Columbia Banking System, inc (COLB) Q2 2021 Earnings Call Transcript

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Columbia Banking System, inc (COLB)
Q2 2021 Earnings Call
Jul 29, 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. Welcome to Columbia Banking Systems Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now turn the call over to your host, Clint Stein, President and Chief Executive Officer of Columbia Banking System.

Clint Stein -- President, Chief Executive Officer

Thank you, Raquel. Welcome, and 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. The earnings release and investor presentation are available at columbiabank.com. Second quarter performance was outstanding as we continue to build upon the momentum generated by remaining open and externally focused over the past 17 months. Excluding PPE, our teams generated record quarterly loan production exceeding $600 million for the first time in our history and shattering the previous record set in the fourth quarter of last year. Moreover, deposit inflows remained robust and well above our expectations. Our financial services group and trust company are having a breakout year, and credit quality is exceptional.

Making a great quarter even better, we announced our entrance into the Northern California market with the signing of the definitive merger agreement with Sacramento-based Bank of Commerce Holdings. Our success this quarter was due to the forward focus of all of our employees. Throughout the pandemic, we remain safely open and available to existing and prospective clients. Our bankers continue to cultivate relationships and win new business by deploying their solutions-based approach to meeting individual client needs, and the benefits of their efforts over the past year are evident our year-to-date balance sheet growth and earnings performance. On the call with me today are Aaron Deer, our Chief Financial Officer; Chris Merrywell, our Chief Operating Officer; and Andy McDonald, our Chief Credit Officer.

Following our prepared remarks, we'll open the line and take your questions. As a reminder, we may make forward-looking statements during the call. For further information on forward-looking comments, please refer to either our earnings release, our website or our SEC filings. This time, I'll turn the call over to Aaron.

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Thank you, Clint, and good morning, everyone. During the quarter, Columbia generated net income of $55 million or $0.77 per share. Adjusted for $510,000 of acquisition-related costs, pre-tax pre-provision income of $66.3 million was one of our best quarters on record. The strong performance was driven by solid fundamentals. Earning assets increased, our cost of deposits remained among the best in the industry and noninterest income was again a solid contributor. Total deposits increased by $578 million or 16% annualized during the quarter to $15.3 billion at June 30. Our cost of deposits held steady at just four basis points. Total loans increased modestly to $9.7 billion at June 30. Net of PPP, our loan balances increased by $219 million or 10% annualized and surpassed $9 billion for the first time in our history.

The increase was driven by record production. During the quarter, we originated $657 million of new loans, which includes $52 million of PPP loans. New loan production, excluding PPP, was brought on at an average tax-adjusted coupon rate of 3.14%, which compares to the overall portfolio rate, also excluding PPP, of 3.90%. Our investment securities portfolio was $6.2 billion as of June 30, which was a linked quarter increase of $718 million, driven by $942 million of purchases. During the quarter, we transferred securities with a fair value of $2 billion from the available-for-sale classification to the held-to-maturity classification. Because the intent is to hold these investments to maturity, the securities are no longer subject to valuation adjustments connected to interest rate changes, and that should reduce the related volatility in equity and book value.

The net interest margin decreased 15 basis points linked quarter to 3.16%. However, net interest income increased by $1.5 million linked quarter as we deployed more of our deposit growth into loans and investment securities. The deposit inflows and larger investment portfolio were key factors behind the margin pressure in the quarter as higher securities balances and lower yields on those balances together contributed 10 basis points to the margin decline. The remaining decline was primarily due to a reduction in loan yields, mostly due to a drop in amortized fees from PPP portfolio, but also from lower coupon rates on new loans. Noninterest income was down slightly on a linked-quarter basis to $22.7 million. The drop was centered in loan revenue stemming from lower mortgage banking income, but most of that pressure was offset by strength in other business lines.

Notably, card revenues, mostly driven by interchange fees increased by $1 million, while financial services and trust revenue rose by $864,000, and deposit and treasury management fees increased by $343,000. Noninterest expense of $84. one million included professional services costs of $510,000 related to the pending Merchants Bank of Commerce transaction. Excluding these acquisition costs, noninterest expense of $83.6 million was essentially flat when compared to the first quarter. Compensation and benefit costs increased linked quarter, mostly due to higher capitalized loan origination costs in the first quarter when compared to the second quarter. That said, even in the second quarter, we continue to benefit from a high level of capitalized loan origination expense. Meanwhile, the other expense line decreased linked quarter due to $1.3 million of less provision for unfunded commitments.

