Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Columbia Banking System Inc (NASDAQ:COLB)
Q3 2019 Earnings Call
Oct 24, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's Third Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System.

Hadley Robbins -- President and Chief Executive Officer

Thank you, Mike. Good morning, everyone, and thank you for joining us on today's call as we review our third quarter 2019 and year-to-date results, which we released before the market opened this morning. The earnings release and a supplemental slide presentation are available at columbiabank.com. I'm pleased with our third quarter results. Earnings exceeded $50 million for the second straight quarter, and on a year-to-date basis, net income was up 16% over 2018 results to $148 million. During the third quarter, our bankers did an excellent job in focusing on those things that they can directly control. Loans were up $109 million on strong production of $383 million. Credit quality continued to strengthen and deposits expanded by $644 million, a portion of which is an increase in public funds that Greg Sigrist, our Chief Financial Officer, will discuss in his comments.

Our succession plan is a key component of sustaining our business model. And I'm happy to report that the CEO succession process now under way is going very smoothly or employees investors and broad spectrum of other stakeholders have expressed a strong support and appreciate a thoughtful continuity of leadership because the talented banker with 25 years of experience, including 14 spent growing Columbia Bank. I'm proud to pass the torch on to Clint, and I'm confident he will lead Columbia Bank successfully into the future. On the call with me today are Greg Sigrist, our Chief Financial Officer, who will provide details about our earnings performance; Clint Stein, our Chief Operating Officer and incoming CEO, who will review our production activity and highlight the status of some of our digital investments; Andy McDonald, our Chief Credit Officer, who will review our credit quality information; and Chris Merrywell, our incoming Chief Operating Officer.

Following our prepared comments, we'll be happy to answer your questions. It's important that I remind you that we'll be making forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filings and, in particular, our 2018 SEC Form 10-K. At this point, I'd like to turn the call over to Greg to talk about our financial performance.

Greg Sigrist -- Chief Financial Officer

Thank you, Hadley. Third quarter earnings of $50.7 million and EPS of $0.70 per diluted share was the second best quarter in our history after the second quarter of 2019. As you didn't know, we've been working diligently since the latter half of 2017. To put protections in place to the fence around them and net interest income should interest rates decline. As reminder, the three primary interest rate risk management tools we've been using have been to increase the duration of our assets selectively grow the balance sheet by borrowing short term to fund the purchase of securities that would respond well in a rate down environment and its derivative strategy utilizing the zero cost column. Since 2017, fixed rate loans have increased from 38% to 47% of the portfolio, and our derivative strategy remains in place with a $15 million notional amount.

We entered the third quarter with approximately $50 million in our security strategy. We did increase our security strategy in the third quarter by selectively increasing public funds by approximately $300 million as an alternative to using FHLB advances, with corresponding increase in the securities portfolio. The decision to use public funds this quarter is in line with our contingency funding plan and desired periodically to test some of the alternative funding sources available to us. Our security strategy now stands at approximately $800 million and along with increased loan duration and the derivative strategy will provide protection in the event of a further decline in rates. After considering the $4.9 million of loan interest recoveries in the second quarter, net interest income did increase $2.2 million quarter-on-quarter, thanks in part -- thanks in large part to an increase in net interest-earning assets and loan growth during 2019.

As you'll recall, the interest recoveries also added 17 basis points to the second quarter NIM. When we factor that in, the remaining decline in the third quarter operating NIM of 9 basis points was driven by the extra insurance we took out in the form of increasing the security strategy. Cost of deposits did increase modestly, given our decision to selectively increase participation in public funds as part of our overall interest rate risk management strategy. If you exclude the public funds, which are hostile in nature, our cost of deposits was unchanged. Noninterest income was $28 million for the quarter, which was up $2.4 million on a linked-quarter basis and up $7 million compared to the third quarter of 2018. While each quarter benefited from onetime items, we are seeing positive trends in loans, card and financial services revenues as we continue to focus on generating noninterest income.

Third quarter expense of $87.1 million includes $1.9 million of expense that is directly tied to our digital efforts. We remain focused on closely managing our expense run rate and anticipate noninterest expense, excluding digital, to continue in the mid-80s range. The year-to-date impact of our digital initiatives was $5.9 million. We anticipate a full year impact of $9 million to $10 million. As we go on to the first year of the digital journey, we have focused on foundational projects that create capacity in the front- and back-offices and we are on schedule to meet the three-year strategic road map laid out a year ago. We expect a similar level of digital investment in 2020, with a full year impact of $8 million to $10 million range.

