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Columbia Banking System Inc (COLB)
Q2 2020 Earnings Call
Jul 23, 2020, 1:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by, and welcome to Columbia Banking System's Second Quarter 2020 Earnings Update. [Operator Instructions] 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. Please go ahead.

Clint Stein -- President, CEO

Thank you, Myra. Good morning, everyone, and thank you for joining us on today's call as we review our second quarter results, which we released before the market opened this morning. Our earnings release and investor presentation are available at columbiabank.com.

I'm extremely proud of our talented bankers who have demonstrated their unwavering commitment to each other, our clients, and communities through one of the toughest quarters in the history of banking. Because Columbia Bank had a well-developed and tested pandemic plan at the ready, we've been able to focus on growing our business, stand up new lending programs as part of the CARES Act and touch $1 million to support communities through our Pass It On and COVID-19 Community Relief campaigns.

COVID-driven changes to our operating model have resulted in minimal disruption, and I'd like to recognize that this is in large part due to the expertise and tenacity of our business continuity and crisis management teams.

The individual that leads this team is military-trained and has over 15 years of corporate business continuity experience. Her guidance and leadership in executing on our pandemic plan has allowed the entire executive team to remain outwardly focused on managing and growing the bank.

The pandemic and resulting economic turmoil has magnified the focus on credit within our industry. At Columbia, we've always taken an active approach in assisting clients through full economic cycles. While the pandemic is beyond typical, we have experienced bankers with thorough knowledge of our clients' businesses. We believe this gives us a competitive advantage over most community banks.

The strength of our capital position provides us the flexibility to help our clients and communities recover from the economic effects of the pandemic.

Like most banks, we're managing the surplus liquidity. And while this has negatively affected our net interest margin, net interest income is relatively stable even in light of the Fed's March rate cuts.

On the call with me today are Aaron Deer, our Chief Financial Officer; Chris Merrywell, our Chief Operating Officer; and Andrew McDonald, our Chief Credit Officer. Following our prepared remarks, we'll be happy to answer your questions.

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

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

Aaron Deer -- EVP, Chief Financial Officer

Thank you, Clint. Second quarter earnings of $36.6 million and EPS of $0.52 were an increase of $22 million and $0.32 respectively on a linked quarter basis. After factoring out the significant provision expense of $33.5 million, quarterly pre-tax, pre-provision earnings of $78.3 million were our best quarter on record, which was $14.2 million higher than the prior record set in the second quarter of 2019, and up $18.9 million on a linked quarter basis.

The increase was primarily due to the gain on the sale of a portion of our Visa B -- I'm sorry, Visa Class B restricted stock and subsequent write up of the remaining shares, which together contributed $16.4 million to pre-tax income. We also recognized an $875,000 gain in the sale of a loan that had been previously charged-off.

Net interest income for the second quarter was $121.9 million, a decrease of $571,000 on a linked quarter basis. The drop was due to the early payoff of three investment securities in the first quarter, which added $1.9 million of non-recurring income to that earlier period.

Meanwhile, second quarter interest income was negatively affected by the full quarter impact of the March Federal Reserve rate cuts, which were largely offset by interest earned on PPP loans.

Interest expense declined significantly during the period, as short-term borrowings were replaced with lower-cost deposit funding. The net interest margin of 3.64%, represented a drop of 38 basis points on a linked quarter basis. Excess liquidity from record deposit inflows, as well as lower yields on loans and investment securities caused by the rate environment contributed 13 basis points and 11 basis points of the decrease respectively. The addition of lower yielding PPP loans dropped it by four basis points and the margin dropped by eight basis points due to one-time prepayment fees in the first quarter combined with increased premium amortization in the second quarter on investment securities. The remaining two basis point decline was due to balance sheet mix.

Our cost of deposits continued to be industry-leading at seven basis points, which was down seven basis points on a linked quarter basis, and 13 basis points compared to the second quarter of 2019. Total deposits ended the quarter at $13.1 billion, up $2.3 billion during the quarter. Approximately, 60% of this increase was concentrated in noninterest bearing demand deposits, which rose by $1.4 billion or 26%.

At June 30, our loans totaled $9.8 billion with PPP loans accounting for about 10% of that. Our loan-to-deposit ratio was 74% at quarter-end. Chris will give more color on the drivers behind this balance sheet trends in a moment.

Given the very strong deposit inflows and excess liquidity, we are starting to deploy more of the funds that we expect much of the PPP money to be depleted over the coming months and could see other outflows as well. So, we're taking a very cautious and incremental approach for our new investments.

Non-interest income of $37.3 million was an increase of $16.1 million from the prior quarter due to the aforementioned $16.4 million gain on Visa stock, and a $875,000 gain on the loan sale. This was offset by a reduction in overdraft fees of $1.1 million. The decrease in overdraft fees is attributed to higher deposit balances, as well as lower transaction volumes due to the shelter-in-place orders.

Non-interest expense was $80.8 million in the second quarter, which was a decrease of $3.4 million on a linked quarter basis. The change was principally due to an $8.8 million reduction in compensation and employee benefit costs, stemming mostly from the capitalization of loan origination costs from the PPP loan program. This was partly offset by $3.6 million of systems, legal and professional, and various other costs, much of which were incurred to respond to the pandemic and set up the PPP program. In addition, the provision for unfunded loan commitments included in other non-interest expense increased by $1.8 million.

Our non-interest expense ratio was 2.13% for the quarter, while our operating efficiency ratio dropped to 54.9%. We expect our quarterly non-interest expense run rate to return to the mid-80s for the balance of the year.

Our effective tax rate for the quarter was 18.3%, which compares to 18.1% on a linked quarter basis and 19% for the second quarter of 2019.

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

Chris Merrywell -- EVP, Chief Operating Officer

Thank you, Aaron, and good morning everyone. It is understood that the economic challenges faced this quarter has been extraordinary. Our bankers have responded with hundreds from all divisions and regions rallying in to ensure our clients obtained PPP funding, while at the same time attending to loan deferral requests and the growing of non-PPP loans and our deposit portfolio. Our bankers are dedicated to their client's success and their efforts have resulted in the balance sheet growth in the UFC [Phonetic].

