Q2 2020 Earnings Call

Worth, noting that $622 million of the goodwill was from the previous parent national astray banks purchase a great Western bank in 2008, and an additional $118 million relates to subsequent acquisitions. So in actuality the balance sheet now is more reflective of the current business, particularly in these market conditions.

As you would be aware goodwill and intangibles, where deduction from capital previously. So this charge is not affect our capital position.

The second item relates for an aggregate $74 million in credit and other related pre tax charges.

The majority of these charges relates to a 40 59.7.

And.

Million dollar provision for loan and lease loss expense, 6% and 0.7, 10.96% respectively. In addition, we impaired and Oreo hospitality holding by $3.3 million given the current environment. As a reminder, we stop Cecil effective October one 2020, so credit charges and coverage for the quarter Dinara flexi.

Yeah.

One of the K point is we redacting prior guidance in light of the coated nodding pandemic and a significant impacts being made on economic and business conditions will be monitoring landscape and will provide updated information as it becomes available in subsequent quarters.

Looking to Revvy net interest income was $104 million compared $107 million in the prior quarter interest, earning assets increased in the quarter, while adjusted NIM decreased 10 basis points to 3.55%.

Emergency right cancer, the 150 basis points.

Generally much contributed to four basis points of mean NIM decline with the decline in total loan yields of 17 basis points.

This is an 11 basis point decline in total deposits for the quarter.

In lot of these low rate environment on slide six we provided and you'd shot on our loan portfolio, which gives additional detail on right floors and repricing timelines for our loan portfolio.

With the recent rate cuts, we now have $2.1 billion of our variable portfolio at floors, and yielding 4.68% alongside $4.6 billion, a fixed lines yielding spot 4.57%.

We'll remain focused on the management, reducing deposit pricing through the quarter as we navigate fed rate decisions PPP lending and funding and changes in customer behavior.

Noninterest income not including fair value activity encode co. The charges were 14.6 million for the quarter compared to $17.2 million in the prior quarter due to the March quarter seasonally being slower for service charge and other fee income combined with a noticeable decline in transaction activity in March revised debit and credit chart.

Volumes.

Expenses, excluding the impairment of credit charges noted earlier was $62.3 million for the quarter compared to $56.9 million in the prior quarter. The increase was driven by 1 million in merit increases that took place in January $3 million in pre coded 19, Oreo and legal expenses and a bonus of half a million dollars that was paid to our re.

Total uncertain supports us in recognition of the hardworking flexibility and keeping our back bank active and open supporting customers.

Our capital position ended the quarter very strong with common equity tier one ratio at 10.6% and a tangible common equity ratio of 9.3%.

$40 million of share buybacks were completed earlier in the quarter and the remaining $35 million of authorized reservation is on whole given the current environment.

Tangible book value per share also increased to $20.84 in the quarter.

We declared a dividend to 15 cents per share.

The quarter ending March 31st 2020, and reflects the desire to help ensure the balance sheet is as strong as possible through the uncertain.

Many of these coded pandemic.

The board will monitor the impact of cobot, non saying and consider dividends within the context of these in subsequent quarters now for an update on our portfolio and asset quality I'll hand over to our Chief operating officer, Doug vessel revenue Doug.

Thanks, Pete loan and deposit growth trended with system growth in the quarter and for an unfunded commitments perspective, we saw a nominal increase of 72 million in balances. This included planned construction draws as well in this environment, we are focused more on portfolio composition and asset quality and.

Provided additional detail on our loan portfolio.

In light of co with 19 pandemic and the economy and on specific segments, such as hotels restaurants travel and entertainment and retail.

Nearly every sector will be impacted by the economic disturbance from Covidien 18, we've been actively reviewing these sectors and along with the entire portfolio for early indicators of stress for this quarter. We included additional information on hotel restaurant and entertainment concentrations given the relative size.

For the portfolio, including geographic distribution, along with how they've been impacted with sudden an abrupt falloff in business activity.

Looking closer at these segments, we have $114 million in entertainment 120 million in restaurant and drinking places and 1.1 billion in hotel and casino hotels.

The Entertainment segment is 1.2% of total loans was 78% of this portfolio secured by real estate.

The restaurant portfolio is also 1.2% of total loans and is 74% secured by real estate.

The hotel portfolio includes 12% of our total portfolio. We have added two additional slides to profile those in more detail.

To summarize the hotel portfolio is 90% and footprint with the remaining 10% still related to borrowers that reside in footprint.

It is a seasoned portfolio with longstanding customer relationships, who own multiple properties and have an average loan to value of 62%.

There are 10 projects and various phases of construction with 11 million advanced on 82 million in total commitments.

These hotels have completion dates scheduled for late 2020 and into 2021.

Regular reviews of the hotel portfolio continue to give us good insight into this segment.

Turning our attention to AG, our annual renewal process on the grain sector is nearly 85% complete with no material deficiencies or downgrades from the process.

Planting progress is tracking above average with conditions vastly better than a year ago when much of the corn belt was underwater. The covert pandemic is impacting overall commodity prices with demand disruption in the supply chains and those details are viewed and work through we are encouraged that use the has a launched.