Our effective tax rate was 19.6% for the quarter and 19.2% year-to-date, both within our target range of 19% to 20%. We actively repurchased shares during the third quarter as part of our capital strategy, and we will continue to do so, provided we feel it will benefit our shareholders. As we've shared in prior calls, we have a strong capital position, and we'll continue to balance buybacks with special dividends and strategic opportunities. Lastly, the team has been working hard on the implementation of new Current Expected Credit Loss, or CECL, accounting standard. Based on our current portfolio and forecasted macroeconomic conditions, we estimated day 1 impact on the Allowance for Credit Losses, or ACL, ranging from a decrease of 10% to an increase of 5%.

This reflects an indicative range from the 5-quarter look back we performed with forecasted macroeconomic variables contributing to quarter-on-quarter variations. No material impact to our capital levels is anticipated, while it does continue to refine and validate our CECL models, and the ultimate impact will depend on characteristics of the loan portfolio and the macroeconomic environment at the adoption date.

At this point, I'd like to turn the call over to Clint.

Clint E. Stein -- Chief Operating Officer

Thank you, Greg. Good morning, everyone. We've always focused on driving long-term value for our stakeholders. This quarter's solid performance embodies the outcomes of our long-term thinking. Our bankers continue to build relationships on both sides of the balance sheet, as evidenced by the growth in loans and deposits. We continue to evaluate how we allocate resources. The gain on the sale-leaseback transaction during the quarter is an example. In the coming years, we will reinvest a small portion of the gain into a contemporary replacement facility that better suits our needs and those of our clients. The remainder can be reallocated to growing other parts of our business. Without the noise created by the increase in public funds, deposits still grew by approximately $344 million or 13% annualized during the quarter.

As a result, the deposit mix shifted slightly from 61% business and 39% consumer. Third quarter loan production was $383 million, exceeding $1.1 billion on a year-to-date basis. Even with this record-setting production pace, our bankers have been busy generating new leads resulting in a solid loan pipeline. Term loans comprised 65% of the production, whereas lines were 35% of the total. The quarterly production mix was 56% fixed, 39% floating and 5% variable. The overall portfolio mix is now 47% fixed, 36% floating and 17% variable. New loan production throughout the quarter was booked at an average tax adjusted coupon rate of 4.77%, which is lower than the overall portfolio rate of 4.82%.

The decline is the result of higher-yielding repayments in the construction and CRE space, coupled with repricing of variable rate loans. Prepayments of $146 million in the current quarter were stable and consistent with the prior quarter amount of $153 million. While stable on a linked-quarter basis, current prepayment activity is down about 10% from third quarter 2018. During the quarter, C&I production was 44% or $169 million of the total production, and commercial and multifamily real estate production was 42% or $161 million of the total. C&I loans were up $63 million, driven by seasonal activity in ag book, along with increases in the finance and insurance sectors. Commercial and multifamily real estate loan totals were up $62 million during the quarter, driven by increases in the warehouse, land, office space and recreational sectors.

As part of our ongoing branch rationalization process, we finalized the consolidation of three branches during the quarter, two in our Puget Sound market and 1 in our Portland region. One additional branch consolidation is under way and scheduled for completion during the fourth quarter. We continue to advance our digital program. In the third quarter, we completed the rollout of our new commercial online banking and treasury management system, and we implemented our new human capital management platform, improving operational and talent management efficiencies across our employee base.

We currently have multiple projects under way that will improve our peer-to-peer money transfer capabilities, digitized deposit account opening, enhance our small business lending capabilities and drive efficiencies through increased automation across the company. We view our digital efforts as an ongoing journey rather than a destination. The primary pillars are employees, the road map is laid out, and we are moving well down the path. I want to take a moment to thank Hadley for his leadership, friendship and contributions to building our franchise over the past seven years, the entire team which is having a long and happy retirement.

Now I'll turn the call over to Andy.

Andrew L. McDonald -- Chief Credit Officer

Thanks, Clint. In summary, credit quality is very good. NPAs to total assets were down to 27 basis points, which is the lowest level in 12 years. In addition, we continued to enjoy positive migration in both the criticized and classified loan categories. We are, however, carefully watching our clients with respect to macroeconomic conditions. If the tariff war persists, it is likely the region will experience negative economic impacts as Washington, Alaska and Oregon, are among the top seven states most affected by these tariffs on a GDP basis. We actively monitor this sector and are encouraged by recent trade developments with Japan and ongoing discussions with China.

