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Columbia Banking System Inc (NASDAQ: COLB)
2020 first quarter earnings call
Apr 30, 2020, 13:00. ET
Content:
- Prepared observations
- Questions and answers
- Call participants
Prepared observations:
Operator
Ladies and gentlemen, thanks for waiting. Welcome to the Columbia Banking System First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will do a question and answer session through the web and the phone. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being filmed.
Now I would like to pass the call on to your host, Clint Stein, President and CEO of Columbia Banking System.
Clint E. Stein – President and CEO
Thanks Tamara. Good morning everyone and thank you for joining us on today’s call as we review our first quarter results, which we released before the market opened this morning. Earnings posting is also available at columbiabank.com.
I want to start the call today by thanking our 2,200 bankers who, despite the tremendous disruption in professional and personal life, have come together to support each other and serve our customers, communities and shareholders as the COVID-19 pandemic has evolved. The Pugent Sound region entered the pandemic earlier than other parts of the United States with the first coronavirus death reported on February 29. We developed a detailed pandemic plan many years ago and recently tested it through a bank-wide exercise in December 2018. It is a phased plan and we started executing it in the first phase in early January. Since then, we have proactively followed our plan for further escalation at predetermined trigger points. Initially, our bankers were in direct communication with our clients to understand their individual challenges and worked through options to provide relief to their businesses and families. We are a community bank at heart and I believe that the empathy, compassion and support of our bankers has been and will continue to be our most valuable currency.
Columbia Bank is well positioned to handle the impact of COVID-19 and is causing disruptions in the market. This is different from the great recession of 2008 and 2009, and it is not a financial crisis, a public health crisis with serious economic ramifications that are still evolving. The strength of our balance sheet, credit profile, liquidity, and capital position coupled with our proactive interest rate risk strategies and sound expense management will serve us well as we overcome the economic consequences of COVID-19.
We started the year with great momentum and you can see the impact across all lines of the financial statements. EPS decreased by $ 0.44 in linked quarterly terms due to the related provision expense for credit loss of $ 41.5 million. On a pre-provision basis, this was the fifth best quarter in our history, in what is typically our seasonally weakest quarter. While net income and EPS were significantly affected by CECL’s provisioning expense, our bankers remained focused on abroad and produced strong growth in loans and deposits during the quarter, while reducing interest-free expenses. Without the impact of COVID-19, it would have been an exceptional quarter.
Today I have been called Eric Eid, who until last Monday was our Interim Chief Financial Officer; Chris Merrywell, our Chief Operating Officer and Andy McDonald, our Chief Credit Officer. Following our prepared comments, we will be happy to answer your questions.
Let me remind you that we can make future statements during the call. For more information on future comments, please see our earnings report or the SEC website or filings.
At this point, I will pass the call on to Eric.
Eric eid – Acting CFO
Thanks Clint. First quarter earnings of $ 14.6 million and earnings per share of $ 0.20 included a CECL provision for day 2 for credit losses of $ 41.5 million. After deducting significant provision expense, quarterly earnings before tax were the best first quarter on record. Pre-provision pre-tax income was $ 59.4 million and was $ 1.3 million higher than the first quarter of 2019. Net interest income for the first quarter was $ 122.4 million, a decrease of $ 2.4 million in a linked quarter and an increase of $ 1.4 million from the first quarter of 2019. The decrease in the linked quarter in net interest income was due to lower loan income due to the reduction in the interest rate environment, one day less of earnings and an increase in interest paid on FHLB advances. This was partially offset by $ 1.9 million of interest income and the accumulation of discounts related to the prepayment of three securities.
The increase in short-term financing costs was mainly due to a decrease in average deposits, although deposits at the end of the period increased during the quarter. The 4.02% operating NIM decreased 7 basis points in linked quarterly terms, mainly due to lower credit yields. Our cost of deposits continues to lead the industry at 14 basis points, 7 basis points per linked quarter. Total deposits ended the quarter at $ 10.8 billion, an increase of $ 128 million from year-end, primarily due to a $ 105 million increase in public funds. Our typical seasonal pattern is little or no deposit growth in the first quarter. As of March 31, 49% of our loan portfolio was fixed, 16% was in apartments, with another $ 500 million or 6% protected by our interest rate necklace. The result is that 71% of our loan portfolio is protected against further rate drops.
