Columbia Banking System Inc (COLB) Q4 2020 Earnings Call Transcript

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Columbia Banking System Inc (COLB)
Q4 2020 Earnings Call
Jan 28, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Columbia Banking System's Fourth Quarter and Full Year 2020 Earnings Update. [Operator Instructions] 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, sir.

Clint Stein -- President and Chief Executive Officer

Thank you. Carmen. Welcome and good morning, everyone. I thank you for joining us on today's call as we review our fourth quarter and full year 2020 results. Our earnings release and investor presentation are available at columbiabank.com.

Amidst the turmoil in 2020 caused by the pandemic, social unrest, turbulent financial markets, and contentious election cycle, Columbia achieved another record year. Pre-tax, pre-provision income of over $270 million was our best year yet, eclipsing in the record set just last year by $25 million. The pandemic drove our provision expense to credit losses to an all-time high, yet full year net income and EPS were still very strong at $154 million and $2.17, respectively.

During last quarter's call, we mentioned that our pipelines were rebuilding. Our bankers' business development activities during the quarter exceeded expectation, delivering a record of $168 million of new loan origination with deposits [TS 18:07] into a new high of $13.9 billion. We are very proud of the resiliency, adaptability and dedication our employees have exhibited during 2020. Our business activities continued in a near-normal capacity with bankers winning new client relationships and completing important operational initiatives that immediately improved our operating efforts. They accomplished so much more than simply remaining open for business during COVID,

On the call with me today are Aaron Deer, our Chief Financial Officer; Chris Merrywell, our Chief Operating Officer; and Andy McDonald, our Chief Credit Officer. We'll be happy to answer your questions following our prepared remarks. I need to remind you that we may make forward-looking statements during the call. For further information on forward-looking comments, please refer to either our earnings release or website or our SEC filings.

At this point, I'll turn the call over to Aaron to review our financial performance.

Aaron Deer -- Executive Vice-President and Chief Financial Officer

Thank you, Clint. 2020 earnings of $154 million and EPS of $2.17 were materially influenced by the economic impact of the pandemic on our net interest margin and credit-loss provision. The steep decline in interest rates at the end of the first quarter was offset by a higher volume of lower yielding earnings from PPP loans and investment securities, both funded by our slow deposit inventories during the year. Interest income was further supported by the interest rate collar implemented at the beginning of 2019. Expenses were carefully managed to $325 million, which was the lowest level since 2017, the year of the Pacific Continental acquisition.

Fourth quarter earnings of $58.3 million and EPS of $0.82 were an increase of $13.6 million and $0.19 on a linked quarter basis. Quarterly pre-tax pre-provision earnings increased $8.3 million to $74 million with the rise driven mostly by a combination of accelerated loan fees from the payoff of PPP loans and the recapture of credit-loss provisions. Though there were other favorable operating trends in the quarter that contributed to the upside and helped to offset continued pressure on core asset yields.

Total deposits ended the quarter at $13.9 billion, up $270 million from September 30, and $3.2 billion over the past year. The quarterly increase was mostly the interest-bearing demand and was spread throughout our footprint. The annual increase is attributed to federal stimulus, including PPP loans, as well as reduced spending and higher savings by both retail and commercial clients. Our cost of deposits declined by 1 basis point during the quarter to 5 basis points. Which is down 21 basis points in the fourth quarter of 2019. The increase in deposits created additional liquidity and we moved a significant amount of our excess cash into investment securities during the quarter, and are being mindful of potential depositor always heading into 2021.

As a result of these investments, our securities portfolio increased $928 million to $5.2 billion, despite this considerable growth, the composition and duration of the portfolio did not change materially. Investment securities yields declined just 1 basis point to 221, where you should note that the fourth quarter yield benefited from the early repayments on two Fannie Mae CMBS bonds. Without these one-time payments, the yield would have been 2%.

The net interest margin improved 5 basis points on a linked quarter basis to 352. The increase stems from the acceleration of $4.9 million of PPP loan fees due to pay-downs or forgiveness by the SBA. This added 14 basis points to the margin. On a stand-alone basis, the PPP portfolio yield was 4.46% and benefited the margin by 5 basis points. In addition, the bank had a $1.7 million recovery of interest on a non-accrual loan that paid off, adding 5 basis points, as well as the two early payoffs of investment securities I just mentioned that contributed $2.5 million of interest income or 7 basis points to the margin.

For the year, the net interest margin decreased 59 basis points due to decreases in loan and investment yield of 69 bps and 28 bps, respectively, as well as greater liquidity on the balance sheet. PPP loans only contributed 2 basis points in the decline as accelerated recognition offset below 1% interest rate. Total loans ended the quarter at $9.4 billion, down $261 million from September 30th, driven by $302 million of payoffs in the PPP portfolio. Excluding PPP loans, balances rose $40 million to $8.8 billion.

New loan production was brought on and the average tax adjusted coupon rate of 336, which compared to the overall portfolio excluding PPP loans of 405. Non-interest income increased $1.1 million in a linked quarter basis to $23.6 million due largely to higher mortgage banking revenues stemming from strong volumes, improved sales execution, and a one-time benefit of roughly $1 million from a change in our sale methodology.