However, we did see an increase in watch-rated assets in the quarter by roughly $31 million. And this was to help us further monitor trade development impacts on our portfolio. Our third quarter provision for loan and lease losses of $299,000 was, again, very modest and essentially unchanged from the prior quarter. The quarter benefited from a large level of recoveries in both the originated and PCI portfolios. Most of the recoveries for the quarter were related to two relationships dating back to the Great Recession. The dedication of our special credit team is exemplified by these recoveries. Absent these recoveries, our provision would have been more meaningful.

So for the quarter, we had a provision of $1.75 million for the originated portfolio, offset by a $1.2 million release for the First Heritage portfolio and a net release of $214,000 for the Columbia River, West Coast and Pacific Continental portfolios. As of September 30, 2019, our allowance to total loans increased by 1 basis point to 94 basis points of total loans. As always, we like to remind you that this ratio is impacted by our acquisitions and the associated loans that were recorded at fair value. Embedded in those valuations is approximately $20 million of net discount for which approximately $15 million is associated with the Pacific Continental portfolio, $3 million with the West Coast portfolio and $2 million with the Intermountain.

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

Hadley Robbins -- President and Chief Executive Officer

Thanks, Andy. We're pleased to announce our regular quarterly dividend of $0.28, which constitutes a payout ratio of 40% for the quarter and a dividend yield of 2.95% based on the closing price of our stock on October 23. This quarter's dividend will be paid on November 20 to shareholders of record as of the close of business on November 6, 2019. In closing, it's been a privilege to be part of this company. I've been inspired daily by the way our employees care for each other, our customers and by their unwavering commitment to help build stronger communities. This concludes our prepared comments this afternoon.

As a reminder, Greg, Clint, Andy and Chris are here with me to answer your questions. And now Mike will open the call for questions.

Questions and Answers:

Operator

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

Jeff Rulis -- D.A. Davidson & Co -- Analyst

Thanks. Good morning.

Greg Sigrist -- Chief Financial Officer

Morning.

Jeff Rulis -- D.A. Davidson & Co -- Analyst

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

Greg Sigrist -- Chief Financial Officer

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

Jeff Rulis -- D.A. Davidson & Co -- Analyst

Okay. Sorry, I didn't hear that year-to-date number. You said $5.9 million?

Greg Sigrist -- Chief Financial Officer

Yes, it's $5.9 million net of approximately $1 million we were able to capitalize. So absent the capitalization would have been higher.

Jeff Rulis -- D.A. Davidson & Co -- Analyst

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

Greg Sigrist -- Chief Financial Officer

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

Jeff Rulis -- D.A. Davidson & Co -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Give me that one more time, so you're talking on the core...

Jeff Rulis -- D.A. Davidson & Co -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Right. I mean, I think ex digital spend, you probably expect to see 2% to 3% growth. I mean, something in line with the rate of inflation. So I mean, if I were trying to model that out, I would try to peg it to the rate inflation.

Jeff Rulis -- D.A. Davidson & Co -- Analyst

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

Andrew L. McDonald -- Chief Credit Officer

Yes. I mean, this quarter, we had 2 significant ones. One for about $1.9 million, the originated portfolio. I guess, you could classify that 1 as a bit of a surprise. We had a strategy in place where we were able to encumber assets and the principles finally decided to do something with those assets and that afforded us the opportunity to collect on the money. Absent them actually taking action to try to create value with the assets, we would have been still waiting for some kind of recovery. The $1.2 million in the PCI book was actually a negotiated settlement where the individual actually came in a year ahead of what we expected and what we had agreed to. And again, it was -- they had an investment opportunity that they want to take advantage of. So, I guess, kind of a combination of a number of things, but that's how I would explain the 2 large recoveries.

Jeff Rulis -- D.A. Davidson & Co -- Analyst

Okay. And Hadley, congrats on the retirement. I think a commendable job when you stepped in kind of a critical point in the bank's history. So congrats.

Hadley Robbins -- President and Chief Executive Officer

Well, thank you, Jeff.

Operator

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

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Hi, good morning, everyone.

