Q3 2020 BOK Financial Corp Earnings Call

Great I guess I would now like to turn the person presentation.

Presentation over to Steven No Chief Financial Officer for be Okay Financial Corporation. Please proceed sir good morning.

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 and credit metrics last.

Lastly, I'll provide third quarter details regarding net interest income net interest margin the revenues expenses and our overall balance sheet position from a liquidity and capital standpoint.

Joining us for the question and answer session, our Mark Martin Our Chief Credit Officer, who can answer detailed questions regarding credit metrics and loan deferral status and also Scott Grauer Executive Vice President of wealth management, who can expand on our differentiating capabilities within wealth management, which have led to another fantastic quarter.

For the company.

P D S of the slide presentation and third quarter press release are available on our website <unk> be okay dot com.

We refer you to the disclaimers on slide two as it pertains to any forward looking statements we make during this call.

I'll now turn the call over to Steve Bradshaw.

Thanks for joining us to discuss the third quarter 2020 financial result, this quarter was another which our fee business is highlighted the effectiveness of our diversified revenue strategy as we eclipsed $150 million and net income for the first time in the history of our company.

Shown on slide four third quarter net income was 154 million or $2 or 19 cents per diluted share that represents dps growth of over 9% from the same quarter a year ago, a remarkable outcome given today is very different economic environment.

The key items that drove our success this quarter were a fourth consecutive record revenue quarter from our wealth management business. Another exceedingly strong production of margin quarter from our mortgage team no credit loss provision was needed this quarter.

Margin was stable due primarily to an accretion acceleration that we will detail momentarily with additional support from highly disciplined deposit pricing and an increase in the affected US a force in our commercial loan book and lastly, we have diligently control expenses from the outset of the business impact brought about by Cobot Knight team.

Turning to slide five while average loans were flat this quarter average deposits were up over 6% linked quarter and up nearly 35% from the same quarter a year ago due primarily to customers retaining higher balances in this current economic environment. After.

Assets under management are in custody were up nearly 4% linked quarter and 2% year over year again, topping $80 billion, we attribute the growth the positive market movement, along with better results in the quarter from active sales of asset retention efforts.

I'll provide some additional perspective on the results before the start of the Kunaev session, but now state the guys, who will review the loan portfolio and our credit metrics in more detail I will turn the call over now to Stacy. Thanks.

Thanks, Steve.

Turning to slide seven period end loans were 23.8 billion down 1.5% for the quarter small pockets of growth in our health care book was offset by pay downs in energy are across our core commercial and industrial loan book.

Some of this was continued repayment of defensive draws and some of this was through the organic decline in economic activity and purposeful de leveraging by our customers.

Looking specifically at energy loans, they contracted 6.5% for the quarter commodity prices, while improving still making a deal difficult to source in the current environment, though we remain optimistic about our ability to enhance market share long term.

Energy borrowers continue to pay down debt to reduce leverage at this point in the cycle. Despite these factors we remain open for business and continued to support our customers in the energy industry.

This business is more than just lending activities as evidenced by the record energy derivatives revenue this quarter as customers continued to aggressively manage sort of commodity risk.

Commercial real estate loan balances were up 3.1% from the previous quarter.

Partially due to continued friction in the permanent financing markets slowing the level of pay down activity.

Looking forward our outlook for loan growth for the rest of the year remains tempered the speed and shape of the broader economic recovery will be the determining factor in restarting loan growth. We are optimistic that once the pre cobot normalcy returns to the economy, we are well positioned in our commercial lending portfolio to grow loans.

Turning to slide eight.

We supply to look into the loan deferral status across me, Okay. AFS portfolio. As you can see just 1.2% of total loans remain had a deferral status of any type.

At the peak that figure was 7.5% of total loans. So we are happy to say that more than 80% of the loans that were deferred have now moved back to regular payment status.

Of the loans that remain in deferral status roughly half or in the commercial real estate portfolio.

