Q2 2020 Community Bank System Inc Earnings Call
Community Bank reported second quarter twice warning or do you.
That's a different station contain forward looking statements for basin.
Securities Litigation Reform Act.
[music] based on current expectation.
Rejecting the industry market.
In which the company operated.
Such statements involve risks and uncertainties that could cause actual results could differ materially.
The results discussed in the state.
As detailed in the Companys annual report on form 10-K.
Securities Exchange Commission.
Today's call presenters are Mark Tryniski, President and Chief Executive Officer, and just sit there executive Vice President and Chief Financial Officer.
He joined by just it certainly.
Vice President and Chief Banking Officer for the question and answer session gentlemen, you may be.
Thank you call. Good morning, everyone and thank you all for joining our Q2 conference calls.
We hope all of you in your families are well.
Like most banks, we had a busy quarter that revolved around PPP loan deferrals and for us and acquisition as well.
We provided nearly $500 million of P.P.P. loans for customers and granted $700 million of deferrals.
Well the most significant impacts for the quarter was the change in our balance sheet, which grew by over $1.6 billion from a combination of PPP the student acquisition and significant stimulus induced deposit growth not surprisingly organic loan growth was negative for the quarter.
[noise], despite granting $700 million long deferrals over the past two quarters total active deferrals as a Friday were down 250 million and request for a second deferral had been very limited, which we hope is good news for the future [noise].
We are certainly starting from a very good point given current credit metrics, but don't expect unnecessarily sustain these levels as we move into the second half of the year.
Operating earnings were actually pretty good for the quarter as Joe will discuss in further detail with operating P.P. at our offering both this last quarter and last year's Q2, encouragingly, our benefits wealth and insurance businesses are all up year to date over last year on both revenue and an earnings base.
Yes.
Mr. Ben acquisition closed on June 15th would that conversion and integration going nearly flawlessly. We're excited about this in market transaction in the further strengthening of our Western New York footprint.
Loan and deposit retention have both been almost 100% and we got three consolidations done there already so we're off to a very good start.
Looking forward to the remainder of the year and into 2021, it's all about three things in my view credit the economic environment in interest rates, it's too early to forecast this credit cycle, but we should get more visibility in the second half of the year, we're starting from a position of strength not just with respect to credit, but also as it relates to.
Earnings capital and liquidity.
Economic environment is equally subject to uncertainties, but we did see significant improvement in consumer activity in the last half of the corridor.
A question for me is not just the near term challenges in severity, but more the longer term impact I'm consumer and business behavior, and the ultimate demand for financial products and services.
And we all know the current interest rate environment has the potential to create continued margin challenges going forward.
It's hard to predict whether stimulus for inflation will ultimately prevail. The current rate environment will make it increasingly more difficult for banks to deliver earnings Roe.
Despite these forward uncertainties and challenges I think CBS I is an extremely good stead as I said last quarter. There is no substitute for earnings liquidity capital asset quality core deposits in revenue diversification.
When I look at the fundamental financial strength. This company I remain highly confident that we're well prepared to manage the challenges that lie ahead into capitalize on the opportunities that are created as a result.
No.
Thank you Mark and good morning, everyone as Mark noted the earnings results for the second quarter of 2020 were solid in spite of the challenges related to the cobot 19 pandemic.
The company recorded 66 cents in fully diluted GAAP earnings per share for the second quarter, excluding five cents per share for acquisition related expenses net of tax affected five cents per share for acquisition related provision for credit losses net of tax effect due to Steuben acquisition political alluded operating earnings per share were 76 cents for the quarter. These.
Ultra four cents per share lower than the second quarter 2019 operating earnings per share of 80 cents due largely to the cold 19 pandemic and its related impacts on the company's operations. The company recorded $6.6 million in this provision for credit losses exclusive of acquisition related provision in the second quarter 2020 reflective of expected.
Losses due to weak economic conditions, the company's adjusted pretax pre provision net revenue increased five cents per share or 4.9% between comparable annual quarters, and three cents or 2.9% on a linked quarter basis I will touch on this do been acquisition in the company's balance sheet before providing a dish.
Details on the company's earnings performance for the quarter.
June 12, 2020, the company parts to Bend Trust Corporation, and its banking subsidiaries to Ben Trust company for a combination of stock and cash representing total consideration valued at approximately $98.6 million the acquisition extended the company's footprint into two new counties in Western New York State and against the company's presence at for Western New York.