Our liquidity position continues to provide us with the balance sheet’s ability to meet financing needs. Overall, we have access to $ 4.5 billion of liquidity primarily through our $ 3.5 billion investment portfolio, of which $ 3 billion is easily marketable investment grade and is not committed on any loan basis. Additionally, we have an unused loan capacity of $ 1.5 billion with Federal Home Loan Bank and correspondent banks. Non-financial income of $ 21.2 million decreased $ 600,000 from the prior quarter, primarily due to a decrease in the deposit account in other fees, partially offset by an increase in loan fees.
Compared to the first quarter of 2019, non-interest income decreased $ 489,000, primarily due to lower deposit account fees and net earnings from securities offset by higher loan fees. Non-interest expense was $ 84.3 million in the first quarter, which was a decrease of $ 2.7 million in a related quarter. On a year-over-year basis, net interest expense actually dropped $ 429,000. We anticipate that our expense execution rate will continue in the mid-1980s as we manage the expenses associated with COVID and continue to invest in our future. Our interest-free basic expense ratio was 2.41% in the quarter, down from 2.53% in the fourth quarter. Our expense ratio compares favorably with the 2.60% reported in the first quarter of 2019. Our effective tax rate for the quarter was 18.1%, compared to 20.5% in a linked quarter and 19% for the first quarter. of 2019.
At this point, I’d like to pass the call on to Chris.
Christopher M. Merrywell – Executive Vice President and Chief Operating Officer
Thank you. Erica and good morning everyone. To echo Clint’s initial comments, we have changed the way we work to address our clients’ immediate and critical needs to communities or at the same time keep our employees, clients and communities safe. Our production and back office teams have been outstanding, working 24 hours to assist clients with pay tolerance and other support programs, including the SBA Salary Protection Program. The teams have had to pivot very quickly because regulations have evolved and have been successful in guiding our clients through the process. As a result, we believe that Columbia is positioned to participate in the paycheck protection program at levels that far exceed our relative market share.
The first quarter saw strong growth in loans and deposits, despite the economic closure. Deposits increased by $ 128 million during the quarter and the combination remained at 59% of businesses and 41% of consumers. The increase was predominantly in public funds and on the retail side. We experienced our typical seasonality of deposits when retail clients withdrew funds to pay credits and other expenses and then built them to return towards the end of the quarter. Our 14 basis point cost of deposits continues to be lower than that of our peers, reflecting the strength of our interest-free deposit base. On the interest side, we immediately moved to lower rates after the Fed’s 150-point fall in interest rates in March and deposit rates back to the levels last seen in 2017.
We continue to believe that our relationship-based approach is a key differentiator, and our clients are too confident of this as of any deposit interest rate available in the market. Loan balances increased by $ 119 million, an annualized increase of 9%. New loan production was $ 341 million and the line’s highest utilization was $ 120 million during the quarter. In line with the industry’s increase in line utilization in the first quarter, it was predominantly on C&I rotary lines that increased from 49% at the end of 2019 to 51.6% at the end of the first quarter. New loan production focused primarily on CRE, 39% or $ 128 million and C&I 38% or $ 126 million with approximately one-third in the real estate leasing sector, followed by the construction, healthcare, hospitality and farming. This was similar to the first quarter of 2019, where production focused on the same sectors, as well as public administration. It is worth noting that agriculture is now presented separately in our financial statements. Previously, it was a component of C&I loans. New agricultural production for the quarter was $ 32 million.
Term loans represented 78% of production, while lines represented 22% of the total. The quarterly production mix was 68% fixed, 28% floating and 4% variable. The overall portfolio mix is now 49% fixed, 34% floating, and 17% variable. Production of new loans throughout the quarter was recorded at an average tax-adjusted coupon rate of 4.3%, which is lower than the overall portfolio rate of 4.44% at the end of the quarter. The overall portfolio rate decreased 25 basis points during the quarter with C&I by 39 basis points and CRE by 11 basis points.
We continue to invest in the business. As we’ve said in previous calls, we look forward to improvements in our peer-based and bank-based money transfer capabilities, opening online deposit accounts, and small business back office lending capabilities that will go online later this year or early from 2021.
Now I will pass the call to Andy to review our credit performance.
