Columbia Banking System (NASDAQ:COLB) Q3 2019 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's third quarter 2019 earnings conference call. 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 web. Instructions will be given at that time. If you are on the telephone and should require assistance during the conference, please press star zero. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System. Thank you, Mike. Good morning, everyone, and thank you for joining us on today's call as we review our third quarter 2019 and year-to-date results with release before the market opened this morning.

0:48 The earnings release and a supplemental slide presentation are available at ColumbiaBank.com. I'm pleased with our third quarter results. Earnings exceeded $50 million for the second straight quarter, and on a year-to-date basis, that income was up 16% over 2018 results to $148 million. During the third quarter, our bankers did an excellent job in focusing on those things that they could directly control. Loans were up $109 million on strong production of $383 million. Credit quality continued to strengthen and deposits expanded by $644 million, a portion of which is an increase in public funds that Greg Segrist, our Chief Financial Officer, will discuss in his comments.

1:35 Our succession plan is a key component of sustaining our business model, and I'm happy to report that the CEO succession process now underway is going very smoothly. Our employees, investors, and a broad spectrum of other stakeholders have expressed strong support and appreciate the thoughtful continuity of leadership. Clint's a talented banker with 25 years of experience, including 14 spent growing Columbia Bank. I'm proud to pass the torch on to Clint, and I'm confident he will lead Columbia Bank successfully into the future. On the call with me today is Greg Segrist, our Chief Financial Officer, who will provide details about our earnings performance. Clint Stein, our Chief Operating Officer and incoming CEO, will review our production activity and highlight the status of some of our digital investments.

2:25 Andy McDonald, our Chief Credit Officer, will review our credit quality information. And Chris Merrywell, our incoming Chief Operating Officer. Following our prepared comments, we'll be happy to answer your questions. It's important that I remind you that we'll be making forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filings and, in particular, our 2018 SEC Form 10-K. At this point, I'd like to turn the call over to Greg to talk about our financial performance. Thank you, Hadley. Third quarter earnings of $50.7 million and EPS of 70 cents per diluted share was the second-best quarter in our history after the second quarter of 2019. As you know, We've been working diligently since the latter half of 2017 to put protections in place to defend our NIM and net interest income should interest rates decline. As a reminder, the three primary interest rate risk management tools we've been using have been to increase the duration of our assets, selectively grow the balance sheet by borrowing short-term to fund the purchase of securities that would respond well in a rate-down environment, and a derivative strategy utilizing a zero-cost collar. Since 2017, fixed rate loans have increased from 38% to 47% of the portfolio, and our derivative strategy remains in place with a $50 million notional amount. We entered the third quarter with approximately $50

3:58 million in our security strategy. We did increase our security strategy in the third quarter by selectively increasing public funds by approximately $300 million as an alternative to using FHLB advances, with a corresponding increase in the securities portfolio. The decision to use public funds this quarter is in line with our contingency funding plan and desire to periodically test some of the alternative funding sources available to us. Our security strategy now stands at approximately $800 million and along with increased loan duration and the derivative strategy will provide protection in the event of a further decline in rates. After considering the $4.9 million of loan interest recoveries in the second quarter, net interest income did increase $2.2 million quarter-on-quarter.

4:43 Thanks in large part to an increase in net interest earning assets and loan growth during 2019. As you'll recall, the interest recoveries also added 17 basis points to the second quarter NIM. When you factor that in, the remaining decline in the third quarter operating NIM of nine basis points was driven by the extra insurance we took out in the form of increasing the security strategy. Cost of deposits did increase modestly, given our decision to selectively increase participation in public funds as part of our overall interest rate risk management strategy. If you exclude the public funds, which are wholesale in nature, our cost of deposits was unchanged. Non-interest income was $28 million per quarter, which was about $2.4 million on a linked quarter basis, and up $7 million compared to the third quarter of 2018.

5:36 While each quarter benefited from one-time items, We are seeing positive trends in loan, card, and financial services revenues as we continue to focus on generating non-interest income. Third quarter expense of $87.1 million includes $1.9 million of expense that is directly tied to our digital efforts. We remain focused on closely managing our expense run rate and anticipate non-interest expense, excluding digital, to continue in the mid-80s range. The year-to-date impact for our digital initiatives was $5.9 million. We anticipate a full-year impact of $9 to $10 million. As we go on through the first year of the digital journey, we have focused on foundational projects that create capacity in the front and back offices and we're on schedule to meet the three-year strategic roadmap laid out a year ago.

