Q1 2020 Earnings Call
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Please standby the call principal begin momentarily we thank you for your patience and asset you. Please remain on the line.
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Good morning, and welcome to SB Financial Corporation's first quarter 2020, <unk> earnings conference call hosting the call today from a financial it's Chris homes, President and Chief Executive Officer.
He is joined by Michael Nike.
Interim Chief Financial Officer, and Greg Bowers, Chief Credit Officer.
Please note.
At the financials earnings release.
Implemental financial information and this mornings presentation are available on the Investor Relations page of the company's website at Www Dot Firstbank online dot com and on the Securities and exchange Commission's website at Www Dot FCC dotcom.
Today's call is being recorded and will be available for replay on F. B financials website, approximately an hour after the conclusion of the call.
At this time.
Having placed in listen only mode.
So called will be open for questions. After the presentation.
During this presentation at the financial May make a comment which constitute forward looking statements under the federal Securities laws.
All forward looking statements are subject to risks and uncertainties and other factors that may cause actual results and performance or achievements of FP financial to differ materially from any results expressed or implied by such forward looking statements.
Many of such factors are beyond at the financials ability to control or predict and listeners are cautioned not to put undue reliance on it such forward looking statements.
A more detailed description of these and other risks is contained in <unk> finance periodic and current reports filed with the Securities and Exchange Commission, including EFI financials. Most recent form 10-K.
Except as required by law SB financial disclaims any obligation to update or revise any forward looking statements obtain contained in this presentation.
Whether as a result of new information future events or otherwise.
In addition, these remarks may include certain non generally accepted accounting principle financial necessary measures as defined by securities.
And Exchange Commission regulation G.
A presentation of the most directly comparable generally accepted accounting principle financial measures and every conciliation of the non-GAAP measures to comparable GAAP measures is available in F. B financials earnings release.
Supplemental financial information and this mornings presentation, which are available on the Investor Relations page of the company's website at Www Dot first bank online dot com and on the Securities and exchange that sat at Www Dot that's easy Dot Gov.
When I looked at a conference over to Chris homes. Please go ahead.
Alright, Thank you God to me try and good morning, everybody. We're happy to be joining you sorry that we or a day later than intended and we did have a proper work off the call vendor yesterday, a that oh, whether they lost their systems and so we.
But we're glad that we were ever get rich scheduled and a welcome to everybody and thank you for joining us.
We appreciate as always your interest in MB financial.
Where are we thinking under other circumstances or my introduction would almost certainly be spent with guidance on our margin a bottle and the recent fed rate gosh.
A discussion of our stellar mortgage performance update on our recently announced Franklin synergy merger and our recently closed first national Bank of Scottsville acquisition or a discussion on some of our recent personnel changes however.
This call I think the important to remind everyone of our vision and values explain how our team has been embodying those over the past too much.
Because more than anything I think our associates, our corporate character and our responses to our customers in communities over the coming quarters were served to drive long term shareholder value.
Great Challenge creates the opportunity of a lifetime for our bank to show, it's true colors and understand to distinguish ourselves.
Our competitors in the process.
Our vision.
The first thing is to deliver confronted solution for our customers.
Robotic great place to work for our associates to invest in our communities and to provide a superior long term return for our shareholders.
We go about delivering that vision by upholding our values one team one bank.
Doing the right thing commitment to excellence existing for our customers treating people with respect and enjoying life along the way.
In March and April had been tumultuous for our customers associates in communities, beginning with a devastating tornadoes that tore through Nashville, and middle Tennessee in early March.
Immediately I'm a relationship managers checked in with our affected customers in our markets hosted food truck to provide hot meals for those in need across our affected communities.
Those coordinated actions were in addition to a myriad of other individual responses Barr associates, such a donations to.
Two salvation Army and food banks and other charity.
Internally, we banded together as a family we had an associate who off nearly all of a world possessions. When the tornado was a direct hit owner top floor apartment.
Our team responded that morning by making I appointments. So she can get new contacting glasses, taking or could the mall to get new clothes, and essentially that can or get a new cell phone.
And then putting are up in housing until she could figure out a longer term solution.
After learning that are pets, we're missing from the door NATO one of our associates was even able to locate them and facilitate an emotional reunions.
Just two weeks after the tornadoes before any kind of recovery had a chance to take take hold.
We were acquired most of our associates to work from home and suspending lobby hours in our branches as social distancing became the cup the country New reality.
As a community bank Weve been acutely aware of the financial and psychological strain that the past two months have created across our footprint.
In turn our first thing family has risen to the challenge of supporting our associates customers in communities in the extraordinary man manner, when which africom have got them.
For our associates protection, we implemented a work from home policy or more to the 16 or emergency management Committee had been meeting.
Eylea since early March in our board has instituted weekly meetings since more to 20 towards between.
Because it's the right thing to do we've now got pay for anyone and able to perform their jobs due to social distancing I personally provide updates to all of our associates every day to ensure that the team has kept the breadth of how the bank is operating in these times and our marketing team provides a daily company wide update on how.
Our associates are stepping up for our customers are co workers in our communities.
All accounts our team has adapted to this challenge and morale remained high across the company, maybe even at an all time high but especially given these challenging circumstances.