As Clint mentioned, the work of our crisis management team provided us a layered approach to COVID and allowed us to keep all of our branches and facilities open during the quarter to service our clients' needs with minimal disruption.

Additionally, in the second quarter, we saw unprecedented loan and deposit growth as an outcome of the federal economic stimulus response to the pandemic.

As Aaron mentioned, deposits grew by $2.3 billion. The growth is largely due to the lower spending resulting from shelter-in-place orders, as well as proceeds from the PPP loan program.

The deposit mix shifted slightly from 58% business and 42% consumer at March 31st to 59% business and 41% consumer at quarter's end. The exceptional build in deposits, balances flow to the asset side of the balance sheet as well.

Loans rose by $839 million during the quarter to $9.8 billion, as was mentioned. And absent PPP loans, our portfolio declined by $103 million.

C&I loans declined by $252 million, but were offset by increases in agriculture and CRE loans of $91 million and $63 million respectively.

Our utilization rate has declined from 51.6% at the end of the first quarter to 47.5% at the end of June. This contributed to $126 million of loan paydowns during the quarter, as we saw clients use other available excess funds to pay down debt and our utilization rates declines were seen across all loan categories.

Total production was $1.3 billion for the quarter, with PPP loans contributing $962 million. Setting aside the PPP portfolio, loan production was lower than normal. But given the environment during the second quarter, our bankers still found opportunities to take care of our clients' needs and produce an additional $295 million.

Construction and one-to-four family real estate was up compared to the first quarter, or as modest production declines were seen in CRE, C&I and our agricultural portfolios.

As Aaron previously mentioned, our cost of deposits declined just seven basis points in the second quarter compared to 14 basis points in the first quarter, reflecting the full quarter impact of our response to the Fed interest rate drop in March.

We continue to believe that our relationship-based approach is a key differentiator and our clients rely on this as much as on any deposit interest rate available in the market.

Excluding the PPP loans, the quarter production mix was 45% fixed, 42% floating, and 13% variable. The overall portfolio mix is now 10% PPP loans, 45% non-fixed -- non-PPP fixed, 31% floating, which is prime and LIBOR, and 14% variable.

Excluding the PPP program, new loan production throughout the quarter was booked at an average tax adjusted coupon rate of 3.79%, which is lower than the overall portfolio rate of 4.19% as of quarter-end. Also excluding the PPP loans, the overall portfolio rate declined 25 basis points during the quarter, with construction down 78 basis points and C&I down 32 basis points.

The lower rate environment has increased demand in the mortgage space. We are very pleased with the progress of our residential lending business and its impact on non-interest income. We will continue to look for opportunities to expand our mortgage solutions in both the purchase and the refinance markets in the future.

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

Andy McDonald -- EVP, Chief Credit Officer

Thank you. The provision under CECL of $33.5 million reflects our economic forecast, which continues to be negatively impacted from the COVID-19 pandemic. As a reminder, we use IHS Markit for our economic forecast.

In general, our forecast anticipates an annualized gross domestic product in the third quarter of 0.4% followed by 4.9% performance in the fourth quarter with the economy continuing to recover next year.

Unemployment remained elevated, ending the year around 12.7% and ending 2021 at about 9.5%. Thus, the economic forecast accounted for about $24 million of our provision for the quarter and negative migration accounted for the rest.

We ended the quarter with a provision relative to period-end loans of 1.55%. Adjusting for the PPP loans, the allowance to period-end loans increases to 1.72%.

In contrasting the first quarter provision relative to the second quarter provision, the second quarter scenario is much deeper of an economic impact than anticipated in the first quarter with a solid recovery in the latter half of this year.

Certainly, the economy has improved and statistics recently bear that out. However, the momentum and path of the recovery is a lot more questionable given recent coronavirus cases and states halting are rolling back opening.

Adding to this uncertainty is the consumer reaction to the recent spike of coronavirus cases and what will future government stimulus look like. Therefore, our modeling now reflects a more protracted recovery with slower GDP growth and an unemployment rate that remains elevated.

NPAs for the quarter were relatively unchanged at 34 basis points. However, I feel adjusting for PPP loans provides a more consistent comparison as we move forward into 2021. With this adjustment, NPAs do increase but only by two basis points. So again, relatively unchanged.

I would like to remind folks, NPAs are still comprised of credits whose issues pre-date the pandemic.

Past due loans for the quarter were 21 basis points, and net charge-offs annualized were 16 basis points for the quarter. Our impaired capital ratio rose modestly from 22.3% to 23.5%. Therefore, your standard credit metrics for the quarter were very acceptable. Overall, when compared to the first quarter, it was a relatively stable quarter.

On the risk-weighting front, loans rated watch or below increased approximately $153 million during the quarter. We saw watch loans increased $75 million going from $310 million to $385 million. Special mentioned loans increased $70 million to $387 million, and substandard loans saw an increase of $8 million and are now around $313 million in total. These changes increased our watch and the low risk ratings from 10.4% to 11% of total loans.

The sector which saw the greatest migration was hospitality, as it accounted for about 45% of the negative migration. The balance was centered in other commercial real estate, however, over a broad range of categories.

On the deferral front, I want to remind folks that most of our deferral programs were four months. So, the vast majority will begin making payments in August. We granted over 3,000 requests for payment deferrals amounting to about $1.6 billion in total loans through June 30th.

As I noted last quarter, we believe these deferrals are in the best interest of all of our stakeholders as we try to work our way through this pandemic. Most of the deferrals, a little over 1,500 or roughly $690 million were granted to clients in our dental portfolio. Another $178 million in loan deferrals were granted in hospitality, followed by office at $116 million, healthcare and non-dental $107 million, retail $93 million, and restaurants at around $66 million.

In total, the categories I just reviewed account for approximately 76% of our deferrals.

With that, I would now like to give you some color on the portfolios we believe to be some of the first impacted by the pandemic. For Columbia, that includes hotels, retail, restaurants, aviation, and of course, our dental and healthcare portfolios. In aggregate, these industries account for about $2.4 billion in loans or roughly 25% of our loan portfolio.