6:26 We expect a similar level of digital investment in 2020 with a full-year impact in the $8 to $10 million range. Our effective tax rate was 19.6% for the quarter and 19.2% year-to-date both within our target range of 19% to 20%. We actively repurchased shares during the third quarter as part of our capital strategy, and we will continue to do so provided we feel it will benefit our shareholders. As we've shared prior calls, we have a strong capital position and will continue to balance buybacks with special dividends and strategic opportunities. Lastly, The team has been working hard on the implementation of the new Current Expected Credit Loss, or CECL, accounting standard.

7:11 Based on our current portfolio and forecasted macroeconomic conditions, we estimated day one impact on the Allowance for Credit Losses, or ACL, ranging from a decrease of 10% to an increase of 5%. This reflects an indicative range from the five-quarter look back we performed were forecasted macroeconomic variables contributing to quarter-on-quarter variations. No material impact to our capital levels is anticipated. Work does continue to refine and validate our CECL models, and the ultimate impact will depend on characteristics of the loan portfolio and the macroeconomic environment at the adoption date. At this point, I'd like to turn the call over to Clint. Thank you, Greg. Good morning, everyone. We've always focused on driving long-term value for our stakeholders. This quarter's solid performance embodies the outcomes of our long-term thinking. Our bankers continue to build relationships on both sides of the balance sheet as evidenced by the growth in loans and deposits.

8:11 We continue to evaluate how we allocate resources. The gain on the sale leaseback transaction during the quarter is an example. In the coming years, we will reinvest a small portion of the gain into a contemporary replacement facility that better suits our needs and those of our clients. The remainder can be reallocated to growing other parts of our business. Without the noise created by the increase in public funds, deposits still grew by approximately $344 million or 13% annualized during the quarter. As a result, the deposit mix shifted slightly from 61% business and 39% consumer. Third quarter loan production was $383 million, exceeding $1.1 billion on an air-to-date basis.

9:05 Even with this record-setting production pace, our bankers have been busy generating new leads, resulting in a solid loan pipeline. Term loans comprised 65% of the production, whereas lines were 35% of the total. The quarterly production mix was 56% fixed, 39% floating, The decline is the result of higher-yielding repayments in construction and CRE space coupled with repricing of variable rate loans.

10:00 Prepayments of $146 million in the current quarter were stable and consistent with the prior quarter amount of $153 million. While stable on a linked quarter basis, current prepayment activity is down about 10% from third quarter 2018. During the quarter, C&I production was 44% or $169 million of the total production and commercial and multifamily real estate production was 42% or $161 million of the total. C&I loans were up $63 million driven by seasonal activity in the ag book along with increases in the finance and insurance sectors. Commercial and multifamily real estate loan totals were up $62 million during the quarter driven by increases in the warehouse, Land, Office Space, and Recreational Sectors.

10:57 As part of our ongoing branch rationalization process, we finalized the consolidation of three branches during the quarter, two in our Puget Sound Market and one in our Portland region. One additional branch consolidation is underway and scheduled for completion during the quarter. We continue to advance our digital program In the third quarter, we completed the rollout of our new commercial online banking and treasury management system, and we implemented our new human capital management platform, improving operational and talent management efficiencies across our employee base. We currently have multiple projects underway that will improve our peer-to-peer money transfer capabilities, digitize deposit account opening, enhance our small business lending capabilities, and drive efficiencies to increased automation across the company.

11:52 We view our digital efforts as an ongoing journey rather than a destination. The primary pillars are in place, the roadmap is laid out and we are moving well down the path. I want to take a moment to thank Hadley for his leadership, friendship and contributions to building our franchise over the past seven years. The entire team wishes Hadley and Gale a long and happy retirement. Now, I'll turn the call over to Andy. Thanks, Clint. In summary, credit quality is very good. NPAs to total assets were down to 27 basis points, which is the lowest level in 12 years. In addition, we continue to enjoy positive migration in both the criticized and classified loan categories.

12:39 We are, however, carefully watching our clients with respect to macroeconomic conditions. If the tariff war persists, it is likely the region will experience negative economic impacts as Washington, Alaska, and Oregon are among the top seven states most affected by these tariffs on a GDP basis. We actively monitor this sector and are encouraged by recent trade developments with Japan, and ongoing discussions with China. However, we did see an increase in watch-rated assets in the quarter by roughly $31 million, and this was to help us further monitor trade development impacts on our portfolio. Our third quarter provision for loan and lease losses of $299,000 was again very modest and essentially unchanged from the prior quarter.