As we were implementing protective policies for our associates are our him we're moving quickly to get in front of our customers and make sure. They knew about the deferral programs that were available to them.
Also posted materials on our website learning customers about little relief programs available to them and encouraging them to ask for help that they need it.
We received fantastic feedback across our customer base as to how quickly we were able to alleviate some of their financial burdens today, we've had over 1400 customer representing 14% of our loan portfolio choose to participate in our deferral program and we're continuing to process, though to request as they come in.
After the cares Zack products to pay the pay check protection program and despite our lack of history with SBK lending, we had a group of 10 executives and associates working in some cases 20 hours a day to determine how we would implement the program to serve our clients where their work we were able to form a team of associates.
Build a process and begin accepting applications on Saturday April before.
Since then we've had associates working relentlessly owner applications approved by the S. BA.
When it became apparent that the initial around the funding would run out quickly. We asked for an additional 50 associates to work shifts around the clock in putting applications to the FDA platform.
We build that quota within minutes it ended up well oversubscribed.
We put out that call. It 553, p. via an email and within an hour we had 30 new volunteers.
In the first of several virtual training sessions, all told over 300 associates have been involved with BBB or approximately 50% of our banking division.
Across all portions of bank, we banded together at one team to make sure that our customers have been taking care of for the first round. The funding that ran out of making the 16th we received or 1500.
We received approval for over 1500 application representing $267 million.
Proximately 29000 employees across our customer base.
I checked in last night after the program in reopened we had gotten an additional 985 loans and $50 million in approvals in our team is fully caught up at this point.
It is getting it via approval responses with a very quick turnaround at applications come in.
We view first bank of the pillar of our communities and our associates have done well to serve as the sources of string since the world changed I could have been the entire rest of the call. An example of our team has made ourselves felt in our communities from providing meals the frontline worker to don't into food banks and organizing or organizing.
Teddy Bear scavenger Hunt.
But but I'll only give one of my favorite examples of the impact our associates have on our communities in one of our community markets City Hall was forced to closed due to co. Good due to the covert contamination our market president knew about the issue and immediately offered up one of our recently shutter branches from an equity there.
And the branch is currently being used rent free by the town to conduct business through the draft through window, providing a safe way for the community to continue going about it business with city Hall.
In short.
Our search it's been living by our value to deliver on our but I want our vision since all this began in March.
These are the time that you discover who you're in the bulk of with and I'm extremely proud of the team and the culture that we built the first thing due to the way our team treated customers in communities I'm confident that we will come through this experience with it with a stronger position and reputation in the market.
And then we went into it with and I'm confident that the response will drive long term shareholder value more than anything we can do over the coming quarters.
With that stayed at Union.
We'll move into our current financials as you can tell we restructured our investor presentation, a bit this quarter to reflect the shift in the shift in priorities of our management team headed into the reset into recession.
Those priorities for the foreseeable future our first the health and safety of our associates and customers second.
Remaining in a strong liquidity position third protecting our capital.
For.
Keeping our elite financial performance status and fear growth.
Notice that growth has moved significantly down there that list.
I touched on our number one priority so now let's talk liquidity.
We saw customer deposits bill about 440 million over the quarter with customer growth of 230 million in another 210 million from our Kentucky acquisition at the same time, we had some larger pay off for the quarter.
As a few larger borrowers refinanced with nonbank lenders in January and February. So we're currently sitting at an 85% loan to deposit ratio, that's our hfive loan to deposit ratio.
We have 774 million in on balance sheet liquidity in the form of cash and Unpledged securities and we have contingent life.
Liquidity of 3.4 billion that's billion would it be available to us and well despite the impact to our margin. We intend to continue to carry much of this excess liquidity, we monitor draws on our lead daily and we've not seen any heightened drawdown or concerning activity there.
On priority number three our strong capital ratios indicate plenty of capital headed into this environment and our capital structure remains simple with the flexibility to act if needed.
Regulatory capital stack consist of common equity $30 million of trust preferred and our allowance for credit losses are simple balance sheet limited double leverage ratio in strong investor relationships also gives us capital options to take advantage of if needed.
We're continuing our dividend at present as we believe our current capital levels in core earnings power.
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We believe that our current capital levels incur earnings power support it based on our current forecast.
Moving on to credit.
I'm happy that we did not losing our credit standards to chase growth over the past couple of years as a former colleague used to say when the patent goes out in times like these will see whose women Nick we don't believe that will lose our suit.
We'll also see that Weve that we've provided more insight about what's in our portfolio this quarter.
There are few industries that we view as being potentially vulnerable due to social distancing and the downturn, namely retail healthcare hotels transportation leisure activities and restaurants. So weve laid those exposures laid out those exposures in our earnings presentation I'll, let our chief credit Officer, Greg Bowers give some color on those.
Buckets as well as the health of the overall portfolio in a minute, but my message is that we are a community bank.
We are going to help our affected customers 30 times through last Thursday, we have seen 371 million in deferral participations for those industries or 33% of the outstanding balances at March 31.
We.
We also have been active and trying to get those customers PPP funding and have gotten him around 38 million so far.
I'm sure.
That you've noticed but we also built the large reserve in the first quarter with the new Cecil method of provisioning our allowance to loans Hfive ratio increased from 71 basis points at December 31 to 195 basis points at March 30 Onest.
