Columbia Banking System (NASDAQ:COLB) Q1 2019 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System first quarter 2019 earnings release presentation. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session through both the telephone and the web. Instructions will be given at that time. If you are on the telephone and should require assistance during the conference, please press star 1. As a reminder, the conference is being recorded. I would now like to turn the call over to our host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System. Thank you, Natalie. Good morning, everyone, and thank you for joining us on today's call as we review our first quarter 2019 results, which released before the market opened this morning.

0:52 The earnings released in a supplemental slide presentation are available at ColumbiaBank.com. We had a strong first quarter. As many of you know, we have a seasonal pattern to our performance. First quarters typically are weakest during the year. We're very pleased with our results and see positive momentum building across our footprint. Loan production was a new first quarter record. The mix of our core deposit base remained stable, and deposit costs were well managed. The total cost of deposits was 18 basis points, Thank you for joining us today. Ordinary Dividends, Special Dividends, Share Repurchases, and Investing in Our Business.

1:58 On the call with me today are Greg Segrist, our Chief Financial Officer, who will provide details about our earnings performance and an overview of our share repurchase plan. Clint Stein, our Chief Operating Officer, who will review our production activity and highlight the status of some of our digital investments. and Annie McDonald, our Chief Credit Officer, who will review our credit quality information. Following our prepared comments, we'll be happy to answer your questions. It's important that I remind you that we'll be making forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filings and, in particular, our 2018 SEC Form 10-K.

2:47 At this point, I'd like to return the call to Greg to talk about our financial performance. Thank you, Hadley, and good morning, everyone. First quarter earnings of $45.9 million and EPS of $0.63 per diluted share was an increase from the fourth quarter 2018 and an increase of $0.08 compared to the first quarter 2018. First quarter net income was the second best quarterly earnings performance in our history. During the quarter, total loans increased by 6% on an annualized basis. Much of the growth occurred near the end of the first quarter, so we will expect to see a positive impact to earnings in subsequent quarters. The operating net interest margin of 4.33% was essentially flat to the prior quarter, as an uptick in asset yields from the late December rate increase was offset by a modest increase in deposit rates and a seasonal shift in funding. In previous quarters, we have discussed our asset sensitivity and our long-term approach to reducing our exposure to falling rates.

3:45 We feel our interest rate strategy is prudent and better positions us to mitigate an eventual decline in rates. The trade-off is a modest NIM headwind, but overall has improved bottom-line performance and protects earnings should rates decline. After removing the effects of acquisition costs that impacted 2018 results, non-interest expense decreased $1.8 million on a linked quarter basis due in large part to items subject to timing differences. Compensation and employee benefit expense was up mostly due to the discretionary 401 employer contribution and increased employer payroll taxes as caps reset. Excluding acquisition costs of $4.3 million in the first quarter of 2018, non-interest expense is up $3 million or roughly 3.5% on a year-over-year basis.

4:33 In the first quarter, we incurred $600,000 of expenses that was directly related to our digital initiatives. As more projects come online in the coming quarters, we will provide you with the appropriate visibility to discern between our operating run rate and the expense impact of our digital investments. We do expect to invest somewhere between $9 million and $12 million in digital initiatives over the balance of 2019, though some of that will be capitalized rather than hitting expenses directly, so it is difficult to tell you the quarterly expense impact in advance. We expect our noninterest expense from ongoing operations to continue in the mid-'80s, we believe we have appropriately balanced the continued investment in our franchise with our longstanding commitment to a disciplined approach to expense management.

5:20 Increases in our expense base over the past year are directly related to higher production and asset levels. Our effective tax rate was 19% for the first quarter, which was down modestly from the prior quarter and is in the range we would expect for a full year, which is 19% to 20%. As Hadley mentioned, and you may have seen in our 2018 SEC Form 10-K, our board approved the share buyback plan that authorizes the company to repurchase up to 2.9 million shares. We do intend to incorporate share buybacks into our capital strategy when it is advantageous for our shareholders to do so. Our ability to buy back shares when it makes sense would also impact the level of our special dividend going forward. We are very pleased to have this additional capital management tool available to us. At this point, I would like to turn the call over to Clint.