Meaningful eight package that will provide $19 billion of immediate relief to most sectors through direct payments that may potentially offset the decline in commodity prices.

This quarter, we reached a level of stability with on our overall asset quality watch loans were flat and substandard loans decreased modestly quarter on quarter.

Net charge offs were 8.6 million compared to 6.1 million the prior quarter, bringing our year to date ratio, 2.31%. We did move three credits totaling 63 million to non accrual this quarter given developments in their workout process, which contributed to an increased to $213 million.

Our specialized business service team is diligently working to resolve these credits.

Dairy performance had been strong but has seen a recent decline in milk prices driven by volatility from the covert 19 pandemic.

Previously we've communicated that we would expect to see a number of upgrades to our dairy customers in the June 2020 quarter based on current performance should lower milk prices continue we will delay upgrades from sub standard to ensure our customers will be sustainably profitable at prevailing market prices coupled.

With support from their marketing and hedging programs.

Last quarter, we mentioned, our new loan risk rating system being implemented with the addition of a special mention rating that resides between.

I mean.

Mostly a while supporting our customers and communities.

After the safety of our employees my number one priority is improving our asset quality as I mentioned previously having Steve joined our team as Chief Credit Officer, which has extensive knowledge of AG lending will bolster our ability to improve asset quality.

We'll now open up the call for questions operator.

Thank you.

We'll now begin the question and answer session.

Ask your question you May Press Star then one on your telephone keypad.

For using and Speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then too and the interest of time. Please limit yourself to one question to allow other callers and opportunity to ask that question as you would like to re queue. You may do so by pressing Star then one.

This time, we will.

One moment to assemble our roster.

Our first question today will come from Terry Mcevoy Stevens. Please proceed with your question.

Hi, Thanks for joining everyone hi, good morning.

Maybe just my one question Theres seven hotel related loans over $25 million.

You just kind of run through those loans or the non accrual watch lists.

Shared national credits and just given give us a little more color given the relative size of those seven loans. Thank you.

None other than not of the of the hotel relationships I think about.

I got one over a million dollars in in some stand at the monetary and that was that was before the coated pandemics.

Overall, the portfolio is pretty strong.

Nothing in terms of sneaks shed credits or participated credits now got enough you ought to give more detail on those on those large ones yet another 70 area would be all in footprint with long term relationships and as Pete mentioned Theres only one its adversely risk rated today.

Okay. Thank you.

Thanks.

Thank you. Our next question will come from Abraham Poonawala of Bank of America. Please proceed with your question.

Good morning.

Good morning Congrats.

Question for Mark Mark on that so on the needle.

I wanted to understand talked process at all and.

Using the dividend.

Yes.

Seamlessly into beta results significantly despite the lack of Cecil adoption just talk to us in gold is all how we should see into the dividend.

Auction analytically auto and Gogo Lps, followed that the bank.

Thanks to generate over the coming quarters.

Yes look I'll kick off the now hand over to Mark Abraham really part of the part of the decision process was just given the uncertainty at the moment Abraham as you say asset quality metrics for the quarter, while not where we will not with Latin today have been pretty stable.

Would really Ali so I think seeing one downgrade as a result of the coated pace.

Just with the uncertainty in the out outlook, we just sort of as a prudent decision.

In a quarter, where we've got goodwill coming off we've got the reserve build as well, we just thought it was appropriate to address the dividend in the same quarter also.

Rather than rather than sort of maybe push it to next quarter as.

As others have.

Talked about was the general thought process.

And with earnings we've always had a strong earnings power, but just given the outlook here at the moment, we just what we'd posen.

For the organization and sell for US right now, it's actually a step around being prudent over the next 90 days as Pete mentioned, we'll have a chance to revisit that dividend and by that time have a much better handle as to the impacts on the duration of the Colby pandemic.

Okay. Thank you.

Thanks Libra.

Our next question will come from Jeff to release of D.A. Davidson. Please proceed with your question.

Thanks, Good morning.

Question.

Maybe for Doug on the.

Hey, good newer nonaccruals brought in on the quarter wanted to see the transition of those are those progressions from previously identified credits any new problem credits, indicating that this tipped over by.

Good.

It's in detail on the new credits in there.

Sure Jeff.

Within that sector. There was one they were all previously classified in prior quarter end, the Winton and.

Other segments. They were in one was and the hog sector and the other.

Was in primarily healthcare.

But all had been on our radar and bank and classified.

Grading previously prior quarter end.

It was about a 50 50 balance between AG and see Eni.

Okay. So that when you said it was three credits are they theaters.

That that came on.

Yes, yes, well into two of them or healthcare related Jeff and his third is in the hog sector, but the balances are roughly 50 50 between see an eye on health care.

Fair enough.

Okay. Thank you.

Yes.

Our next question will come from Jon Arfstrom RBC capital markets. Please proceed with your question.

Thanks, Good morning, everyone.

Morning jarring.

Right.

I guess congratulations.

Park in the new role and.

Also congratulations on getting rid of the goodwill.

I know, it's a big number not easy, but I never thought those fair accounting so it's a fresh start.