Lastly, the provision for income taxes increased $2 million on a linked-quarter basis to $14. five million, representing a 20.9% effective rate. We continue to expect our 2021 tax rate to remain in the range of 19% to 21%. And with that, I'll turn the call over to Chris.

Chris Merrywell -- Executive Vice President, Chief Operating Officer

Thank you, Aaron, and good morning, everyone. Throughout the economic turbulence of the past 17 months, we have focused on what we can control in order to take care of our employees, clients and communities. We continue to invest in our people, relationship training and banking systems. Our bankers have responded by keeping the pipeline full and providing custom solutions to meet the needs of existing and new clients. Following this business-as-usual mindset positioned us to capitalize on high-quality credits and win new business during the quarter. While still in the background during the second quarter, the pandemic is no longer the lead story. The bank continued to originate PPP loans through the programs' end on May 4, and in the final tally for both rounds of PPP, approximately 9,300 loans were originated which infused over $1.5 billion into the Pacific Northwest economy.

Forgetting that both rounds is now underway as the Round two platform opened for our clients on July 7. Net of unearned income, PPP loans were $692 million at the end of the second quarter. We have received over $820 million of payoffs and paydowns related to round one of the program, and we have received over 2,000 applications for forgiveness around two loans since the portal opened. As Clint noted, excluding round two PPP loans, we achieved a new loan production record of $605 million, which was notably higher than the previous -- than the prior quarter record of $468 million set during the fourth quarter of 2020. Production was especially strong in CRE and C&I was diversified with good growth in real estate lending and leasing, healthcare, construction, and the agriculture sectors. Line utilization was flat at 44.6%, but we saw absolute dollar increases in C& I and construction lines. Excluding PPP, the quarterly production mix was 58% fixed, 34% floating and 8% variable.

The composition of the loan portfolio remained relatively unchanged, and the overall portfolio mix is now 7% PPP loans, 49% non-PPP fixed, 33% floating and 11% variable. As was mentioned, deposits grew by $578 million during the quarter and by over $2 billion over the past 12 months. The quarterly inflows were split between noninterest and interest-bearing, with the majority from business customers. Over half of the increase is from new accounts, with the remainder attributed to delayed spending and investment by existing business clients and consumers. Approximately 60% of the quarterly increase came from our Puget Sound region with approximately 35% from Oregon and the Columbia Gorge clients. The deposit mix increased slightly to 61% business and 39% consumer. We continue to drive exception rates down, maintaining our industry-leading cost of deposits.

Although residential mortgage activity slowed on a linked-quarter basis, other fee income categories were up during the quarter as we benefit from benefit from our relationship focus and higher quality referrals. CB Financial Services and Columbia Trust Company have both had a tremendous year, achieving record revenues and assets under management. Card revenue was up $1 million on a linked-quarter basis and deposit service fees increased by $343,000. As part of our ongoing branch rationalization process, we recently announced the consolidation of three branches scheduled to occur during September and October of this year. We are continually optimizing our delivery strategy and have been proactive in consolidating branches over the past decade, expanding each branch's service coverage area given local market conditions and projected growth.

Continuing to expand our delivery strategy, on July 12, we relocated our Tigard, Oregon branch and opened a new financial hub. It joins our Ballard and Boise neighbor hubs, which are specifically designed to support a relationship-based approach to helping our clients achieve their financial goals. Now I will turn the call over to Andy to review our credit performance.

Andrew McDonald -- Senior Key Executive

Thank you, Chris. This quarter's allowance for credit losses totaled $143 million, a reduction of $5. three million from last quarter. Net recoveries of about $200,000 led to a provision release of $5.5 million for the quarter. It should also be noted that the release from the provision was muted by over $215 million in loan growth, net of PPP during the quarter. Our IHS market economic forecast assumes full year GDP growth of 6.7% for 2021 and 4.7% for 2022, with the unemployment rate predicted in 2021 at 4.2% and in 2022 close to pre-pandemic levels. This forecast is an improvement over last quarter when GDP was forecasted at 5.7% for 2021. The improved forecast is counterbalanced by the continued stress in our loan portfolio as borrowers continue to be impacted by the lingering effects of the pandemic and related lockdowns.

As such, we continue to apply an overlay for what we consider high-risk commercial real estate and downstream potential impacts of permanent job losses at a significant Northwest employer. These amounted to a combined $10 million in Q2 reserves, a decrease from $11.7 million in Q1. Our adjustment is driven by the continuing impacts of the pandemic affecting hospitality, shifting dynamics in office and retail and business closures and labor challenges in the restaurant industry. We ended the quarter with an allowance relative to period-end loans of 1.48%. Adjusting for PPP loans, the allowance to period-end loans increases to 1.59%. NPAs for the quarter improved to 14 basis points. The decline in NPAs was principally due to paydowns and payoffs with a modest amount returning to accrual status. Most of our remaining NPAs are assets that have gained to this classification due to reasons not related to pandemic.