6:08 Thank you, Greg. Good morning, everyone. Throughout our history, we've been successful in retaining our top-performing talent, as well as recruiting highly experienced bankers in all of our major markets. Over the last several quarters, we've had the opportunity to add more depth by bringing new bankers onto our team. And we are certainly seeing the results of their activities. Deposits continue to be one of our differentiating strengths. with 49% in non-interest-bearing products. Our total cost of deposits is just 18 basis points. We experienced our typical seasonality with average demand deposits declining $217 million during the quarter. However, consistent with prior years, period imbalances rebounded and were down only $89 million at quarter end.

6:56 As I stated in the earnings release, our bankers are doing an outstanding job of winning new deposit relationships resulting in a nice pipeline of prospective business. As Hadley mentioned, loan production for the quarter was $366 million, which is our best first quarter on record. It is worth mentioning that historically, first quarter tends to be the low production point in the year. Production for the last four quarters is over $1.5 billion, and our loan pipeline remains to our satisfaction. Term loans represented $254 million of new production, while new lines accounted for $112 million. The mix of new production was balanced in terms of loan size.

7:41 With respect to geography, 53% of their production was generated in Washington, 27% in Oregon, 5% in Idaho, and the remaining 15% in other states. We had a late spring this year, resulting in line utilization remaining at seasonal lows at quarter end. Prepayments and payoff activity has continued to moderate from their elevated levels in 2018. It's too early to call it a trend, but first quarter prepayments were in line with our normalized historical experience. The quarterly average tax-adjusted coupon rate for new loan production was in line with the portfolio rate of 4.99%. Average coupon rates on new loan production were lower this quarter as we selectively chose to fund some public administration loans that were priced very competitively due to their credit profiles.

8:39 During the first quarter, C&I production was 58% or $220 million of the total production, which on a percentage basis is consistent with prior quarters. The C&I portfolio grew by $71 million to $3.5 billion with the strongest growth in the public, retail, and healthcare sectors. Commercial and multifamily real estate loans were up $71 million on $112 million of new production. The growth was spread across the multifamily, warehouse, condo, and hospitality sectors. Overall, we are pleased with the growth in loans, especially given the weather-related delay and our seasonal uptick in line utilization.

9:25 We recently announced the consolidation of three branches, two in western Washington and one in the Portland metro area. We intend to continue to provide banking services to our clients in these areas through the combination of nearby branch facilities and our digital channel. We have an ongoing and disciplined process in place for reviewing our branch network and markets, and these closure decisions were a result of that process. Over the past few quarters, we have given you some insight into our digital initiatives. In 2019, we will be introducing new platforms for our business clients and improving our transfer functionality via the Zelle and TransferNow products.

10:10 We're also focused on strengthening our internal capabilities to expand the foundation for all digital operations. We're moving purposefully and in a disciplined manner, balancing speed and our overall vision. In part, the record production, earnings performance, and success at winning new business we have mentioned on this call is because we are starting to see the maturity and resulting increased adoption rates from some of our 2017 digital investments and their positive impact on our financial performance. For example, our consumer online banking product brought online in July of 2017 has seen annual mobile deposit growth go from 3% before the new solution to 40% currently.

10:57 New online banking users have risen from less than 4,000 annually with the old platform to over 20,000 new digital users per year. In the fourth quarter of 2017, we rolled out our customer relationship management platform as a way of helping our bankers deepen relationships and provide an improved client experience. Since then, referral activities have increased across the bank By getting the client paired with the right banker, cross-line referrals increased 37%. In summary, we've been hitting on all cylinders, and through selective hiring, we've created new capacity in all our major markets. Now, I'll turn the call over to Andy to review our credit performance.

11:43 Thanks, Clint. Our first quarter provision for loan and lease losses of $1.4 million compared favorably to the $1.8 million in the prior quarter. This included provisions of $1.2 million for the originated portfolio, $150,000 for Pacific Continental, and $100,000 for West Coast. Offsetting these provisions was a release from the Intermountain portfolio of $75,000. The provision for the corridor was principally driven by net charge-offs and, to a lesser extent, loan growth. Problem loan migration was minimal and loss rates were essentially unchanged. As of March 31, 2019, our allowance to total loans was also essentially unchanged. As always, we'd like to remind folks that this ratio is impacted by our acquisition and associated loans that were recorded at fair value.