Greg Sigrist -- Chief Financial Officer

Good morning.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes. I mean, I think the capitalization piece is always -- it's triggered late in the process once we're able to negotiate contracts, and it really is a fallout of what's on the piece of paper. And I would say we've had better experience negotiating contracts this year than we probably planned, talked about earlier in the year. Of that $3 million to $4 million range, I am hopeful that some amount of that we could capitalize or we could bring it down to the lower end of the range, Aaron, but there's also a piece of that, that could flip into next year. So that's why there's a bit of a range there, still.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes, the range I commented on my prepared remarks was $8 million to $10 million for next year. Looking at next year's projects, there's probably less opportunity to capitalize than we've been able to do in some of the, what I call, the cornerstone projects, given size and scope. But there could be some that could pull you down to the lower end of the range, Aaron. But until we really get into that, it's really hard to predict.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes. Well, again absent any potential action next week from the Federal Reserve, I think, you're really looking at a flat to down environment. Pricing is going to be very competitive. We're always going to have some quarter-on-quarter fluctuation, just given our funding mix and deposit flow out in the first quarter. But again, absent a change next week, I think where it's going to be flat to down a little bit is the way I'm thinking about it.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay, great. Thanks for taking my questions

Greg Sigrist -- Chief Financial Officer

And you're welcome

Operator

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

Gordon McGuire -- Stephens Inc -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes, the security strategy that have a 9 basis point impact, Gordon. I mean, there were other impacts in the quarter, but when you factor out some of those ups and downs, it really -- you're left with those 9 basis points.

Gordon McGuire -- Stephens Inc -- Analyst

Okay. So it held pretty flat if you back out the interest recoveries in the strategy?

Greg Sigrist -- Chief Financial Officer

That's right.

Gordon McGuire -- Stephens Inc -- Analyst

And then just to clarify on your last -- your comment on the last question. You said absent the -- any change? Are you just saying absent a rate cut, NIM is flat to down? Or absent a change in the projections for a rate cut?

Greg Sigrist -- Chief Financial Officer

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

Gordon McGuire -- Stephens Inc -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes, I think a good question. I mean, it's fairly consistent. If we have a 25 basis point cut next week or in the future, let's say, we would have an estimated $3 million impact over the next -- the following 12 months, and that's net of $2.5 million of protection from the interest rate risk strategies.

Gordon McGuire -- Stephens Inc -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes, sure. I think as you point out, the interest rate environment does impact the efficiency ratio, and we did expect that to float up a little bit this year as we execute on the digital strategy. I think longer horizon, so later into next year and then probably into the following year, we do expect that to flow back down. And we are really focused on driving the operational efficiencies, in part due to digital initiatives to help that make that happen. But I think the range we're in is probably the range we're going to be in for the next couple of quarters. And if you just also kind of segue and think about the ratio of noninterest expense to average assets, in the quarter that was, I think, 259, and that's really in that range we've been talking about for a while too, which is having that ratio in the 250 range. So that is the other metric we are keeping a close eye on as well.

Gordon McGuire -- Stephens Inc -- Analyst

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

Greg Sigrist -- Chief Financial Officer

You asked the one question I don't have in front of me. I think it was slightly over $35 a share. But the math -- once you get the 10-Q, the numbers will drop down.

Gordon McGuire -- Stephens Inc -- Analyst

Thanks

Greg Sigrist -- Chief Financial Officer

Your welcome

Operator

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

Matthew Clark -- Piper Jaffray -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes, I think it does reflect both of those. What it doesn't reflect that is we're still midstream in our budget cycle for next year, which is where we'll really start to make a lot of the decisions that foundationally could help us calibrate the number better math. But I would say at this point, it does include both of those factors.

Matthew Clark -- Piper Jaffray -- Analyst

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

Chris Merrywell -- Chief Consumer Banking Officer

Yes, Matt, this is Chris. I'd say that despite a very competitive environment, we're seeing sufficient opportunities that match our credit discipline. The pipeline remains full. But we're continuing to monitor prepayment activity, which is difficult to forecast. And we stayed frequently in contact with our clients to try to stay ahead of that. And so yes, we're in that range.

Matthew Clark -- Piper Jaffray -- Analyst

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

Clint E. Stein -- Chief Operating Officer

Yes, Matt, this is Clint. I actually had that number in the script and I took it out because I just consider payoffs is kind of a good thing. Part of what we expect when we make loans, and it's the prepayments that create the variance. Let me come back to -- I've got it in a report in here. I can follow up off-line also because it's just a report that we pulled the prepayments from the same report, so we can give you the number.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then just last one on the interest recoveries. Last quarter, $4.9 million, for some reason, you haven't been able to find this quarter what they were?

