Q2 2020 BOK Financial Corp Earnings Call
Greetings and welcome to the be Okay Financial Corporation second quarter 2020 earnings Conference call.
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It's now my pleasure to introduce your host Mr., Steve and no Chief financial Officer for be Okay Financial Corporation.
Thank you you may begin.
Good morning, and thanks for joining us today, our CEO, Steve Bradshaw will provide opening comments and Stacy times executive Vice President of corporate banking will cover our loan portfolio.
Leading detail around our energy health care and commercial real estate portfolios.
Mark Malone, our Chief Credit Officer will cover credit metrics, and Scott Grauer Executive Vice President of wealth management will cover the outstanding results from his team this quarter.
Lastly, I'll provide second quarter details regarding net interest income net interest margin additional fee revenues expenses and our overall balance sheet position from a liquidity and capital standpoint.
In addition, I'll provide a few thoughts regarding expectations for future quarters.
Pds of the slide presentation in second quarter press release are available on our website it'd be okay, yes dot com.
We refer you to the disclaimers on slide two as it pertains to any forward looking statements we make during the call.
Now I'll turn the call over to stay Bradshaw.
Good morning, Thanks for joining up to discuss the second quarter 2020 financial results were pleased to report a record quarter be okay financial in terms or pre provision net revenue. Despite the many economic challenges due to covert Nite TV.
Shown on slide four second quarter net income was 64.7 million or 92 cents per diluted share that's up 4% from last quarter. Despite another quarter of elevated provision for credit losses.
This quarter were bolstered dramatically by $214 million in revenues from our fee businesses as our wealth management and mortgage teams have continued their momentum to oppose simultaneous record quarters for the company.
I see our pre provision net revenue, it's clear to see the significant benefit we drive for a company with our long term commitment to balanced revenue and breadth of business capabilities.
Pre provision net revenue was 216 million this quarter the highest level in the history of our company.
During the environment, we find ourselves in today. This is truly a remarkable outcome there all of our high performing and talented employees I should be proud of.
Big Commission revenue was up nearly 11% from the previous quarter, an incredible 21% quarterly year over year on continued strong wealth management and mortgage revenues.
The revenue now represents 43% of total revenue that's up from 38% in the same quarter a year ago.
This once again demonstrates an important differentiating characteristics would be okay financial we have long had a diverse revenue mix. It provides good earnings buffer and economic downturn because of the counter cyclical nature of some of these be revenue stream.
Expense measure arrayed prudent with an efficiency ratio below 60% for the quarter, even with the shifting the mix of revenue towards the income. It should also be noted that we added 3 million an unplanned contribution to our foundation included incremental 1 million in the second quarter to eight those in our communities with food insecurity Whopper.
Body much needed job for displays restaurant workers.
Our loan loss provision was 135 million this quarter due to a combination of changes in a reasonable supportable forecasts of macroeconomic variables along with some credit migration that mark will cover in more detail momentarily.
While we continue to build the reserve again this quarter, we believe the material reserve build should be largely complete assuming or economic forecast is in line going forward.
Net revenue was up 16.7 million to $278 million this quarter. Despite the ongoing impact to the 150 basis points of emergency rate cuts in March our ability to decrease deposit costs and the relatively elevated nature of LIBOR or early in the quarter helped preserve a large portion of our margin.
Stephen will cover the underlying components in more detail later in the call.
Turning to slide five average loans increased 2.2 billion to Eclipse 24 billion. This quarter well. This was positive for the company overall 1.7 billion to this will do the small business administration Triple B program.
Average deposits were up nearly 16% linked quarter and up nearly 30% from the same quarter a year ago.
We attribute this strong growth to continued momentum in deposit gathering activities, along with triple B loan deposit and government stimulus payment.
Even with the significant growth in deposits, we were able to bring overall interest bearing costs down from 98 basis points last quarter. The 34 basis points. This quarter as we were able to adjust rates paid on interest bearing deposits due to our proactive management in the face of an unprecedented bed movement in the first quarter.
Assets under management or a capacity were up nearly 5% this quarter on strong sales effort to increases in the equity markets during the quarter.
We believe asset growth is in part attributable to the volatility in the markets, which is really underscore the value that a professional advisor brings to individual corporate investors during times of extreme uncertainty.
I'll provide additional perspective on the result at the conclusion of the prepared remarks, but now state because we'll review the loan portfolio in more detail I'll turn the call over to Stacy.
Thanks, Steve.
As you can see on slide seven period end loans were 24.2 billion up 1.7 billion for the quarter.
Triple P. loans added 2.1 billion to the portfolio. So that we did see growth inside of our specialty areas net of Triple B broad pay downs across our core commercial and industrial one book actually contracted the portfolio this quarter.
Some of this would repayment of more defensive draws in the first quarter and some of this was due to organic decline and economic activity.
Energy loans contracted 3.3% for the quarter as commodity prices may new deals difficult to source in the current environment.
Energy borrowers are paying down debt to reduce leverage at this point in the cycle.
Energy commitments were down 360 million from the first quarter of 2020.
630 million since the end of year.
These commitment declines are a direct result that redetermination of borrowing bases that occurred during the second quarter.