12:39 Embedded in those valuations is approximately $24 million of net discount, for which approximately $17 million is associated with the Pacific Continental portfolio, $5 million with the West Coast portfolio, and 2 million with the Intermountain portfolio. While net charge-offs drove the allowance for the quarter, they were relatively modest and were centered in the originated and Pacific Continental portfolios. Across these portfolios, charge-offs remained centered in commercial business loans. The charge-offs were fairly granular with no systemic issues or industry concentration. In summary, it was a nice, stable quarter. Pretty much all of our metrics, past dues, non-performing loans, and problem loans all remained essentially the same. So while we are obviously pleased with the performance of the portfolio, we remain cognizant of the fact that we are well into one of the longest economic recoveries in history. And as such, we must remain diligent.

13:42 With that, I will now turn the call back to Hadley. Thanks, Andy. We're pleased to announce our regular quarter dividend of $0.28 and special dividend of $0.14, which together constitute a payout ratio of 67% for the quarter and a dividend yield of 4.81% based on the closing price of our stock on April 24, 2019. This quarter's dividend will be paid on May 22 to shareholders of record as we close the business on May 8, 2019. I'd like to end by recognizing our employees committed in all the communities we serve. This week is Columbia Bank's annual Melanie Dressel Community Commitment Week. And our employees are out in force across all three states volunteering at nearly 60 different organizations. This commitment is at the root of our heritage and a source of pride for all Columbia bankers.

14:37 This concludes our prepared comments this afternoon. And as a reminder, Greg, Clint, and Andy are here to answer your questions. And now, Natalie, we'll open the call. Certainly. To ask a question from the telephone, please press star then 1 on your telephone keypad. To ask a question via the web, click the Q&A button on the lower left-hand corner of your screen. Type your question in the open area and click Submit. Our first question comes from the line of Jeff Rulis. Your line is open. Thanks. Good morning. I wanted to follow up on the expense side. Greg, I appreciate the detail on the digital spend. You said the remainder for 2019, what was that figure again?

15:40 We're expecting another $9 million to $12 million of investment in 2019, but again, Not all of that will drop to the bottom line as we're still going through the chartering or internal governance processes and figuring and negotiating with vendors. So some of that will get capitalized as well, Jeff, but that is the total investment level. So if you said the $600,000 in the quarter, was that maybe earmarked or there were some offsets? Would that be an appropriate percentage of I guess what will fall to the bottom line? And maybe that's tough to say, but... Was Q1 indicative, or is this just going to be a lumpy item? Well, I think for the balance of 2019, I would expect that 9 to 12, you know, a fair chunk of that will hit the bottom line. So I think it's probably somewhere between 70 to 80 percent will hit the bottom line over the next three quarters.

16:31 But it's going to be lumpy over the quarters, Jeff, is the way I'm thinking about it. This is really a quarter for us to go through our internal governance and really start to hone in on who our long-term partners are going to be. And until you really start to work with contracts with those partners and It's really going to take a bit of time before we can get more granularity until we've done that. Got it. So if I'm just running the math, this could be $2 million to $3 million a quarter for the rest of the year. So that's going to increase meaningfully from $600,000 this quarter? Yeah, I mean, versus the $600,000 this quarter, I do expect it to float up over the balance of the year and As we get into next year, we're going to start to see the benefits of the digital, both in terms of right now as we go through this, and I think we've talked about this before, for some of the platforms, we're paying for the existing platform.

17:23 At the same time, we're investing in the new platform. So we're going to start to see the benefits of that migration next year and then just some of the more direct benefits as well. I'll just add that I think you hit the nail on the head when you said it's just going to be one of those items that's going to be lumpy. and it's similar to when we go through an acquisition and we have acquisition expense that hits. We have an idea and we forecast it until we actually get there. So what we really want to focus on is making sure that we provide you and others with what our operating run rate is and then what that lumpiness created by these digital investments ends up being. We'll do that at a later time.

18:11 Like you said, you gave us the guidance on the mid-80s, so that's baked into the guidance there. Well, I would say the mid-80s, again, it's really our operating run rate. I think you should think about digital being incremental to that. So I think to Clint's point, we're really going to try and focus on our run rate, which we feel is quite stable, and Directionally proportionate to our ability to generate loan production. So I think we're comfortable giving you guidance on that basis. And then to Hadley's point, we'll continue quarter on quarter to give you some outlook going forward. Great. Thanks. And then the loan growth, I think the previous guidance was low to the single digit. You kind of crushed the first quarter number.