We use Moody's baseline economic forecast from early April, which assumes unemployment increasing do around 8.7% second quarter before slow that coming back down over the next few quarters.
We believe the having close to a 2% allowance will provide for the projected loss content of our portfolio.
We hope that it substantially less than that but with this is what would the Cecil model heavily based on economic forecast, we could have further provisioning at the outlook in the economy continues declined in the second and third quarters.
And and we still lack the clarity needed to make the qualitative adjustments to our model at this point, we're speculating about.
Unprecedented product precedented economic shop, and know what ultimately knows what's going to happen.
We're going to continue to prepare for the worst and think that will end up being pleasantly surprised.
We had charge offs of 19 basis points this quarter and we wrote off the remainder of a commercial credit that ran into issues in the fourth quarter.
The issue with the moral came up suddenly late in the quarter before we were able to get a full view of the circumstances.
With the time to gain additional information and the change in the economy. We went ahead and wrote down the road the remainder of 100% this quarter of the 24 basis points of annualized charge off we've had in the past two quarters combined that loan accounted for 17 basis points.
As with our seasonal build this quarter and the lack of major qualitative adjustments that we made to hold down our ratio given the uncertainty of the next few quarters.
We had acted conservatively by charging the remainder of that load off this quarter and as we hope to be presently supplied by the loss content of our aggregate more portfolio. We're pleasantly we are pleased to already recognized a $700000 recovery in the second quarter from.
The charge off that I just noted above.
Our nonperforming loans increased this quarter.
As approximately 5.5 million of loans previously excluded from this category did have been the being up.
Purchase credit impaired are now reportable as nonperforming old undersea so.
We would consider the slight increase in those ratios routine not indicative of any decline in the underlying quality of the portfolio.
Moving on to profitability, our core or earnings power, which for comparability say, we're viewing in terms of adjusted.
Pretax pre provision earnings right now were 33 point Megan for the first quarter.
8.1% from the fourth quarter of 29, 2019, and 16.8% from the first quarter at 49 team.
As a percentage of average assets adjusted PT Pp was 2.1%, which we believe remains very solid compared to the rest of the industry.
As always we continue to focus on more mortgage im sorry mortgage.
Margin.
And expense control to drive that profitability forward.
We will be providing guidance on the margin this quarter given the unknowns the market volatility in the extraordinary number of moving pieces I'll give you some detail on trends that we see in the actions that we've taken.
First as you're aware the full impact of the margin of the 150 basis points of rate cuts is not evident in this quarter, even excluding any noise that they could be loans will calls this quarter, we would expect to see.
Further dip at our margin for the second quarter.
Of course, our goal is to minimize the trough.
Hopefully begin expanding by year end.
We cut rack rates across our interest bearing deposit products by about 40%, 47% on March 17.
And cost of time deposits has come in by around 30 basis points.
From where they were in mid March.
On our negotiated rate accounts will continue to lead our local decision makers make local decisions were frequent discussions with our customer facing associates about the rate environment that had been asking that they they have conversations to bring those rates down as appropriate.
Well the asset side, I'll remind everyone that were about 50%, 50% floating in our loan portfolio.
And our variable rate portfolios split evenly between prime and LIBOR based roughly 58% of our prime based loans are at their floor really they should be closer to 100% given unless rates go negative and we don't think thats going to big case.
About 22% of our LIBOR based loans are at their floors. So we'll still see some rate reduction on our libel base from portfolio.
Now moving to mortgage.
Team had a phenomenal quarter with 8 million of direct contribution it with a record January and a record February would've been a record March as well if we hadn't taken some earnings off the table to reserve against potential fall out on interest rate locks due to co good and the disruption of the mortgage supply chain.
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For the remainder of 2020, we hope to continue to capitalize on lower rate environment for as long as the market hold as volumes have remained strong with their April we also feel comfortable that our restructured rightsize mortgage division has ability to perform well in any environment.
We'll also be focusing on expense control for the remainder of 2020 and until the banking industry buttons, it's putting again.
This quarter expenses were primarily up related to the farmers National Bank Group Scottsville acquisition.
Excluding scottsville, we estimate that bank expenses grew by by 2.5% over them.
Over the fourth quarter of 29 team.
We are scheduled to convert the scalable acquisition in May and following conversion, we expect to begin realizing our 20% cost savings assumptions.
So far on Scottsville almost the.
Parity of our conversion prep activities have been occurring remotely and going very smoothly. We believe that this is a testament to the quality of our team in the Cape of our capability that our technology.
Also give a brief update or pending acquisition, what Franklin synergy.
We continue to be excited about the core community bank that we are.
Adding them one of the most attractive markets in the country.
We believe that we're still attractive close in the third quarter.
The strategic reasons for the merger are the same as they were at announcement and we are eagerly anticipating combating these two great banks to continue.
Degrade a powerhouse community bank and Middle Tennessee.
With that.
I will let Greg Bowers.
Go into a bit more detail on our credit portfolio.
Good morning.
My high level thoughts on the portfolio and then I'll be available on the question and answers section as well.
Looking at the Big picture, we are in our core community bank that makes loans to support the economic activity of our coming.