Despite these factors we remain open for business and continue to support our customers in the energy industry.
Energy lending is core to our DNA and our experience in previous commodity cycles proof that this is a profitable business when approached in a consistent and disciplined manner.
This business is more than just blending activity as evidenced by the record quarter. We had a 5.4 million in energy derivatives revenue this quarter as customers continue to aggressively manage their commodity risk.
This long term view has served us well.
And today, we remain well positioned in the industry with a complete service offerings World class energy bankers and enviable customer base.
We continue to see great opportunity for our energy franchise over the next several years as other banks have retreated from this based entirely on the part.
Mark will cover the credit specifics of the energy portfolio momentarily, but as we said in a path. We believe the duration of the oil price decline as a more significant factor affecting performance.
In the level of prices.
Our health care sector loan balances increased 124 million to 3.3 billion or nearly 4% for the quarter, primarily due to growth and balances from our hospital system clients, who demonstrated strong credit profile.
This client segment had been impacted due to deferrals of elective procedures as well as a need to increase the inventory of supplies in protective equipment.
That said the cares act has multiple revenue enhancement measure for both hospitals and skilled nursing facilities as they manage through the risk of the virus.
This is benefited multiple clients and is expected to help mitigate the credit risk in the health care portfolio.
Well it is still early thus far we have not realize any material credit migration or deterioration in this portfolio.
Commercial real estate loan balances were up 2.3% from the previous quarter.
Largely due to the lowest level of pay downs, we have seen in many years as a result or friction in the permanent financing market.
Well Triple B loans did help stimulate overall loan growth in the second quarter are out like for loan growth for the rest of the year will largely be determined by the speed in shape of the broader economic recovery.
I'll turn the call over to Mark mom to discuss our credit metrics Mark.
Thanks, Stacy turning to slide nine we've again compiled a list of loan segments, we consider more exposed to the economic impact of the pandemic.
As you can see the exposure to the entertainment and recreation, which includes gaming in our native American specialty portfolio that boasts a strong credit profile.
Retail hotels churches airline travel and higher education that are dependent on March social gatherings to remain profitable today is less than 7% of our total portfolio.
This group of loans is highly diversified with over 550 loans for an average loan size of less than $3 million.
Some of these clients have participated in the Paycheck protection program, which has provided some measure of relief. We'll obviously continue monitoring these exposures closely in coming months.
Credit quality has remained manageable and but there has been some migration of nonaccrual and potential problem loans given the current economic environment, primarily in our energy portfolio that led to a larger provision for credit losses in the second quarter.
Slide 10 details our provision actions this quarter.
The total provision was 135.3 million, but the 138.8 million related to lending activities.
Changes in our reasonable in supportable forecasts of macroeconomic variables, primarily due to the anticipated impact of the ongoing cobot 19 pandemic another assumption required a provision of 54.6 million.
All other changes totaled 84.2 million, which included 14.4 million, primarily due to increased Pacific impairment of energy loans and portfolio changes up 55.7 million, primarily due to changes in risk grade related to energy loans.
84.2 million was partially offset by the impact of a decrease in loan balances and net charge offs of 14.1 million, bringing net portfolio change adjustments to 70.1 billion for the quarter.
Revision related to lending activities was partially offset by 3.6 million decrease in the accrual for expected credit losses for mortgage banking activity.
Our base case reasonable and supportable forecast includes an 18% increase in GDP and an 8.4% civilian unemployment rate in the third quarter of 2020 as adjusted for the impact of government stimulus programs. Our forward 12 month forecast through the second quarter 2021.
Assumes a 5% increase in GDP and 8.5% civilian unemployment rate.
<unk> oil prices are projected to generally follow the Nymex forward curve that existed at the end of June 2020, $38.99 per barrel for delivery in the third quarter 2020.
Increasing to $40.13 per barrel in the second quarter 2021, our downside.
Reasonable and supportable forecast reflects a more severe and prolong disruption in economic activity than the base case.
That includes a 6% increase in GDP and a 9.7% adjusted civilian unemployment rate in the third quarter 2020.
Our forward 12 month forecast through the second quarter 21 assumes a 6% increase in GDP and a 10% adjusted civilian unemployment rate.
<unk> oil prices are projected to range from $33, a 99 cents per barrel for delivery in the third quarter 2020 to 34 63 per barrel for delivery in the second quarter 2021.
Turning to slide 11, non accruing loans increased $92 million this quarter, primarily due to a 67 million dollar increase in nonaccrual energy loans, and a $13 million increase in Nonaccruing services loan.
As we've said before we believe the risk of migration to potential problem and non accruing status outweighs the risk of loss in the energy portfolio.
Potential problem loans totaled 626 million at quarter end up from 293 million at March 31st This increase largely comes from an energy portfolio at the recent oil price decline, coupled with the capital markets environment, requiring certain customers to work through their liquidity needs weighed on some energy borrower.
Yes.
Commodity prices, particularly oil prices remain depressed throughout most of the second quarter recovered somewhat in June.
As we noted last quarter if prices remain depressed as we went through the spring borrowing base Redetermination process. We would expect continued credit quality issues in this portfolio.