These are being closely monitored but short term the credit quality has held in better than our original expectations.

Long term outcomes will be dependent on the pace of economic recovery and the impact of any additional fiscal stimulus.

Also on slide eight we begin compiled the list of loan segments, we consider more exposed to the economic impact of the pandemic.

This group of loans is highly diversified with over 550 loans for an average loan size of less than 3 million.

Clearly the 596 million retail portion of this portfolio remains the most vulnerable today and we'll continue monitoring these exposures closely in the coming months.

Our office and multifamily makes the impact here, we believe our geographic footprint will help us in these segments in the long term because of the strong and migration overtime.

Turning to slide nine you can see the credit quality remains stable as witnessed by our lack of credit loss provision this quarter.

As we mentioned last quarter, we felt the material reserve Bill would be largely complete assuming our economic forecast is in line going forward.

Looking at the underlying components at 1.7 million provision related to blending activities was offset by a decrease in the accrual for expected credit losses for mortgage banking activities and allowance for credit losses from investment Securities chain.

Changes in our reasonable unsupportable forecast of macroeconomic variables, primarily due to an improved economic outlook related to the anticipated impact of the ongoing COVID-19 pandemic and other assumptions resulted in a 12.8 million decrease in the provision for credit losses from lending activities.

Changes in the loan portfolio characteristics, including specific impairment losses loan balances and risk rating resulted in a 14.5 million increase in the provision for credit losses from lending activities.

Net charge offs of 22.4 million or 37 basis point annualized is slightly above last quarter, excluding triple Q ones net charge offs were 41 basis points annualized year.

Year to date net charge offs totaled 53.7 million or 30 basis points annualized well within our company's historical loss experience.

The combined allowance for loan losses totaled 448 million or 1.8% of outstanding loans at September thirtyth compared to $469 million or 1.94% of outstanding loans last quarter. The.

The combined allowance for credit losses attributed to energy was 4.3% of outstanding energy loans at September Thirtyth.

Non occurring energy loans decreased 34 million this quarter attributed almost entirely to a decrease in non occurring energy loans.

Potential problem loans totaled 623 million at quarter end down slightly from 626 million at June Thirtyth.

A decrease in potential problem energy loans was partially offset by an increase in general business loans and commercial real estate loans.

Just a quick note on energy credit is that is currently the largest driver of overall asset quality for the company.

The second quarter of 2020 was an imperfect storm for the semi annual borrowing base redetermination process, given the impact to supply from OPEC plus and.

And demand from COVID-19, all hit in the midst of this process will for borrowers even had time to react and manage their response.

The result was a higher level of navigated credit migration.

While commodity prices rose in the third quarter to the level that we expect to improve the credit outlook, we do not upgrade credit in a wholesale manner solely based on commodity price changes.

As we go through the semi annual Redetermination process in the fourth quarter, we would expect positive credit migration in prices remained stable at these levels.

I'll now turn the call over to highlight our NIM dynamics fee revenues and the important balance sheet items for the quarter.

Thanks Stacy.

With record net income this quarter was clearly another fantastic one for the company pre provision net revenue topped $200 million for the second consecutive time, demonstrating the full earnings power of the company.

Net interest revenue strength net interest margin defense outsized fee revenue and diligent expense management all contributed to our success this quarter.

As noted on slide 11, net interest income was 272 million down just over $6 million from last quarter PPP loan fee recognition contributed $11 million this quarter versus 13 million last quarter. Additionally, due to loan payoffs and adjustments for acquired loans.

Discount accretion was 13 million this quarter versus only 3 million last quarter.

Net interest margin was 2.81 per cent compared to 2.83% in the previous quarter lower loan yields in the near zero rate environment were offset primarily by the acceleration of discount accretion from co Biz acquired loans, which supported net interest margin by 11 basis points worse.

This last quarter and is expected to normalize next quarter.