In our conversations in the past we've highlighted on our local operating model focused on relationships with our customers.
Strategy at its heart moves dealing with local people, we trust and node because operators our portfolio reflects that buys we believe that will help our credit results over the long term and during this pandemic crisis.
We believe and conservative underwriting standards.
Focus toward cash equity or skin in the game and personal guarantees we belong focused on keeping hold levels lower rather than higher we didnt predict the virus, we knew the things happen maintaining this discipline there good risk management tool.
We're trying our best everyday to underwrite for the long term through the cycle not counting on that Gregory.
Our strategy has always been about end market lending and I think you'll see that in the numbers in todays presentation, we've never been big on buying in the shared national credits. It doesn't match our strategy of relationship lending, we want to bank the company the owners and its employees you don't do that.
Group meeting led by money Center Bank, our snake exposure is less than $75 million.
And consist of three credits, which we maintained that historical relationship prior to participating in the syndicated credit.
None of these next or in our defined industries of concern. We just wanted to highlight our strategy here.
As noted earlier by Chris we have participated in the PPP program as well as offerings short term deferrals to assist our customers. During this unprecedented time.
We view this as both a service to our customers.
As well as part of the process of managing credit risk.
The slide to follow highlight our exposures to those industry groups and we view as having the potential to be hardest hit by the buyers.
I believe you'll see that they are generally a good reflection of what I've stated earlier about our strategy.
Steven broad diversification few concentrations in market lending and smaller average ticket size.
Looking at slide 12 in our retail exposure, we have two buttons.
The less orders of retail sites.
And retailers themselves.
Touching first on the non owner occupied space, we have a mixed in property types with no real concentration across our footprint.
No major concentrations by tenant.
We feel good about the asset quality of the portfolio coming into a recession.
Our largest single loan is about $8 million for a fully center with approximately 69% loan to value.
We have a relatively small ticket size across this portfolio.
Generally falling into the $2 million to $4 million range.
On the owner occupied NCR retail side, you can see that we have a good portion of that.
Outstanding Auto dealerships with the largest customer in the 20 million dollar range.
Otherwise were fairly well diversified across the segment.
With no major concentrations.
The 37% of other retailers that you've seen the Pie chart is all over the board, whereas some specialized manufacturers largest which is focused on consumer gift products. We have some buildings glass stores and then other smaller retailers.
Again. This is the type of granular diversified portfolio that you get we elect community bankers go and serve their communities.
Moving on the slide 13.
With our health care book, we do not have a national practice, and we know love private equity backed startups or other high growth risky types of businesses.
As you can see our largest concentration in health care is to assisted living nursing home and continuing care companies.
This is an area where executive management has some background as our chairman Mr. airs had a long and illustrious career in the nursing homes space.
We have a little bit of size there.
Moving several assisted living projects.
Each at 10 million or under.
21 million dollar exposure to a continuing care facility.
And $11 million outstanding to skilled nursing operators.
We also have a $28 million loan to a region will not for profit mental header Hello, operator, Hello, operator.
Otherwise, we have a number of loans medical and dental practices across the footprint generally modest average loan size with our largest being one loan and $8 million to larger local practice.
On slide 14, you'll see that our hotel portfolio is diversified across our footprint and is focused on high quality operators and high quality flags.
We have a loan to value of about 57% in this book and we started stepping back from the space, particularly on the construction side.
In 2018, when it seemed like things are getting over bill.
Our focus has not been on downtown Nashville properties with the exception of 112 and a half million dollar exposure.
Most of the National MSC projects are in places like Brentwood and Green Hills.
Our largest single project exposure is $23 million and has a 54% loan to value.
We do have a concentration with one operator in five distinct properties owned by five different unique ownership groups.
Going into this crisis, we felt very good about our hotel portfolio.
We still do for the long term.
But this industry segment as you know has been hit harder than most.
Our long term outlook is largely based upon the quality and strength of our operators.
Flags locations and our overall lower loan to value of the portfolio.
It was not uncommon to require our borrowers to inject 35% or more cash equity into the project upfront.
We believe that bodes well for their longer term success and the quality of our credit metrics.
Short term, there's no doubt that their businesses will required adjustments and or capital.
Moving to slide 15, our trucking exposure consist of truckload operators.
Equipment, less orsa owner operators and loan to me local franchisees have major national trucking companies.
There is one larger relationship at the 26 million dollar level, but otherwise fairly spread out across operators and our franchise.
And this exposure makes sense for us given our footprint in the middle of the country, where there are several large logistics hubs.
Our air exposure is primarily related to multiple owners and or operators.
And no commercial airline.
On slide 16, you'll see that our other leisure book is also scattered across the portfolio with no primary concentration.
The largest exposures are highlighted on slide.
Otherwise.
It is distributed across various types of customers with a modest average ticket size.
In closing with restaurants on slide 17, we don't have any significant concentration by operators or brands.
Our largest customers the strong local independent operation.
With roughly 4 million outstanding secured by real estate.
The portfolio is widely distributed across our footprint.
We do not have our heads in the sand to the contrary, we're diligently monitoring our portfolio and recognize challenges lie ahead.
We are fortunate to enter this recession with solid credit metric in the back end markets and pre virus, where some of the strongest anywhere.