Non-interest expense decreased $815,000 on a linked quarter basis to $84.3 million largely due to a $1.3 million recapture provision for unfunded loan commitments. Our non-interest expense ratio declined to 2.05% for the quarter and our operating efficiency ratio decreased 3 points to 53%. We expect our quarterly non-interest expense run rate to be in the mid to upper 80s in 2021.

The provision for income taxes increased $6.8 million on a linked quarter basis to $16.8 million representing a 22.3% effective rate, which was elevated due to the higher level of taxable income in the final quarter of the year. And the true up our full year effective rate to 19.8%. We expect our 2021 tax rate to be in the range of 19% to 21%. And with that I will turn the call over to Chris.

Chris Merrywell -- Chief Operating Officer

Thank you, Aaron, and good morning, everyone. As Clint noted, fourth quarter loan production of $468 million was a new quarterly record propelling full-year production excluding PPP loans to $1.4 billion. Total loans declined from $9.7 billion to $9.4 billion, mostly due to the pay-off of PPP loans. Line utilization remained stable during the quarter at 46.6%. When compared to the end of 2019, total loans increased by $684 million primarily due to open PPP loans of $662 million as of the end of 2020. During the year of unprecedented challenges our bankers' focus on relationships with our clients resulted in loan levels consistent with those before the pandemic. This is a win and credit goes to everyone throughout the Company for pulling together to move our clients' businesses forward in a time of significant need.

Excluding the impact of the PPP portfolio, loans grew by $40 million during the quarter. Growth was centered in the C&I and CRE portfolios, which increased $64 million and $35 million respectively during the quarter record production in both portfolios was offset by payoffs and continued low line utilization. CRE growth in Warehouse and Retail segments, and C&I growth in Rental and Leasing and Public Administration segments were offset by declines in agricultural loans. Mortgage loans increased by $46 million, mostly due to the purchase of a $50 million portfolio at the end of the quarter. Residential mortgage activity continued at an accelerated pace during the fourth quarter, driving non-interest loan revenue higher by $1.3 million on a linked quarter basis.

The quarterly production mix was 55% fixed, 41% floating, and 3% variable. The overall portfolio of a mix now stands at 7% PPP loans, 48% non-PPP fixed rate loans, 32% floating rate, and 13% variable. PPP loans were $652 million and at the end of the year with over $300 million of payoffs and paydowns since the forgiveness portal opened in mid-August. If that wasn't enough, we've opened our new portal for round two of the program on January 19th, that once again experimented large volume of applications.

Our bankers and back office teams are actively working with our clients to ensure that loans are funded as quickly as possible and we are seeing great results. Deposits grew by $270 million during the quarter and $3.2 billion during the year to end the year at $13.9 billion as Aaron mentioned. The deposit mix shifted from 62% business and 38% consumer as of September 30, back to our typical 60%-40% business consumer split at December 31. This client and business deposit is attributed to our normal seasonality. From a product perspective, deposits as of December 31 were evenly split between noninterest-bearing and interest-bearing as part of our brand strategy, we completed the consolidation of two branches during the quarter and we continue to evaluate our distribution system as we move forward.

And now, I will turn the call over to Andy to review our credit performance. Thanks, Chris. This quarter's ACL totaled a $149.1 million. A reduction of $7.8 million from the third quarter comprised of net charge-offs totaling $3.1 million at a provision release of $4.7 million. The lower required allowance was the result of an improved economic outlook offset by management adjustments with COVID-related exposure in the Commercial Real Estate segments of the portfolio, specifically restaurants, office, retail, and hotels.

Consistent with my comments last quarter, the momentum in half of the recovery will continue to be threatened by the coronavirus pandemic. While downside risk has narrowed, numerous risks still remain such as the fourfold increase in COVID cases throughout Q4, the slow rollout of the vaccine, flat to decline in GDP over November and December, and continuing localized lockdowns in our footprint.

Our model assumes annualized gross domestic product to decline in the first quarter of 2021 by 2.8% before rebounding and ending 2021 with a fourth-quarter increase of 3.2%. The unemployment rate is predicted to end 2021 at 6.6%. As a reminder, we use IHS Markit for our economic forecast. As I noted previously, we continue to apply and overlay this quarter of what we consider high risk commercial real estate and downstream potential impacts of permanent job losses at a significant Northwestern quarter. These amounted to a combined $11 million in Q4, an increase from $5 million in Q3. Much of this thought process is driven by the lock-downs which occurred during the fourth quarter in our footprint. We ended the quarter with an allowance relative to period end loans of 1.58%. Adjusting for the PPP loans, the allowance to period end loans increases to 1.7.

NPAs for the quarter were relatively unchanged at 21 basis points. However, as you know, I like to adjust for PPP loan and I believe this provides a more consistent comparison as we move forward. With this adjustment, NPAs do not increase, but decline by 2 basis points. So again, relatively unchanged. Past due loans for the quarter were 28 basis points compared to 15 last quarter, and net charge-offs were annualized at 13 basis points for the quarter versus 8 last quarter. Our period capital ratio improved modestly from 25.3% to 23%, thanks to a decline in the substandard assets.