18:57 Does that adjust your expectations for the full year to inch that more towards the high end? Well, you know, Jeff, the former guidance was based on trends that we saw with repay and payoff, and we've never really had concerns about our level of production, which is something that we control. But as we see trends kind of shifting away from the headwinds we have, It'll take a couple quarters, I think, before we're satisfied that that kind of trend is behind us. I don't know, Clint, what do you think?

19:42 I agree. The headwinds we talked about for most of last year have minimized this quarter. But I'm cautiously optimistic that it's the start of a trend. But I want more than one quarter behind us before I'm ready to stick that stake in the ground and say that that's where we're at. From a production standpoint, though, we're very satisfied. And too early to tell of that lessened pay-off activity? Is it checking the temperature out in the business community?

20:28 Could you point to anything that said maybe it was lighter? It's just sort of timing and it's too early to say. It's too early to say. I'll give you one counterpoint to the normalized payoff activity. One of the themes that we hear from our customers is that they're cautiously optimistic about their own businesses. But they worry about the economy and where we're at this late in the cycle. And so that type of concern could cause some consolidation and additional sales that we've experienced really since we got out of the downturn. And so we didn't see as much of that this first quarter.

21:17 It could pick up in the ensuing quarters or maybe not. Okay, appreciate it. Thank you. And our next question comes from the line of Matthew Clark. Your line is open. Hey, good morning. On the payoffs, could you quantify what they were this quarter? In terms of dollar amount, is that what you're looking for? Mm-hmm. Yeah, I think there were $267 million last quarter. Well, it was in the current quarter, what I'd call prepayment activity was just under $119 million.

22:10 Relative to the fourth quarter, that number was $161 million. And when we look at year over year, Thank you very much. Thank you. Cautiously optimistic statement I made to Jeff's question is that it's actually lower than where we were and so it could be a bit of a timing issue. We did have some significant weather during the quarter that tended to slow things down.

23:10 I don't know to the extent that it impacted this number as well. Okay, and then I think you mentioned line utilization was still around seasonal lows. Can you just I think it's about 49%. It's pretty much flat with where we were at at the end of the year. Okay. And then just on the core NIM, if you exclude the purchase accounting accretion, and you think about the seasonality on the funding side that occurred this quarter, you get some of that core funding back, maybe pay off some of the borrowings. Is your expectation that you might see a little relief in the core NIM here in 2Q before, you know, stabilizing again or some modest pressure?

24:01 No, I think you're thinking about it right, especially with the seasonality on the funding side. And, you know, a lot of the production we had in the first quarter closed late in the quarter. And just with the strong pipelines, I would expect that combined with, you know, line utilization coming back with the weather to be good upward lift and, you As you know, we've been able to manage our deposit costs very closely, so I'm cautiously optimistic over the next couple of quarters. Okay, great. Thank you. And our next question comes from the line of John Arfstom. Your line is open. Hey, thanks. How's everybody doing? Good. A couple questions for you. Just go back to the loan growth number, the period on loan growth.

24:52 Were you guys surprised at all at that number? It just seemed unusually strong, not being critical at all, but it just seems like it's a really, really solid number for you. It's a very solid number, and I think that if we rewind a lot of the discussion that we had last year regarding the headwinds that we had, Some of it was the delayed closing of Pacific Continental and the time that it takes to rebuild the pipelines there. We already addressed the prepayment headwinds. The new teams that we were able to bring on selectively in some of our key markets and getting their pipelines built. And then the ability or the opportunity that we had to bring in some fresh talent with some departing bankers. And we've seen all of those things come to fruition in the first quarter.

25:57 Okay. Good. Only good numbers. On the digital programs that you're talking about for 2019, I think we understand the spending piece of it, and it's hard to pin down, but you talked about 2017 programs starting to show success. When you look at the six programs you lay out for 2019, which one or two do you think are the most critical or most important for you to complete? All of us probably want to jump in, and so I'll start with the easy one, and then as it gets more difficult to differentiate between them, I'll kick it over to Hadley. Okay. Our Business online banking version to me is the most critical as a commercially oriented organization.

26:52 What we see, the capabilities of that platform, and when we layer in what we've experienced to date with the consumer online banking platform, which is one of the ones that I mentioned in my prepared remarks, I think that not only is it A critical application for retaining our existing client base, deepening those relationships, but also our ability to go out and compete for middle market business. Well, I'll agree. I think that treasury management conversion that we're going forward with is a critical one because it creates a very contemporary product set for our key depositors.