They counties in which it currently operates in connection with the acquisition the company consolidate three forest event branch offices into existing community Bank branch offices and added 11 additional full service opposite to its current network. The company acquired total deposits a $516.3 million in total loans, a $339.7 million in connection with the two.
Transaction.
The company close the second quarter 2020 would total last $13.44 billion. This is up $1.64 billion or 13.8% from the end of the linked first quarter and up $2.7 billion or 25.1% from a year earlier, the very large increase in total assets over the last 12 months was driven by the third.
For 2019 acquisition of Cantor <unk> Bancorp second quarter 2020 acquisitions to ban.
Large inflows of government stimulus related funding PPP originations and other organic balance sheet growth.
General are they average interest earning assets for the second quarter 2020 of $11.11 billion was up $1.07 billion grew 10.6% from the linked quarter 2020, and up $1.68 billion or 17.8% from one year prior.
Ending loans at June Thirtyth 2020 were $7.53 billion. This was up $661.9 million for 9.6% from the end of the first quarter and up $1.24 billion or 19.8% when compared to June Thirtyth 2019.
The company acquired $339.7 million of loans loans. It must have been acquisition in originate $492.4 million a P.P. loans exclusive of these activities the company's outstanding loan balances decreased $170.2 million or 2.5% during the quarter due largely to a significant slowdown in business activities and then.
Endemic related shut down of non essential businesses and the company's northeast markets.
At June Thirtyth 2020, the carrying value of the company's available for sale investment Securities portfolio was $3.29 billion. This includes net unrealized gains of $163.1 million up from 155.3 million in net unrealized gains at March 31st 2020, and $36.3 million. It in that I don't really.
These gains a year earlier, the effective duration of the company's investment Securities portfolio was 3.3 years at June Thirtyth 2020.
The company maintained average cash equivalents during the second quarter 2020 of $823 million. This is up $708.3 million or 618% over the linked first quarter and $488.7 million or 146% over the second quarter of 2019.
Very large increase in cash balances was due to large inflows of government stimulus funding driving up the company's deposit liability switching to turn were invested overnight fed funds at an average yield of 10 basis points during the quarter very large increase of cash equivalents during the quarter placed a significant drag on the company's net interest margin and return on asset metrics in the second quarter.
Average total deposits were up $1.05 billion or 11.6% on a linked quarter basis due to see ban it stimulus and $1.61 billion or 19% over the same quarter last year due to see band stimulus and Kinderhawk as Mark how do we believe the company's capital reserves and liquidity along with diversified revenue streams are strong.
Credit record an experienced management team leaves us well prepared to doherty impacts of the cobot 19 pandemic the company's net tangible equity the net tangible assets ratio was 10.08% at June Thirtyth 2020. This was down from 10.78% at the end of the first quarter and 10.56% from one year earlier due primarily.
To a significant increase in assets the company's tier one leverage ratio was 10.79% at the end of the second quarter, which remains over two times, the well capitalized regulatory standard a 5% while the company's tier one risk based capital ratio total risk based capital and common equity tier one capital ratios were 17.1% 80.
8% and 16.1%, respectively reflective of the company's lower.
Risk asset base and high levels regulatory capital.
The company has an abundance of liquidity resources, an extremely well positioned to fund future loan growth companies funding base is largely comprised of low cost core deposits at June Thirtyth 2020, checking and savings accounts represented 71.7% of the company's total deposit base, the company's cash and cash equivalents net of opening reserves totaled one point.
0.2 $5 billion at June Thirtyth total borrowing availability at the Federal Reserve Bank was $259.8 million in total borrowing capacity at the federal home loan Bank was $1.8 billion.
The available for sale investments Securities portfolio was valued at $3.29 billion 1.62 billion of which was available for pledging it needed in total these sources of immediate liquidity exceeded $4.9 billion.
The company reported total operating revenues of $144.9 million into second quarter 2020. This represents a 0.8 million dollar or 0.5% increase over the second quarter 2019, excluding net gains on securities of $4.9 million.
A $3.7 million or 4.1% increase in net interest income between comparable orders were partially offset by 2.8 million dollar or 16.5% decrease in banking noninterest revenues and a slight decrease in financial services business revenues. The increase in net interest income was due to a 1.7 billion dollar seven.
18.8% increase in average earning assets between the periods offset in part by 43 basis point decrease in net interest margin a decrease in market interest rates and a significant increase in change in the composition of earning assets, including a 488.7 million dollar increase in average cash equivalence between the periods negatively impacted the company's net interest margin.