13:33 The quarter benefited from a large level of recovery in both the originated and PCI portfolios. Most of the recoveries for the quarter were related to two relationships dating back to the Great Recession. The dedication of our special credit team is exemplified by these recoveries. Absent these recoveries, our provision would have been more meaningful. So for the quarter, we had a provision of $1.75 million for the originated portfolio offset by a $1.2 million release for the first heritage portfolio and a net release of $214,000 for the Columbia River, West Coast, and Pacific Continental portfolios.

14:18 As of September 30th, 2019, our allowance to total loans increased by one basis point to 94 basis points of total loans. As always, we'd like to remind you that this ratio is impacted by our acquisitions and the associated loans that were recorded at Fairville Value. Embedded in those valuations is approximately $20 million of net discount, for which approximately $15 million is associated with the Pacific Continental portfolio, $3 million with the West Coast portfolio, and $2 million with the Intercontinental portfolio. With that, I turn the call back to Hadley. Thanks, Andy. We're pleased to announce our regular quarterly dividend of $0.28, which constitutes a payout ratio of 40% for the quarter and a dividend yield of 2.95% based on the closing price of our stock on October 23rd.

15:13 This quarter's dividend will be paid on November 20 to shareholders of record as we close the business on November 6, 2019. It's been a privilege to be part of this company. I've been inspired daily by the way our employees care for each other, our customers, and by their unwavering commitment to help build stronger communities. This concludes our prepared comments this afternoon. As a reminder, Greg, Clint, Andy, and Chris are here with me to answer your questions. And now Mike will open the call for questions. At this time, we would like to take any questions you might have for us today. To ask a question, simply click the Q&A button on the lower left-hand corner of your screen, type your question in the open area, and click Submit.

16:00 If you would like to ask a question over the phone, press star, then the number 1 on your telephone keypad. To withdraw your question, press the pound key. And we will pause for a moment to compile the Q&A roster. Your first question is from the line of Jeff Rulis. Your line is open. Thanks. Good morning. Good morning, Jeff. Well, I guess first one's for Greg. Just to kind of get back into those expenses, your favorite topic, I think the mid-'80s range, X to digital, is what you had said and have said in the past. The $9 million to $10 million range, Full Year Digital Spend. What is that year-to-date?

16:48 Year-to-date, I believe I said in my comments, it was $5.9 million year-to-date. And that actually did reflect almost a million dollars that we were able to capitalize this quarter, which brought in the year-to-date range versus what I indicated last quarter. Okay. Sorry, I didn't hear that year-to-date number. You said 5.9? Yeah, it's 5.9, which is net of approximately a million dollars we were able to capitalize. So absent the capitalization, it would have been higher. Got it. Okay. I guess for the full year, I guess Q4, we're still looking for a ramp in that spend in addition to the mid-'80s guidance? Incremental to the mid-'80s guidance, correct.

17:34 I mean, we're pretty far along in the year, and I think as Clinton said in his comments, a lot of the cornerstone projects are pretty far along. but there are, I think over the balance of the year, roughly 30 projects we're gonna have done. So there's still a little bit that could flip between the fourth and first quarter but yeah, there would still be some incremental to the mid-80s fund rate. Okay, and if we took kind of that mid-80s base into 20, you talked about another eight to 10 added for the additional digital spend. What kind of core expense rate could we assume on the, on the mid-80s number, if you're comfortable discussing that. Give me that one more time, Jeff, so you're talking on the core.

18:21 So, yeah, did you mention $8 to $10 million in 2020 for additional digital spend? Right. Okay. I mean, I think you... Exit Digital Spend, you'd probably expect to see 2% to 3% growth. I mean, something in line with the rate of inflation. So, I mean, if I were trying to model that out, I would try to peg it to the rate of inflation. Okay. That is helpful. I was just trying to get that number down. Other question? I guess for Andy, just trying to understand that these recaptures and recoveries on past transactions kind of come and go, it seems like we've We've seen a flurry of them the last couple quarters. Is there anything prompting the timing of that, or is it just kind of indeed coming in all in the last couple quarters?

19:12 Anything to read into that? Yeah, I mean, this quarter we had two significant ones, one for about $1.9 million in the originated portfolio. I guess you could classify that one as a bit of a surprise. We had a strategy in place where we were able to encumber assets and the principals finally decided to do something with those assets and that afforded us the opportunity to collect on the money. Absent them actually taking action to try to create value with the assets, we would have been still waiting for some kind of recovery The $1.2 million in the PCI book was actually a negotiated settlement where the individual actually came in a year ahead of what we expected and what we had agreed to. And again, they had an investment opportunity that they wanted to take advantage of. So I guess it's kind of a combination of a number of things, but that's how I would explain the two large recoveries.