Additional support was provided by an eight basis point reduction in interest bearing deposit costs down to 26 basis points and increased effectiveness of floors in our commercial loan book as average LIBOR continue to fall in the current quarter.

Turning to slide 12, clearly earnings this quarter was bolstered dramatically by 223 million in revenues from our fee businesses as our wealth management and mortgage teams have continued their momentum to post outstanding quarters elevated margin in mortgage reflect the continued lack of it.

Industry capacity, given the strong demand in the current low rate environment.

Mortgage production revenue remains high just slightly below the prior quarter refi.

Refinances accounted for 54% of total originated this quarter down from 71%.

Our wealth management team put together a fourth consecutive record total revenue quarter Predating, the low rate environment, we find ourselves in today.

This quarter with a host of complimentary business units, we saw incredible deposit growth of over 8% linked quarter significant financial market based investment management fees and risk management revenues and great synergies with commercial banking through the insurance arm acquired by Cobas altogether exception.

Oh performance and Scott can provide additional detail during the question and answer session.

Brokerage and trading revenue increased 7.5 million with commissions, increasing $3 million.

We continue to see elevated mortgage backed security trading activity out of our Connecticut office derivative fees and commissions increased 2.4 million, primarily due to increased hedging activity from our energy clients. A result of our expertise in that lending vertical.

Investment banking revenue increased $1.8 million, primarily due to increased syndication fees as we.

As we look forward to 2021 the team is adjusting strategy to overcome the decline in fees from traditional cash investments that are now paying close to zero, providing further optimism for continued growth.

Fee revenue now represents 45% of total revenue up from 40% in the same quarter last year.

This once again demonstrates an important differentiating characteristics be okay financial.

We have long had a diverse revenue mix of provides an earnings buffer and economic downturns because of the countercyclical nature of some of these fee revenue streams.

The net economic benefit of changes in the fair value of mortgage servicing rights and related economic hedges was $6.5 million during the quarter, including a $3.4 million increase in the fair value of mortgage servicing rights 1.5 million increase in the fair value of securities and derivative contracts held.

As an economic hedge and $1.6 million related net interest revenue.

Turning to slide 13 expense management remains prudent with an increase of just under $6 million. We have managed personnel costs by holding the line on adding new positions and challenge the need to fill open positions together. These actions work to decrease regular compensation by $2.6 million.

This quarter while.

While this will moderate a bit as our branch network has now opened we have revised our branch strategy to a hybrid model. This new model will continue to meet the needs of our client, but recognizes that the pandemic has accelerated customer behavior adoption of technology.

And we will need to.

Fewer staff and locations to meet future needs.

This is a change we recognize early in the pandemic and we were able to make real steps towards efficiency. In fact looking at headcount we have absorbed approximately 140 positions company wide or almost 3% of our personnel base since March simply through attrition and increased efficiency.

Elsewhere in personnel expense incentive compensation increased $5.6 million due to a $3.1 million increase in cash based incentive compensation, resulting from higher fee revenues and 5.9 million largely related to vesting assumptions regarding the company's earnings per share growth.

Relative to the defined peer group.

These increases were offset partially by $3.5 million increase in deferred compensation.

Looking at the 2.3 million increase in non personnel expense there were several offsetting components write downs on a set of oil and gas properties and a retail commercial real estate property professional fees and data processing expense were partially offset by decreases in occupancy and equipment expense and.

Other expenses. In addition, the second quarter included a charitable contribution to the be Okay foundation of $3 million.

On slide 14, our liquidity position remains very strong given the continued inflow of deposit balances our loan to deposit ratio has now 68% compared to 71% at June thirtyth, providing significant on balance sheet liquidity to meet future customer needs.

Our capital position levels remained strong as well with a common equity tier one ratio of 12.1% an improvement from 11.4% last quarter and well ahead of our internal operating range minimum.

On slide 15, I'll leave you with some general outlook for the near and mid term that might be helpful.