Andy McDonald – Executive Vice President and Chief Credit Officer
Thank you Chris. The $ 41.5 million increase in provision under the CECL is primarily due to a deteriorating economic forecast resulting from the COVID-19 pandemic. We use IHS Markit for our economic forecast, and compared to the beginning of the year estimate, as you can imagine, it has changed quite a bit. Overall, our forecast anticipates an annualized reduction in gross domestic product in the second quarter, approaching 28% to 30%, a relatively flat performance after that with the next quarter beginning to see a rebound. Therefore, the change in the forecast represented approximately $ 34 million of our provision and the rest was due to the negative migration that occurred in the portfolio.
NPAs increased a little to 34 basis points, however this was unrelated to the COVID-19 impact. The increase occurred in non-accrual loans represented by borrowers who had been under stress long before the issuance of COVID-19 and the related impacts materialized. Past due loans for the quarter were 23 basis points and annualized net repayments were also 23 basis points for the quarter. Therefore, their standard credit metrics for the quarter were very acceptable. On the risk-weighting front, loans with an observation rating or below increased approximately $ 450 million during the quarter. We saw that watch loans increased $ 126 million from $ 184 million to $ 310 million. The aforementioned special loans increased from $ 265 million to $ 317 million, and lower quality loans increased by $ 65 million and are now $ 304 million in total. These changes increased our loss and low risk ratings from 5.4% to 10.4% of total loans. Many of these cuts occurred in portfolios that we believe will be quickly affected by the COVID-19 measures.
Clearly, these are unprecedented times. The rapidly changing environment in which we operate today has dramatically changed the Bank’s credit risk assessment. As with the Great Recession, we believe that it is in the best interest of all our stakeholders that we face this by focusing on industries that we believe will be some of the first to show stress. As such, it is prudent to recognize these risks and we believe that the provision made in the quarter and the assessment of risk ratings made before the end of the quarter demonstrated our determination in doing so.
We have also granted 2,600 deferment requests totaling approximately $ 1.2 billion in total loans through April 24. We believe that these deferrals are in the best interest of our stakeholders as we try to overcome this pandemic. Most of the deferrals of approximately 1,400 or approximately $ 580 million were awarded to clients in our dental portfolio. Approximately 770 went to small businesses, which accounted for another $ 300 million in loan deferrals.
With that, now I would like to give some color to the portfolios that we believe will be some of the first to be affected by the pandemic. For Columbia, which includes hotels, shops, restaurants, aviation, and of course, our dental and healthcare portfolios. Together, these industries represent approximately $ 2.2 billion in loans or approximately 5% of our portfolio. The largest portfolio affected by COVID-19 is our dental portfolio. I am sure most of you know this, most states have mandated that dental practices stop working with the exception of emergency type procedures. So indeed, dental offices are closed and are not expected to reopen until sometime in May. As of March 31, we had $ 812 million in dental related loans, representing approximately 2,100 hundred bills with an average size of $ 382,000. Therefore, it is a very granular portfolio.
As I said, today we have processed payment references for approximately two thirds of this portfolio. As such, the majority will not be required to resume payments until August of this year, we believe that the impact on this portfolio is truly transitory and by working with these clients, we will be able to minimize the impact of COVID-19 on their business, as well as the bank balance. We anticipate that a large number of these clients will also participate in the paycheck protection program, which will help them with working capital needs as they re-open their businesses.
Before continuing, I would like to share some credit metrics regarding this portfolio. As of March 31, approximately 95% of the portfolio had previous ratings. Past fees were minimal at 17 basis points. I would also note that deferrals did not affect this number, as deferrals were only granted to reputable customers. In other words, they made their March payment. We also have approximately $ 4 million in non-accrual dental loans, however these loans were already in accrual prior to the COVID-19 outbreak. So, excluding the dental portfolio, we have another $ 1.4 billion or 16% of our portfolio to discuss. The next largest segment, which we have identified is at high risk, related to the economic disruption caused by COVID-19 is our retail portfolio. We have approximately $ 498 million in retail related exposure divided between commercial real estate and commercial business loans. This represents around 5.6% of our loan portfolio.