20:27 Okay. Thanks. And Hadley, congrats on the retirement. I think a commendable Your next question comes from the line of Aaron Deere. Your line is open. Hi, good morning, everyone. Good morning. And I'll extend my congratulations as well, Hadley, on your retirement and, Clint, on your new role as well, Chris, to you as well. I guess following up on Jeff's inquiry into the expenses, I'm just trying to understand a little bit about the year-to-date versus the full-year guidance. It looks like you're basically talking about a $3-4 million expense that could hit in the fourth quarter, but I guess I'm expecting some amount of that given the size of it. You must be looking to capitalize?

21:20 Can you give us a breakdown of how that might occur? Yeah, I mean, I think the capitalization piece always, it's triggered late in the process once we're able to negotiate contracts, and it's really, it's a fallout of what's on the piece of paper, and I would say we've had better experience negotiating contracts this year than we probably planned and thought about earlier in the year. Of that three to four range, I am hopeful that some amount of that we could capitalize, so it could bring you down to the lower end of the range, Aaron, but There's also a piece of that that could flip into next year. So that's why there's a bit of a range there still. Okay. And I'm sorry, what was the amount of that spend that you expect for next year? And is it a similar kind of situation where some of that will end up being capitalized and so won't fully be recognized in the year?

22:15 The range I've commented on in my prepared remarks was maybe 10 million for next year. Looking at next year's projects, there's probably less opportunity to capitalize than we've been able to do in some of what I call the cornerstone projects, just given size and scope. But there could be some that could pull you down to the lower end of the range, Aaron. But until we really get into that, it's really hard to predict. Sure. Okay. Looking at the margin, just given some of the balance sheet strategies that you employed during the quarter, as well as just the changing rate environment, what's your expectation for the net interest margin as we head into here going into the fourth quarter and into next year?

23:04 Yeah, well, again, absent any potential action next week from the Federal Reserve, I think you're really looking at a flat-to-down environment. Pricings continue to be very competitive. We're always going to have some quarter-on-quarter fluctuation just given our funding mix and as deposits flow out in the first quarter. But again, after the change next week, I think it's going to be flat-to-down a little bit is the way I'm thinking about it. Okay, great. Thanks for taking my question. You're welcome. Your next question comes from the line of Gordon McGuire. Your line is open. Good morning. Good morning, Gordon. And congrats, Hadley and Clint. Greg, I just wanted to clarify, you said the full nine basis points of operating NEM decline X the recoveries last quarter, that was all from the security strategy?

23:58 Yeah, the security strategy did have a nine basis point impact, Gordon. I mean, there were other in and outs in the quarter, but When you factor out some of those ups and downs, you're left with those nine basis points. Okay, so it held pretty flat if you back out the interest recoveries. That's right. And the strategy. And then just clarifying your comment on the last question, you said absent any change, are you just saying absent a rate cut NIM is flat to down or absent a change in the projections for a rate cut? As in a rate cut next week, and if you just look at where the curve is now, I would expect, and I think the curve does factor in a cut, but if we just take a look at the curve as it stands today and roll forward into the next quarter, I would look at down, flat to slightly down.

24:48 Okay. And then just the impact from the rate cut, is it still what you were talking about last quarter? No. just the net basis from the protection strategies. Is it still in the same range? And can you just kind of update us on? Yeah, that's a good question. I mean, it's fairly consistent. If we have a 25 basis point cut next week or in the future, let's say, it would have an estimated $3 million impact over the next, the following 12 months. And that's not up to an appellate of protection from the interest rate risk strategies. Okay. Sorry. Go ahead.

25:33 And I understand there's a lot of moving pieces to the expense base next year, but it's been a little while since you've talked on this call about the efficiency ratio and the mid-50% target, and the rate outlook's changed since then, so I'm wondering if you could provide an update there. Yeah, sure. As you point out, the interest rate environment does impact the efficiency ratio, and we did expect that to float up a little bit this year as we executed on The Digital Strategy. I think longer horizon, so later into next year and then probably into the following year, we do expect that to float back down. We are really focused on driving the operational efficiencies, in part, through the digital initiatives to help make that happen. But I think the range we're in is probably the range we're going to be in for the next couple of quarters.