The largest portfolio impacted by the COVID-19 pandemic is our dental portfolio. I'm sure most of you are aware, most states have directed dental practices to cease operation with the exception of emergency types of procedures last March and April. So effectively, most dental offices were closed until the end of May.

When we last spoke, about 86% of our portfolio was in states that had yet allowed dental practices to be opened. Today, 100% of the states where we have exposure have allowed dental offices to open with appropriate COVID-19 protocols in place.

As of June 30th, we had $879 million in dental-related loans, representing approximately 2,745 notes for an average note size of 328,000. Therefore, it is a very granular portfolio. Within this number is approximately 635 PPP loans for a gross balance of $67 million. So, the growth in this portfolio was isolated to PPP loans.

Again, we believe the impact on this portfolio is truly transitory. Today, most of these practices are generating revenue at around 82% of pre-pandemic level. At this level of revenue generation, we believe most of these practices are operating above breakeven.

The combination of deferral and PPP loans are allowing these practices to move forward with little impact on the bank's balance sheet. Today, we've had very little requests for additional relief within the dental portfolio and continue to report 95% as pass-rated. Excluding the dental portfolio, we have another $1.6 million or 16% of our portfolio to discuss.

The next largest segment which we have identified as having high risk relative to the economic disruption caused by the COVID-19 is our retail portfolio. We have approximately $568 million in retail-related exposure, split between commercial real estate and commercial business loans. This represents about 6.3% of our loan portfolio. Again, growth in this portfolio was driven by PPP loan. We granted 394 PPP loans for a cumulative total of $75 million to our retail customers.

The largest part of our retail exposure is comprised of commercial real estate loans with approximately $442 million balances. It is evenly split between Washington and Oregon, and as you would expect, centered within the Portland and Seattle MSAs. The average loan size is $370,000.

Again, we provide retail loans primarily to stand-alone retail centers like auto parts stores, building materials, and garden stores, along with food and beverage, and gas station. In addition, the portfolio contains grocery-anchored centers and mixed-use properties, mostly strip centers. We are not in large downtown core metropolitan areas, nor do we finance regional malls.

Using at origination values, the average loan-to-value for the portfolio is 52%, with 97% of the portfolio having a loan-to-value less than 75%. We have stress-tested this portfolio for an equivalent decline in value as seen in the great recession. The average loan-to-value rises to 64% with about 72% of the properties having a loan-to-value less than 75%.

For the entire retail portfolio, 86% is pass-rated, 7% is watch, 5% is special mentioned, and 2% substandard. The breakdown is essentially unchanged from the first quarter. We did see an uptick in deferral requests in this portfolio during the second quarter and have granted about $93 million in loan deferrals or roughly 16% of the retail portfolio. Most of this activity occurred early in the quarter and the pace of new deferrals has declined greatly, which is consistent across the entire portfolio.

Let me give you a little more color around deferrals for the entire portfolio. During the month of April, we granted $1.2 billion in deferrals. Therefore, we are averaging about $298 million a week. During the month of June, we granted $58 million in deferral for an average weekly volume of $12 million. So far, through the first two weeks of July, the weekly volume has declined to $5.4 million. So, the demand for deferrals has declined.

Okay. Let's discuss hotels, next. We have $336 million in hotel loans, representing about 3.4% of our loan portfolio. About 35% is in major markets, which would include the Portland and Seattle MSAs. However, we also have about 16% of the hotel portfolio or $55 million of exposure out on the Oregon coast.

To give you an idea of the types of hotels we finance, most have one of the following flags: Holiday Inn, Best Western, Choice, Marriott and Wyndham. In total, flagged properties comprise 70% of the portfolio. The average loan size is $1.5 million.

Today, we have granted deferral requests for about $178 million or half of the portfolio. We anticipate the recovery in the hotel sector to be prolonged. I would expect many of these clients will seek additional support throughout 2020 and into 2021.

With this in mind, we are working on a number of options for our client, which include USDA program, the Main Street Lending Program, along with more conventional solutions as well.

Similar to the retail commercial real estate loans, we continue to do stress-testing on this portfolio as well. The average loan-to-value for the portfolio based on originated appraised value is 54% with 99% of the portfolio having a loan-to-value less than 75%. On a stressed basis, about 71% of the portfolio has a loan-to-value less than 75%.

Non-dental healthcare is about $297 million in total. This was another area where we saw a fair number of PPP applications. We extended 322 PPP loans for around $48 million in this segment. PPP loan activity was thus responsible for growth in this portfolio. Approximately $93 million of the portfolio is veterinary. Another $152 million are physician practices of varying kinds and $52 million is other types of healthcare providers such as chiropractors, physical therapists, and counseling services.

The average loan size is $311,000. As of June 30, 98% of the portfolio is pass-rated with 1% on watch and 1% rated substandard. We have granted deferral requests for about $107 million in total in this segment or roughly 36% of the portfolio.

Similar to the dental space, we see this sector rebounding, as folks are once again able to see their orthopedists, dermatologists or optometrists. In addition, elective surgeries, such as hip replacements, knee replacements, cranial, cataract and cosmetic surgeries are now being performed.

Okay, restaurants and food services. We have approximately $214 million in this portfolio with two-thirds being commercial real estate loans. The average loan size is $265,000. Today, 87% is pass-rated, 6% watch, 3% special mentioned, and the balance is substandard. We have granted 157 deferrals or about $66 million in this portfolio.

The portfolio did see negative migration during the quarter, primarily out of the pass and watch categories to special mentioned and substandard. Similar to the hotel and retail segments, we see this area taking some time to heal.

We do stress-testing on the CRE portion of this portfolio. And on a pre-pandemic basis, the average loan-to-value was 58% with 93% having a loan-to-value less than 75%, again on a pre-pandemic basis.

Under a stress-test scenario, loan-to-value rise is to 72% with only 54% having a loan-to-value less than 75%.

The last portfolio I'm going to discuss is our aviation portfolio. It is comprised of both direct exposure to domestic airline carriers as well as entities that lease least airplanes and engines to airline carriers. In total, the portfolio is about $148 million with about $100 million being direct exposure to U.S. domestic airlines and the remaining $48 million in exposure to lessors of airplanes. Today, most of the portfolio is rated special mentioned, with the exception of one credit rated watch and one rated substandard.