Most of our retail exposure is comprised of commercial real estate loans totaling approximately $ 416 million. It’s evenly divided: I’m really fighting here, between Washington and Oregon, unsurprisingly focused on the Portland and Seattle MSAs. The average loan amount is $ 344,000. The most important component is building materials and garden center business types that account for about 23%. Next up is vehicle and auto parts dealers with around 20%, followed by food and beverage stores with 20% as well. Using source values, the average loan-to-value for the portfolio was 54%, with 85% of the portfolio having a loan of less than 65% based on origins. We have tested the stress on this portfolio for an equivalent decline in value as seen in the Great Recession. The average loan value increases to 66% with approximately 50% of properties that have a loan with a value of less than 65%. On a stress basis, 92% of the properties have a loan with a value of less than 85%. For the entire retail portfolio, 85% has passed, 6% is special mentioned and 3% of inferior quality. We have also seen minimal requests for payment references to date in this portfolio.
Hotels is the next area that I would like to address. We have $ 326 billion in hotel loans, which represent about 3.6% of our loan portfolio. About 38% is in major markets, which would include the Portland and Seattle MSAs, however we also have around 17% of the portfolio or $ 52 million of exposure on the Oregon coast. To give you an idea of the type of hotels we finance, most have one of the following flags; Holiday Inn, Best Western Marriott and Radisson. These would be good examples of the types of flags on the properties we fund. In total, the properties marked comprise 84% of the portfolio. The average loan amount is $ 1.8 million. To date, we have granted 44 requests for deferrals for approximately $ 110 million.
Similar to commercial retail real estate loans, we also conducted some stress tests on this portfolio. The average loan value for the portfolio based on the appraised value originated is 52%, and 80% of the portfolio has a loan with a value of less than 65%. On a stress basis, approximately 48% of the portfolio has a loan with a value of less than 65% and 87% has a loan with a value of less than 85%.
Non-dental medical care is approximately $ 245 million in total. Approximately $ 85 million are veterinarians and another $ 122 million are medical offices of different times and we also have $ 38 million from other health care providers, such as chiropractors, physical therapists, and counseling services. The average loan amount is $ 335,000. Today, 98% of the portfolio is previously rated with 1% service and 1% poorly rated. We have granted 124 requests for deferrals for approximately $ 41 million in total in this segment. As in the dental space, we see that this sector recovers when the economy opens up as people return to see their orthopedists, dermatologists, optometrists, etc.
Good. Restaurants and food services. We have approximately $ 183 million in this portfolio with an average loan amount of 299,000. Today, 84% is approved, 12% looks and the balance is poor. We have granted 101 deferrals for approximately $ 44 million in this portfolio. Today, 84% have an approved rating, 12% are on call, and 4% are below standard. The average loan had a debt service coverage of 1.56 with a loan value of 46%. In a stressful scenario, the loan to value increases to 56%.
The last portfolio that I am going to discuss is our aviation portfolio. This included both direct exposure to national airlines and entities that lease aircraft to airlines. In total, the portfolio is approximately $ 150 million, with approximately $ 100 million of direct exposure to US domestic airlines. USA And the remaining $ 50 million exposure to lessors of aircraft. Today, essentially the entire portfolio has a special rating mentioned, with the exception of a poor credit rating. As you know, during the week of April 13, national airlines began entering into formal agreements with the United States Treasury regarding the receipt of funds through the CARES Act. We believe this government funding will help them recover from the impacts of COVID-19 along with the billions of dollars of capital raised in recent weeks by many industry participants.
Regarding the lessor’s portfolio, 49% of the exposure is in Asia, 23% in Europe and 9% in North America. The rest are in South America and the Middle East. Most of the portfolio consists of narrow body aircraft with an average age of 6.5 years. We believe that these younger, more fuel-efficient aircraft are in more demand after the pandemic. Based on source values, our average loan value for the landlord’s portfolio is 74%. However, based on what we believe to be the current values, the loan to value is closer to 81%.
Good. Now I will return it to Clint.
Clint E. Stein – President and CEO
Thank you Andy. I want to take a moment to welcome Aaron Deer, our new CFO to the Columbia Bank family. Many of you know Aaron as he has covered financial institutions for almost 20 years. Aaron officially started on Monday and we are delighted to have him on board. Aaron now experiences these calls from this side of the table.
We also announce our regular quarterly dividend of $ 0.28. The dividend for this quarter will be paid on May 28 to shareholders of record at the close of business on May 14.
This concludes our prepared comments. As a reminder, Andy, Chris and Eric are with me to answer your questions. And now Tamara will open it for questions.
Questions and answers:
Operator
Thank you. [Operator Instructions] By phone, we have a response from Jeff Rulis. Please go ahead.