27:42 And at the same time, it offers us an opportunity to provide a higher level of treasury management services to our small business clients, which we'd like to build going forward in a more direct way. We also have some payment technology that's coming forward, which is important to us. We're going to introduce Zelle and think that that will certainly help our customer base feel as though we're bringing the products that they need to them. And some of the projects that are going on that don't have the application sizzled to them are the hard work that's going on behind the scenes to position the bank's operations to be much more and more. Customer focused and frictionless as we work through creating efficiencies and at the same time making our services faster and less complex for our customers. So those are the initiatives that are kind of unfolding and they'll take a while to get introduced and stabilized but I'm very convinced that they'll Thank you. Thank you.

29:30 and 2020 are online small business capabilities as well. Okay. And then just last follow-up on that, you've talked about the $9 to $12 million, Greg, but longer term, do you feel like there are potential expense offsets? You maybe changed the roles of some people to be more revenue generating. Does this take some of the burden off the back office? Yeah, I mean, I think that The spend itself combined with increased capacity that hopefully we're either generating revenues or reducing, to your point, some of the friction. We're also just broadly speaking focused on operational efficiencies, John. So we absolutely see opportunity to have a meaningful return on that investment as we head into next year. I'll just add that we've consistently reinvested in our business over our 25-plus year history.

30:25 That's continuing. It's just the nature of the investment is different. Rather than investing in expanding brick and mortar locations, it's really into more of the digital area. And we are able to optimize our branch footprint and achieve some offsets. And as I mentioned on the start of the call, we have three pending branch consolidations right now. And as the expense levels and branch traffic counts continue to change, we'll find that balance. But in general, it's not a huge spend story. I think it's a continuation of what we've been doing. It's just a different type of expense that's migrating from the occupancy.

31:14 And in some cases, there will be some efficiencies on the personnel side as well into more of the digital spend. OK. All right, thanks for the help. I appreciate it. Again, to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Jackie Bolin. Your line is open. Hi, good morning, everyone. Hi, Jackie. I wanted to turn to capital management. Just given the discussion of the buyback and then the specific highlighting in the press release, You know, I know that the special dividend policy has been more of what you've looked for in the past, and I wanted to get your thoughts on how those two will play together.

31:59 If you might lower a special dividend and repurchase shares, if you might switch more to a buyback, if it's going to be, you know, very specifically driven by stock price, just how you're thinking about those two together. Yeah, I mean, let me start, and Hadley can jump in if he sees fit, but, you know, obviously... Any buybacks are dependent upon the price point and making sure that the execution's at a level that makes sense for our shareholders, quite frankly. So one of the challenges in thinking about it is that forward look in terms of what's going to happen to the share price and the ability to transact it at levels that make sense. To the extent that we are able to buy back shares, though I do think directionally it would cause us to look at that overall level of special dividends, at the end of the day, Our payout ratio for the quarter between the regular and the special dividend was, I believe, 67% in that neighborhood.

32:54 We don't want to be in a position where we're taking that payout ratio above 100% over a longer horizon, Jackie. So we're absolutely going to be looking to see what our experience is on the buybacks and using it to calibrate the special going forward. Okay, so more information, I guess, on the future as we see how pricing levels are and how that unfolds? We have quarter-on-quarter conversations, certainly internally, and I would expect us to have the conversation with you as well. Okay. And then a question from a loan perspective, it sounds like most of the pruning that took place last year is now complete. Is that a fair assessment? Well, I think it's an ongoing discipline, and it's something that we're always looking at the portfolio and making decisions about it.

33:48 And I'm pretty comfortable with the activities that have taken place, and we haven't seen a systemic move of any kind within the portfolio with regard to risk migration, but I'll turn it over to Andy. Yeah, I would just echo Hadley's comment that we certainly saw a lot of institutions being aggressive in the marketplace in terms of trying to build assets on their balance sheets. And so we felt that was a good opportunity for us. And so some of the pruning activity may have been a little bit higher than normal. I don't think it was substantially higher.

34:36 and as our bankers here, the things that I always say, the biggest key to credit quality is who we choose to bank. Second thing is we need to monitor those that we choose. And then thirdly, which is not the fun part of the business, but we do have to actively prune clients that for whatever reason choose to take their businesses in directions that we're not comfortable with. or their performance is one that we are uncomfortable with. So in that case, we hope to part amicably. It's just business. Okay. That's good color. Thank you, Andy. And then just one last one. In terms of the advertising expense line, I know you gave good color on how you expect the digital spend to go and then outside of that just operating expenses.