But I guess big picture for you Mark is a low so if we get asked about the numbers but.

This is your first call Andy.

Just 30000 feet, what do you want to change a great question what.

When you look at it where do you see the opportunities what do you want to do differently we understand.

Near term credit headwinds, but what do you want to change of the company.

Yes, Thanks and for me.

This halls.

As a week has been an amazing journey in terms of just getting a chance to see how the organization handle stress help people step up and how we have rallied.

Historically, great Western Bank has focused on having a very strong efficiency ratio.

Look at the numbers and you see that through our expense controls, but I think for me one of the things that we can do to not only.

Make our employees more successful.

At doing their jobs, but also make it easier for customers to bank with us is make investments and some technologies whether that's.

Taking our smaller credits and making them.

Far easier to manage easier to get through the system and easier to monitor going forward.

I want to make sure that we make those technology investments that may have an initial slight uptick in our expense, but ultimately will make this organization far more efficient in terms of reducing the number of manual processes, reducing the amount of risks that we have by not having these systems and technology pieces in place so from a 30000.

View, but view I believe strongly that we can make some of those targeted investments we can actually.

Make the bank more efficient, but not only in terms of efficiency, but assay for the bank in a better positioned to manage the risk and sells at that for me is really.

I think our big opportunity for US I also look at our footprint and I look at how we differentiate ourselves in the marketplace.

While we make those changes in Mali have more standardize processes across the footprint and while we have.

Centralization of some of our key.

Activities I don't want us to lose that local feel one of our core values is empower locally, but think globally and I don't want to lose that local Felix I believe strongly thats, what differentiates us in our markets and and how we can win business from our competition and so I don't want to lose that but I do want to make those targeted investments I do want to be able to increase our bill.

City and efficiency around processes, standardizing, and making them far better able or make us far better able to manage the risk associated with those processes.

Okay. Good.

Fair enough and then maybe if I can squeeze in one more for you Pete.

A lot of moving parts in the income statement.

Just another bigger picture question, how do you how do you want us to think about.

The pretax pre provision trajectory it seems like she's or a little softer expenses little higher we understand the margin pressure, but anything you want to call. This large ones in terms of.

While we should think about pretax pre provision from here. Thanks.

Well look John I think Youve I think you got the moving parts there I think.

In the name I think you'll still be a little bit of softness obviously it was exacerbated a little bit this quarter.

By the emergency top.

And then on the on the fee income line.

Pay some mortgage seasonally will be better next quarter.

Which is which is always a positive.

Just on the service charge income as I said, just with everybody staying at home as a bit of uncertainty around the the debit and credit card interchange in the mountains of how that will flow through and have the PPP will probably floods, so but not I think you've got the moving parts John just given the amount of moving parts in the next quarter, we'll we'll just take stock here and and see how this plays out before.

Maybe more guidance in the subsequent quarter.

Okay. Thanks, a lot.

Thanks.

Our next question will come from Andrew Liesch Piper Sandler. Please proceed with your question.

Good morning, everyone.

Right.

Just a follow up question, Doug on the expenses for the quarters, how the the uptick in the Oreo costs and maybe.

$1000 of excess.

Maybe it sounds like onetime.

Compensation costs. So if we got back some of that out.

As a run rate of around 61 million for maybe this quarter looking okay, recognizing there could be coming.

And the investments made in the in the quarters ahead.

Yes.

You've got to that.

Underlying Andrew sort of in that 61 62 for the quarter.

Yes. So that's that's the good base run rate to move off and then in subsequent quarters, where does have to say how we go around anything we need to do around impact covidien alike, but yes, that's a good baseline run rate.

Great I heard all my other question. Thanks.

As a reminder, if you wish to ask a question. Please press Star then one on your Touchtone phone.

Our next question will come from date Damon Delmonte KBW. Please proceed with your question.

Hey, good morning, everyone hope everybody is doing well during these challenging times.

My question, just looking to get a little bit more detailed on the amount of loan modifications in dollar amounts associated with that and as well as the PPP activity.

What do you guys expect you realized and loan fees related to that thanks.

One month yearend landlords diamond, it's at the moment and it's a pretty fluid as you'd appreciate it's running at about 12% of the portfolio such that 400.

Surround the portfolio, it's around $1 billion that 1 billion 1.1, which runs about 12% of the portfolio based on information.

Dial saga.

Great and then with regard to the PPP activity I think you said around 600 million in loans, how much in and fees are you expecting from that.

Yes, it's around 3%.

Okay. Thank you very much at around that.

Yes.

Our next question will come from Janet Lee of JP Morgan. Please proceed with your question.

Good morning.

Thank you provided deferrals Q4, 15, like questionnaires and what is that in terms of loan balances and what percentage.

Our 1.4 billion Lori Colgate sensitive those are in deferrals. Thanks.

So we just.

The dollar amount janet's about 1.1 billion.

And all that 1.1 that half of that is in relation to the.

Hotel and us service industry portfolio, which as you'd expect.

Thats being one of the portfolios that.

Slide most significantly so and that's about half of those requests after that is a pretty wide spread across a number of different different industry said, there's nothing else, particularly material that that really.