We realize this migration as we completed most of our Redeterminations in April and May prices have improved sense, but do remain fragile and closely tied to the continued economic recovery should current price level hold into the fall, we would anticipate positive credit quality migration in this portfolio.
The allowance for loan losses totaled 436 million or 1.8% of outstanding loans at June Thirtyth 2020, excluding PPP loans the allowance for loan losses was 1.97% of outstanding loan and the combined allowance for loan losses and accrual for off balance sheet credit risk.
From unfunded loan commitments was 2.12%.
Fiscal stimulus has had a positive effect on credit quality through PPP loans.
SP a support and other cares act programs that said, we received a number of deferral or forbearance requests early in the quarter, but very few new ones. After April all requests were evaluated on a case by case basis, and we have granted 1.2 billion in forbearance requests from customers as of June Thirtyth income.
Adding 704 million or about 5% of commercial loans, primarily in the small business in health care portfolios.
Just starting to reach the expiration of the first 90 days and today over 60% of the deferred loans are going back to regular payment while retail commercial real estate does account for over 40% of our commercial real estate.
Deferrals.
We have not experienced any material credit issues today, primarily due to stimulus programs clearly the retail portion of this portfolio is the most vulnerable to sustain stay at home and shelter in place directives.
As with oil the loss content and retail will closely.
Correlate with the duration of the various governmental orders and adjustments in consumer behavior. After these orders are lifted.
While office and multifamily, we'll see impacts here, we believe our geographic footprint will help us in these segments in long term because of the strong in migration over time.
Short term quality migration in commercial real estate will be dependent on economic recovery and the impact of fiscal stimulus.
I'll turn the call over to Scott Grauer to cover the wealth management fee revenue contribution this quarter Scott.
Thanks, Mark on Slide 13, you'll see the highlights of the wealth management Division second quarter financial results.
As our investors know wealth management as a business that we've been committed to for over a century it be okay financial with a broad cross section of products and services, including institutional and personal wealth management Trust services for individuals and corporations and institutions.
Private banking services retail and institutional brokerage investment banking and financial risk management as well as a few others.
Wealth management revenue was up 14% 234 million from the previous quarter end up 18% quarterly year over year.
This is inclusive of the fee income lines that investors see in our corporate income statement brokerage and trading in fiduciary asset management, but it also includes net interest income from loans and deposits and our private wealth group and our trading portfolio.
Okay, AFS continued its growth in hedging pipeline risk and providing liquidity to mortgage originators strengthening its position as a market leader in a market maker in that space overall mortgage issuance increases driven by lower rates as the fed step and to provide market stability and GFC policy changes around.
Forbearance created an opportunity for be okay, I've to provide greater liquidity to the housing market during a period of record volumes, increasing the trading portfolio by 27% and driving a record quarter in our trading and derivatives business.
Total brokerage and trading revenues generated in wealth management division were up 61% from the same quarter year ago, eclipsing 54 million.
The majority of this was derived from mortgage related trading activity was second quarter total MBS GBA trading related revenue of 48 million, that's a 21% increase over linked quarter and a 220% increase from the same quarter year ago.
Net direct contribution which is operating income before corporate allocations was up a robust 37% for the quarter.
This was the result of careful expense management as total operating expenses for the division before corporate allocations were up only 3% compared to last quarter and up 16% from the same quarter year ago. Despite the outsized revenue growth.
This translated into significant and meaningful earnings leverage for the division.
On the net interest revenue side wealth management loans were up slightly and deposits were up 10% respectively. This quarter.
Testament to our ability to be attitude in a multitude of ways to the company in fact wealth management deposits now represent 26% of total company deposits as our efforts there have expanded relative to the rest of the company.
Perhaps most importantly, the stage is set for continued growth in wealth management division in the short term lower interest rates and the resulting stimulation of the mortgage industry bodes well for continued performance in our brokerage and trading segment.
Longer term the retirement of the baby boomers and the transfer of nearly six trillion of wealth to their ears is one of the most powerful demographic trends facing the wealth management industry. We believe we're well positioned to benefit with the diverse set of products and services to meet the needs of the next generation.
Ill now turn the call over to Steven now Steven.
Thanks Scott.
As noted on slide 15, net interest income for the quarter was 278 million up nearly 17 million from the first quarter. Those 13.6 million to that was attributable to PPP loan activity.
Net interest margin was 2.83% compared to 280 in the previous quarter extreme reduction in deposit costs of 64 basis points, all the way down to 34 basis points LIBOR spread remaining elevated early in the second quarter and the strategic positioning of our balance sheet have combined to reduce the.
Pressure a margin this quarter as.
Excluding the impact of PPP loans net interest margin was 2.82 per cent compared to 280 in the previous quarter, a testament to the steps we've taken.
Average, earning assets increased 1.9 billion over the last quarter and average loan balances increased 2.2 billion largely due to the influx of PPP loans in the second quarter.
Well go for sale Securities increased 816 million as we have adjusted our balance sheet for the current rate environment.
Fair value obsolete securities held as an economic hedge of the changes in fair value of mortgage servicing rights decreased $1 billion.
In addition, receivables from unsettled security sales primarily related to our mortgage backed trading operations increased 1.6 billion.
Growth in average, earning assets and non interest bearing receivables was largely funded by 2.2 billion dollar increase in interest bearing deposits more.