Jeffrey Allen Rulis – GIVES. Davidson & Co. – Analyst
Thank you, good morning
Clint E. Stein – President and CEO
Hi Jeff.
Jeffrey Allen Rulis – GIVES. Davidson & Co. – Analyst
First question about margin. Before I got to that, the percentage of floors I wanted, that happened pretty quickly. But I think you said that 71% of the portfolio was protected from rate movements, which is 49% of fixed loans, but it could go through the percentage of loans with flats and those that are in flats.
Eric eid – Acting CFO
Yes, let me get it out here. So we have: 49% are fixed, we have 16% on the floors and then we have the notional necklace. The $ 500 million notional necklace offset 6% of our one-month LIBOR. So when you add all that up, this is how you’ve hit 71%.
Jeffrey Allen Rulis – GIVES. Davidson & Co. – Analyst
Okay, I got you. So 6% is the notional necklace.
Eric eid – Acting CFO
Approximately.
Jeffrey Allen Rulis – GIVES. Davidson & Co. – Analyst
Yes. So I guess, by stepping back into the margin, the biggest risk you’ll see is that the loan yields security yields or a kind of lack of ability to reduce deposits, since they already have a fairly low deposit level.
Eric eid – Acting CFO
Probably maybe all of them up to a point. I think that in the short term with the PPP program, we will probably see a yield increase in the coming quarters as the loans are made and we take the deferred fee income and it extends more obviously for the loans that we have in our balance sheet. That will impact our spreads and margins will continue to be under pressure. Forecasting now is a bit of a challenge. We are seeing a dislocation between LIBOR and federal funds. And then we are holding onto that. But I think we will see continued pressure on the NIM for sure.
And Clint, do you want to add something?
Clint E. Stein – President and CEO
Well I think just looking at it is a slightly different way that might help. So, among the fixed portion of the portfolio, about $ 1.5 billion of floating rate loans that are already on your floor, and then when we think of loans that won’t be fixed again next year, there’s about $ 6.5 billion of the $ 8.9 billion in the portfolio, that’s not going to face that revaluation pressure. I think, as Eric mentioned, you know the difficulty with NIM and for modeling purposes it is a bunch of fresh loans with a 1% coupon. But looking at our core business dynamics, we have a sizable chunk of the loan portfolio, it’s not going to change the price, part of our interest rate risk strategy that we implemented, buying stocks up front for much of last year that work well in a low rate environment. So I don’t think you will necessarily see us reinvesting aggressively into the stock book right now. We will be opportunists about it. So I think that gives us some defense. Asset mix, that’s the big unknown. We don’t know when the economy reopens, how quickly things return to normal. We had a lot of momentum through January and February in terms of our organic growth and saw some changes in the balance sheet asset mix shift a little more to loan to deposits as the loan / deposit ratio increased . Those are all the factors that we are taking into account when thinking about looking forward. And as Chris mentioned, our deposit finance cost – deposits are near their all-time lows, but we still have some adjustments that we can make in that space, too.
Jeffrey Allen Rulis – GIVES. Davidson & Co. – Analyst
Good. And, Clint. Just another question on the capital side. In terms of: It had a high payout ratio that included the special safe to say that maybe it would feature the special offer and buybacks, but focus on staying regular. Any ideas on the capital there.
Clint E. Stein – President and CEO
Yes. We bought back I think it was around 731,000 shares during the quarter under our 10b5-1 plan and we liquidated it in late March when we received the $ 20 million we had allotted for that. At this time we have no intention of repurchasing for the foreseeable future. In terms of the special dividend, it has always been a tool that we have used to manage our capital relations down. We still have a pretty healthy 10.7% TCE ratio, but I think there’s so much uncertainty out there that our main focus is on keeping the dividend steady, and then I think I’d be happy to let those capital ratios go up.
Jeffrey Allen Rulis – GIVES. Davidson & Co. – Analyst
It is understood. And a quick and last one. The level of reserve if you were to include credit marks in relation to the $ 137 million of the established loan, what would that be enhanced?
Clint E. Stein – President and CEO
Entonces, si volvemos a agregar los descuentos en las carteras adquiridas, ¿es esa la cuestión?
Jeffrey Allen Rulis – D.A. Davidson & Co. – Analista
Yes.