We believe they have the resiliency to come out of this equally strong.
With that I'll turn things over to Michael to talk little bit more about our profitability.
Thank you Greg I know that we have covered a lot. So far so I'll give some brief color on larger than mortgage and then be happy to answer any questions. After our prepared remarks.
First on the margin our cost of interest bearing deposits for the month of March was 1.14% compared to 1.25% for the quarter.
Cost of our non time interest bearing deposits for the month of March was 79 basis points first 93 basis points for the quarter and the vast majority of our non Tom interest bearing accounts that were able to reprice centrally have been repriced.
We are thing these costs come in by about 30 basis points since those actions were taken in mid March.
On the time deposit side, our cost for them up in March of 1.91%, we have ever 650 million coming due over the remaining three quarters of 2020.
Proximately 175 million in the second quarter, approximately 270 million in the third quarter and approximately 215 million in the fourth quarter.
Those are coming due with an average cost of 1.94%.
With rates, where they are now we are hopeful to pick up significant costs on the deposits as they mature.
On the asset side, our contractual your loan yield for the month of March was 5.03% and the fact contractual yield on our loan portfolio. Excluding PBP loans is approximately 4.9% right now.
Interest bearing cash and earning 25 to 35 basis points right now as opposed to the 1.51% that we reported for the quarter and our investment portfolio is yielding around 2.6% as compared to the 2.81% we reported for the quarter.
Our mortgage no additional color on outlook, but I would like to highlight the hedging activity on our MSR, we were able to offset approximately 15 million in value reduction of our MSR asset. During Q1, there are hedging strategy, which is designed to mitigate changes due to rate movement and expect that prepayment.
We do not hedge fair value, the cash which accounted for approximately 4.7 million of MSR fair value change for the quarter.
With that I'll turn the call back over to Chris.
Thank you Michael.
Now that within the quarter.
Let me touch briefly on our personnel announcements from Friday before I wrap up and open it up for questions.
As you're aware at this point James Gordon.
As following the path of many great, Tennessee ends and he is heading down the Texas.
James has been an integral part of our operations. He is a personal friend.
But a great team mate for these last four years.
We're going to miss him.
We wish him well.
That said James has helped us develops and Greg bench strength in finance accounting finance and accounting, we have faith and Michael in the rest of the team that will leaner on and we conduct a search for Janus replacement.
I was also very happy to come up to remote some of our market executives in that announcement Travis Edmondson, our new Chief banking officer has been a great young talent that we.
Picked up in the transaction with Clayton.
And I feel very confident and his leadership in his ability to handle that role.
Nathan Hunter has 45 years of banking experience and is a great talent and we look forward to his shepherding, our east region going forward.
Vol. Another great young talent from the Clayton transaction.
We'll take over Knoxville from Nathan.
Jim most be will take over as our Nashville region President Jim has been a star member of our team for sometime now and we're excited to see him operate in this expanded role.
Finally to conclude.
A lot happened this quarter.
Im extremely proud of our associates for the matter, which they've taken care of our customer so far.
We are at community bank, and we differentiate ourselves with customer service and quick local decision making.
I think we've done very well with that so far.
No doubt, we will continue to serve and support our customers and communities going forward.
Out of the way our associates have handled this adversity and our management team for getting everything up and running so quickly. So they would hardly miss a beat operationally as the world's changed from a liquidity capital and credit perspective, I'm confident in the strength of our balance sheet.
I believe that we are well positioned to weather the storm and come out on the other side ready to take advantage of all the opportunities at this disruption is going to create.
Im confident that we go to keep our position as a fully at ALLETE financial performance.
With that operator.
I'd like to turn it over open up land for some quiet.
Certainly thank you he said I'd like to register your question. Please press the one.
On your telephone you'll hear us be Tom Tom to acknowledge your request to your question has been answered and you'd like to lets try your registration. Please press the wonderful by this me.
Once again to register for question. Please press the one small by the four on your telephone.
First question comes from the line of Stephen Scouten with Piper Sandler. Please go ahead.
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The more Stephen how you doing.
Yes, good thanks for all the detail on the presentations very helpful. I'm curious, maybe first off I didn't see any.
Breakout of with the manufactured housing portfolio is currently in.
Curious if you could give us an update on that portfolio and kind of how you're thinking about that.
This terminal.
Yes sure.
We put a couple of general things in there on the on MH portfolio remember a couple of things about that portfolio one.
We.
Look at it in two pretty distinct pieces, one that we call manufactured housing retail were MCO manufactured housing communities.
The communities portion is the bigger piece of the portfolio and that is.
Actually the.
Yeah.
That is what it says it's that it's.
In fact, having neighborhoods are communities across our geography, we've got a.
Roughly a southeastern footprint actually in that business.
It is those loan resemble.
Kind of.
A more almost.
Like like see an eye stuff and then the retail portfolio, which is a smaller in the retail portfolio, probably 100 to let's say 100, and just 100 880 million 180 million roughly.
That is actually loans to folks that by the units.
And Greg I'll, let you talk about the.
Performance characteristics and that thanks, Chris.
That's a that's right unit that manufactured housing piece of it is something we picked up with the Clayton acquisitions run Kevin Kenzie does a great job.