26:20 If you just also kind of segue and think about the ratio of non-interest expense to average assets, You know, in the quarter, that was, I think, 259. And that's really in that range we've been talking about for a while, too, which is having that ratio in the 250 range. So that is the kind of metric we are keeping a close eye on as well. Got it. And then just housekeeping, what was the weighted average price of the repurchases this quarter? You asked the one question I don't have in front of me. I think it was slightly over $35 a share. Okay. Thank you. Once you get to 10Q, the numbers will drop out. Thanks. You're welcome. Your next question comes from the line of Matthew Clark.

27:07 Your line is open. Hey, good morning. Congrats to you, Hadley and Clint as well. Echo those comments. On the expense outlook, mid-80s, layer on 2% inflation, call it the midpoint of the 8 to 10 million of digital. That implies an $89 million run rate on average next year. Does that consider, maybe modest, but the recent branch closures and the efficiencies that you might gain from some of these dual systems coming off? Yeah, I think it does reflect both of those.

27:54 What it doesn't reflect yet is we're still midstream on our budget cycle for next year, which is where we'll really start to make a lot of the decisions that foundationally can help us calibrate the number better, Matt. But I would say at this point it does include both of those factors. Okay. And then just on the loan growth outlook, I think you've conservatively Guided to Low Single Digits in the past. Looks like you're tracking to do around 5% for this year. I guess, how do you feel about the growth outlook as we look into next year and you consider some of the new producers you brought on board? Whether or not that might change your outlook?

28:43 Yeah, Matt, this is Chris. I'd say that despite a very competitive environment, we're seeing special opportunities that match our credit discipline. The pipeline remains full, but we're continuing to monitor prepayment activity, which is difficult to forecast, and we stay frequently in contact with our clients to try to stay ahead of that. And so, yeah, we're in that range. Okay, and did you happen to have the loan payoffs in the quarter? I think you spoke to prepays but not the overall payoffs. Yeah, Matt, this is Clint. I actually had that number in the script and I took it out because I just considered Payoffs is kind of a good thing. It's part of what we expect when we make loans, and it's the prepayments that create the variance.

29:56 Let me come back to if I've got it in a report in here. I can follow up offline also, because it's just a report that we pull the prepayments from the same report, so we can get you the number. And then just last one on the interest recoveries. Last quarter, 4.9 million. For some reason, haven't been able to find this quarter what they were. Matt, this is Andy. Interest recoveries this quarter were not anything out of the norm, and so we didn't highlight them. The recoveries last quarter were far above what we normally enjoy.

30:43 Okay, thanks. Your next question comes from the line of John Arstrom. Please go ahead. Hey, thanks. Good morning, everyone. Good morning. Good morning. A few follow-ups. Maybe, Greg, for you first in terms of, you know, call it asset liability management. You talked about the collars. You talked a little bit about the securities and public fund strategy. What more do you think you need to do? Are you just satisfied where things are at today in terms of when you look at the forward curve in the rate environment? Do you feel like you're set or might we see some more changes in the next few quarters? John, honestly, it's not something we ever stop looking at.

31:30 We have a very active dialogue around our ethical liability management and pricing on both sides of the balance sheet. And obviously mix comes into play as well. So we're not resting on where we are at this point. We're absolutely still intending to actively manage tech or NIM as well as actively manage our net interest income. Okay. And is the expectation with some of the loan growth that you guys have talked about, expectation is even with maybe some incremental margin pressure, you still feel net interest income growth is in the cards for 2020? It's hard to predict at this point. I mean, as I mentioned, we're still going through the budgeting process, so I hate to give you any leading indicators on that, John, but, you know, as Clint commented on, you know, we feel comfortable with the pipeline, and, you know, it's still something that we're going to continue to work through as we get into next year.

32:22 Okay. Chris, for you, follow-up on loan growth. This is like a high class problem, but you had your second best quarter in terms of new originations. It's below what you had last year, but still a healthy number. Are you seeing any changes in the pipelines or any part of your commercial or commercial real estate where optimism or pipelines might be fading a bit, or do you feel like this is all pretty consistent? I'd say it remains pretty consistent. The pipeline is full. And again, as I mentioned, we're seeking plans of opportunities that meet our disciplined credit philosophy. So at this time, I would say it remains consistent.