Clint E. Stein – Presidente y Director Ejecutivo
No he hecho las matemáticas. Creo que Andy tampoco. Se ha centrado en
Jeffrey Allen Rulis – D.A. Davidson & Co. – Analista
Solo la cantidad, ¿tiene la cantidad de descuento?
Clint E. Stein – Presidente y Director Ejecutivo
Podemos hacer un seguimiento con usted después de la llamada. De acuerdo, de acuerdo, gracias. Gracias Jeff.
Operator
Thank you. Su próxima respuesta es de Gordon McGuire. Please go ahead.
Gordon Reilly McGuire – Stephens Inc. – Analista
Buenos días.
Clint E. Stein – Presidente y Director Ejecutivo
Hola gordon
Gordon Reilly McGuire – Stephens Inc. – Analista
Entonces, Clint, habías mencionado que la producción de enero y febrero era bastante récord. Me preguntaba si podría proporcionarnos cómo iban todos los meses. Supongo qué tan grande fue la caída en marzo y cómo se verá la tubería para el próximo trimestre y supongo que solo es su perspectiva general para el resto de este año.
Christopher M. Merrywell – Vicepresidente Ejecutivo y Director de Operaciones
Gordon, este es Chris. Y puedo decirles que la caída fue bastante, bastante significativa a medida que avanzamos en la fase de comenzar a cerrarse y cerrar las empresas, nos posponemos. Andy tuvo una revisión bastante extensa de la cartera dental. Así que lo usaré como ejemplo si tenemos solicitudes que ponemos en espera. Este punto de vista del negocio está cerrado y cosas de esa naturaleza. Entonces no obtuve la cifra real en la tubería, pero fue bastante significativa para el último mes. Estábamos en camino de establecer un nuevo récord del primer trimestre.
Gordon Reilly McGuire – Stephens Inc. – Analista
Bueno. La tubería está bastante silenciada. Asumiré que las perspectivas son probablemente más planas a partir de aquí.
Christopher M. Merrywell – Vicepresidente Ejecutivo y Director de Operaciones
La tubería, todavía tenemos un buen declive. Existe cierta incertidumbre acerca de lo que sucederá en la economía cuando la gente vuelva a abrir. Hay una demanda acumulada de cosas. Veremos si se materializan, pero eso dependerá de la reapertura de lo rápido que eso suceda y qué tan rápido las empresas vuelvan a las ganancias, los ingresos. Probablemente los corrijas direccionalmente, ciertamente será más difícil.
Gordon Reilly McGuire – Stephens Inc. – Analista
Bueno. Y Chris, discutiste un poco sobre PPP en tus comentarios preparados, pero no estoy seguro de si obtuve saldos totales. ¿Tienen eso y cómo están pensando en financiar esos saldos, como supongo que con la seguridad no se está reinvirtiendo realmente, pueden financiar muchos de esos depósitos o buscarán fuentes externas?
Christopher M. Merrywell – Vicepresidente Ejecutivo y Director de Operaciones
Tenemos la capacidad de financiar, analizaremos todas las opciones disponibles para incluir la capacidad de alinear para ponerlas en la deuda total como una de las opciones en cuanto a discutir los totales, ya que estamos en el segundo trimestre, no proporcionar orientación sobre eso y están preparados para discutir los totales. Pero le diré que el equipo ha estado trabajando duro y muchas horas largas noches, días que se muestran desde las 9:00 PM hasta las 12:00 PM, hora de la Costa Este, reabriendo estas cosas de esa naturaleza. Y como dijimos, creemos que haremos más que nuestra participación agregada en función de nuestro tamaño y le diría que la demanda superó nuestras expectativas.
Gordon Reilly McGuire – Stephens Inc. – Analista
Bueno. Supongo que Andy su cita en el comunicado habla sobre la migración neta de crédito que se sumerge profundamente en el impacto de las industrias. Supongo que la inmersión profunda probablemente fue justificada por COVID, pero me pregunto qué cantidad de la migración negativa a la que hace referencia es específica para los problemas de COVID o quizás problemas subyacentes que podría haber visto, pero fueron identificados como resultado de la inmersión profunda. tomaste o hay alguna correlación más allá de los problemas generales de COVID que viste?