However, with that said, the pandemic has, in some cases, impacted the business' ability to rebound. Nevertheless, with 14 basis points, NPAs are very manageable at this point. Past due loans for the quarter were 17 basis points compared to 11 basis points last quarter. Net charge-offs, as noted earlier, posted a small recovery of about $200,000. Problem loans, which we define as loans rated watch or worse, declined from $920 million last quarter to $804 million as of June 30, 2021. When compared to a year ago when problem loans were about $1.1 billion, you can see there has been a meaningful amount of healing within the portfolio. This is principally within the hospitality, transportation, food and beverage and retail portfolios. Okay. Deferrals. At the close of the quarter, we had $40 million in active deferrals or less than 1% of our portfolio, excluding PPP loans.

This is, of course, very different from this time last year when we had $1.6 billion. The majority of these deferrals, or roughly 75%, are on their first deferral. It can be found in our hospitality and restaurant portfolios, along with some urban parking lots. Deferrals, for the most part, continue to run off as expected. We continue to classify our retail, hospitality, restaurant and aviation portfolios as portfolio subject to an elevated level of risk due to the pandemic. In aggregate, these portfolios account for about $1.2 billion in loans or 13% of our loan portfolio. Retail is the largest segment at $572 outstanding at the end of the quarter. While we remain concerned over the pandemic's impact on this portfolio, problem loans are actually down year-over-year as well as from last quarter. In fact, this portfolio has now exhibited improving credit trends for four consecutive quarters, and problem loans are half of what they were a year ago.

We had no past dues in this segment. Non-accruals were only four basis points, and no retail loans were on deferral as of June 30. As mentioned before, PPP loans have certainly made a difference for our borrowers in this portfolio. While these statistics are all positive, we continue to be cautious here given the colloquial evidence we see in our footprint, along with footprint, along with conditions seen in the labor markets. Hospitality at $331 million has shown a mixed bag of results. In total, problem loans in this segment declined during the quarter and now represent about 53% of the portfolio, down from 70% a year ago. As discussed last quarter, there's clearly a bifurcation in the portfolio between leisure-oriented and business-oriented properties. Leisure accounts for about 69% of our portfolio, while business accounts for 31%.

Leisure properties have weathered the pandemic much better than our original expectations. While business-oriented properties, which make up most of the substandard assets in this portfolio, are taking longer to recover. About half of the hospitality portfolio's $169 million of problem loans are substandard or roughly $89 million. It does appear that this level of classification in substandard hospitality loans has leveled off. For most of these hotel properties rated substandard, we have put into place long-term action plans to help get our customers through to recovery. Restaurants, which account for about $230 million remained consistent this past quarter. Problem loans were stable at roughly 22% of the portfolio. We had about $2.6 million in deferrals in this portfolio at quarter end.

Similar to the bank in general, deferrals this time last year amounted to $66 million, so a dramatic reduction year-over-year. Again, PPP loans have had a meaningful impact for restaurant operators. As of June 30, 100% of our restaurant operators were clear to open at 100% occupancy, which, of course, is great news. However, the new issue affecting these operators is finding enough employees to support 100% occupancy. So it's a good news, bad news scenario for restaurant operations. Finally, the aviation portfolio had roughly $117 million, down by about $32 million from a year ago, was stable during the quarter. As in past quarters, no loans are past due. All customers continue to pay as agreed and no loans were on deferral. This industry will take time to recover, mostly due to business travel, which, as of yet, has not rebounded as dramatically as leisure travel.

There is a lot of pent-up demand on the leisure side, as seen by the TSA traffic, with July traffic averaging 80% of 2019 levels. Grandparents are excited to go visit their grandchildren, and many families are finally taking that long awaited trip to Hawaii. However, headwinds continue with low demand for business travel, as noted before, and an unequal global recovery. Despite the slow recovery due to these continued headwinds, many U.S. airlines are projecting a return to positive cash flow within the next few quarters, and have begun using their liquidity to retire debt and deleverage their balance sheets. I will now hand the call back over to Clint.