More than $2 billion that PPP loans outstanding at quarter end were funded through the federal reserves PPP liquidity facility.
On slide 16 fees and commissions were 213.7 million an increase of nearly 11% from last quarter and an increase of 21% quarterly year over year. This was fueled largely by strengthen our brokerage and trading business. The Scott just covered but also a record quarter from our mortgage bank.
These.
Mortgage banking saw a significant surge in production revenue this quarter growing 17.6 million or more than 81% relative to last quarter and almost 230% from the same quarter a year ago.
Volumes are up it was the increase in gain on sale margins of 159 basis points compared to last quarter that drove the strength.
Today, the industry as against capacity constraints, which is easing pricing competition and growing margins.
Refinances represented 71% of total originations as low rates drove much of the demand.
Well, we see the second quarter as peak seasonality in this space, we fully expect to be able to capture our share of the purchase and refinance activity as long as the opportunities persist.
Service charges decreased 4.1 million largely due to the shelter in place impacts coupled with proactive waivers of fees that were extended as a courtesy to our customers during the pandemic.
Another success story of the quarter relates to the hedging of our mortgage servicing rights. This quarter. The net MSR activity resulted in 9.3 million benefit through the combination of positive net hedging results.
Modest assumption updates and an economic benefit from the sale of approximately 1.6 billion an unpaid principal balance.
Of our out of footprint Ginnie Mae servicing rights.
An impressive outcome as the rate environment remains volatile.
Many of our fee businesses are clearly driving the overall success story the company once again, highlighting the significance of the revenue diversity that we had.
Turning to slide 17, total operating expenses increased 26.8 million to 295.4 million.
Personnel expense increased 20 million for the quarter largely due to a 22.3 million increase in incentive based compensation split between cash based and deferred compensation.
The cash based portion of 11 million resulted from increased trading a mortgage activity at 11.6 million a deferred compensation largely related to the overall equity market recovery.
This recognition of deferred compensation expenses offset by 11.7 million gain on related deferred compensation assets, resulting in no earnings impact for the quarter.
Other components included any increase in regular compensation of 1.5 million in a seasonal payroll tax decrease in employee benefits at 2.1 million.
Non personnel expense was up 6.7 million for the quarter.
Mortgage banking costs increased 5.1 million with 1.7 million due to MSR amortization expense and 2.8 million due to changes in our portfolio and loan counts delinquency levels and additional accruals related to losses on loans and forbearance.
Occupancy and equipment expense increased 4.6 million newsy impairment of two leases.
We also made a charitable contribution of $3 million the be Okay Foundation in the second quarter.
These increases were partially offset by a decrease of 4.3 million in business promotion costs largely related to reduce travel and entertainment expenses as a result of the pandemic.
Our liquidity position remains very strong given the exceptional inflow deposit balances our loan to deposit ratio has now 71% compared to 77% at March 31st providing significant on balance sheet liquidity to meet future customer needs. Additionally, we had 14.6 billion up.
Secured borrowing capacity and over 6.5 billion of unsecured and contingent liquidity capacities to support the liquidity needs of the company.
Our capital levels remained strong with a common equity tier one ratio a 11.4% an improvement from 10.98% last quarter and well ahead of our internal operating range minimums, and a full 440 basis points above regulatory minimums.
Our internal stress test that giving us confidence to support our customer base and to maintain our current level of dividends.
Although we have no set plans or commitments to buy back stock in the near term our capital levels would allow for that opportunity.
Currently we don't feel the need to supplement holding company or bank level capital with any capital raising actions.
Due to the continued uncertainty around the severity and duration of the pandemic and its impact on the broader economy, it's difficult to provide specific guidance that we've done in more normal times, but I'll give you a few comments on slide 19 that might be helpful.
Our loan growth is expected to be saw for the foreseeable future. Most energy deals will likely not be down at current prices. Many health care opportunities will remain on whole do that pandemic and little activity will be present, our CRT and seeing eye portfolios. We will continue to originate mortgage loans very limited amount ending up in apartment.
The portfolio.
Our available for sale Securities portfolio, which is largely agency mortgage backed securities yield at 2.29% during the second quarter.
Given the sustained low rate environment prepayments could reach over 700 million per quarter, we expect to reinvest those cash flows at current rates around 90 to 100 basis points.
As we noted we had success during the second quarter driving deposit costs down significantly we feel there's a bit more room to reduce deposit cost, but likely will not drift much below 30 basis points, which is comparable to our deposit costs low watermark during the last near zero rate environment.
The combination of pressure of asset yields and little room to lower deposit costs will put some pressure on net interest margin in the next quarter.
Our diverse portfolio fee revenue stream should continue to provide some mitigating impact the overall earnings pressure being felt in our spread businesses, we expect our brokerage and trading activity to continue at elevated levels, given our products and capabilities in the mortgage backed trading space.
Our mortgage origination and servicing business you remain solid, but we'll likely slow some as refinance opportunities abate and seasonality trends slow as the year progresses.
Our disciplined approach to controlling personnel and non personnel costs will continue we had no plans to reduce staffing or cut existing capabilities are products.