Andy McDonald – Vicepresidente Ejecutivo y Director de Crédito
La gran mayoría de la rebaja fue como resultado de nuestra parte, supongo, sumergirse en carteras específicas. Por lo tanto, se mira a las aerolíneas con un valor de $ 150 millones que fueron calificadas en el pasado con todos los movimientos a mención especial, todo eso está relacionado con COVID. Son bastante bajas en nuestras áreas de hoteles y tiendas y eso está relacionado con COVID. ¿Hubo créditos allí, probablemente tienen debilidades subyacentes? Of course. Quiero decir que no puedo discutir en contra de eso. Pero diría que debido a que nuestro enfoque en esas carteras redujo la calificación, creo que está relacionado principalmente con COVID-19.
Gordon Reilly McGuire – Stephens Inc. – Analista
OK gracias. Yo retrocederé Gracias.
Operator
Gracias, su próxima respuesta es de Jon Arfstrom. Please go ahead.
Jon Glenn Arfstrom – RBC Capital Markets — Analyst
Thanks, good morning guys.
Clint E. Stein – President and Chief Executive Officer
Good morning, Jon.
Jon Glenn Arfstrom – RBC Capital Markets — Analyst
Andy anything new or notable on the Ag portfolio?
Andy McDonald – Executive Vice President and Chief Credit Officer
Anything more notable?
Jon Glenn Arfstrom – RBC Capital Markets — Analyst
Yeah, new or notable? I mean I know we’re focused on these other areas. But can you give us your assessment of how things are performing at ag at this point?
Andy McDonald – Executive Vice President and Chief Credit Officer
Yes. I think that the area that has been a struggle for us to now a couple of years has been the agricultural portfolio and of course, and I’m sure you all aware of commodity prices. There is certainly the great news reports coming out of the Midwest that more farmers buying things under the ground and dairies pouring milk on to the ground and so we are concerned about the Ag portfolio. We’re going to have to see how that plays out. Most of the book came through the 2019 cycle OK. Some still have some product to offload, but for the most part, it is really going to be a function of what do we get in production in 2020 and then do we see any kind of a rebound in commodity prices by the time we bring the 2020 crop to market. Absent that the one portfolio that’s not going to have the ability to enjoy I’d say, calendar or time-frame is our cattle book which is about $150 million in exposure and we are also watching that very closely.
Jon Glenn Arfstrom – RBC Capital Markets — Analyst
Bueno. Bueno. That helps. And then the dental deferrals. I think I caught what you were saying, but it sounds like you’re — most of these loans would come off their deferrals in August. Is that — did I catch that right in your prepared comments?
Andy McDonald – Executive Vice President and Chief Credit Officer
Correcto. So our standard deferral programs were four months and that was on purpose to take us into the latter part if you will or at least the middle part of the summer, so give those offices time to adjust to the reopening of the economy, get some revenue under their belt before they would have to start making payments. So again, we think that’s the prudent thing to do both for the dental practice and for ourselves.
Jon Glenn Arfstrom – RBC Capital Markets — Analyst
Bueno. And then just maybe a subtle question here more on the P&L, but what are you seeing on the card revenue trends? Are you seeing, I’m assuming you saw a drop and it looks like it’s down a little bit year-over-year and certainly sequentially, but are you seeing stabilization there or changes in activity trends?
Clint E. Stein – President and Chief Executive Officer
Yes. I think that there certainly has been a — we saw a drop. I think you’ll start to see as we said, some stabilization based on, it will shift so from in-person purchases to more online purchases, things of that nature. We’re also working and expecting some pent-up demand as things been start to become reopens that people will get back out there and want to spend money but certain parts of the industry through this process continue to do very well and those are places for people who are using their cards, so it is fairly simple.
Jon Glenn Arfstrom – RBC Capital Markets — Analyst
Bueno. Thanks a lot.
Operator
Thank you. Your next response is from Jackie Bohlen. Please go ahead.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Hi, good morning everyone.
Clint E. Stein – President and Chief Executive Officer
Hi Jackie.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Hi. Andy, I apologize if you mentioned this already in your prepared remarks, I just missed it. But the the migration from the Ag portfolio that went on to non-accrual in the quarter, what sector is that from.
Andy McDonald – Executive Vice President and Chief Credit Officer
It’s primarily from the fishing industry in the state of Alaska. So last fishing season is primarily what they call the pink salmon which is lower quality, a lot of it goes as they say slam it in the can. They delayed the opening of that. So the quality of the fish was less. And so we had a couple of fish processes that as a result, they have lower quality fish, which attracts a lower quality price and that put stress on their business.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Bueno. And is that what the charge-off in the quarter related to?