Of the domestic airlines, we have exposure to, they have raised over $33 billion in additional capital to assist them through this pandemic, including carriers we do not have exposure to, the amount of capital raised to-date exceeds $63 billion.

As such, this additional capital, combined with the expense reduction efforts results in all of our borrowers having over 12 months of burn rate now. In addition, these domestic airline carriers are continuing to negotiate agreements amounting to billions of additional funding with the U.S. Treasury via the CARES Act. Within our portfolio, our customers have executed a little over $11.7 billion in signed letters of intent and industrywide approximately $20 billion in letters of intent have been executed.

While no final agreements have been executed and no timeline for funding has been provided, we know, if needed, additional capital is available. We believe this government funding will help them recover from the COVID-19 impacts along with the billions of dollars of capital already raised.

Most of our domestic airline exposure is secured by aircraft with a pre-stress loan-to-value of 69% and a current loan-to-value we believe closer to 72%.

As for the leasing portfolio, 45% of the exposure is in Asia, 27% Europe, and 8% North America. The rest is in South America and the Middle East.

The majority of the portfolio consists of narrow-body aircraft with an average age of 8.2 years. For the entire portfolio, the average age is 6.7 years with wide body the lowest at 3.4. We view younger, more fuel-efficient aircraft as being the most in demand post-pandemic.

Based on origination values, our average loan-to-value for the portfolio is 73%. However, based on what we believe is today's values, the loan-to-value is closer to 82%. Okay. I'll now turn the call over to, Clint.

Clint Stein -- President, CEO

Thank you, Andy. As I stated on our first-quarter earnings call, Columbia Bank is actively meeting the challenges of the disruptions caused by COVID-19. The strength of our balance sheet, credit profile that Andy just reviewed, liquidity and capital position are serving us well and we continue to expand our reach.

Recent examples of the ongoing reinvestment in our business are the deployment of Zelle earlier this month and the construction of our Boise NeighborHub, which is scheduled to open later this quarter, sending a clear message on our long-term commitment to the Treasure Valley.

We continue to receive recognition for the work we do on your behalf and are honored to recently have been selected by Forbes as the Best Bank in both Washington and Oregon. These awards are a direct result of the tremendous work done each day by our bankers.

Recent external events have underscored the importance of a company's values and culture. Diversity and open discussion is core to Columbia Bank's culture. And during this turbulent time, we continue to engage with our employees and communities through active dialog and outreach.

This morning, we announced our quarterly dividend of $0.28. This quarter's dividend payout of 54% of earnings will be paid on August 19th to shareholders of record as of the close of business on August 5th.

This concludes our prepared comments. And now, Myra, we will open the call for questions.

Questions and Answers:


Thank you. [Operator Instructions] We have our first question over the phone line from Luke Woodham [Phonetic]. Your line is open. Please go ahead.

Luke Woodham -- Analyst

Hey, good morning, guys.

Clint Stein -- President, CEO

Good morning.

Luke Woodham -- Analyst

I was wondering -- Andy, do you mind rattling off the special mentioned and substandard portfolios again for the quarter? I missed just, I think, those two numbers.

Andy McDonald -- EVP, Chief Credit Officer

Yes, that's not a problem. I can do that. So, our special mentioned loans are now $387 million and our substandard loans are $313 million.

Luke Woodham -- Analyst

Perfect. Thanks. And then I wanted to talk a little bit about the geography of the reserve build. Last quarter, we saw that the majority of the increase was related to the commercial portfolio. Was it similar this quarter and do you have the commercial loan and consumer reserve to loans ratio, excluding PPP on hand?

Andy McDonald -- EVP, Chief Credit Officer

Well, our reserve isn't as complicated as some of the larger banks. So, I know we allocated, but I don't have those numbers with me.

Luke Woodham -- Analyst

That's OK. Yes. Okay. Then just kind of talking about the -- if you look at, I think, it's on Slide 19 that shows the macro factors again, kind of, weighing on the majority of the reserve build.

Looking forward, I mean, given the kind of visibility that we have now versus kind of the quarter-end, do you see that the majority of the reserve build should kind of continue to be impacted by that or should it be probably more geared toward portfolio migration going forward?

Aaron Deer -- EVP, Chief Financial Officer

Well, first of all, our consumer book is really small. It's performing fine. So, it's really not drawing much in reserve. In terms of looking forward, with CECL, it's all about your economic forecast. If you look at our first quarter where we had over $400 million in loans downgraded, over 75% of the reserve build was due to the economic forecast.

So, even in a quarter where you double the size of your, if you will, problem loans, it has a muted impact from a reserve build standpoint.

So, the real, I think, wildcard continues to be the economic forecast. And of course, I said in my speech, all the recent economic data, it was pretty good. Although today, the unemployment came out at 1.4 million unemployment claims. So, I think the real question is, what's going to happen to the consumer as we enter into the latter half of the third quarter with rising cases?

If you look at California and Texas and some of those states, they've rolled back much more significantly than others. States like Idaho, which we are in, historically has not been impacted. And now, you have the governor trying to get people to wear a mask.

So, if that puts the consumer back on the sideline, then the economic forecast in the third quarter will continue to be poor and will thus continue to drive more provisioning.

If the consumer doesn't get frightened by that and the case counts improve and we don't end up going backwards, then I think migration will have a larger percentage than what it has today, but it will still -- the majority will still be driven by the economic forecast.

Does that help you at all?

Luke Woodham -- Analyst

Yes. No, those are very helpful. Thanks. And then just lastly, and maybe this is for Clint. Just, kind of, on the PPP loans, do you mind just giving us the kind of schedule that you guys are modeling for forgiveness and then what percentage of the overall portfolio you expect to be forgiven?

Clint Stein -- President, CEO

Well, I think that it's still a bit of a moving target to what does -- what the entire process looks like? And if Congress passes expedited relief for the smaller ones -- I know there is a bill circulating in the Senate right now that further modifies the forgiveness process, but I'm going to defer to Chris. He has been very close to, in terms of our internal focus on the forgiveness process and what that might look like.