Our loan growth is expected to be soft in the near term. However, as we put together our budget with the expectation of economic recovery will be looking for opportunities to grow loans once again in 2021.

Our available for sale Securities portfolio, which is largely agency mortgage backed securities yielded 2.11% during the third quarter, given the sustained low rate environment prepayments could reach approximately $750 million per quarter.

We concurrently reinvest those cash flows at rates around 70 to 90 basis points.

As we noted we have had success during the third quarter driving deposit costs down further we are now below the low point reached during the last near zero rate environment. We believe there is room to push a bit lower over the next couple of quarters, though we feel we are nearing a bottom to deposit costs.

The combination of the normalization of elevated discount accretion pressure on asset yields and less room to lower deposit costs will put some pressure on net interest margin.

Our diverse portfolio of fee revenue stream should continue to provide some mitigating impact so overall revenue pressure being felt in the spread businesses.

We expect our brokerage and trading activity to continue at elevated levels, given our ability to monetize every part of the fixed income space.

Mortgage business should remain solid from continued low rates and housing demand with perhaps some normal seasonal slowdown in the fourth quarter.

Our disciplined approach to controlling personnel and non personnel costs will continue as noted earlier, we have made good progress through the pandemic.

We have no plans for a direct reduction of workforce or any corporate wide program to cut existing capabilities or products for our customers. We will have or look for all opportunities to gain efficiency through automation and process improvement.

Although there remains uncertainty in the economic environment. We continue to believe the loan loss reserve building is behind us.

As I mentioned, a moment ago, we feel good about our capital strength, we will maintain our quarterly cash dividends and have plans to restart opportunistic share buybacks.

I'll now turn the call back over to Steve Bradshaw for closing commentary.

Thank you the differentiated earnings outcome that our strict credit discipline and heavily fee based revenue model produces during times of uncertainty cannot be overstated here, but as you've seen our fee income streams have produced over $600 million in revenue. So far this year and we believe that strength will continue as we have never seen.

Clients with a higher appreciation for advice than in today's uncertain economy business owners mortgage holders wealth management clients corporations, all are facing significant financial decisions as they plan for 2021 are relationship driven business model is really in the sweet spot between high touch in high Tech and it's perfectly.

We in touch with the needs of clients today we.

We continue to expand existing relationships and acquire new customers as we believe individuals and companies are clearly evaluate how well their financial partners did or did not help them in the last eight months. The okay financial is uniquely positioned to win incremental market share and that will be our focus heading into 2021 with that we are pleased to take your call.

Questions operator.

Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad.

The confirmation Tom indicate your line is in the question queue you may.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.

One moment, please while we poll for your questions.

Okay.

Our first question is coming from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Great. Thanks.

Good morning, everyone.

Morning morning, My first my first question is for Stacy If you do see positive credit migration in the fall Redetermination process. As you expect would that actually lead to a release of reserves or is that already in your seasonal expectations.

Yes, theres so many different assumptions that go into how that I mean part of that would be what do our updated economic outlook look like.

What other credit migration, maybe happening in other aspects of the portfolio I think it's difficult at this point to to try to have conjecture around what we think positive credit migration would do.

To to reserve levels, as we think about the fourth quarter I think.

I think generally speaking we're as you think about the allowance you probably want to get into some.

Into some level of post co bid or or.

Vaccine environment, where you have a lot more transparency around what the environment's going to look like as you think it would be difficult to try to do something there and then and then have the economic environment turn against you I think we feel very good about where we are today, obviously, but I think it would be early to surmise, what what could happen with a positive credit migration in energy.

Got it okay that helps and then in terms of the brokerage and trading side, obviously your fee income.

Guidance implies the fees are going to remain strong I think.

Yes, Stephen you mentioned that brokerage is going to remain high I guess, it doesn't kind of going straight up over the last couple of quarters. It's been very strong results what is it about brokerage and trading that keeps it high at this level going forward.

Hi, Ken This is Scott Grauer. So let me let me take a stab at that were when you think about our.