The.
Portfolio has continued to perform well.
To date past dues are hanging in there.
As soon as our across across the board so.
It's always something that we're going to pay attention to but right now.
That has worked out well the deferrals within that group are similar to the deferrals that you would see on the mortgage portfolio.
And we and.
We referenced.
As as it pertains to the energy piece, we said you know that they do have some exposure in the oil and gas.
Dependent area.
And so we looked at that and that's just one of those categories. It will be.
Attention to along with about every other portfolio segment, we have.
I will say interestingly, we monitor it daily in terms of past dues and week over week. The past dues actually came were less in the late last week, and then where the previous week and as we've been talking to folks.
Affordable housing is always.
In demand and perhaps it's even a little more demand right now so.
We're keeping in contact with the borrowers were so far that portfolio is as performed well.
Great Clayton folks that manage it had it through the last downturn until they've got some experience with it.
Most of us it around the table at this very moment didnt have that and so were where theres a lot of communication, but frankly, so far it has been.
Better than than expected as things have turned now so.
That's great that's helpful.
And then I'm curious maybe on an update with the.
Pending FSP acquisition.
Obviously last two quarters they've taken.
The loss as they continue to try to dispose of some of those non riskier credit book and I know they said they released that there's been some slowdown in that their ability to dispose of those loans. So wondering if you could remind us how that transaction will work as it pertains that.
400 million plus the loans within still looking to dispose of and what your exposure is potentially that in the transaction structure.
Yeah got it soon thank you.
So just a general.
The general comments.
The as you said the financial the World has changed.
Obviously, since we announced the transaction.
We're Franco synergy and.
And of course, that's on.
Not anticipated.
That being said you know there really.
If you think about the transaction.
And there are lot of moving parts and pieces you know you get your obviously your credit remarks, you get your interest rate more together with anymore to get.
Yeah and.
On not only the loan portfolio, but on the investment portfolio and own.
Fixed assets.
And in I'd tell you, whereas we evaluated and we looked at changes remember we also locked in an exchange ratio and so basically the tangible book value piece of that is.
It looks.
At least in a given all these numbers are moving so.
But that looks to be.
Still about about a neutral transaction for us.
I'm not sure exactly the impact on the EPS accretion is the mark screw ups on that would probably come down a little bit, but but generally that that all books still pretty good. The 400, when there's a $430 million portfolio. This kind of I'll call. It a legacy.
The snake.
Leveraged lending portfolio that.
We announced when we did the transaction that that'd be something that we wouldn't be doing going forward is actually.
Something that they announced that they wouldn't be doing going forward as well. They have worked had been working that down it's a little easier just because of a size standpoint for us to work it down that is them because it it is performing and it does have earnings associated with it.
That's down to that it didn't move down to about 400.
With some draws move back up to around 4.8 or so.
As we look at it going forward.
It it looks at the world's changed it could change our plans with it.
It doesn't change our long term plans could change our media plans, we're not going too.
So sell good loans at big discounts, good performing loans, a big discounts because we said we're going to sell them and so we're going to be prudent as we go forward maximize profitability and minimize risk and so.
When we frankly, when we initially announced the transaction.
It looks like it was going to not be difficult at all to get rid of the vast majority of the portfolio at close to par.
And not saying thats not still possible, but its but it's.
But it is.
Certainly changed in that caused us to looking at that strategy a little differently.
Hey comment.
I think it well, we say in contact with their management, they're continuing to do a great job serving their community and mentioned the bank in these times, maybe a reference their participation in the PDP program as well.
They did also indicates a satisfactory overall asset quality, but has seen some challenges and that institutional portfolio like you talked about.
Makes sense it was a great I'm hearing you right as you might take on more of that 408 million remaining at close then you would have expected, but that being said you might need probably we also increased the market that does occur is that you got fares summary.
Yeah, Yeah, that's fair.
Okay, Great and then one last thing you guys gave some great detail on the Pvp program I haven't seen from others in terms of.
You are expecting fees on a net basis and I'm wondering if you could give some color into what's driving that kind of 65% net.
Many of these direct cost of originations as that kinda accrual accounting or is that true incremental costs that are related to the PPP program overtime and other things just.
Give us some idea what we can expect relative to the gross fees.
Yes sure yeah.
The short short answer is we've got some technology partners there that we're paying.
That are going to get.
They get a little piece is the short answer.
I am I give a slightly expanded answer to say when we went into this I mentioned, we're not at a historical SB eight lender and so when it comes out as many banks aren't and so as it comes out a lot of US were scrambling on the front end to figure out a solution. So we tapped.
A lot of sources ultimately.
Jack and raise of vendor of hours that we.
Done a lot with continued to a lot where they helped us with the solution.
That went through that that helped us with both the application process, but also act the.
Submission process. So two different vendors that are helping us there one with application with the submission and ask BA.
And I got to say this so we took some time on the front end if you'll notice that said we didn't start accepting applications until I think it was the Saturday before the program went live on a Friday.
And so we got.
So a little bit of a late start if you can remember that time, there was a lot of anxiety, both one to jump in and but we didnt have the process.
As.
Reliable as matter of fact, we went though plan b on Saturday day, because we had a problem with one with a different solution.