Chris Merrywell -- EVP, Chief Operating Officer

Thanks, Clint. Yes, look, the process continues to evolve and we are obviously very helpful. I'm sure that others have an expedited process. If you use an amount of about $150,000, that'd be somewhere in excess of 3,000 of our requests that'd have an expedited forgiveness process. The rest kind of remains to be seen as the timing where we're crossing our fingers and hopeful that our clients are anxious to start that process and be able to move forward as well. But we're really waiting for the guidance to come out of when we can actually submit. We're ready to go and say we're anxious, our clients are anxious, but timings to be determined.

As far as the amount of overall forgiveness, I think that's going to be anybody's best guess. I think when we first started having an eight-week timeframe in which to deploy the funds and some of the other restrictions that were on it, I think it was a lower number. I think extending through the end of the year, allowing the numbers to change from payroll to other types of items as well, which in a position are majority, and I'd say a high majority is likely to be forgiven.

I think the program has set itself up to, if a recipient spends the money correctly, then you'll have an extremely high forgiveness rate, but there is also the opportunities where some folks may indeed go out of business or something. So, I can't really give you a clear number, but I'm looking at it, there is a very high percentage that will be actually forgiven from when they come out and it will trickle through the end of the year.

Luke Woodham -- Analyst

Okay, that's helpful. I'll step back. Thank you, guys.

Clint Stein -- President, CEO



We have our next question, comes from the line of Jon Arfstrom. Your line is open. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning, everyone.

Clint Stein -- President, CEO

Good morning, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

[Technical Issues] to start with the margin [Technical Issues]

Clint Stein -- President, CEO

You broke up there, Jon, but I think you want to talk about the margin --

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes [Technical Issues].

Clint Stein -- President, CEO

Jon, we're not picking up. I'm not sure if you're able to get a little closer to a cell signal if that's what's going on or try another line.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. I can dial back in. I'll dial back in.


We have another question from the line of Lebi Posen [Phonetic]. Your line is open. Please go ahead.

Lebi Posen -- Analyst

Hi, good morning. This is Lebi Posen on for Jeff Rulis.

Clint Stein -- President, CEO

Good morning, Lebi.

Lebi Posen -- Analyst

Good morning. I saw, related to PPP, that you guys broke out the benefit to interest income. And you mentioned that a majority of the decline in comp was related to the deferred expense there. I was wondering is there a number for the deferred expense that was recognized this quarter?

Aaron Deer -- EVP, Chief Financial Officer

Yes, I guess, to maybe give some more color generally within the expense categories, maybe just a breakout kind of five different items that I think will help you arrive at what might be considered a core rate within the comp and benefits line. There's about $9.3 million, and that was -- the vast majority of which, were those PPP origination cost. So, that is $91 million [Phonetic] impact. In the -- we also had a credit with our regulatory premiums, that was about $300,000 in the quarter.

We had some outsized data processing costs of about $1.1 million. We had legal and professional costs that were outsized by about $1.3 million. And then in the other line, we had expenses there that were about $3.3 million outsized, and that was largely the provision for unfunded commitments.

So, if you add up each of those items, you come up with about $3.9 million in total kind of what I would consider to be outsized or abnormal items and which is pretty close to the $85 million that we talked about being the run rate.

Lebi Posen -- Analyst

Okay. That's helpful. Thank you for the color there. Moving over to the credit side, I appreciate the detail that was broke out there. But in the credits that moved to NPA, particularly the CRE line of credit, any more color on those relationships?

Aaron Deer -- EVP, Chief Financial Officer

You mean the movement in the CRE-NPAs?

Lebi Posen -- Analyst


Aaron Deer -- EVP, Chief Financial Officer

No, not really. They just represent commercial real estate projects that were struggling pre-pandemic. There is a couple of them that are in there. We've been working with these folks for a while. They're just kind of running out of steam. And so, we placed them on non-accrual.

We'll have to see where that goes. One, we'll probably take a longer-term work out. The other one, I anticipate, one of the sponsors will probably dilute the other guys out. So -- and that would be just fine with us.

Lebi Posen -- Analyst

Okay. Thank you. That's it from me. I'll step back.


[Operator Instructions] We have our next question comes from the line of Jon Arfstrom. Your line is open. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

All right. Sound better?

Clint Stein -- President, CEO

Much better, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

All right. I'm standing on the roof of my house. Hopefully this works. So, Aaron, a question for you. I'm sure you had an interesting quarter, first one in the Chair, but just -- let's get right to the margin, in terms of, you talked about liquidity and loan pricing, prepayment fees. All of those are headwinds, and I guess, we understand that. But how do you want us to think about the margin from here? And do those categories, all, kind of, maybe through payment fees don't, but the other categories kind of persist and cause some pressure in Q3?

Aaron Deer -- EVP, Chief Financial Officer

Yes, that's exactly right. And I mean, I gave kind of a breakdown of those different drivers. And we also have that within the investor presentation we posted to the website at the bottom of Page 11. And so, it's kind of shows the shift from first quarter to second quarter and what drove that 38-basis point decline.

Excess liquidity was clearly a big part of that. As I mentioned, we're going to try to get more of that deployed, but we're going to do so. It's pretty conservatively as we try to ascertain what kind of -- what the depositor behavior is with all the new inflows that came on to the balance sheet.

So, hopefully, as we get -- get some of that deployed, that will to help recover some of the pressure. But fundamentally, the low rate environment is the real challenge here. And as an asset-sensitive institution, there is not a great deal that we can do given where our funding costs already are.

So, if you look at the -- where our yields went quarter-to-quarter, you can see that it came down quite a bit on the loan book, as well as the investment securities.

Our new purchases on investment securities during the quarter were right around 150. So, that book is going to continue to be under pressure. And similarly, on the loan side, as Chris mentioned, the new loans in the quarter came on at 3.79%, again, well below what the average is for the book.

Now, that arguably might be a little low just because of the mix of the types of credits that we put on during the quarter. So, hopefully, that will come up. But if that's where new asset yields are coming on the balance sheet, obviously, we're facing a pretty strong headwind on that front.

So, we'll try to make up some of that in terms of how we're pricing credits and getting things -- getting more of this liquidity deployed. But I think the margin is going to be -- the core margin, I should say, is going to be real challenge.