Trading and brokerage activity, while we get probably a lot of headline attention to our mortgage backed securities piece.

Which is a significant component its roughly a third of that revenue.

That being said our activity with mortgage originators is really only about it's 25% or so we've had real strong activity in our downstream correspondent financial institution business our activity to asset managers has been very strong and then our other component pieces.

We've had some.

Significant momentum building in.

Our CMO activity from a product standpoint, we've had good activity with our investment banking, our municipal underwriting and.

And as Stacy mentioned, our hedging activity has been very strong so it's been really.

Really across the board in all of our activities in the in the brokerage and trading piece in our asset values have have rebounded.

Since.

The recovery in the equity markets are recurring fee business, which is roughly 50 50, even on the brokerage side.

Our back to pre March levels. So.

It's strong across the board.

All right Great and then just one really quick last question in terms of your expense guidance. You said, it's going to be roughly the same level as last few quarters. If I got my numbers right. It looks like expenses have been going up quite a bit over the last few quarters are you talking more.

In line with Threeq you are in line with the average which is lower than 10 three Q.

Given the kind of change in revenue mix more towards the fee side relative to the spread businesses. You are just going to have a slightly higher expense base to support that revenue stream. So I think going forward you will see it similar to what we had in the in the third quarter here Ken.

We did have one item, where we caught up if you will.

Our incentive compensation.

Accruals because of our positioning around where we fall within the peer group, so we needed to catch that accrual up.

But also we didnt put any dollars into our.

Community Foundation are and so we may do that in the fourth quarter you may not have the catch up on the the incentive comp.

Component for the stock based compensation, but you may have a little bit higher contribution to our foundation. So all those things may wash out in the end up at a spent expense level similar to what you had in the third quarter.

All right perfect. Thank you very much.

Thank you. Our next question is coming from the line of Grady County.

VW. Please proceed with your questions.

Hi, Thanks, Good morning, guys.

Ready.

So I wanted to ask about share buybacks sounds like you guys will be active in that headed into year end stock.

Dr. One times tangible you have it.

You have a decent amount of excess capital I mean, I'm looking back at where you guys have repurchase stock in the past and you know that's over $80 a share the stockpile sub 60, so how aggressive you think you'll be on the buyback fried.

This quarter and into next year.

[music].

Yes, well you're exactly right great.

Brady when I look back the three quarters preceding the last two what we didn't buy any stock back and we averaged about 350000 shares at $78. So you'd have to expect we would be as aggressive if not more.

Given the current stock price and given the capital levels are stronger now than they were back then and we.

And we feel pretty comfortable with the credit side as Stacy mentioned so.

I think you would expect us to be.

At that level or more aggressive in the fourth quarter and then we'll just see where where we roll out in the 2021 I don't want to make any extra money.

Provide any guidance around what we would do in 2021, but certainly I think you will see us back in the market.

Okay.

And then moving on to the margin.

Talked about seeing pressure on the margin obviously with.

With that.

The accretable yield from co biz normalizing that'll that'll push the margin down on its own but excluding any sort of movements from accretable yield how much pressure would you expect on the net interest margin going forward.

Well, let me just take a few of the components I really think our loan pricing has kind of adjusted me I don't know.

That to be together.

Go down any further also our lending groups Stacy norm Bagwell, others had had been able to get some floors in on about 10% to 15% or so of our portfolio and that's supporting the margins up so.

So I feel pretty good about where our loan pricing as I mentioned deposit costs I think we can push those down a little bit more I don't know how far I wouldn't commit that we could pass through 20 basis points, but we're at 26 average for the third quarter.

The last month of the quarter was a little better than that I think we can keep pushing there some.

I think where the where you'll see the margin pressure is from our available for sale securities portfolio, where you've got as you would expect some pretty sizable cash flows from that portfolio. I mentioned, I think 750 million a quarter that will come out of a portfolio yield of 211.