In summary, while our credit metrics improved for the quarter, I would still characterize them as stable. On the risk rating front, loans rated watch or worse declined $129 million during the quarter. We saw watch loans decline $57 million, going from $393 million to $336 million. Special mentioned loans declined $57 million to $297 million, and substandard loans saw a decline of $15 million. At year end, we had approximately $321 billion in substandard loans. These changes decreased on our launch and below risk ratings from 11.1% to 10.1% of total loans, again very stable matrix.

Okay, deferrals at the close of the quarter, we had $147 million in acted deferrals, or roughly 1.7% of our portfolio, excluding PPP loans. This is up modestly from $114 million deferrals. At the end of the third quarter. I would note that about 23% of these loans are criticized classified assets. The deferral bucket is comprised of $50 million in clients with first deferrals and $97 million of clients with second deferrals.

Approximately, 45% or $44 million of the second deferrals are related to an Oregon State deferral program unique to our footprint and others doing business in Oregon is a statue that allows borrowers with loan secured by real estate in Oregon to obtain a deferral simply because they have real estate domiciled in order. This statute expired December 31.

So these borrowers will begin making payments again this month unless the Oregon Legislature amends and extends the statute. Most of the deferrals continue to be in portfolio, which accounts for $39 million of the active deferral. As mentioned before, this is consistent with our strategy, relative to the sector and does not cause us to be any more concerned that when we entered the pandemic. The remaining balance of deferrals are really spread out across a wide variety of businesses. The portfolio as identified back in April of 2020 as being some of the first to be impacted by the pandemic, which includes our dental, retail, hotel, healthcare, restaurants and aviation portfolios amounted to about $2.4 billion as of December 31, 2020 or roughly 24% of our loan portfolio. If we exclude the dental and healthcare portfolios this number drops to $1.2 billion or 13% of our portfolio as of December 31, 2020.

The largest portfolio we identified again was our dental portfolio. As previously discussed throughout 2020, we believe the impact on this portfolio to be truly transitory. When we look at the credit metrics for this portfolio that story bears out. Past loans represent 97% of the portfolio. Special mention and substandard loans actually declined in the fourth quarter. We have only one loan on deferral for 715,000 past dues are only 1 basis points and non-accruals are 2 basis points.

We will likely be removing this that a pandemic-impacted portfolio for our 2021 reporting. The next largest segment we identified as having high risk relative to the economic disruption caused by COVID-19 is our retail portfolio. We have approximately $512 million in retail-related exposure, excluding PPP loans which comprised of commercial real estate and commercial business loan, and represents about 6% of our total loan portfolio.

The largest part of our retail exposure is comprised of commercial real estate loans, which account for approximately $452 million of the total or roughly 88%. Again, to give you an idea of the types of retail properties we financed, the most common are small four to five-day strip centers located in suburban communities and stand-alone single-tenant properties.

In addition, the portfolio contains grocery-anchored centers and mixed-use property. We are not in large downtown core metropolitan areas, nor do we finance regional malls or big-box retailers.

For the entire retail portfolio 95% is tax rated, of which 5% is watch, which we also categorized as a past category. It is a slight improvement over the last quarter and continues a positive trend. While this trend is encouraging, we remain cautious given government mandated COVID closures and government-mandated deferrals.

Okay, deferrals in this segment are up slightly from the third quarter from 1% to about 1.3%. With half on their first deferral and the other half on their second deferral. However, it is still a significant improvement from earlier in the year when deferrals accounted for 16.4% of the portfolio.

Using at origination values, the average loan-to-value for the portfolio is 50% with 98% of the portfolio having loan-to-value less than 75%. We have stress tested this portfolio for equivalent decline in value as seen during the Great Recession. The average loan-to-value rises to 63% with about 76% of the properties having a loan-to-value less than 75%. Obviously, we're pleased with how this portfolio is performing, but we remain cautious, and our expectation is that we will see a weakening in this portfolio throughout 2021.

Let's discuss hotels next. We have $327 million in hotel loans representing about 3.5% of our loan portfolio. Again, to give you an idea of the type of hotels we finance, most have one of the following flags, Holiday Inn, Best Western, Choice, Marriott and Wyndham. In total, flagged properties comprise 77% of the portfolio.

The average loan size is $1.5 million. Today we have $39 million on deferral, which is down from last quarter when approximately $62 million was on deferral. However, $31 million of the $39 million is on its second deferral. For us, this is not surprising as we are executing on longer-term strategies. We do expect deferrals will continue to decline in this category.

For the fourth quarter, we actually saw some healing in this portfolio. Loans rated special mention and substandard declined from $180 million to $145 million as the leisure travel properties performed well in 2020. It appears that since folks did not go to Hawaii, Puerto Rico, or Europe, they chose to go to the Pacific Coast, national parts of Idaho and Oregon, as well as other recreation areas in the Northwest.

Similar to the retail and commercial real estate portfolio, 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 97% of the portfolio having a loan to value less than 75%. On a stress basis, about 55% of the portfolio has a loan to value less than 75%.

Let's move on to the non-dental healthcare portfolio, which is about $254 million in total excluding PPP loan. Similar to the dental portfolio, we saw the impact of the pandemic here to be transitory. Problem loans have remained steady at around 1.4% of the portfolio for the last three quarters and this is down from 2.1% at year-end 2019. Past dues are consistent at 10 basis points and payment deferrals have declined from $107 million to $250,000 which really only represents one client.