Obviously, in the PPP loans, that too is -- adds a little bit of pressure on a -- it will -- excluding the rate of forgiveness on that, that could continue to cause lot of pressure too, given the low yields on that category. But I would expect that if the -- if the forgiveness comes in, I think, as a lot of people expect over the next couple of quarters, the acceleration of the fees related to that will at least give a non-core bounce to the margin. So, we'll -- it's kind of wait and see how that plays out.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Okay. I know it's hard to project, but that helps. Andy, a question for you. It was great detail on what you consider maybe stressed or at-risk categories. But is it safe to assume that those that are not on deferral would be credits that you consider healthy or they have the resources to stick around and pay the loans, is that the fair assessment?

Andy McDonald -- EVP, Chief Credit Officer

Yes, I don't think that's all of that characterization. And there are a lot of businesses that -- even within our hotel segment, not every hotel is doing poorly. We have some properties that have really benefited in a strange way because of COVID and other types of facilities have closed down.

And so, for construction workers, for example, though the extended stay folks are doing quite well in a lot of the rural markets to achieve social distancing and then also to provide a place in case a co-worker in a processing plant or a manufacturing plant gets tested. A lot of businesses are renting hotel rooms to have those places where those individuals can go for 14 days and get quarantined before they go back to work.

So, there are a lot of things like that. And so, yes, I would agree with your characterization.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. And then last one, kind of a random question, but maybe it's for Chris or Clint. Curious if there is a way to characterize how your people are spending their time today versus how they were spending their time, say, back in January or February? I'm assuming it was all hands-on-deck with PPP, but I'm just curious to kind of gauge a sense of normalcy. What are your people doing today versus what they were doing pre-pandemic, if that makes sense?

Clint Stein -- President, CEO

Yes, it's -- I'll start and then, I'll let Chris finish. No, as we got past the grind of the PPP origination process and into the month of May, we really started focusing on what's the new normal at least for this interim period.

And I think that the work that we did then has actually set us up for what -- how things have played out since then as we look at, even things like schools across the country going virtual, the impact that has on families, the capabilities that we have for folks who can work remotely, but also the need for continuing to stay connected to the organization and rotate them in to the offices in a safe socially distanced manner.

What we've seen, let's say, over the last two months, and this is even true for the executive team, as we've started resuming some of what we would consider normal types of activities, traveling throughout the footprint, spending time in market with our bankers, doing some client calls, it's very different.

Some of those client calls now -- by our bankers are being done via things like Microsoft Teams or Zoom, but some are also occurring in-person. And I think that's something that our bankers have embraced. It is getting back to what feels normal to them, and the ability to not only take care of their existing client base, but also continue to develop their prospects and win new business. And we've had some examples, in the last 45 or 60 days of significant wins on the new business front.

And so, so -- it's not business as usual, because I think as a society right now, nothing is normal. But it certainly is a sustainable way for us to continue to grow our franchise and that's what I was getting at in my prepared remarks.

I believe the term I use was we continue to expand our reach. And I referenced the rollout of Zelle. So, we're still focused on -- digital is more important than ever and the work we've done in the last several years is certainly paying big dividends now. But also, we're looking at markets that we're very bullish on and expanding our physical presence like what we're doing in downtown Boise.

So, I think that all of those types of activities give our bankers a sense of normalcy.

And I'll turn it over to Chris to fill in any gaps I might have missed.

Chris Merrywell -- EVP, Chief Operating Officer

Thanks, Clint. Yes, Jon, I think the parts that I can fill in are is, with a return to a little bit of normalcy, I mean, our -- as I mentioned, our facilities, our branches, our lobbies were open a majority of the time during the last quarter. And what we've seen is, people moving more to utilizing drive-throughs, utilizing mobile deposit options.

And so, we spent some time working on scripting and outreach to our clients, since they're not coming in quite like in the same amount, to proactively start talking to them about things like Zelle, in a pre-extensive project that went into that and promoting that, so that we can see that adoption rate move and increase.

I'd say also, folks have looked at the opportunities of while they may not be able to travel where they wanted to. They may not be able to go on a European vacation, we've encouraged our folks to find time to get away from the office and just try and decompress because it really has been all hands-on-deck and quite a sprint for the six months of the first half of the year.

And so, encouraging to do that, knowing that the second half, we're going to be faced with some -- and our employees, as well as school closures and what that means. So, again, trying to get people some relaxation and some rest.

In the meantime, it's focused on the business going forward, and you've heard us talk about the things that we've invested in and we do -- we'll continue to do that. We'll continue to look at our distribution network. But we're also remaining opportunistic.

And there are -- there is a business that is out there, there are opportunities coming up. As Clint mentioned, people are working their prospects. It is different. There's not as much entertainment or anything of that nature. Don't expect that will probably change throughout the end of the year.

But our team has been very effective with their approach and their experience is waning out in that. And then in certain business lines, we've seen a real uptick back to more of a normal pre-flighting new deals. It wouldn't be surprising if I told you that in the second quarter, our healthcare group did about 10% of their normal volume. As Andy described, the dental offices were closed and that made perfect sense. You're starting to see a lot of that comeback, and we're looking at those very closely and not to belabor it, but we do spend more time on each and every deal, making sure we understand not only where they've been, but what are they doing to evolve their business in the COVID environment. And what's coming, it is now -- it's more important than ever to understand the changes and how that could potentially impact the revenue.

So, new loan deal takes -- it takes longer, but it's a very disciplined approach that we've always had and we're sticking to it. So, hopefully, that provides you some color.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes, it does. Thank you.


We have our next question, comes from the line of David Feaster [Phonetic]. Your line is open. Please go ahead.

David Feaster -- Analyst

Hey. Good afternoon, everybody.

Clint Stein -- President, CEO

Hi, David.

David Feaster -- Analyst

I just wanted to get your thoughts and you just touched on it a bit, but just thoughts on organic growth. Loans, ex-PPP were down a bit more than expected. It seems like this is largely due to declining C&I utilization. But just curious, the trends you're seeing, how much of this was strategic, like were you tightening the credit box versus asset sales or just simply less demand for new credit, I guess? Thoughts on growth going forward, where you're interested in growing and even where you're seeing demand for new credit?