Then roll into securities that we reinvest between 70 and 90 basis points. So you can kind of do the math around that and figure out that you've got some roll down of net interest margin in the next few quarters, so that maybe I'll leave it at that.

Okay. That's helpful. And then finally for me I just want to.

I just wanted to ask about the expense base.

Yes, yes.

So at some point all the all the success you are having on the fee income side will start to decline somewhat maybe next year as you start to see fees not be as strong.

What are their continued opportunities you have on the expense base to help.

Offset any.

Pressure on profitability I know you mentioned, you've already allowed the workforce to be reduced by 3%. If you think there's more work to be done on the expense side next year, yes.

Yes.

Hey, Brad.

Good.

That's an absolute focus for us.

And it.

It became a significant for us really going all the way back to mid March when we return to near zero rate environment, we understand the implications of that we had a playbook from that or not.

Not too in the not too distant past when we had the same scenario and you're right. We've used attrition to bring that workforce now we've done some targeted reduction where.

Where we've seen the efficiencies currently doing that at our branch network. There's other areas that we're focused on as well so that.

That is going to be critical I think for us in 2021 and the good work. We've done has been a little bit masked because steven's point when you see outsized performance from mortgage you see outside performance.

Brokerage and trading those are both commission based compensation businesses, you're going to pay for that and we are happy to pay for that and that's going to be reflected in personnel costs. When you strip that away and we've got a very positive.

Trend line in reducing some of our costs in that fashion. If we're going to continue that into 2021. So it's not it's not like we're just waking up today to address that this is something that we've been working on as a management team for seven months.

Okay got it thanks guys.

Thank you. Our next question is coming from the line of Jon Arfstrom RBC capital markets. Please proceed with your question.

Hey, Thanks, good morning.

Morning.

Stacy for you back on slide nine.

Can you talk a little bit about how granular.

The energy non accruals are and also some of the potential problem loans.

Is it is it a handful of larger credits or is it more broad based than that.

No I mean energy overall tends to Q2, a higher average loan size and so there is a probably a higher average loan size embedded in both potential problem loans.

To a lesser extent the nonaccruals generally by the time they make it that far you've had a couple of borrowing base reductions and they tend to be a little bit smaller by the time, they get to that point.

But we're very optimistic about a kind of this.

Fall Redetermination season.

We feel good about potential loss content embedded here.

We fared exceptionally well if you look at I think year to date, you know were.

Last five quarters were kind of been in that 27 basis point range and and me about feels very good, particularly given what we've been through.

But even without that that would be a good number for us. So I feel good about kind of where we are from a loss content perspective, there doesn't mean, there won't be more I certainly would expect there to be some level of additional loss content embedded there.

As we work through those problems, but feel good about the outlook for sure.

Okay that helps and then.

Steven maybe another way of getting back to Ken's earlier question, but what what would.

What would have to happen to drive a higher provision for to get you back into positive territory. It seems like loan balances and maybe a little flattish in the near term and we've got some credit improvement, but what what would have to have to happen for you guys to go back to a positive provision.

Well I think you'd have to have a you know an economic outlook that deteriorates.

More than we have.

A base case upside case in a downside case and I think you would have to have much more the downside case.

Out in expectation for next year or early part of next year that would throw you buy.

Throw you back into a scenario, where you needed to provide for.

You know expected losses in a scenario like that.

You know perhaps some.

More deterioration on the energy side, but we're not seeing that at this at this stage so.

I think it really drives more around the economic outlook backing up and deteriorating significantly from what we have in our estimates today.

Okay.

Okay. That's helpful. And then one last small one I don't know if you touched on it but do you have the mortgage pipeline and maybe how that looks today.

No I don't have that in front of me you know I've got what the origination activity was third quarter versus second it was just slightly lower.

Not much but a little bit lower.

You know, there's always some seasonality even even in these very low rates that have driven a lot of origination activity you still have a slowdown in the fourth quarter generally that's what we've seen in the past the swine noted dead.