Next up is restaurants and food services. This, of course, is a portfolio that has been very impacted by government actions attempting to control the COVID-19 pandemic. After having been forced to close in the spring of 2020 and then again in the late fall or early winter of 2020, we anticipate further weakening in this portfolio throughout 2021. We have approximately $173 million in this portfolio excluding PPP loans with two-thirds comprising commercial real estate loans. 82% as watch, a little better, down from 86% at the end of the third quarter. Thus watch and worst loans increased $5 million to $35 million. In absolute terms, not big numbers, but directionally, it demonstrates the effects of governmental action.

We granted a 157 deferrals for about $66 million in this portfolio. Today, we have 12 payment deferrals for about $8 million. Last quarter, this portfolio had $16 million in deferrals. Similar to the hotel and retail segments, we see this area taking some time to heal and we are not surprised by the negative migration. Certainly, the current round of PPP funding will greatly benefit this cycle. We do stress that thing again on this portion of the portfolio and on a pre-pandemic basis, the average loan-to-value is 58% with 94% having a loan-to-value less than 75%, again on a pre-pandemic basis. Under our stress test scenario, average loan-to-value rises to 73% with only 55% having a loan-to-value less than 75%.

The last portfolio, I'm going to discuss is our aviation portfolio. Products comprised of both direct exposure to domestic airline carriers as well as entities that lease airplanes in engines to airline carriers. In total, the portfolio was about $140 million with about $96 million being direct exposure to U.S. domestic airlines and the remaining $44 million in exposing to lessors. Today, most of the portfolio is rated watch, which is consistent with last quarter.

Given the longer duration for recovery in this segment, risk ratings are highly dependent on borrowers liquidity and run rate or as we call it the burn rate physicians. Of the domestic airlines, we have exposure to, they have raised over $53 billion in additional capital to assist them through this pandemic. As such, this additional capital, combined with expense reduction efforts results in our borrowers having between 18 to 35 months of burn rate. This does not include $6.5 billion more that was recently announced an additional payroll support agreements with the U.S. Treasury Department. Based on the current burn rate, the airlines with the majority of our exposure have sufficient liquidity to get them into the fourth quarter of 2022.

Most of the domestic airline exposure is secured by aircraft with a pre-stress loan-to value of 69% and a current loan to value would really closer to 74%. However, on a stress test basis, the loan-to-value rises to 89%. As for the leasing portfolio, which again is only $44 million, 50% of the exposure is in Asia, 26% in Europe and 8% in South America. The rest is in North America and the Middle East. The majority of the portfolio consists of narrow-body aircraft, with an average age of 8.7 meters. We view the 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 74%. However, based on what we believe is today's value, probably closer to 78%, and on a stress basis, it rises to 91%. Similar to the domestic airline, many of the lessors have been able to access the bond market and securitized unencumbered assets to bolster their liquidity positions. We estimate our lessors to have raised over $3 billion in liquidity as well through the third quarter.

So while decline back to profitability, and more importantly, positive cash flow for this industry will be protracted, it continues to attract the necessary capital to bridge them through return to profitability, which we do not anticipate until 2023 at the earliest.

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

Clint Stein -- President and Chief Executive Officer

Thank you, Andy. Besides the challenges of 2020, we remain focused on supporting our communities throughout the year. We extended our community impact, while catering our efforts to meet the unique challenges for the year from following fund rising, company contributions and importantly dividend generated nearly $4 millIon[[Phonetic] economic support across our footprint.

This is a testament to our employees' dedication to the communities where the live and work. I'm particularly proud of they've $315,000 raised by for Warm Hearts Winter Drive during the holiday season. Nearly $1.5 million has been raised to support more than 60 shelters over the Drive's six year history. Our team is also supported communities through our Pass It On program, while we saving more than 350 small businesses over $600,000 to provide a service for someone in the community. It was impacted by COVID-19 or the economic downturn. These are just a few examples of the ways our team express their dedication to our communities in 2020. I'm proud of their continued support and the commitment they've demonstrated in the mix of a very challenging year.

Lastly, we announced our regular quarterly dividend of $0.28 this morning. This quarter's dividend will be paid on February 24th to shareholders of record as of the close of business on February 10th.

This concludes our prepared comments. And as a reminder, Andy, Chris and Aaron are with me to answer your questions.

Now. Carmen, we will open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from Jeffrey Rulis with D.A. Davidson. Your question please.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Thank you. Good morning.

Clint Stein -- President and Chief Executive Officer

Good morning.

Jeffrey Rulis -- D.A. Davidson -- Analyst

I wanted to check back in on the -- just the expenses and I got Aaron's sort of guide of mid-to-upper 80s run rate, but kind of thinking about the mix of that and catching up to where you sit on kind of investment versus management of expenses and just kind of the intricacies I know that it's an ongoing investment, but just trying to get to where anything new you're launching or what the spend you've had in years past. Just trying to catch up with that dynamic. Thanks.