As you've seen with be okay F and most other banks significant loan loss reserve building has taken place during the first and second quarter.
Although there remains much uncertainty in the economic environment, We believe loan loss reserve building is largely behind us.
As I mentioned, a moment ago, we feel good about our capital strength.
Well maintain our current level of quarterly cash dividends, and we'll evaluate share buyback as the year continues.
Now I'll turn the call back over to Steve Bradshaw for closing commentary.
Thanks, Steven our success this quarter as a result of a long term strategy to serve clients in a holistic way with the benefit to shareholders have less earnings volatility and enhanced risk mitigation as we do not feel any temptation to reach for growth by extending risk in any of our lending businesses.
Those who have been with us for a while can think back to the last interest rate cycle. We're most financial institution saw their earnings opportunities compress with net interest revenue.
At that time as it does today be okay financial outperform with a unique heavily fee based business model that benefit our shareholders through that challenging environment.
Well no two downturns are the same there are clearly several bright spot proving out to be okay. If today, namely in our wealth management and our mortgage businesses.
That said the most significant opportunity going forward will be the returned to full economic activity in a safe manner across the nation ultimately, we thrive when our clients and our communities do so our expectations remain tempered as the path to a healthier macro environment comes into focus.
Until that time, we will continue to do everything we can to assist our customers regardless of the speed and shape of the economic recovery.
The TV more together as a phrase you will often hear it be okay up and that couldnt be more true today when covert night team began to threaten our communities. We stood together taking difficult steps to reduce the risk of infection for our clients and each other being together or part does have its own set of challenges, but we continue to learn from our virtual experience and we are.
Related shape, how we will manage aspects of our business going forward.
I'm just as proud of the resiliency I see in individuals across our organization as I am the financial outcomes that it is generating our strategy and our people would be okay financial are clearly different than most similar size peers and I think that our ability to compete effectively with the national Bank and investment firms is a significant factor in a result.
We produced this quarter.
With that we're pleased to take your questions operator.
Thanks.
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Our first question is coming from Ken Zerbe of Morgan Stanley. Please go ahead.
Great. Thanks, good morning.
Good morning, I guess can you just have a broad question about energy I know in the whole pandemic started you guys.
Certainly some cautious commentary just about the obviously the duration the magnitude of.
Pemex.
Does lead to some pretty serious losses, the epic or continues to continue.
How is that it's been three months since your last earnings release like how is that the trends in the energy industry.
Performed versus kind of your expectations.
At the beginning of the cycle. Thanks.
Sure. Kevin This is Stacey you anything from our perspective, the recovery has been swifter than we would have anticipated when it began.
Thank the market and I think including is that Didnt forecast the level of shut in production and things that would happen to curtail supply in this environment. We saw a very strong response from the industry.
When prices decline so precipitously in so.
The industry has always been self healing and we talk about that it usually takes six months to 18 months to kind of find the new equilibrium price, but certainly the price recovery that we've seen in the last 30 days or so, particularly in oil has been very encouraging and and certainly we feel much.
Much better about you know future loss potential at these price levels. Then what we were were on the strip average not on the spot, but owning their strip average were 12 bucks or so per barrel a higher today than we were when we had our earnings call last quarter and that makes a big difference.
In terms of our outlook and what we see as potential loss content. There I think mark alluded in his comments to the fact that if prices stay here, we would expect to see positive credit outcomes from a credit migration perspective, as we move into the third in the fourth quarter.
Recall that we don't downgrade the whole portfolio when prices move we do that as we touched them through the semiannual redetermination process.
And with those prices were not great prices, when we were going through the redetermination.
But much in the same way, we don't upgrade the entire portfolio when there's a price recovery. So as we touched those credits in the late third and into the fourth quarter. If prices hold at these levels, we would expect to see very positive migration in that book.
Hi, Craig perfect.
And just the second question.
Yeah, I Didnt line in your press release.
It looks like you have your deposit growth since 2.7 billion was related to carriers active funding I think you had 2.1 billion of TPP loans.
He just clarify that did you did you guys I access the federal governments facility to fund the PPP loans was that part of the deposit growth.
Hi, Ken this is Steve and.
No that was just an inflow both from PPP as well as all other kind of care Zack.
Initiatives that generated that that deposit growth. So it was not just PPP EBIT was other it was other cares act.
Stimulus that flowed into our customers account. So we went through and try to find out how much of our 4.5 billion a deposit growth was related to either cares or other stimulus programs and came up with roughly 2.7 billion of that growth was from.
From those areas. The rest of what was just regular kind of growth from our from our core customer base.
I see okay. So if the pvp loans pay offs and or let's just say ppt plus loans payoff to maybe 2.7 billion that funding might go away or is that deposits go way, but then you're saying the other call. It roughly $2 billion is a pause is just core deposits the might be more sustainable over time that's.
Correct.
Alright, perfect. Thank you very much for the questions.
Thank you. Our next question is coming from Gary Tenner.
Vincent Please go ahead.
Thanks, Good morning, everybody.
Mark I I appreciate the color on the of.
The economic outlook I think in the slide deck. It noted come to build was based on three centers you highlighted two can you I.
I said in the third is is that a further adverse scenario or is that a kind of upward scenario and maybe.