Andy McDonald -- EVP, Chief Credit Officer

Sure. This is Andy. I think the second quarter was a tough quarter for everybody. And so, there just wasn't demand on the C&I or the CRE front for much activity. And so, I think if you look across the industry, that's pretty consistent for most banks. I think too the bankers were extremely distracted by the encompassing nature of PPP.

As we've kind of moved beyond that, with the PPP and the relatively modest activities, the cash build also means to pay down on the revolvers and leave our utilization revolver at about 43%. So, it's down significantly. What we are seeing though is businesses are starting to begin to get a little bit more active in the front, of looking at, "Okay, I still need to keep my business running, I still need to invest in capital projects that ensure that I remain competitive."

I think there are more modest projects than maybe what we had seen in the past. We aren't seeing people necessarily moving to new markets or launching new products, but rather investing in what they already do and do well. And so, from that perspective, the credit decisions are all easier.

We also have seen an opening up in the construction area, with the states opening up, and so, construction activity again is moving forward. As Chris noted earlier, activity in the homebuilding segment is very strong and we're also seeing commercial real estate projects now getting back under way.

And so, those are kind of areas where we see growth and demand, but I would characterize it as modest at this point.

Clint Stein -- President, CEO

Yes. Hey, David, I agree with Andy on that. It's building. We're seeing some things come back. There's still folks there, cautious. But we're also starting to hear more about businesses that are potentially wanting to sell. And so, that transition will create opportunities. And we're doing all we can to be in front of our centers of influence and things and be in the right place to participate in those. But again, we'll have to look at each and every one of them with a higher level of due diligence, which makes perfect sense in this environment.

And I wouldn't say, it's any one specific area. We've always had a philosophy of being in markets, albeit cautious. But we'll look for opportunities that are available in any space and know that we're going to have to work a little harder to maybe find the best of the best. And that's part of what we do in the discipline.

So, between the production and Andy's credit team, who work very close to me and spend a lot of time right now pre-flighting things and looking at them, so that we end up with a good client experience and also end up with a good credit that joins our books.

So, optimistic is the best way to look at it, but there's a lot of unknowns that are out there that could change that at any time.

David Feaster -- Analyst

Okay. That's helpful. And then just, kind of, following up on that production commentary. Has there been any -- just curious to get your thoughts on hiring. Has all this disruption created additional opportunity for new hires and maybe expand into new markets and pick up a team that's kind of be on the shortlist, and maybe be a bit more aggressive while a lot of others are kind of being more fearful?

Chris Merrywell -- EVP, Chief Operating Officer

Yes, the short answer is yes. We continue to look at opportunities. You never know when somebody from other organization might be ready. So, we've always had a eye to good people, good teams, and we're always open for that coming on board. As Clint mentioned, we're expanding our presence in Boise with opening up the NeighborHub there.

And so, disruption happens across the industry at all places. And different organizations are going to attack problems in different manners. And that creates opportunities for the right individuals to potentially look for something different.

And I think our values and our culture and the way we do business attracts a certain type of individual. We've been successful at that in the past and we expect to continue to be successful in it.

David Feaster -- Analyst

Okay. That's helpful. And then just one quick one. I apologize if I missed it. But do you have an estimate for net PPP fees that are expected to come through, net of deferred or net of origination costs?

Aaron Deer -- EVP, Chief Financial Officer

We'll look at that. I'm not sure that we're disclosing that, but I know that -- we can follow up afterwards, I guess.

Clint Stein -- President, CEO

I think just we haven't disclosed the number, but I think of what I've read just from all the analyst reports and different things, I think we're probably in that range of what you all are predicting for the industry as a whole, relative to the amount.

David Feaster -- Analyst

Okay. That's helpful. Thanks.


Your next question comes from the line of Matthew Clark [Phonetic]. Your line is open. Please go ahead.

Matthew Clark -- Analyst

Hey, good morning. I apologize if I -- if you guys already touched on this. I've been jockeying between a couple of other calls. I guess, with the deferrals and knowing almost half of them came from the dental portfolio, do you have a sense in, as you talk with your customers during the quarter, what percent of that deferral amount might cure here in the third quarter?

Chris Merrywell -- EVP, Chief Operating Officer

Are you asking -- you kind of broke up there at the end. How many will want additional deferrals?

Matthew Clark -- Analyst

No. How much will cure? How much will resume regular payments? What's your estimate for a percentage?

Chris Merrywell -- EVP, Chief Operating Officer

Almost all of it.

Matthew Clark -- Analyst

That's great. Okay. And then just, at Seattle you had [Indecipherable]. Portland looks like a disaster these days. I guess, how is this impacting kind of day-to-day, not really at the bank, but just among your customer base, are you seeing any kind of disrupt business within your portfolio or not?

Clint Stein -- President, CEO

I don't know that we're seeing a tremendous amount of business disruption from our clients and even ourselves with operations in both those areas. We've had the nuisance of some broken windows and vandalism with tagging and other things that you can quickly address. I think it's more the underlying themes that I'm hearing from clients and businesses. And Chris and I had a meeting with one yesterday, that's been located in downtown Seattle for their entire 20-year history. Their lease is up next year and they're looking at Bellevue.

So, I think that's really the risk longer term, as you had both Seattle and Portland, our beautiful downtown cities that are on some sort of a -- they're at a turning point. And for several years, the City Council for Seattle has been marginally anti-business. And I think what we're seeing there is that it's no longer even marginal.

And so, that's concerning. But I think it's also an opportunity for greater metro area. I think it's an opportunity for the Tacoma and Pierce County community, where we're headquartered, and have a lot bigger operations. And I think it's a tremendous opportunity for Bellevue and Eastern King County. And then also if you think about the Portland metro area, there is opportunities across the river in Vancouver. And in some of the outlying communities that are outside of Multnomah County there.

I wouldn't say I'm losing sleep over this, but I wake up in the morning thinking about the possibility of some of the business climate that we're seeing in Seattle and Portland, spreading to these other communities that I just mentioned. And then I do think then in that case, it could be very disruptive to our clients.