Clint Stein -- President and Chief Executive Officer

Okay. You touched several areas. I'll let Aaron to get into the details of it and then as appropriate Chris might jump in. But just to start up with one of the things, and I think you changed your question in this fashion is that we've never stopped investing in our business and in the future of our franchise and that investment can be anything from additional technology can be, we opened in the quarter or our newest NeighborHub in Boise, that's an investment at community, also there is a fair amount of disruption that occurred across the -- across our three states footprint and it's with some of the large national banks that are consolidating operations, COVID and remote work has been a dynamic that has caused folks to maybe reconsider the company's that they work for, and we continue to remain a employer of choice broadly across our markets. And so we've had the opportunity to get new team. So as those opportunities present themselves, we'll continue to take a long-term view and make the investments that we think will drive additional returns down the road for our shareholders. And so, and I'll step back and let Aaron add these details.

Aaron Deer -- Executive Vice-President and Chief Financial Officer

Well, Jeff, as you saw in the press release, we did have the $1.3 million recovery growth provision fund side commitments in the fourth quarter. So that's obviously something to keep in mind when you're thinking about where the run rate guidance is for next year. In addition, there's always kind of normal year-end true-ups, a brighter kind of ins and outs on that front, one of the larger though is that we had a $700,000 reversal of a medical accrual in the fourth quarter, so that obviously won't carry into the first and then as you know, you're always kind of have some higher accruals generally in the comp side, FICA costs, that's those sorts of things heading into the new year. Also just as a year-over-year reference, we called it that in the early part of 2020, we recognized $2.2 million in credits or FDIC assessments, those benefits have obviously gone away. And then as the year goes on, we're hoping that we get -- our bankers are excited to get back out in front of clients and off of Zoom calls. And so we can see some increase in travelling and streaming cost and that sort of thing. As Clint said, we're always invested in new personnel and new technology as just kind of an ongoing part of our business, unless Chris has anything to add in terms of kind of special items on that front.

Chris Merrywell -- Chief Operating Officer

No, probably just more of the Jeff you've followed us for a long time, and know that we have a pretty consistent methodical process around our branch system and other parts of the of the network, and we've been locking down square footage for years, for decades, and we'll continue to look at that, we will continue to do it. There's a piece now that's been brought into play with all of the consolidations in the industry for the closures. We're looking at that from an opportunistic standpoint and what does that mean and we're seeing business that we're able to pick up, so there a revenue play on the side too from these branch consolidations, especially on in more of the world communities and things of that nature. So again, we'll look at that. We'll look for opportunities, but I wouldn't see us changing from our current direction of consistency if you will on that. As far as people, there's certainly disruption in the industry when mass consolidations are announced and things like that, it creates anxious employees and where an employer of choice is quite mentioned and so we'll continue to look at where those folks come available and if the investment makes sense from an opportunity is there, we'll certainly continue down that path. But it's been a very disciplined approach over the history on the of the bank. And I don't see that are changing.

Jeffrey Rulis -- D.A. Davidson -- Analyst

I appreciate it. That's good coverage. One last one, just maybe per plant, it's been a while on the acquisition front and some of that certainly by design, but also perhaps by the market. Any update on your appetite within that and my guess is, it's more stored -- steered toward may be lift-outs and other but maybe give us an update of where you, how are you thinking about acquisition going forward?

Clint Stein -- President and Chief Executive Officer

Yeah, it's, still very much a part of our DNA. We look at the individuals that have been part of our acquisition and integration teams over on the last 10 or 12 years, I'd say that we've had some folks have retired. But I'd say that a lot of our key leaders in those types of activities are probably 80% to 85% of them are still with us. So it's definitely a skill set that we still possess. We spent a lot of time modernizing our platforms and things over the last few years and really started looking toward with both the M&A market might hold about this time last year and then COVID hit and kind of shut everything down, I'd just say that our history of being active in M&A is still part of our strategy and I think that there's just nothing specific, but I just think in general with M&A vs pent-up demand and I think there's an increased sense of urgency relative to the rate environment and need to improve operating leverage and grow revenue. And so I think that's going to accelerate as we get further beyond the pandemic and our goal is always to at least be part of the conversation. So when somebody breaches the point where they're ready to find a partner, our goal is always to at least have them pick up the phone and give us a call. I don't know if that's helpful. But that's kind of how we view it.

Jeffrey Rulis -- D.A. Davidson -- Analyst

All right, thanks, Clint.

Operator

[Operator Instructions]. Our next question is from Jon Arfstrom with RBC Capital Markets. Your question please.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, good morning, everyone. Afternoon, I guess.

Clint Stein -- President and Chief Executive Officer

Morning Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yeah. That means, I get to ask 20 questions by the way, I mean the queue was light behind me, so I'll start, but anyway maybe Andy, a question for you. I appreciate all the commentary on the stress portfolios. If you had to consolidate all of that, are you more optimistic/less pessimistic or do you still have things that keep you wake at night? it feels like things are better than kind of looks like that from your economic factors in your reserving, but give us a big picture of your consolidated thoughts on that?