And so to but we did get the process working very well and I'll say this in round, two which started Monday.
We processed we've gotten approval for 900 in the in the this was through yesterday, so when the today, we'd gotten approval for 985 applications.
And $50 million worth of loans in the two days and so we worked out process. It now works very well and it's going very well and one other thing because I think it's interesting in the first round the average.
Loan was 175000 hours anyway. It was about 175000 average balance on the loans. This round. So far it's 51000 ever found so smaller a smaller.
Customers are getting served in the second round.
And I think they were a little later to get their applications in and so I think thats and I think that will probably be you'll see that nationally in terms, which is a good thing that's a lot of smaller.
Folks that didnt get applications in as quickly or with as much that were eat as easy to quality check or getting in on this next room. So.
Great. Thanks, so much greater color and the times one of them.
Alright, Thank you Stephen.
Our next question comes from the line of Tyler Stafford Stephens. Please go ahead.
Hey, good morning, guys.
More dollar.
Hey, I wanted to start on when it just seems earlier question just around the image portfolio.
180 million of retail how much is the community.
Piece of it and then you said the deferrals there are similar to what you've seen in mortgage but I don't think you guys disclose what the actual deferrals are on mortgage so could you quantify that a little bit for us.
Yeah, Yeah. Thanks, Thanks, Steven as Greg the.
That MH.
Community portfolio is around 220 $230 million the when I was talking about deferrals.
That's as the actual number these around 6.7%, which.
Ties back to a reference that I had regarding the MBA and.
Regarding just single family in general and that it would be similar to that was my point.
Okay got it.
That's helpful. Thanks for clearing that up.
On the hotel portfolio can you give us a sense of pre covet impacts how that portfolio was.
Not performing but what what that portfolios.
Loan to value and debt service coverage was maybe at 12 31 19, I heard you mentioned I guess, Chris that's you typically get 35% cash into those deals, but what just on the on a weighted average basis, what would be does ltvs and debt service coverage on that book at a yearend.
Oh that this is Greg so so.
Debt service coverage on things like that we've got in excess of 125 130, as what you would see.
What we were emphasizing was on the construction projects.
See 35% or more cash equity going into the projects. All of these were doing well the exception to that is one that you've seen on our list for a long time frankly, it's.
Been there.
Probably since 2010 since both of the Youre right. So long time, and it's one properties on non accrual, it's approximately $5 million.
Not not excited about that one it's on non accrual otherwise this portfolio has performed very well I'm very strong and.
So it's.
We've got it in here because just like everybody else, though this is an industry that we're going after watching you dropped from occupancy you know.
Hi, occupancy to an average occupancy cost across the country right now and the 20.
Property.
It needs more than 20% to work.
Sure.
Okay.
What's the specific.
Reserve on that 5 million dollar non accrual hotel portfolio.
Gosh I'm not sure of the $5 million nonaccrual.
Yes on that one.
Tyler that is probably.
It's.
Yeah. It's.
Such little over a million.
We have we got some additional collateral on that it's it's I think it's in that.
750 range Okay.
And so and it's a.
Oh I said, it's been we've had no known accrue at the largest nonaccrual and its and it's been there kind of on and off it's always been on nonaccrual. It's been in terms of operation. It's sometimes it gets better sometimes it gets worse, but it's it's just one of those that.
We do have pretty good collateral support for it because we've got the real estate or we have actually even some additional collateral beyond the so the the specific facility and so.
But it's it's one that was built it has been a little over time. So it was not affected by that probably affected back over 19, but it was we didn't like it before that.
Understood Okay.
I'm just thinking about the reserve for a moment I appreciate completely that the final marks on FSB aren't obviously completely but if we can kind of maybe put aside the macro.
Kind of Moody's related changes for for a moment is there any preliminary range you can help us think about for a combined hcl ratio I close for for the two companies.
Yeah.
Really not.
Tyler and my bottom.
Let you comment as well I mean, we've.
Thought about it and.
Really not at this point you know sequel is new enough and where we're we're still making sure that we understand for ourselves and so so we really don't have that were at a point, where we can talk about at this point. So I wish we did but we just really not thinking and with all the moving parts not only in the economy, but you also got the moving parts of.
It would cecil and so we.
We.
Hey, if we could we just haven't yet.
Fair enough that's a that's totally fine. Thanks, Michael you add anything that comment I would echo that comment too and I would expect this probably likely higher than ours, yes, probably it probably is are there.
All right.
As a reminder to register for question. Please press. The one is all about a four on your telephone.
Our next question comes from the line Stuart <unk> Smith KBW. Please go ahead.
Hey, guys good morning.
Good morning, Stewart How're you.
Good good right I guess, most my questions I've been answered or push you don't color on the credit book, maybe trying to expenses on a question for Michael.
Yeah, I think that run rate this quarter came in a couple million higher than we were looking at.
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How are you are you guys thinking about.
Q runway run rate was a full quarter of Scottsville.
In there as well as you kind of targeted expense cuts.
I'm just trying to get a.
Better picture, we cannot expect before layering on FSP.
Yeah, Good morning, Stewart and so the quarter had a couple things in there around merger expense and then obviously you mentioned FNB that Chris mentioned in his comments, which we expect to see.
Some cost there.