Clint Stein -- President, Chief Executive Officer

Thanks, Andy. We're excited to have Bank of Commerce Holdings join the Columbia family and are still on target for a fourth quarter close. Randy Eslick and his team have been working closely with their Columbia counterparts to ensure a seamless closing and integration of the merger. The partnership will bring together two community-focused banks with complementary business models and cultures. This morning, we announced our regular quarterly dividend of $0.28. This quarter's dividend will be paid on August 25 to shareholders of record as of the close of business on August 11. This concludes our prepared comments. As a reminder, Andy, Chris and Aaron are with me to answer your questions. And now, Raquel,we will open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Matthew Clark with Piper Sandler.

Matthew Clark -- Piper Sandler -- Analyst

Good morning. Very strong production this quarter, and wanted to get a better sense of the type of commercial real estate production that you're doing, assuming that retail, office, hospitality are still areas of some concern in terms of new business. Just wanted to get a sense for what drove that a sense for what drove that the the a sense for what drove that commercial real estate piece of production?

Clint Stein -- President, Chief Executive Officer

Yes, just a sec, let me get it in front of you. I have too much paper. So Andy outlined the detail, Matt. I'll just speak in general in terms of the record production for the quarter. And as I noted in my opening comments, it was -- far surpassed the record -- previous record set in the fourth quarter of last year. And so that's just a continuation of what we saw at the end of the third quarter of last year going into the fourth quarter, and that momentum continued to build in terms of pipeline activity and what we're seeing just broadly is even though there's a lot of liquidity still out there in the market, it's a very competitive atmosphere.

We're taking market share and some longtime clients. And that's what you saw that really drove that record production during the quarter. I think Andy has the detail that will respond to your question.

Andrew McDonald -- Senior Key Executive

Yes. So most of the growth is actually an owner-occupied CRE, and it's a combination of owner-occupied office warehouse warehouse-type properties. And then we've also done a little bit in the retail space, but that's pretty modest at $4 million. So it's predominantly owner-occupied.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then how does the pipeline compare to last quarter coming out of 2Q? Is -- given the production, is it in pipeline? Is it down, and you feel like you need to kind of backfill? Or I'm just trying to get a sense for the change on a percentage basis from last quarter or even year-over-year?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Sure, Matt. And as expected, I would -- you would expect that after a record quarter at those levels that the pipeline would pull back some. We're very pleased with where it's at. And our bankers continue to prospect, win new deals, and we're holding on to a lot of our existing loans on the books as well. So yes, it's retreated a little, but in historic -- if you look at it historically, we're very pleased at the level that it's at, and it should lead to growth for us.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then just on the new coupons at 3.14%, that's down pretty materially from last quarter, I think at 3.90% ex PPP. I guess how much of that was related to the mix? And how much of that might be related to just being more competitive on price?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Yes, I'll take a start on that, and then Aaron can come in and maybe some more details. It does have to do mostly with the mix. During the quarter, we had the opportunity to participate in some municipal deals that drove similar balances. Those are highly competitive RFPs. Our approach, our expertise in that space allowed us to win those deals. But those high-quality credits certainly come along at a lower coupon, and that skewed the number for the quarter. I think past that, we see more of a return to leveled out numbers and improving numbers. And Aaron, is there anything you'd like to add? I'd just add, Matt, the loan yields during the quarter, excluding PPP, was 4.26%, and that compares to 4.28% in the first quarter.

Matthew Clark -- Piper Sandler -- Analyst

Yes. Okay. And then just on -- I know it's a small piece of the revenue pie. But on the mortgage, the weaker mortgage gain on sale, and I think it's embedded in your loan revenue fee line. Can you give us a sense for how much in the way of loans were sold in the specific gain this quarter versus last?

Clint Stein -- President, Chief Executive Officer

So Matthew, I'm not sure we're going to provide the specifics on that. But generally speaking, the volume of sales as well as the gain on sale was not materially different from quarter-to-quarter. What changed was the pipeline and the value of the pipeline. So that was really what drove the decline sequentially. So it's more of a -- the volume of activity in the business versus the gain on sale amount that drove the change.

Matthew Clark -- Piper Sandler -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Jeff Rulis with D.A. Davidson.

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

Good morning. A question on the -- just trying to ball together the margin and your securities investments. If you could kind of offer any thoughts on go-forward what you think could do with that earning asset balance as well as kind of stabilizing the margin. I know the goal is spreading from dollars. But just the interplay and anything you could kind of point to what you think back half makes?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

It's -- the margin is going to continue to be a bit of a challenge. The -- I mean, there's a lot of factors at play. As you noted, we had a very significant increase in investment securities balances during the quarter and the balances that come on, came on at lower yields. Ultimately, to see that the margin kind of rebound is going to take either an improvement in the rate environment or a significant shift back toward loans. So I think, over the next couple of quarters, you're going to have the noise of PPP continuing to add to that.