Andy McDonald -- Chief Credit Officer

Yeah. So I think obviously the dental and healthcare portfolios played out like we saw it and so we feel very good about those. The hotel portfolio has performed exceptionally well, I would say, and I think it has to do with the fact that we have more leisure related hotel exposure that we do business travel and I look at that in my comments and then, yeah, I have to be pretty happy with the rest of the portfolio, but the two that I continue to be concerned with. And I think this is consistent is the restaurants and retail and that really has to do with the government closures in our footprint and many of those are small businesses, and I think it will -- will have a very detriment, so many of them got closed early in the year, they got closed at the end of last year, and they remain close now or if they are open its very limited, 25% of what they could do prior to. So those 2 segments are the ones that I continue to have, I guess, more focus on and concerned in the other segments, which I think is performing quite well.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Okay. The path, maybe this is Aaron-Andy question, the path to get back to maybe where the reserve was as a percentage of loans earlier in the year. Is that just a natural evolution of the economy, lending and things getting more comfortable?

Andy McDonald -- Chief Credit Officer

Yeah, I mean obviously under the CECL model, we put aside a large amount of reserves in the first half of 2020 and as I have discussed earlier, our provision, I think is really relatively unchanged as we go throughout 2021, I don't see a whole like any really big changes in that other than I see that charge-offs materializing in the latter half of the year and into 2022 and that will bleed down the reserve. We won't necessarily have to replenish that if the economy continues to move in a positive direction. And so, to your point, yes, it will be a natural evolution of how the reserve works?

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, good, Aaron, maybe one for you, you put a little bit of cash to work this quarter in securities. And I think I understand that, but talk to us a little bit about what you expect on the margin, some of the puts and takes on the core margin, I think with your new loan yields. Are you suggesting continued modest pressure, but maybe with some of these loan growth production numbers, the potential to outrun that. So maybe kind of walk us through what we should think about in terms of how we model it?

Aaron Deer -- Executive Vice-President and Chief Financial Officer

Sure. John, as you saw, we reported a 352 margin for the fourth quarter. The PPP impact of that in the quarter, all in both the interest earned on those, the normal amortization amounts, and the accelerated amortization of fees is included in that 5 basis point benefit. We also had an 5 basis point benefit from the interest recovery that we had on a non-accrual loan of $1.7 million. And then there is two CMBS prepays, that added about 7 basis points. So you can kind of take out all that I guess get at some measure maybe what a core would do. I would say that it's not entirely uncommon to have some prepay benefits on the portfolio just given that we do have a number of portfolios that kind of match those characteristics. But as you noted, going forward, the rate where new production is coming on relative to the portfolio is going to be detrimentals to the margin. Third quarter excluding all the kind of PPP noise, the rates on the loan portfolio was 415 in the fourth quarter that dropped down to 405. New production coupons are around 340. So there is going to be a continued headwind of there. Similarly, on the securities portfolio, excluding the benefit of those prepays, the yield on that focus rate at 2%, just as in the portfolio and we had a very busy quarter on that front. As you noted with having brought about $1.1 billion in the securities. The yield on that was 1.26%. So again, it's going to continue to weigh on things going forward. So long as we continue to remain in this extremely low rate environment. Hopefully, we have seen a little bit of lift in the 10 year recently and hopefully that sticks and continues to build and hopefully, ultimately we get higher rates on the short end as well if we continue to progress through the economic recovery as expected, but we're not counting on any benefit from that anytime soon. But I think we kind of take where the new stuff is coming on and yeah, that should give you a sense of the kind of pressure that we'll probably likely to continue to see through the year, notwithstanding all the additional noise that we're going to see from PPP.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, all right. I appreciate the help. Thanks a lot.

Operator

Thank you. Our next question comes from Matthew Clark with Piper Sandler. Your question please.

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning everyone. On the new money yield on the loan side of 340, I guess I'm a little surprised at how low they are, is that just a mix issue this quarter? Or we might see a little bit higher rate going forward or is that just kind of the new, that's where the competition is.

Clint Stein -- President and Chief Executive Officer

Hey Matt, this is Client. Your kind of sigh there at the end tells me that we're all kind of think in the same way may be. A lot of it is the competitive environment, the massive amounts of liquidity are out there. The challenges of when you find a good credit is it's extremely competitive and so we steer away consistently from anything that involves structures that we're uncomfortable with, terms that we're uncomfortable with, but we're going to have to compete on rate sometimes in that. And so some of it also is the mix. You know you bring on some larger deals during the quarter, those come on at a little lower rate, generally and going forward I would anticipate that it will probably be looking at this for a while, and it's going to take a little sorting out as competitors are entering or may be pulling back from the market based on how their portfolios perform, but I would expect that the competition continues especially for high quality credit deals.

Matthew Clark -- Piper Sandler -- Analyst

Okay, makes sense. And then on the -- as it relates to the disruption in your markets are you at the point where you've already started to identify individuals or teams or is that still a ways out.

Clint Stein -- President and Chief Executive Officer

You cloud out a little bit there and so was question, how identified teams and that we brought on new talent?

Matthew Clark -- Piper Sandler -- Analyst

Yeah. Have you already identified teams at this stage and if so, are you looking for certain type of specialty lenders or is it just your general commercial banker with season books of business?