It's also weightings between three scenarios that are used sure.
The base case scenarios when we highlighted there that we waited at 50%. We also run an upside case in the downside case.
That weighted each those at 25%.
Thats similar waiting to what we had in the first quarter again.
The economy is moving so quickly.
And changing so rapidly that we.
Felt that kind of that base, even even waiting across those scenarios of 50 25 25.
Help reflect kind of that.
Tensile volatility.
Okay. Thank you and then as.
Oh, you're thinking about.
Recognizing the fee side of the PPP loans and what you've got embedded in the net interest revenue. This quarter from that was that just based on a 24 month average life review made any other adjustments in terms of assuming a shorter average life for revenue recognition purposes.
So yeah. This is Steve I know you're correct. We felt there was about 13.6 million I believe benefit in our net interest income from PPP split a well not split, but roughly 10 million or a little bit more was the fee recognition side and another 3 million or so.
So just in net interest income from PPP loans.
We had at weighted as those loans begin to.
Get forgiven out more in the fourth quarter than any other periods. So you'll see additional in the third but then more in the fourth quarter as we think a lot of those will begin to.
Get ended forgiven forgiveness status and then there'll be a tale of it as those loans stay on the books a you know out for 24 months. So we've got a staged out that way.
Alright, thank you.
Thank you. Our next question is coming from Brady Gailey of KBW. Please go ahead.
Thanks, Good morning, guys.
Good morning, good morning.
Well I wanted to start with fee income and then you have another new record this quarter after another record last quarter, but it sounds like.
Commentary it sounds like brokerage and trading.
Remain at this level mortgage will come down some but it sounds like fee income will remain ahead.
So this is close to this elevated level.
For the rest of the years, that's the right way to think about the strength and fee income.
Hey, So why don't you take the brokerage in trading piece and I can make some comments about mortgage.
Okay. So sure. So this skywalker hour in terms of wealth management a couple of.
Of reasons, we feel confident about the momentum and really beyond even the mortgage backed securities volume and activity, which was obviously very strong in both the first and second quarter.
When we look to maintain a robust levels there.
Both on our TV, a hedging activity as well as just the overall volumes inside the mortgage backed securities.
Product mix.
We've got good momentum and have had solid results in our financial institutions group, which offers both taxable and tax exempt securities across the spectrum.
The downstream banks.
As banks look to position there securities portfolios with a little bit of a waning loan demand. So that activity has been very strong.
In terms of our.
Corporate Trust business and our retirement plans business, we've seen very good activity and pretty good pipelines in fact in our defaulted debt.
Space and our corporate trust piece, where we typically have a handled.
Yeah, one or two.
Recognizable names Oh, we today have eight.
Defaulted debt assignments, so that presents good opportunities for us our investment banking activity a in the second quarter was very strong both on the municipal a piece a financial advisory and underwriting as well as.
Our.
Corporate deals, where we had a.
Surprisingly high number of capital market transactions for energy names.
So when you look at just the overall trust fees.
We really went from a period of a decline if you looked at from a in the 19 to the end of March.
And then on into April Trust fee revenue rate had declined about 17%.
From peak to the bottom and we've now a recapture that in our back on.
A year end trust fees overall, beginning in June so we feel like we've got pretty good activity and a reason to be confident about sustaining the momentum.
So brady on the on the mortgage side as we've had two quarters in a row now with mortgage production volumes over a billion dollars I think the difference this quarter was the margin the gain on sale margin improved from two always six in the first quarter to 365 in the second quarter. So that's what drove the.
Majority of that increase in mortgage revenue and I you know, we're going to be strong there I think on out through the year, but I do think there's some seasonality there.
When you look at the second quarter also being 71% refining those revised are not going last forever I mean, I think that abate some overtime. So even though I think mortgage is going to stay strong.
Cautious to say it it hits the same level that hit in the in the second order because the outsized margins or the rest of the fee businesses look pretty good I mean, you you look at the transport network.
And their activity, they're softness in consumer service charges, you see that across the industry with depend demick, and we'll see if that recovers overtime, but it our fee businesses are going to be a pretty significant contributor I think for the next several quarters.
Relative to.
Our other businesses in the bank.
All right. That's helpful. And then lastly from me Yeah, if you look at potential problem loans.
They are up a pretty notable now for I think they went from up roughly 300 million to about 600 million. Thank you guys called out the energy as one big drivers, but any other color on the increase in potential problem loans in the quarter.
Well this mark today, it really has been energy driven the borrowing base Redetermination season was in the primarily in April and May which was at the.
The low point for oil prices and so that was what caused the migration in those potential problem loans, which we hope as we do as Stacy mentioned earlier.
Prices stay where they are that that will that will migrate.
Positively as we go into the fall today, we have not seen any significant migration and other portfolios. We've had nothing that I would call outsized relative to what you would see in a normal.
Cycle, we are monitoring our portfolios across the board have done a lot more deep dives into.
[noise] areas that where we consider higher risk and we're focused on those and so we'll monitor them closely and evaluate them as they go forward, but we havent seen any significant migration yet.
And I would add it back.
I would expect to see that improved much like the commodity price improvement that we've seen.
Thats also that potential problem loan bucket is where we put those.