Andrew L. McDonald -- Chief Credit Officer

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

Matthew Clark -- Piper Jaffray -- Analyst

Okay, thanks.

Operator

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

Jon Arfstrom -- RBC Capital Markets -- Analyst

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

Greg Sigrist -- Chief Financial Officer

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

Jon Arfstrom -- RBC Capital Markets -- Analyst

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

Greg Sigrist -- Chief Financial Officer

It's hard to predict at this point. I mean as I mentioned, we're still going through the budgeting process. So I hate to give you any leading indicators on that, Jon. But as Clint commented on, we feel comfortable with the pipeline and it's still something that we're going to continue to work through as we get into next year.

Jon Arfstrom -- RBC Capital Markets -- Analyst

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

Chris Merrywell -- Chief Consumer Banking Officer

I'd say it remains pretty consistent. The pipeline is full. And again, as I mentioned, we're seeking plans of opportunities that meet our disciplined credit philosophy. So at this time, I would say it remains consistent.

Jon Arfstrom -- RBC Capital Markets -- Analyst

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

Clint E. Stein -- Chief Operating Officer

Hey, Jon, this is Clint. The sale leaseback was a facility in the Bellevue market that, obviously, with all the growth that's happening there and the period of time that we've owned the location. It's a fairly dated branch facility and on a very valuable piece of dirt and so as we looked at what we want to do, not just with branch consolidations, but just the branch footprint in general because in my prepared remarks, I mentioned we'll reinvest in more contemporary location in the coming years. We've got up to three years or so that we can evaluate where we're going to be in that same part of town.

We've talked in the past about our neighborhood concept, and I expect that you'll see a facility like that replace this specific location. But we also have some other places within our footprint where we feel like that additional branch locations would be beneficial to serving our clients and helping our bankers generate new relationships. So that's the reinvestment component of it. The rationalization part in the deck that we put out on our website this morning we have what we've done in that regard over the last 10 years or so, that's ongoing.

And don't -- we've never been fans of putting a target or a number out there because we really look at how branch traffic is changing, how the different channels that customers are using and that really drives what we see as potential additional consolidations or foreclosures. So it's more than just simply reducing the number of branches. So you won't see a ton of new branches. I don't want you to think that we'll get a branch expansion strategy by any means, but it's a very dynamic process that we go through. Chris and I have worked in our current capacity very closely on it for several years. And I'm pretty excited to see what Chris does considering this as we move forward.

Jon Arfstrom -- RBC Capital Markets -- Analyst

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

Operator

And the next question is from Jackie Bohlen. Your line is open.

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Hi, everyone. Good morning.

Greg Sigrist -- Chief Financial Officer

Morning, Jackie. Welcome back.

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

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

Greg Sigrist -- Chief Financial Officer

Yes.

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

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

Greg Sigrist -- Chief Financial Officer

We would dynamically continue to reassess what the entirety of the interest rate risk management strategy is, that's correct.

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

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

Andrew L. McDonald -- Chief Credit Officer

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

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

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

Andrew L. McDonald -- Chief Credit Officer

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

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

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

Greg Sigrist -- Chief Financial Officer

That range really does reflect the entire range Andy just talked about. So we just wrapped up a 5-quarter look back, I would say the high end of the range absolutely reflects where we are today.

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, OK. And I would be remiss if I didn't echo everyone's comments, and congratulations on this management shifts, and Hadley, I hope you have a lot of fun things planned.

Hadley Robbins -- President and Chief Executive Officer

That I do. Thank you, Jackie.

Operator

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

Clint E. Stein -- Chief Operating Officer

Before we conclude the call, Matt, I'll circle back on your question regarding payoffs during the quarter, they were $62 million. So prepayments of $146 million, payoffs of $62 million got us to our $208 million total.

Hadley Robbins -- President and Chief Executive Officer

Okay. Thank you. And that concludes our call for the day. I appreciate it.

Operator

[Operator Closing Remarks].

Duration: 51 minutes

Call participants:

Hadley Robbins -- President and Chief Executive Officer

Greg Sigrist -- Chief Financial Officer

Clint E. Stein -- Chief Operating Officer

Andrew L. McDonald -- Chief Credit Officer

Chris Merrywell -- Chief Consumer Banking Officer

Jeff Rulis -- D.A. Davidson & Co -- Analyst

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Gordon McGuire -- Stephens Inc -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Jackie Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

More COLB analysis

All earnings call transcripts

AlphaStreet Logo