We still have $700 million of PPP loans on the balance sheet. My expectation is that much of that will be forgiven over this quarter and next. And so that will continue to drive some of the fee income on that and benefit the margin. Underlying that, you're going to see the full quarter impact of the changes that I just discussed with respect to the securities portfolio. and lower yields on both the securities as well as on the loan portfolio. So there's going to be some fundamental pressure there that continue.

Though that said, I do think that we're getting closer to where I would expect that to bottom out. And obviously, I'm very hopeful that we get some improvement in the rate environment. The rates this quarter were not ideal. Not only did we see the 10-year come in quite a bit, but the flattening was not ideal. Encouragingly though, some of the more recent forecast that I've seen for rates are more suggestive that we could see a good lift by the end of the year. So hopefully, the operating environment in terms of rates show some improvement from here.

And then with the worst of the kind of balance sheet pressures kind of working through the system, my expectation is that the core margin is closer to a bottoming than not, but we probably still have a little further to go.

Andrew McDonald -- Senior Key Executive

And I'll just add on to that, to me, the wildcard around the margin is what happens with deposit growth. And that's really created the liquidity and the shift into, I guess, the earning asset mix shift. And as you know, Jeff, from all the years you followed us, that in a normal environment, virtually all of our deposit growth comes in the second half of the year. And we had another $1.5 billion in the first half of this year of deposit growth. So that certainly impacts the margin calculation. And I know that's an important component of your modeling, but we're still at four basis points for cost of funds. And so where I'm really focused and the team is really focused is making sure that we're growing net interest income. And I think that if we continue to have strong deposit growth, while we'll push the loan-to-deposit ratio down and perhaps grow in the short term, the size of the securities book, it should result in increased revenue for us.

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

Okay. Well, I appreciate the commentary. Maybe one other, just a different angle. On the expense line, you kind of noted some of the PPP impact there, but it's a pretty low number. You guys had talked about mid- to upper-80s kind of run rate. Is that -- can we adjust that lower? Is it squarely kind of mid-80s if we came in a bit? Just trying to sense if that's come in or if there's significant investment in the second half we should look for?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Yes. Jeff, I guess I'm disinclined to guide you lower at this point. That said, I commend the team for doing a great job controlling expenses. And as Chris noted, we're going to be doing a little bit of consolidation here in the back half, but they'll help some. But the FAS 91 in the second quarter was still pretty strong. There's probably a couple of million of that. And I would expect that that's going to have much less of a beneficial impact on our expenses in the third

Quarter.

And then we've also got some project costs that I'm expecting are probably going to hit our data processing and software in the third quarter. So at this point, I think that the prior guidance still stands, particularly just as we're seeing a lot more of our folks get out. And while they've been active with clients throughout, I think we're starting to see a little bit more travel, and entertainment kind of expenses, and so that's going to probably first light up, too. But we're certainly being very mindful of holding those costs in check.

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

Okay. Thank you.

Operator

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

Jackie Bohlen -- KBW -- Analyst

Sorry. --- Hi. Everyone. So I'm going to give you a little bit of context for where my question is coming from. So I apologize if this is a little bit wordy, but I want to make sure I make it clear what I'm asking. This is one of the -- your one of the lesser quarters that I've had. And looking through other earnings releases, I realize that I've been asking the wrong question, and so I have the opportunity to actually ask you guys the right one, which is I feel like I've been really focused on line utilization when what I should be focused on is actual line draws.

And you had -- if I did my math right, excluding PPP, you had balanced growth in the commercial business portfolio. And so I want to see where that's coming from? If you have a sense whether it's from customers that are actually out there and spending more or whether it's some of the new generation that you were talking about and just kind of how you think of the momentum going forward?

Clint Stein -- President, Chief Executive Officer

Yes, that's absolutely the right way to think about it because especially if you're looking at year-over-year or even on linked quarter as our bankers are out there originating new commitments and new balances on those commitments that it can skew that utilization ratio. I'm looking at the -- the line utilization number itself did not change from quarter-to-quarter. But you're right to be thinking about the draws have increased, just as the commitments have increased.

Yes, I think I mean you have some context for that change. Because I think what we're really trying to get at is how much of those roughly $200 million of growth came from growth in new outstanding lines.

Jackie Bohlen -- KBW -- Analyst

Yes. Just wondering, because my thesis, and I don't know if this is going to play out or not, is that though we're not seeing line utilization change, that's because you're adding new customers, which is drawing the commitment level up. And so it's masking the benefit of some of the draws that you are seeing. Does that sound fair?

