbins -- President and Chief Executive Officer
Well, I think that low single digits is what's in my mind. But since I am going to hold Clint accountable for delivering everything. What's on your mind, Clint?
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Well, generally, Hadley and I are on the same page. And that's where my mind that is that it's probably going to be low single digits, with the wild card being what happens with the payoff activity.
Hadley S. Robbins -- President and Chief Executive Officer
And that, you have to clip that growth in the context of the seasonality of our year, which starts off low point first quarter, fills a bit in the second, third typically is the strongest. And then fourth quarter can vary sometimes, just depending on the timing of some of the opportunities we have. But it typically drops. And so average outstandings are kind of what I measure the success of the year by.
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Great, thanks.
Operator
No more questions at this time. Please continue.
Hadley S. Robbins -- President and Chief Executive Officer
Okay. There are no more questions. Thank you all for your attendance this afternoon, appreciate it. Bye-bye.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 53 minutes
Call participants:
Hadley S. Robbins -- President and Chief Executive Officer
Greg Sigrist -- Executive Vice President and Chief Financial Officer
Clint E. Stein -- Executive Vice President and Chief Operating Officer
Andy McDonald -- Executive Vice President and Chief Credit Officer
Jeffrey Allen Rulis -- D.A. Davidson & Co. -- Analyst
Matthew T. Clark -- Piper Jaffray Companies -- Analyst
Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst
Aaron James Deer -- Sandler O'Neill & Partners LP -- Analyst
Jacquelynne Bohlenn -- Keefe Bruyette & Woods Inc. -- Analyst
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