We think mortgage will stay relatively strong, but with some seasonal kind of slowdown.

The margins have held up very very well in fact, they were up two basis points. All the way to 367 I believe for this quarter you know I don't know if.

I don't know if that will hold up forever, but certainly we're seeing still very good activity in the mortgage company.

During the fourth quarter here.

Okay.

Thanks, a lot guys appreciate it.

Thank you. Our next question comes from the line of Jennifer Demba, which securities. Please proceed with your question.

Hi, this is branded coming off again.

Brian.

Hey, so most of my questions have been answered, but I wanted to touch on loan growth and I saw that there was growth in the healthcare senior housing came and I was wondering if.

You could provide more details on.

On the underlying trends of that actually takes full quarter, possibly.

[music].

Sure. So healthcare has been obviously a strong focus for our company for a long time, we've got a fantastic team that's focused there the two.

The two really three areas that we focus on our our hospital systems and that's generally large high end credit hospital systems medical physicians practice groups and senior housing and we see opportunity for growth really particularly in the latter two weeks our growth and hospital systems in the first.

Half of the year is they work to obtain additional liquidity to work through the pandemic I think what we would expect to see over the next year or so is that is that need the lessons that their need for liquidity would lessen and and so their need for credit would probably less than as well or at least or their draw downs.

We see good opportunity inside of our health care group, both the medical decisions group as well as the.

Senior housing grew I think that what we've seen in the in the growth in the near term has been as we've talked about in the past some of the large Reits that have struggled may divest of certain property sets and so we have some clients who are the operators are those properties and maybe they sold them. The right originally many years ago.

They continue to operate them they know the facility they know the health.

The mix of that facility, so they're very comfortable purchasing that facility out out of the right and so that's created some opportunities for growth from up with existing clients with existing properties that they operate.

And so thats been part of the growth that we've seen here in the third quarter and we we think particularly once we got through the pandemic back we'll continue to be a very strong opportunity for growth for us.

For us and we're very happy with our growth in our medical physicians practice group, we really.

That was a big part of the acquisition for Cobiz for Us on the health care Prime and they've really exceeded expectations and continuing to have high expectations for that team as we move forward.

Awesome and other than health care are there any other areas of growth that you could be looking to capitalize on going into next year I know.

More demand is pretty soft right now, but any particular areas outside of coke or you could be looking to take in the market sharp too.

Look I think that that from our perspective growth will be tempered until such time. His people are very comfortable in the in the economic environment.

I think that probably is you know into Oh, a widely available vaccine, but I will tell you I think that the response that we've seen from our customer base around our customer service and responsiveness, particularly around PBB.

Thank our opportunities to grow in all aspects of our lending once the economy begins to grow I mean, if we were growing loans in a big way right. Now you guys are probably be questioning and challenging how we were doing that where that growth was coming from.

But I think when the economy turns we're exceptionally well positioned because our customers have realized that having a trusted advisor and having a person they can talk to when they need credit and when they need to work through an issue.

Is worth a lot to them and so I'm very optimistic about our growth prospects once we get to that kind of proverbial other side of this pandemic.

Okay that is great hey, thank you very much.

Thank you. Our next question is coming from the line of Gary Tenner with da Davidson. Please proceed with your question.

Thanks, guys good morning.

Morning wanted to ask a question on energy and I appreciate the positive comments regarding the upcoming Redetermination season, but I was curious in terms of borrowers that may have had shortfalls that for the spring Redetermination how successful have they been in correcting those or is really maybe some increase in the borrowing base and in the fall going to be the more power.

The driver of that.

Well I mean, it's hard to answer that could you, we probably only been through about 15% to 20% of the Redeterminations at this point and so in many cases. The last time, we saw was in the spring when a when the prices were were significantly lower in the meantime, they've done things to manage their business reduced cost.

In some cases they've shut in wells.