35:30 But how are you, from that line item in particular, how are you expecting that to go in the next quarter or so, just given past seasonal trends? You know, I'll maybe start, and if Adley wants to jump in. I mean, I would just say as we roll out our digital initiative, Jackie, there's certainly going to be an element of digital marketing associated with it. Off the top of my head, I'm not sure there's really a range or any incremental thought I would give you other than the fact that it is going to be part of our digital strategy going forward. Yeah, we'll have some quarter-by-quarter calls on that. But overall, I'd look to last year for the guidance on where we plan with marketing.

36:15 Okay. Great. Thank you, everyone. Thank you, Jackie. Our next question comes from the line of Gordon McGuire. Your line is open. Good morning, or good afternoon over here. Good morning. So, Clint, the new production yields of 499 basis points, you mentioned those are lower because of the public administration funding. Is there any way you could strip out what the yields might have been if those hadn't funded? Just trying to get a sense of new production outside of those. Yeah, we can. I don't have the detail in front of me to do that.

37:00 I think it was about $60 million of the production that accounted for that. But we can certainly follow up with you offline and give you the number or what the coupon rate was excluding the public finance. Great. That would be great. It looks like you completed the securities leverage strategy earlier this quarter. Do you have the total balances that you added from that and maybe what the duration and the average yields on those purchases were? Well, I would say we really kind of filled up the bucket late into last year and into this year, and we're at the level we would expect to be, which is roughly $500 million. And it's really, I think as you know, it's Borrowing Overnight, and then investing into securities products that will perform well in a rate down environment.

37:57 I don't actually have the rate overnight with me. I can tell you the differential between the overnight borrowing rate, and maybe you can back into it, and what we're earning on those assets is about a million dollars of net interest a quarter that drops to the bottom line. Okay. And just on the securities balances from here, Would you expect that to decline over time if you need them to deploy liquidity into the loan growth, or do you think you can still kind of build the balance sheet growth out of those? Well, I think that's a great question, and it's a discussion we're having internally. And as we sold securities kind of late in the first quarter, it was consciously to fund loan growth, to be honest. So you would have seen our loan-to-deposit ratio tick up a little bit to 82, I believe, for the end of the quarter.

38:47 I think part of the conversation is around what happens with the seasonal deposit flows. Over time, I think we would be comfortable seeing that loan-to-deposit ratio move up a little bit. Lastly, just clarification on the $9 million to $12 million investments. That was on an annualized basis, or was it quarterly? No, that's what we would expect over the balance the remainder of 2019. Okay, and How much of that would be more of consulting fees that would be out of the run rate once you're finished with the projects or something that kind of stays in the expense base? I'm just trying to figure out what 2020 expense ads from this could look like.

39:33 Yeah, I'm not sure there's going to be much of the consulting spend in that, quite frankly. A lot of it just gets down to how you negotiate the contracts with the vendors. There'll be some component of it that'll be capitalized and then become part of the run rate going forward, but to the extent we're replacing existing platforms, even that's a takeout of costs that were already there. So I think the detail you're looking for is really important, and I think it's part of what we would plan to keep coming back quarter on quarter and give them better transparency on. Okay, great. Thank you, guys. You're welcome. And our next question comes from the line of Aaron Deer. Your line is open. Hi, good morning, guys. Just following up on that point, to the extent that there's costs that are coming out, Well, that 9 to 12 is a gross spend, right?

40:19 So you could have either some, you know, costs that go away or maybe there's capitalized software expenses that might be included in that. Anything like that that would add additional noise? Well, and I think I talked about it a little bit last quarter. You know, we certainly have a number of platforms, including the Treasury Management Platform that Clinton Hadley talked about. Well, we're paying for the existing platform today and, you know, As the new platforms come online, we'll start dropping off the run rate associated with the existing platform. I'd have to look back at last quarter's notes, Q&A, to give you the exact number on it, but we certainly expect to see saves of that nature start to filter in in the fourth quarter of this year and then into next year. And I think to Clint's point, as each digital platform comes online, we do expect to see the benefits downstream and have a return on those investments that really start to trickle in into next year.