Chris Merrywell -- Chief Operating Officer

Sure. It's always in process and we go with the philosophy of we're recruiting, all the time and you never know when somebody is going to be ready to make that move. And so if we know the individuals, we know the markets that they're in, we've got a good idea of their books and what they do, and we'll be opportunistic and when the time is right. Now, when we look at specialties and things of that nature, that is certainly to the core of how we operate and if we can somebody, they are interested in joining us, and they bring a new niche or perhaps are absolutely interested in. If somebody that fits into an existing niche that maybe we've been competing against, we know on where we are in the spectrum. We know those quality bankers and will add them into that piece. Some of our markets, we're pretty widespread between metropolitan areas and rural, as you get farther away from the metropolitan area. You tend to get more generalist, and some of them. [Technical Issues] And so it's kind of a long way around and is open to any and all and we're constantly looking.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then can you just remind us how much you have in the way of net PPP-related revenue to come through from round one?

Aaron Deer -- Executive Vice-President and Chief Financial Officer

What was remaining at December 31?

Matthew Clark -- Piper Sandler -- Analyst

Yes.

Aaron Deer -- Executive Vice-President and Chief Financial Officer

It is $9.9 million in remaining net fees to be amortized.

Matthew Clark -- Piper Sandler -- Analyst

Thank you.

Operator

Our next question comes from Jacquie Bohlen with KBW. Your question please.

Jacquelynne Bohlen -- KBW Research -- Analyst

Hi, good morning everyone.

Clint Stein -- President and Chief Executive Officer

Hey Jacquie.

Jacquelynne Bohlen -- KBW Research -- Analyst

I was just curious on the driver of the loan purchase this quarter with that driven looking to some of them run-off or whether just an attractive portfolio that came across your desk?

Clint Stein -- President and Chief Executive Officer

Kind of both. It's more we have a portfolio of mortgage and it's a fair bit of that obviously is paying down given how rates are. So it was a little bit of reselling of that but and I would just highlight we are also producing a great deal and what we're producing doesn't tell necessarily match, what we want to hold on our own balance sheet. So the amount of that we've purchased is certainly far below what we actually sold in acquisition and sold during the quarter unless has Chris has anything to add to that.

Jacquelynne Bohlen -- KBW Research -- Analyst

Okay, just balancing kind of overall competition within that portfolio with the driver.

Chris Merrywell -- Chief Operating Officer

Yes.

Jacquelynne Bohlen -- KBW Research -- Analyst

Okay. And then touching back on on the M&A topics, I'm just wondering if you could provide us a refresher with what you're looking for in terms of a partner, in terms of maybe how small or how big you might be looking to go. And also if Northern California still remains of interest to you.

Clint Stein -- President and Chief Executive Officer

Yeah, it's, we say it's going to be a cultural fit and we've said that, that's what has been one of our criteria. When we start with the balance sheet and look at their business model, because if it's a very different business model than what we have, it's probably going to culturally be very hard to bring the two organizations together. There is -- the size thing is a bit of a moving target, if you will, because I think it depends on if it's a bank that has a really good niche that is additive to what we do. It could be on the smaller side, and that would give us something that then we could look at and build upon. An example and not that from a size standpoint, the Pacific Continental fit into this, but the Pacific Continental had the National Health Care platform. It was very complementary we felt at the time, and three years later, it's proven itself out, that it's very complementary to what we were doing in the healthcare front in our existing market. So if there is a bank that's on the smaller side that has something like that, that would be of interest, if it's a fill-in and there are some fill-in opportunities within our existing footprint that might cause us to look toward the smaller side of it. There is obviously ones where you have a lot of market overlap and we give that an operating leverage and -- but those are going to typically be on the larger end of it. And then as it relates to all of those things, if it provides entry into a new market, that's also something that we would evaluate. It has to be that cultural fit, first and foremost, but then what else does it bring to us. Entry into a new market, something that is very, very close look at. And specific to Northern California, we've been studying that market for several years now. We like that what we've learned about the market, it's very similar in a lot of ways to, first of all add a value and even as you get into the more metro areas of not necessarily San Francisco proper, but in and around the Bay Area and those markets, they are pretty similar to Portland, Seattle. So this is something that that we think is -- it's still of interest, and we continue to just learn more and more as much as we can about about the market and who the quality bankers are in that market. Great, thank you, Clint. That was great overview. Thanks Jacquie.

Operator

Thank you. And our last question comes from David Feaster with Raymond James. Your question please.

David Feaster -- Raymond James -- Analyst

Good morning, everybody. It's great to see the acceleration in originations in the quarter. I'm just curious, where are you seeing growth? Is it from existing clients that are continuing to invest? Is it new clients from the PPP program or the new advisor, even in neighborhood concept, and just kind of the pulse of your clients as we enter 2021? Do you get a sense that they are ready to invest in expansion capex and we could see accelerating growth throughout the year or your client is still a bit cautious given the uncertainty?