Revolving credits in energy that have gone through bankruptcy, but the revolver is generally okay, but it's the sub debt or the capital markets unsecured debt that is being kind of klinsmann equitized.
We view that potential problem loan bucket to kind of park those as they go through that process. So as those began to emerge a there could be some positive credit migration that would come out of there from that perspective as well.
Got it thanks guys.
Thank you. Our next question is coming from Jennifer Demba of Suntrust Robinson Humphrey. Please go ahead.
So hey, this is brand in keying off for Jennifer.
Hey, Brian I know hey.
I noticed that you're impact areas table.
That surgeons in college as I mentioned and I wanted to know if you had any color on what was going on as far as trends in these portfolios.
As far as today.
On those portfolios, we havent seen any significant issues on the colleges and universities side of it of course, we're in the summer we're waiting to see how they.
The plans at the various universities make with regards to reopening.
And bringing students back but were visiting with those were were we feel like we're in good shape on those loans today, but we're closely monitoring them on the churches. It is a broad based portfolio of a lot of smaller loans.
So we have had.
Two or three loans that we've had some issues with but overall, we haven't seen any migration yet.
But that's a much broader based theres not substantial large loans in that portfolio they tend to be pretty small.
So we feel pretty comfortable that we can manage that risk associated with that portfolio.
Okay. Thanks.
And just additionally over the impact areas, which are those irrs are you seeing the most stress.
And what areas are you seeing the least stress.
Well if I could this be selective on that I think the lease stress is probably in the in the casino.
Piece of that.
Those are with almost exclusively native American and tribal casinos.
I think 70% of our Outstandings are covered by cash that's available at either the casinos itself or the tribes.
So while they have shut down completely.
For a couple of months, they're starting to reopen.
We feel pretty comfortable based on the liquidity of the tribes and so forth. There was very few PPP loan requests.
Associated with the casinos or loan deferrals associated with the casinos. So that is probably performed.
In a positive manner.
We have a small hotel portfolio that we acquired as a result of our code is acquisition because that's not.
Area that we pursue however have ever pursued actively.
That portfolio is pretty small, but it is probably going to be the most challenged portfolio.
Okay.
Loans that are identified on that slide.
All right. Thank you very much.
Thank you once again, ladies and gentlemen, if you would like to register a question you may do so by pressing star one on your telephone.
Hi.
Our next question is coming from John asked from RBC capital markets. Please go ahead.
Thanks, Good morning.
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Couple of clean up follow up questions I guess.
Just on the energy Mpls stays here Mark can you just talk about the characteristics of the increase it may be obvious, but give us an idea of.
What's in there.
Well.
There what happens.
I guess I'll put it this way.
The increase in the Nonperformings were done primarily from the borrowing base Redetermination process. We went through in April and May we in our price deck as Stacy noted was 10 to $12 less.
So based on that when we're discounting back to cash flow the level of collateral support was below.
In some cases, what the loan level was and would need to be a deficiency that would need to be addressed.
The overall quality of the collateral base was strong enough that we were covered or don't expect didnt expect significant amounts of loss, but it did create a stress situation for those borrowers and so that resulted in an increase in nonperforming loans.
Now if we as we go forward.
Great thing about the energy lending portfolio as we get to re size our loans, we get to reassess the loans every six months based on it on day current price deck. So if we were looking at these loans in the fall, we anticipate that they'll migrate more positively because we have a significant increase in in the price avail.
Really I mean, it's important to note that.
We're not relying on drilling to get repaid we are reliant on the production and the existing borrowing base, where the existing collateral set at.
Given price levels and.
I'll add one more thing to this I think it's important to get this out is that we have we have significant amount of hedging in our portfolio.
It continues to be very strong.
77% of our oil commitments are hedged at greater than 50% $52.
For the rest of 2020, and 41% our hedge more than 50% at 50 220 into throughout 2021, so the hedging profile, both our oil and gas portfolios is going to help sustain.
Through this process.
As the economy reopens and the price deck improves.
Okay got you also see you get a allowance there for energy that you know 4.4 plus percent.
That well above what it was during the last cycle into peak and our view is that that we're trying to address this now through the Cecil proactively. So you kind of get this all reserve for we evaluate every one of those npls for any impairment as we look at though so I think the perspective is you know Weve reserve.
For that we'll continue evaluate circumstances, but.
We think that they were well reserved inadequate adequately reserved for that portfolio as we move forward.
Okay, that's all helpful and.
I kind of falls in the next question or two more but I put tried to put abate in the more loan loss provision line from our model.
Didnt work, so I mean, a little bit of help defining what abate means in terms of reserve building are you, saying.
Was meant to be funny by the way, but are you saying that.
You do expect to build reserves somewhat.
You're not expecting very much loss content.
And obviously you.
Pretty clear message on loan balances so and so is the message expect a pretty heavy retreat.
I would go ahead, Mark, Yes, Oh, I won't say that we will have a heavy retreat. What I would suggest is that if we have cecil designed to bring reserve build earlier in the cycle.
Economic forecasts that had been put out in plus the the way we've looked at our loan portfolio has resulted in a pretty strong reserve build to this point in time, if our base case forecast would play out.