Andy McDonald – Executive Vice President and Chief Credit Officer
No. The charge-off was related to a row crop operation in Eastern Washington.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Bueno. And I would guess that even though it was a little bit elevated in both these metrics in the quarter, it’s just kind of normal course of business.
Andy McDonald – Executive Vice President and Chief Credit Officer
Yeah, we had one charge-off of $4 million, which really drove charge-offs for the quarter. It was an extraordinary situation with this row crop farmer and I would not characterize it as normal business strain. I’ll just say he grewsome stuff and then expect them to.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Bueno. So much more of micro issue than a macro issue?
Andy McDonald – Executive Vice President and Chief Credit Officer
Yes.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Bueno. And then also I wanted to talk a little bit about and the press release noted some efficiency initiatives that were ongoing and I know that you gave a range of where you anticipate expenses to be in just in light of investments and COVID-related costs, but maybe just a little bit of color on what kind of initiatives you’re looking at right now from an efficiency standpoint.
Eric Eid – Interim Chief Financial Officer
Well, with regards to the digital, we’re essentially done with our oversized digital spend at this juncture, Jackie, and this has become part of our run rate. That being said, we are going to continue to invest in innovative solutions, keep us competitive, and remain relevant with our clients, but some of the things that are coming Zelle, we’ve got the small business lending platform coming and the new account open and fund there. They’re tracking and, but we’re just offsetting, I mean it’s just part of our run rate right now.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Bueno.
Clint E. Stein – President and Chief Executive Officer
I will add some of the other things that we’ve done, it’s the combination of the things we’ve been doing over the past few years and starting to get higher adoption rates. Obviously some of that has accelerated with people learning how to conduct business differently and through digital channels, but also it’s some of the things that have always been ongoing and that’s what Eric was getting, it is part of our DNA is looking for how we can do something better. I’d say in the last six months, we’ve taken a look at functionally how we’re aligned and we’ve been able to eliminate and reduce some redundancy and that has some efficiency or some improvement in terms of our non-interest expense run rate. There is still some — some of the things that we’ve learned actually as we went through the paycheck protection program project. There are some other areas as we talk with our bankers, they say they’ve learned how they can do things more efficiently. That’s the silver lining in this cloud that we are under now with COVID-19 is that people are finding different ways. And when we come out the other side, I think we’re going to leverage some of the spend that we’ve had, focus that we’ve had as well as some new opportunities that we’ve uncovered through this. So that’s kind of a high-level 90,000 foot overview of the types of things that we’ve been working on and we’ll continue to work on.
Andy McDonald – Executive Vice President and Chief Credit Officer
I will provide some color on that too Jackie, just with regards to the PPP program. We digitize the whole process from the loan application all the way through fulfillment and we used existing capabilities that we have and we did it rapidly and there is no way we would have been able to keep up with the demand and the 10-day funding requirement without having all hands on deck and that digital background really helped us gives us over the finish line.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Bueno. And understanding that you’re not going to provide guidance as to the number of loans or the dollar value, when you did the PPP program, was that open to existing customers or was it existing and some potential new relationships?
Clint E. Stein – President and Chief Executive Officer
Jackie, we chose to follow the process to work with existing clients and not use it as an opportunity to prospect the demand. And the most important thing we can do is take care of our clients throughout this process.
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
Bueno. Great, thank you all very much.
Operator
Thank you. There are no further questions in the queue at this time.
Clint E. Stein – President and Chief Executive Officer
All right. Well, thanks everyone, and good luck. Stay well and stay safe.
Operator
[Operator Closing Remarks]Duration: 50 minutes
Call the participants:
Clint E. Stein – President and Chief Executive Officer
Eric Eid – Interim Chief Financial Officer
Christopher M. Merrywell – Executive Vice President and Chief Operating Officer
Andy McDonald – Executive Vice President and Chief Credit Officer
Jeffrey Allen Rulis – D.A. Davidson & Co. — Analyst
Gordon Reilly McGuire – Stephens Inc. — Analyst
Jon Glenn Arfstrom – RBC Capital Markets — Analyst
Jacquelynne Chimera Bohlen – Keefe, Bruyette, & Woods, Inc. — Analyst
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