Clint Stein -- President, Chief Executive Officer

Jackie, I think that's a fair question, and I apologize for not having that right at the tip of our fingers. I'd be happy to...

Jackie Bohlen -- KBW -- Analyst

No. I know it's really nuanced, so sorry to put you on the spot like that.

Clint Stein -- President, Chief Executive Officer

No worries. We'll see if in our information here, we do have it, and you can either get back if you have another question or we'll get back to you afterwards, certainly. It's a great question. And the new balances, the new clients that are coming on are certainly transferring line balances and it does mask the overall aspect of it. So yes, it's an excellent question.

Jackie Bohlen -- KBW -- Analyst

Okay. And that -- I mean, your comments right there, Chris, kind of get to the heart of what I'm looking at, which is more just the general momentum that you're seeing more so than an actual dollar figure And then my -- the second thing I wanted to ask is just related to construction. I know demand is high in the market, but obviously, there are constraints relating to supply chains and just availability of land and inventory and everything. And so I'm wondering how -- what you're seeing in that market in terms of growth potential and how projects are moving along?

Chris Merrywell -- Executive Vice President, Chief Operating Officer

Yes. So referring more to our builder banking group, they're having a fantastic year. Builders are still -- they have inventory. They're finding -- while projects are delayed and taking longer, they're getting through to the end sales up into the second quarter were very strong. I think the biggest challenge for us when you look at that segment is houses are selling so quickly that they're not staying around on our books. So the churn of it is pretty robust. Now we're going to move into a season where how sales tend to slow down and things of that nature may give us a little bit of a lift there.

But to date, it's been extremely quick, other than the delays from the supply chain.

Aaron J Deer -- Executive Vice President, Chief Financial Officer

And Jackie, this is Aaron. I just pulled up the sequential change, if I'm understanding your question correctly, the sequential increase in revolving lines at the bank increased by about $76 million on a net basis.

Jackie Bohlen -- KBW -- Analyst

Okay. And again, I apologize for having such a technical question, I was just trying to get kind of a sense of new customer activity and what impacts that's having on utilization rates.

Aaron J Deer -- Executive Vice President, Chief Financial Officer

That's a good question.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning. Maybe just back to the question on deposits. You're expecting similar second half deposit growth to maybe what we see historically. In other words, are you seeing some normalization developing in deposit flows? Or do we still have some of the excesses out there in the market in terms of money flowing in?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Wow, that's a forward-looking question that I'd love to have an exact answer for it. But historically, yes, you've seen that. I think that it remains to be seen. And there's still a lot of liquidity in the system. We've talked in previous quarters about what's it going to take for that liquidity to exit the system. All things being equal, I think I can't pinpoint that we'll be at the same exact levels. But there is a lot of economic activity. Money is changing hands, and I would expect that our client base will continue to behave as they have.

With that said, I think one of the variables could be new client acquisition and what continues to come on in that space, which may be an offset to if normal activity is not there we may see a pickup in that, which would then offset it. So all that around, I would say, yes, I would think it's going to be fairly normal, but the components of it may be different.

Chris Merrywell -- Executive Vice President, Chief Operating Officer

There's one other variable that comes into play, and that's what we do through our CB Financial Services group. And that's something that as clients begin to maybe look for returns above what we're paying on bank deposit rates, and we see some activity, and we've seen that pre-pandemic was several hundred million dollars for a couple of quarters that moved off our balance sheet into assets under management with our financial services group. So we still drive positive economics from that.

And you can see some of that activity still occurring today, and you see that with that upward trajectory in terms of the fee income that we're driving from that group. So that's something that as we progress through the third quarter, fourth quarter, if that's a significant driver of net deposit balances, and we'll certainly highlight that for you.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. That was another question I had, so I can scratch it off my list. Andy, a question for you. One of your quotes in the release is things are very strong, and I appreciate all the puts and takes in terms of the reserve and provision, but what does it take -- what more does it take to bring -- to keep bringing the reserve down? Is it economic improvement that does it? Is it changing of your factors? And I guess I'm just trying to get a bit of a forward look because of some of these negative provisions that we've seen in the last couple of quarters?

Andrew McDonald -- Senior Key Executive

Right. Well, for Colombia, we still have $400 million-plus in substandard loans. And so we need to continue to work through and help those borrowers recover. And that will have a meaningful impact on our level of allowance for credit losses. I think as the economy stabilizes and we do not see dramatic changes in economic forecasts, the economic forecast will be less of a driver and more traditional levels of problem loans, charge-offs and those kinds of activities will be driving the provision.