That's why, I think I'm pretty bullish on the Boise, Idaho market, as well as the time that we spent there and meeting with the economic development and chamber and other folks and just seeing the sheer volume of inquiries they are getting from business relocations.

So, it's -- time is going to tell. I think, it's -- we're a little over a year away from elections for the City Council. And I think that's where we'll see kind of, if business -- both folks, what they're thinking and what we're hearing now. But it is something that I think we're all closely monitoring.

And I don't know, Andy or Chris have any additional insight?

Andy McDonald -- EVP, Chief Credit Officer

I think you did most of it in there. It's not really disrupting our day-to-day operations, but it's more staying close to any and all clients that we have and what their thoughts are. I think the best thing to kind of hammer home is, one, pay attention to it; and then, two, Clint summarized it well by saying time will tell. But it is -- it's an obvious concern for us.

Chris Merrywell -- EVP, Chief Operating Officer

Yes, I mean, most of the activities in downtown core areas where white collar people, they're mostly working from home anyways. So, it's not really disrupting businesses from that perspective.

I think what's the bigger issue for businesses closely in the Seattle market is just how business-friendly the community and the city is, and the taxing environment is what's really pushing people across Lake Washington to Bellevue.

Matthew Clark -- Analyst

Okay. Great. And then maybe just back to the PPP, how are you guys modeling kind of forgiveness process here. You kind of sense that most of it, if not all of it will be forgiven. And what's your expectation on timing as you think it will be more fourth quarter and then maybe a little bit into the first quarter and then beyond?

Aaron Deer -- EVP, Chief Financial Officer

Matthew, in terms of modeling that out, there is a lot of uncertainty. Obviously, the notes are two-year terms, but the expectation is that a lot of it is forgiven relatively quickly. We're, I think, expecting the majority of that to happen, the vast majority of it really in the back half of this year and into early next year. But it's really hard to say exactly what the exact timing of that's going to be.

Clint Stein -- President, CEO

Matt, there's also some unknowns in that of when we can submit. So, that's one unknown. And then when we do submit, when we actually receive the reimbursement. So, there are some things that we're still unknown in that. So, it could drag a little bit.

Matthew Clark -- Analyst

Okay. Are you assuming [Speech Overlap]

Clint Stein -- President, CEO

I mean, you can't even get participants today, even if you wanted to, which is the beauty of this program. But I think that for a lot of businesses, because of the accounting impact, we're going to want to get it done in 2020.

Matthew Clark -- Analyst

Okay. And I assume you have no appetite to sell PPP loans to a third-party?

Clint Stein -- President, CEO

No. We usually delete those emails as they come in.

Matthew Clark -- Analyst

Got it. Thank you.


Your next question is from Gordon McGuire [Phonetic]. Your line is open. Please go ahead.

Gordon McGuire -- Analyst

Hi. Aaron, I wanted to follow-up on the margin discussion, and particularly the potential for deposit outflows other than those that are PPP-related. I guess, I was wondering if you could hazard a guess, trying to size up, what that could look like?

Aaron Deer -- EVP, Chief Financial Officer

I will tell you this, it's something we've spent a lot of time thinking about, because obviously deposit flows were very strong. And so, we've gone back and looked at past cycles to see what consumer and business depositor behavior was like at the time.

Having gone through that exercise, we actually feel pretty good that this should be pretty sticky funding, but -- but at the same time, this is unlike anything we've really faced before.

So, at this point, I think we're assuming that a lot of the PPP funds are utilized for business purposes, as expected over the coming months. And with the remainder of inflows, we've seen further reasons where we're hopeful that a lot of that sticks around, but we're also going to be prudent in terms of how we get that investment.

So, it's -- there's just a lot of uncertainty to it. But hopefully, that at least gives you some color on our thinking.

Gordon McGuire -- Analyst

Nope, that does. And if it were to stick around, if you felt more confident with it, would you consider -- I know you typically target about $800 million in non-core funding balances, would you consider moving those lower if the lower cost deposits were stickier?

Aaron Deer -- EVP, Chief Financial Officer

Say the question again.

Gordon McGuire -- Analyst

I think, historically, you tried to manage non-core funding to around $800 million, and I was wondering if you do determine that these deposit inflows are a little bit more sticky, whether you consider moving that $800 million Boise lower?

Aaron Deer -- EVP, Chief Financial Officer

Sorry. I apologize. We have, in fact, actually already let a lot of that higher cost funding go. So, as it makes sense to do, we will continue to do that. So, we've had it in the past as part of the balance sheet strategy. But given where rates are now, we're very focused on keeping the funding cost as low as we possibly can. Obviously, our deposit costs at seven basis points is hard to beat elsewhere, so.

Gordon McGuire -- Analyst

And then just housekeeping, and one of the double-check. Does the PPP fees, do they show up in the footnote -- the margin footnote with the $5.1 million of net deferred loan fee amortization, or is that laid on top?

Aaron Deer -- EVP, Chief Financial Officer

Repeat the question, please.

Gordon McGuire -- Analyst

In the margin footnote, where you give us the amortization levels of the deferred loan fees this quarter. I'm curious, if PPP flows through that number? And I think it was $5.1 million this quarter.

Andy McDonald -- EVP, Chief Credit Officer

We'll follow up. We'll follow up with you offline on that one. But that PPP would be small though, because those are 4-year [Phonetic] notes. So, they weren't outstanding for very long to amortize much of the fee and the income.

Gordon McGuire -- Analyst

Okay. Thank you.


And you have no questions at this time. Please continue.

Clint Stein -- President, CEO

All right. Well, thanks everyone for joining us. And look forward to another interesting quarter here in the third quarter and chatting with you all at some point during the remainder of the quarter or on our third quarter earnings call. Thank you.


[Operator Closing Remarks]

Duration: 79 minutes

Call participants:

Clint Stein -- President, CEO

Aaron Deer -- EVP, Chief Financial Officer

Chris Merrywell -- EVP, Chief Operating Officer

Andy McDonald -- EVP, Chief Credit Officer

Luke Woodham -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Lebi Posen -- Analyst

David Feaster -- Analyst

Matthew Clark -- Analyst

Gordon McGuire -- Analyst

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