We would not need additional reserve build.
That doesn't mean that we will start to.
[noise] reduce that unless we saw improving credit quality or not see the increase in credit deterioration that might a company.
Should.
Depending on how things play out in the economy, we feel very good about the energy portfolio, we still stimulus packages have helped.
Support retail and some of the cobot impacted industries, and we need to see how those play out over the next.
Several quarters, but I would say if it does play out into in maybe into 21, you might see as have the opportunity to really look at that reserve level.
John We define reserve build this provision greater than charge offs and certainly dependent on what we see from a credit migration as this virus unfolds, what we're trying to foreshadow. There is we do think the significant provision and reserve building that we experienced in the first and second quarter is largely behind.
And as we move forward, we would be more responsive to actual charge off levels. Then then continuing to try to build the reserve.
If our economic forecast holds.
Okay. Okay.
I may follow up on that but it just feels.
Feels to me like with your potential problems potentially coming down.
You are really not signaling a lot of stress in credit from here is the way agreement.
Following up.
Last one is on the buyback.
What would you guys need.
To have but maybe courage is too stronger word, but the comfort we encourage.
Think about.
Are you starting repurchase program.
Thanks.
Well this is Steve and you know I think what I would say as that we've we think thats the prices attractive and we'll have to see what the environment looks like we have substantial capital I'm really happy with our capital position actually grew this quarter.
So you know I'm, not making any specific commitment to buyback or not buyback, but I do think it's something that we discuss opportunistically here at the bank and and we'll make a decision, but it's not necessarily off the table.
Like like you've seen a lot of banks announce you know more buybacks for the year I, just we're not going to be in that position, we'll evaluate it as time goes across the year and.
Could very well buy back shares.
Yes, it's no firm commitment.
Great. Thank you.
Thank you. Our next question is coming from Jared Shaw of Wells Fargo. Please go ahead.
Hi, Good morning, this is actually 18, more Brazil or for Jared.
Hi, I'd like to I'd like to just follow up I'm not on credit question from the prior caller. It looked like the allowance build this quarter was quite sensitive to credit migration.
And from all the commentary that you are saying it seems like the combination of the of the improve pricing.
Along with other things that theres going to be Sims potentially meaningful positive credit migration and ms. early as a third quarter.
I guess, what would prevent that same level of sensitivity.
The allowance coming off as migration improves in the coming quarters versus allowance build when migration worsened in the second quarter.
Well I mean, I think thats the nature of Cecil and you know that the our models.
Build in a factor or risk grade migration, which we had and as mark and Stacy pointed out.
When we did our borrowing base determinations that when we determined the risk grade of those energy customers than we saw migration.
Nick and that feeds into our profitability a loss are a probability of default calculations and our seasonal model. So to your point, if we get improvement in those grades in the third or fourth quarter. When we redo the borrowing bases at that time hopefully at these prices that have come back.
Annually and in June than we would expect.
Risk grade migration back the other direction, which would clearly have a very positive impact on our Cecil calculation and the nature of that calculation is if we feel.
There is reserves that need to come off then we'll pull those will pull the reserves. All we just have to see where that where that lands in the third and fourth quarter, but thats the way we understand it works.
Okay. That's helpful. And then just last one from me there's a statement in the release.
Talking about repurchasing loans from Ginnie Mae when certain delinquency criteria as Matt.
Is that mandatory when certain when certain criteria that you have to repurchase some back from those pools or is that at CER discretion and I guess any kind of color you can provide around that would be helpful. Yeah. It's it's not mandatory.
It it's our discretion, but you lose quote sale.
Basically half controls and you can earn some backs you bring them back on your balance sheet, but it just grosses up the balance sheet.
So you don't actually purchased some but you bring the loans back and then you have an offsetting a liability on the other side.
So it's not mandatory.
But we have in the past.
Purchased some of those for real and have gained some advantage of that over time, but.
That's that's the way the accounting works there.
Got it thank you.
Our next question is coming from Gary Tenner of D.A. Davidson. Please proceed with your follow up.
Thanks, I just had one quick follow up in terms of a 1.6 billion of the club at 19 impacts very of loans.
On slide nine what amount of those have been under.
Forbearance or modification.
Since this kind of nexstar.
Hi.
Yeah. This is mark.
What amount of been under deferral.
We've actually had.
Our deferral amounts is about 5.6% of our total loans.
But 70% of those loans that.
Our in that slide actually receive PPP as opposed to asking for to.
So we haven't had as any significant increase in deferrals on that particular slide relative to any other part of the portfolio.
Because they were primary beneficiaries from PPP and that caused the number of will not take deferrals.
Okay, the slides as TPP loans to those categories or 240 million versus the 1.6 billion. So that's about 15% Greg 15%.
Of those loans received PPP with 70% of the customers got to PPP, though.
I see revenue.
More countdown $10.
Perfect. Thank you.
I would like to turn the floor back over to Mr. know for closing comments.
Okay. If that's all the questions. We have the then we really appreciate everyone. Joining us today, if you have any further questions.
Feel free to call me at 918595, 303 zero or you can either email us at IR at be okay at Dot com.
Everyone have a great day. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines to lock off the webcast at this time and have a wonderful that.
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