Does that answer your question? I mean I'm trying to be, I guess, a little bit more specific to COLB.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes, that does help. I guess, from an outsider's point of view, I still see your levels as relatively high. particularly relative to your NPAs. So I just kind of wanted to get a flavor for what we should expect in terms of the quarterly impact on the P&L.

Andrew McDonald -- Senior Key Executive

Okay.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Last question, maybe for you, Clint. It -- just on this loan production and growth numbers that you've been seeing, it just -- it feels like something is different in your model in a positive way. And you guys always highlight expenses to average assets. And we've touched a little bit on expected deposit growth, so that brings up assets as well. But I'm just curious what kind of capacity you feel like you have to add assets without a lot of hiring and spending in other ways, what kind of leverage do you have in your business model? And is it different than a couple of years ago? Are you still there?

Operator

Ladies and gentlement, please stand by. [Technical Issues] Please resume.

Clint Stein -- President, Chief Executive Officer

. All right. John, that was the best answer I've ever given. Unfortunately, nobody heard it.

Jon Arfstrom -- RBC Capital Markets -- Analyst

I think you put me on mute and started hysterically laughing and you hit disconnect instead.

Clint Stein -- President, Chief Executive Officer

Well, I'm trying to decide if it was Andy or Chris that kicked something under the table, but Andy...

Jon Arfstrom -- RBC Capital Markets -- Analyst

Did you hear my question?

Clint Stein -- President, Chief Executive Officer

I believe so. Do you want to repeat it just to make sure?

Jon Arfstrom -- RBC Capital Markets -- Analyst

I'm just curious about the operating leverage in your business because I'm looking at the loan production, it's going up. And you always highlight the operating leverage piece of the business. And I'm just curious, is the business model a little bit different, meaning you have the capacity to add assets without hiring a lot of new lenders? And is there the potential for longer-term improvement in operating leverage based on some of the changes you made over the last couple of years?

Clint Stein -- President, Chief Executive Officer

The short answer is yes to both of those, but it's more nuanced in terms of internal capacity, in particular, in our ability to handle additional loan volume is something that we've worked on for the past several years. And even with the things that we've discussed over the past year, where when we say that our bankers remained externally focused and we continued throughout the pandemic in a near normal operating capacity, well that also included moving forward on internal initiatives in the back office, process improvement, increased automation, and all of those types of activities as well as just the collaboration among our various teams and groups and getting the right banker in front of the client.

And that's resulted in relationships on both sides of the balance sheet, driving activity to Columbia Trust Company as well as CV Financial Services. And that's always been the goal is to have that type of activity and volume to be able to scale our business. So we have been working on it. been working on it. And I think that results of our participation in both rounds of the PPP program, where we booked over 10,000 PPP loans for about $1.6 billion just demonstrated the capabilities and the progress that we've made on that.

If you think, it wasn't too long ago that -- well, just PPP alone from a volume standpoint was about double the number of loans that we would typically do in a year, and then equated to what our annual production was just a couple of years ago. And so to be able to do that, and in the midst of that, have two of our top three quarters of production and do it in a very controlled manner, it wasn't -- other than the first part of PPP, which was all hands on deck effort, everything else was handled in essentially a business as usual fashion.

So that's the long-winded way of saying, yes, we can do more with the existing talent and infrastructure that we have. But I think it's also important to note that there's some disruption that's occurring with some of the large national banks in terms of how they serve their clients. And that's creating some dissatisfaction at the client level that we're benefiting from, but also they have some really good bankers. And if we have the opportunity to bring in good bankers, we'll make room on the bus for them.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yup. Okay good. It's a long --- I appreciate all that, I think it was a good quarter so thank you.

Clint Stein -- President, Chief Executive Officer

Thanks, Jon.

Operator

[Operator Instructions] Your next question comes from the line of Andrew Terrell with Stephens.

Andrew Terrell -- Stephens -- Analyst

Good morning. Maybe just to start, Aaron, can you remind us just with the approach you're taking from a duration perspective to investing in the securities portfolio is? It seems like you might be buying in a bit longer duration, just given where the overall portfolio duration trended this quarter?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Yes. I haven't done that a little bit further on the curve. I don't think that we're going to extend beyond where we've been buying. The overall duration in the portfolio is inched up. We're now right about five years. And as you noted, we split the portfolio between an AFS and HTM portfolio. So there's a little bit of differential between those two, the AFS is at about 4.7% and the held to maturity is about 5.8%. The new purchases in the quarter were right around $6 million.