In the early stages that they'll bring back online. So I think it's a little bit premature to answer that with a lot.

A lot of clarity until we've been through this fall redetermination cycle.

But based on the.

Credit that we have seen through that process I think we're optimistic that between.

A positive price movement and actions of the borrower that we're going to work through this in a very positive manner, and we don't see loss content in that portfolio that inconsistent with what you've seen from us in the past.

Okay. Thank you and then just on PPP unless I missed it in them in the press release anywhere.

Can you tell us what the fees were that were recognized in the third quarter.

Yes, Gary this is Steven.

The fees were 11.3 million that we recognized in the in the third quarter for PPP.

All right. Thank you.

You're welcome.

Okay.

Thank you. Our next question is coming from the line of Peter Winter with Wedbush Securities. Please proceed with your question.

Good morning, good morning.

Good morning, Andrew.

Lastly, credit is a good story I was just wondering if you could give a little bit more color on the retail side that you guys called out you're watching a little bit more closely.

Yeah.

Certainly invite mark to provide color here as well.

Today, we're not seeing real big issues, there were calling it out as a risk area because it's intuitive and we see that you know from that perspective, but I think in my comments I mentioned that it's.

It's held up better than than we would've expected and knowing what we know now and given the depth of the pandemic in various markets. So.

We're not necessarily seeing credit migration there today as much as we are calling it out as a potential risk area. In fact, as we dig through that and as you can imagine we spent a lot of time in the last 90 days doing that we.

We we actually feel much better about it than we did when this all kind of started than we began to kind of call out some of these higher risk areas.

Yes, Mark what I'd only add is that from a loan deferral standpoint.

We've had two thirds of our consumer loans and mortgage loan.

Exit from that deferral program, so and they tend to have a longer requests and little longer ability than most so we've had very good success in having those those migrate back to regular payment.

Got it.

And then if.

If I can just follow up on that the provision expense outlook Stephen So the way to think about it is kind of a deal.

Provision for the next.

Several quarters, assuming no further deterioration in the economy.

Well, that's kind of what we see I mean, you know I. We've made the statement that we feel like the reserve build is behind US we made that statement last quarter.

That if the economic environment stayed relatively stable, which it did in fact improved a little bit that we felt like we wouldn't have to remain below reserve anymore adds kind of the stance. We have now who knows what will change and I answered the question earlier.

In this call that you know it if the economics.

I'll make environment and outlook deteriorates significantly then yeah, we got to go back and run our models and determine if if there's more expected loss there but today.

We're not seeing that.

Okay and just my final question.

So Steve I was just wondering if you can give an update on what your thoughts are of M&A. Thank M&A in this environment.

Yes, Peter I don't think our stance really.

Really changes there were always interested and quality organizations, especially areas that we can expand within our existing footprint we.

As you know we like the markets that we're in very much. We've got some good growth markets, where we don't have substantial market share we could benefit from extra scale I think realistically in this environment hi.

Hi, quality banks are not as likely to be sellers.

With the uncertain credit out were.

With low rates and maybe falling margin.

You were at owner of a good quality beg you probably don't see that.

Great greatest opportunity to maximize the value of your bank, you're probably going to see more scratch and dent type.

Type transactions and while we look at those from time to time.

We typically not gone down that route because our belief.

I'd say is with confidence and not areas that I'd, rather have the management team focused on growing our own organization, which we've had great success doing and trying to turn around a bad situation in an uncertain environment. So.

We remain interested and and focused on that as we think about going forward, but I think that the opportunity that we have will probably be limited.

Here near term.

Thanks for taking my questions.

Thanks.

Thank you there are no further questions at this time I would like to hand, the call back over to Steven now for any closing comments.

Okay. Thank you thanks, everyone for joining us I appreciate all your questions and interest in the Okay. Yes. If you have any further questions. You can call me at 91859, 530, 30, or you can meet email us at IR at be Okay. If dotcom.

I have a great day. Thank you.