Chris Merrywell -- Chief Operating Officer

Hi David, this is Chris. And I got to tell you it's a mix in there. In case some of our markets and they haven't had governmental closures and things of that nature so there are operating much different. The originations are purely across the footprint, those in companies that didn't experience a downturn or things of that nature. They are being opportunistic as you said and they're looking to make investments. Now, some of it's purchasing their own building, and things of that nature. But to tell you, it's a mix between current clients and new. Now, we were one of the institutions that in the first round of PPP, we did not extend it as a marketing tool and we didn't take on non-clients in that manner. However, we are seeing people coming to us after the facts, and is that we are winning during the fourth quarter as confirm just our bankers' efforts and their continued effort to stay in front of a prospects. We bought on some other investment types of things that are ultimately turning into opportunities, which has been good to see. And then, we just started looking toward the year. I think it's a little bit of a mixed there too. You've got, if you look at the second round of PPP and what the requirements were to enter that, there is a lot of companies out there that are doing very well and are not eligible to reapply. They're going to [Technical Issues] investments or whatever it may be for their business. Then those that are reapplying, just go around that really need that stimulus and that support. So we'll have to see how this next round really plays itself out. I think the story really is the momentum that we had talked about building, we saw a lot of that hit in the fourth quarter. I am typically always cautiously optimistic that we can continue that. A lot of our bankers, a lot of our back office loan ops, things of that nature, our sleeves rolled up and working it through hard right now on second round. And that's a distraction. But again, there is also new business that's out there at the same time. So we're really balancing that out and trying to keep the momentum from the fourth quarter going, but there is a bit of a distraction, and that's going to continue for a little bit.

David Feaster -- Raymond James -- Analyst

Okay. And then just on the fee income front, the counter cyclicality some of some of business lines has been a huge help in the challenging environment. Just curious how you think about the fee income? And there any digit that you'd be interested in expanding into whether organically or through M&A, and just how you think about fee income and expanding that fee income contribution?

Aaron Deer -- Executive Vice-President and Chief Financial Officer

Yeah. Hey, this is Aaron. I'll start just -- because I do want to highlight that during a quarter, we had this in our price list that there was almost $800,000 fair value adjustment on the mortgage loan pipeline. So just that said into a little bit of that volatility, but I mean I don't mean to take away from tremendous activity that we've had in mortgage that team has just been doing a fantastic job. But beyond that, I'll turn it over to Chris to add anything else on the fee front.

Chris Merrywell -- Chief Operating Officer

Yeah, I think there is, are we looking for other areas that's always something that's under consideration. We've explored a lot of things, haven't found anything that's truly a hit that goes to -- doesn't change who we are, who we've been. And with that said, we have CD Financial. We have our trust group and those teams continue to grow and approve. 2020 was off to a tremendous start and then the pandemic and there was a little bit of a dip in the middle there but they closed the year strong. And what we're seeing in that business is a real demand for people to participate in financial planning and look at possibly business sales and things of that nature as we start to come out of this. So optimistic in that area. The mortgage group continues to do a great job as was mentioned. That's a little bit more rig contingent now is as rates start to rise, that will certainly change the refinance aspect of that, but to-date, it hasn't -- that hasn't happened and they continue to come in. So optimistic there as well. I think when you look into some of the things like carted revenue and some of the other sea based types of situations so a little bit up in the air, still. As the economy opens up, as the vaccines become more prevalent as people basically where I'm going as just people start to send money, we should see those return just don't know yet if that's going to return to pre-pandemic levels or is something going to be different. How has consumer behavior change. The rest of it, sales kind of business as usual we still participate in and swaps and other fees sources such as that. But again, always open to looking and considering something that we're not currently doing or how we could possibly expand what we're currently doing in the investment world or something of that nature.

David Feaster -- Raymond James -- Analyst

Okay, that's helpful and then just could you just talk about your asset sensitivity here. You guys are naturally assets sensitive in it. It seems like the asset sensitivity might have increased, just given the building, liquidity, and significant proportion of loans that are repricing here in the next six months. As you also got the impact of floors, but it's just kind of putting it all together, how do you think about that and how do you plan to manage your rate sensitivity and maybe does that give you some confidence to potentially take out some duration in the securities book?

Clint Stein -- President and Chief Executive Officer

Well, we've done just that actually. During the quarter, we purchased $1.1 billion in securities with net growth of a little over $900 million. We have, but let's just say we've attempted to put a little bit more duration on there. I think what we purchased had about 6.7 years duration, on average, if I recall correctly, but it didn't to extend the overall portfolio duration that materially, we're still below five years there. And in doing so we arguably have taken some asset sensitivity across table to generating a little better interest income on near term rather than letting that will sit in cash. But I think that's the right decision. We still have an enormous liquidity position and that both loan going to be throwing off around $600 million a year-end cash flows, which we hope to redeploy into higher yielding loans as loan growth comes back and in a more material way. So I would say we are arguably less asset sensitive today than we were three months ago, I think we're extremely well positioned for rising rates. I mean the real secret there is as our cost of funds and there is, our deposits ever just in a phenomenal on a very low cost deposits and that's going to serve us extremely well and when we eventually see some growth.

David Feaster -- Raymond James -- Analyst

Okay, that's great, thanks.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Clint Stein -- President and Chief Executive Officer

Aaron Deer -- Executive Vice-President and Chief Financial Officer

Chris Merrywell -- Chief Operating Officer

Andy McDonald -- Chief Credit Officer

Jeffrey Rulis -- D.A. Davidson -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Jacquelynne Bohlen -- KBW Research -- Analyst

David Feaster -- Raymond James -- Analyst

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