We had some payout from higher payroll and the first quarter sort of expect.
To return to normal a bit.
In Q2.
It was a little bit elevated.
But.
Yes, we think that as Chris mentioned as we will be monitoring expenses very closely as we go through.
The next couple of quarters.
And prepare for FSP and.
So and I just said, it's Stuart on the expense side and win.
Roughly.
About a 2.5% growth if you look at an apples and apples comparison.
Over the last even couple of years.
Expenses have been I mean, it's expenses, if you're in banking expense control better be a core competency based and so.
And it is here that being said we've had a lot of investments over the last couple of years, we wish we.
And so it's not a core competencies and maybe that's been emphasize as much some other things into.
As we move forward in the environment that we're in expense control becomes more and focus and so as we think about where we're in a lot of conversation about which investments to make which investments to delay.
And.
We actually have.
I used the words <unk> with a little bit of caution we've said.
Through our folks was put in a hiring freeze.
And so we're not we are hiring some from replacements.
But we're not out look into grows the staff right now from a people standpoint, and so we've done we do some things like that and we as we look at the rest of the balance of the year.
Then expense has become an important part of I think the balance of the your expense control becomes and when I say hiring freeze we will make some exceptions to that.
That's the reason I say it lightly is we will make some exceptions to that core.
For for various reasons, but in general we're kind of.
Not yet we're kind of not not doing a lot one other consideration there that we got to make sure. We're thinking about is the 10 billion dollar.
Hurdle and you know when the combination Frank the synergy $10 billion gets right in the cross hairs, we may be over it and so there's a little bit of expense that comes with that and so.
And so we've got that in view as well and so that means it's hard to do a lot of a cut but also like said, we're evaluating investments things like that.
Chris I appreciate all the color on that and sorry last one from me.
We try to the revenue side.
Obviously, we know we're going to have some margin compression coming forward just given the rate shock we got in March from fed cuts.
And your guidance for the 5.7 million and.
Redemption costs are coming through from PPP.
In terms of geography, we expect that and in and spread income and you expect to realize most of that in Twoq and Threeq here. How do you think about at that point through thanks.
Yeah, I believe we it does it will go into spread income is exactly where it will go.
And how we recognize that.
I'd say is cautiously [laughter], that's how we recognize that because there's a couple of things you've got a.
As this program has been rolled out you know it's been short on rules, that's not a complaint because this program of the way that the the government the because the agencies it treasury.
As be a everybody has been able and banks a banking.
The banking system have been able roll this out been fantastic actually even though it's had its bumps and bruises along the way. If you think about the feedback when thinking about the macro picture of what's been accomplished it's actually remarkable and Oh that being said when we rolled it out.
There are lot think we don't know and so.
We're going to be cautious probably by going back to the reserve side before we just take all that into income. We go be careful make sure we get paid back by the SB. A some cases you may get paid back by customer. Other cases, you may not be get paid back and so.
The way to take it is three spread and it would come in over the life of the loans. So that theoretically that's probably the next two quarters, but we're going to be cautious in reserving before we really take any of that in wind farm course, following proper accounting principles.
But we're going to be cautious by reserving before we take any of that.
Michael You tell me if I'm.
But in the middle of no I agree with that I think you also have to think about of the popular better learners indirect expenses associated with the PDP program and and Chris touched on the work effort from our associates and so you know as as those come the maturity the and.
The loan payoff then.
Our forget them its case maybe.
What will recognize an indirect expenses associated when you're supposed to defer both the fee and the direct expenses and so and there are some direct expenses associated with it so we would.
Yeah, you defer both of those but again it in this case, it's a shorter term deferral. It's a two year life of the loan which you expect most of them to be forgiven in in a much shorter time period than that and so.
So I would.
Summarize that Stuart by saying, we're not going we've taken a lot of that into income.
Immediately.
Got it.
No, but what's on your line is pretax obviously.
Nothing yet or interact.
That's correct and you know given brown things up and running you anticipate providing further guidance is that funny runs out you know.
Given your participation so for all.
Or.
Yes.
Thanks for non will probably use at 5.7 million, but it sounds like.
You guys have been active and round to so I'm just trying to think about how we we put that into over the next few quarters.
Yes or no.
Yes.
Yeah. Thanks to we'll get some update there some update guidance as we continue through the program.
But yes, we that we have been very active and around too.
And so will.
So and we will continue to update and I said last night. We were we had done 985 loans I'm sure. It's over 1000 now.
Compared to roughly 1500 around one and so thats only the first two days around too so.
And so I.
I think we'll continue to see that and those loans exit smaller balances, which also means by the way higher higher fee. So.
And we will we'll try to keep that some of that provide some updates on it.
Thanks, Stuart Great Yeah, Thanks for taking my questions yes.
Sure Mike.
Mr homes are appearing to be no further questions I'll turn the call back over to you.
Alright very good.
Thank you. We appreciate again, we're sorry for the delay some things are beyond your control and so we apologize that we got we got delayed but we appreciate everybody joining today and and we appreciate your interest in after the financial and we will look forward to.
Moving forward with another.
Another exciting quarter. Thanks, everybody.
Thank you that does conclude the conference call for today, we think all for your participation and ask that you. Please disconnect your lines.
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