So as I said, we have done at some, but we're also being pretty thoughtful with what we're buying. So we're buying things that have a lower likelihood of prepay, if we're buying things that have pretty good upfront cash flows so that to the extent that we are seeing continued strong loan growth, we -- if deposit flows aren't keeping up, that we have those cash flows to reinvest into the loan growth. So we're being really mindful about what we're doing. And of course, you know that we tend to stick with very high-quality type of purchases.

So it's a very deliberate process that we go through. Obviously, with the size that the book has gotten to be, we need to be very thoughtful about how we're managing that. and we're doing so. But I would not expect that you're going to see that portfolio duration extend materially from here.

Andrew Terrell -- Stephens -- Analyst

Okay. Great. That's helpful. And apologies for maybe the back-to-back kind of technical questions. But looking at page 10 of the slide deck, about half of the loan book is variable and another -- about 40% of that is currently at a floor rate right now. Just for those loans currently at floor rates, how many rate hikes do you think we would need to see before breaking past kind of the average loan floor?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Well, I don't have that off hand, but it's -- there's -- it's a mix where there's some that are going to lift pretty quickly and there's others that are going to take a little longer. So we'll we actually looked at this inter-quarter and it's something that we're going to, I think, start providing some better disclosure for because our hope, obviously, is that rates are going to be moving higher and not lower. And so I think we can start providing you with some additional context that will help with that.

Andrew Terrell -- Stephens -- Analyst

Great. That would be very helpful. Okay. That's it for me thank you taking questions.

Operator

Your next question is from the line of Matthew Clark from Piper Sandler.

Matthew Clark -- Piper Sandler -- Analyst

I just had a few follow-ups. Just to circle the wagons on the deposit-related question, kind of a traditionally stronger second half in terms of growth. I assume you're also expecting that $700 million of PPP loans, a lot of that likely translates into deposits as well, which is just going to cause that phenomenon to continue here in the second half. Is that fair?

Clint Stein -- President, Chief Executive Officer

I think that's a fair assumption because to qualify for forgiveness, they probably have already spent the money.

Matthew Clark -- Piper Sandler -- Analyst

Yes. Okay. And then just on the securities purchases, can you give us the weighted average rate on what you bought this quarter? And yes, that's my second question, I guess.

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Yes. So the rate on the new purchases was $159 million and which is actually up from the first quarter where we were at 146. So despite the drop in rates through the quarter, the average purchase on the -- actually improved. So I was pleased to see that. And particularly given the volume that we added during the quarter. We've had about $942 million of purchases. And so my expectation is that we won't be buying in that volume again going forward. But that's -- hopefully, that answers your question.

Matthew Clark -- Piper Sandler -- Analyst

Yes. And I guess my follow-up part of that question was related to what the curve has done. It's kind of gone against you and everybody else. So I guess, what are your thoughts on, I guess, what -- if you were to buy something today, what is that kind of the blended rate on that knowing the volume of what you're going to purchase this coming quarter is going to probably obviously be lower?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Well, I mean, we are continuing to purchase. I don't mean to make it sound like we're suspending that because we're going to have cash flows and things will need to be reinvested. But I would say that of the purchases that I have seen of late, they are a little below where the average was in the second quarter. But we'll see what happens through the quarter. We're still pretty early. So I can't tell you directionally what's either going to happen with rates or with purchases.

But at this point, I guess, we're down a little bit from where we were in the second quarter, but hopefully, that turns.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then just finally on the loan purchases, I think you mentioned it early or on in your comments, but I didn't pick -- I didn't catch it. Can you give us the amount of loans purchased and what specifically you bought? And what's your appetite to do more of that going forward?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Not sure which are -- we did not make any loan purchases during the quarter.

Matthew Clark -- Piper Sandler -- Analyst

Okay. I know you did last quarter. I just wasn't sure if I heard you did more of it this quarter. So I assume no more single-family resi purchases?

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Well, periodically, if it makes sense, given paydowns in the portfolio, we might do some topping up of that, but there is nothing of that work done in the second quarter.

Matthew Clark -- Piper Sandler -- Analyst

Okay. Thank you.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Clint Stein -- President, Chief Executive Officer

Aaron J Deer -- Executive Vice President, Chief Financial Officer

Chris Merrywell -- Executive Vice President, Chief Operating Officer

Andrew McDonald -- Senior Key Executive

Matthew Clark -- Piper Sandler -- Analyst

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

Jackie Bohlen -- KBW -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Andrew Terrell -- Stephens -- Analyst

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