41:16 Andy, you sounded pretty pleased with the credit position, but given the very wet spring that the Pacific Northwest had this year, have you had an opportunity to check in with some of your ag producers and any crop types or anything that are causing you any concern at this point? Yes. The late spring is going to cause some issues just like they are in the Midwest. The farmers are getting into the ground later, so it's certainly going to impact potatoes and onions, especially potatoes. They contractually have to be taken out of the ground so that the world doesn't run out of french fries.

42:02 So that means that the potatoes are going to be smaller because they won't have as much time to grow, and so yields will be down. So we're analyzing that relative to farmers' budgets also the cold weather and the snow late is going to impact cherries and apples simply because those trees now are kind of behind the curve as well. The key with cherries is you always try to get them into the grocery stores for the Fourth of July, red, white, and blue and all that. So we would anticipate that the ag portfolio would start to show some healing, say two and many, many more. But to what extent have you seen any changes in consumer behavior or increased demand for exception pricing or that sort of thing that could cause us to see any sort of sudden increase in deposit costs going forward?

43:23 We continue to, throughout the quarter, we continue to have a lot of outreach with our larger customers and We did make some rate concessions and I think that later in the quarter the frequency of things that at least hit my desk slowed, but it's still there. There's still the risk for continued pricing pressure for deposits. But I'll also add that we had a lot of success with winning new relationships. And it's not just, you know, it's obviously not going out and competing on price, but it's our service, the expertise that we bring to the table, our product set, all of those things. So, you know, it is, it's a very competitive environment, but I think that we have a very solid team of bankers that are, you know, not only defending their Their existing portfolios, but also going out and winning new business.

44:37 Okay, that's great. Thanks for taking my questions. Thanks, Adam. You bet. And our next question comes from the line of Matthew Clark. Your line is open. Hey, just on expenses, next year it does sound like there's some relief coming later this year and into next year, but Maybe thinking about it a different way, do you still expect to achieve that mid-50s efficiency ratio at some point next year? Yeah, I think into next year, with everything we've talked about, I certainly think that's the target we're shooting for. You know, we are going to continue to focus on our operational efficiencies, Matt. And, yeah, I think that's the right target. Okay, and then the tax rate...

45:22 It's kind of hung in closer to 19% more recently. Is 19 a good number to use going forward? You know, I'd maybe blend it with last year's rate or maybe look at last year's average rate for the full year is probably the better barometer, Matt. Okay. Go ahead. I'm sorry. Yeah, it's in that range. Okay. And then on the business and occupancy tax expense just bumped up this quarter after being Within a tighter range, was there anything unusual in that item, or is that a good run rate? Yeah, there was a little bit of unusual activity. So we had an unfavorable interpretation from, I believe, the city of Seattle on how we calculated our B&O tax. And so there was a catch-up period. And I don't have the exact number in front of me, but It's probably the majority of that delta that you're seeing there.

46:24 Thank you. Roughly 400,000. Okay, great. Thank you. And our next question comes from the line of Don Worthington. Your line is open. Thank you. Good morning, everyone. Morning. Good morning, Don. Just had maybe one more, and that was – What your current thoughts might be on M&A as a way to deploy capital? Well, it's always in our thoughts, and it's an ongoing part of the strategic thinking that we have. And, you know, the way that we're thinking through a lot of M&A-related projects Thank you. Thank you.

47:41 Accretion at a level that hopefully is above mid to high single digits. And so that puts us in a range where we're looking at larger banks. And there are fewer and fewer M&A opportunities in our existing footprint, although we will Thank you for joining us. and we would consider going, well, excuse me, it's northern California and moving a bit south in the valley as far as there's reliable water.

48:50 But, you know, it's a more difficult proposition for us simply because we don't have the ability to get the takeouts that you would normally get within your footprint which makes your ability to provide a price that's competitive with an in-market competitor as competitive as they could put on the table. So, you know, it's ongoing. It's a conversation. We want to be ready. We're holding our capital at levels that would put us in position to do it, and we have the interest. But one of the things that we think a lot about is the discipline, and we don't want to overpay. So we're thoughtful about it.

49:37 Okay, great. That's great color. Thank you. And there are no further questions at this time. And I would like to thank everyone for joining us today, and we hope you found this webcast presentation informative. This concludes our program, and you may now disconnect. Have a great day. Thank you.