33:07 Okay. And then last follow-up. Give us a little more details on the sale-leaseback, if you can, and then what kind of potential branch consolidations there might be on the horizon coming in 2020. Thanks. Hi, John. This is Clint. The sale-leaseback was a facility in the Bellevue market that obviously, with all the growth that's happening there, and the period of time that we've owned the location. It's a fairly dated branch facility on a very valuable piece of dirt. And so as we looked at what we want to do, not just with branch consolidations, but just the branch footprint in general, because in my prepared remarks, I mentioned we'll reinvest in a more contemporary We've got, you know, up to three years or so that we can evaluate where we're going to be in that same part of town.

34:23 We've talked in the past about our Neighbor Hub concept, and I expect that you'll see a facility like that replace this specific location. But we also have some other places within our footprint where we feel like that additional branch locations would be beneficial to serving our clients and helping our bankers generate new relationships. So that's the reinvestment component of it. The rationalization part in the deck that we put out on our website this morning, we have what we've done in that regards over the last 10 years or so. That's ongoing, and we've never been fans of putting a target or a number out there because we really look at how branch traffic is changing, how different channels that customers are using, and that really drives what we see as potential additional consolidations or closures.

35:36 So it's more than just simply reducing the number of branches. So you won't see a ton of new branches. I don't want you to think that we'll get a branch expansion strategy by any means. But it's a very, very dynamic process that we go through. Chris and I have worked in our current capacity very closely on it for several years. You know, and I'm pretty excited to see what Chris does with it as we move forward. Okay, great. And echo the comments, Hadley, congratulations, and Clint and Chris, a long runway ahead, so best of luck. Yeah, thank you.

36:21 And as a reminder, to ask a question, you can click the Q&A button on the lower left-hand corner of your screen, type your question in the open area, and click Submit. To ask a question over the phone, press star 1 on your telephone keypad. And the next question is from Jackie Bolin. Your line is open. Hi, everyone. Good morning. Good morning, Jackie. Welcome back. Hi. Thank you. I just wanted to touch base on, make sure I understood the comments regarding the security strategy and the positive impact that that has had. So, Greg, you were saying if we were to have a rate cut next week, then that would be approximately a $3 million decline in income over 12 months, and that's net of a $2.5 million benefit from the strategies you've undertaken.

37:09 Do I properly understand that? Yeah. Okay. So, is it fair to assume then, and I think you kind of alluded to this, that if we are to have an environment where we have continued cuts, You know, you would actively look at the potential benefit for continuing those strategies. Is that fair? We would dynamically continue to reassess the entirety of the interest rate risk management strategies. That's correct. Okay. Okay, thank you. And then, Andy, question for you. You know, just given some concerns that you're seeing from your customer base over the possible impact of tariffs and, you know, what that might do to businesses, Has this changed anything within how you think about your reserve methodology?

37:56 Understanding, of course, that we're about to enter CECL. Yes, and CECL will save us all, I guess. So that'll be a wonderful thing. Well, certainly from a qualitative standpoint, it does impact our economic outlook as we look forward. So when we are Calculating our reserve, we are very cognizant of what's occurring, especially with trade wars, Brexit, and other economic indicators. To look at manufacturing over the last several quarters, it's been on a decelerating basis. So those kinds of issues are always part of our methodology when we're looking at our allowance.

38:48 and then, of course, as we would see those things, if it were to materialize on the quantitative side of the model, we would ease off on those qualitative assumptions. Okay. And then I would assume that the introduction of CECL methodology and given, you know, a lot of the political noise that we have, that could increase volatility. Is that fair? I think that's a very key observation on your part. If you just think about the economic environment in the fourth quarter of 18 to the first quarter of 19 to where we are now today, you can see quite a bit of volatility in economic data and forecasts.

39:40 The guidance you provided, and thank you very much for that, for a CECL range of minus 10% to up 5%, is that based on where we stand today? That range really does reflect the entire range Andy just talked about. So we just wrapped up a five-quarter look back. I would say the high end of the range absolutely reflects what we are today. Okay. OK, thank you. And I would be remiss if I didn't echo everyone's comments. Congratulations on the management shifts. And Hadley, I hope you have a lot of fun things planned. Well, I do. Thank you. At this time, we have no further questions on the phone.

40:31 Before we conclude the call, Matt, I'll circle back on your question regarding Payoffs during the quarter were $62 million. So prepayments of $146, payoffs of $62 million. It got us to our $208 million total. Okay. Thank you. That concludes our call for the day. Appreciate it. Thanks to all our participants for joining us today. We hope you found this webcast presentation informative. This concludes our webcast, and you may now disconnect. Have a good day. and more.