Total revenues were down $3.8 million or 2.5% on a linked quarter basis. The company reported a 4.3 million dollar or 24.7% decrease in deposit service revenues and a 1.9 million dollar or four per 4.8% decrease of financial services business revenues between would linked quarters offset in part by one.
1.9 million dollar or 2.1% increase in net interest income and he 0.5 million dollar 50% increase in mortgage banking revenues.
Interest income and fees on loans was up $4.7 million or 6.3% over the comparable prior year quarter.
Due to a 924.7 million dollar or 14.7% increase in average total loans outstanding.
And $2.9 million PPP related interest and fee income, partially offset by 33 basis point net decrease in the average loan yield increase in average the outstanding loan balances was due to the Kinderhook acquisition in third quarter 2019, pre cobot organic loan growth the Steuben acquisition in the second quarter 2020 as.
Wells as a significant increase in business lending due to $492.4 million of PPP alone loan originations during the quarter.
Interest income on investments, including cash equivalents decreased $1.8 million or 8.9% between the second quarter 2019 in the second quarter 2020. The decrease is reflective of lower market interest rates a significant increase in the proportion of low yield cash equivalent balances and he is zero point $8 million decrease in the company's federal reserve banks.
The annual dividend payment offset in part by a $265.2 million were 9.5% increase in the average book value of investment Securities.
Interest expense was zero point $8 million or 13.4% lower than the previous years second quarter, driven by a nine basis point decreasing the cost on interest bearing liabilities, partially offset by 971.9 billion dollar or 15% increase in average interest bearing liabilities.
The average cost of deposits was 17 basis points in the second quarter of 2020 as compared to 22 basis points in the second quarter of 2019 reflective of market driven rate decreases for deposits between the periods and significant increases in noninterest bearing deposits by comparison, the average cost of deposits during the linked first quarter 2000.
20 was 25 basis points.
The company reported $9.8 million and the provision for credit losses. During the second quarter 2020. This was comprised of $3.2 million of acquisition related provision due to this to ban transaction and 6.6 million of provision related to expected credit losses, largely due to the cobot 19 pandemic net charge offs for the quarter were zero.
Point $9 million. This compares to $1.4 million in the provision for credit losses, and 1.2 million in net charge offs recorded during the second quarter 2019.
On a linked quarter basis to provision for credit losses exclusive of the acquisition related provision increased $1 million due to weaker economic forecast and the continued financial hardship experienced by certain segments of the company's long customers.
The company recorded $52.9 billion in noninterest revenues in the second quarter 2020, as compared to 55.8 million in the second quarter 2019, excluding $4.9 million of investment security gains. This represents a 2.8 million dollar or 5.2% decrease in noninterest revenues between the periods.
$2.7 million at which is attributable to a decrease in banking related noninterest revenues.
A significant decrease in banking noninterest revenues was due to a $4 million decrease in deposit service and other banking revenues offset in part by $1.2 million increase in mortgage banking revenue.
The decrease in deposit service and other banking revenues was driven by precipitous drop in deposit transaction activity due to the mandated shutdown of non essential businesses in the company's northeast markets during the quarter.
Employee benefits service revenues for the second quarter, 2020 were 0.3 million or 1.2% higher than the prior year second quarter due to increases in plan administration record keeping an actuarial service fees.
Insurance service and wealth management revenues were down zero point $4 million or 2.4% from the same quarter last year.
Total noninterest revenue decreased $5.7 million or 9.7% on a linked quarter basis. This was driven by 4.3 million dollar 24.7% decrease in deposit service and other banking revenues.
And 1.3 million dollar or 5.1% decrease in employee benefits service revenues is 0.7 million dollar or 10.8% decrease in wealth management revenues, partially offset by 0.5 million dollar or 50% increase in mortgage banking revenue and a slight increase in insurance service revenues.
Excluding acquisition expenses operating expenses decreased $2.5 million or 2.7% from 90 million in the second quarter 2019 to 87.5 million in the second quarter 2020.
The decrease in operating expenses between the periods was largely true largely attributable to the decreased levels of business activities due to the cobot 19 pandemic.
Is this development and marketing expenses decreased $1.6 billion or 52.1% between the periods other expenses decreased $2.1 million or 33.6% driven largely by decreases in employee business expenses.
Salaries and employee benefit expenses increase your point $7 million or 1.3% benefited from a 0.8 million dollar 21% decrease in employee medical expenses due to reduced provider uses utilization on a combined basis data processing and communications expenses legal and professional expenses and.
Occupancy and equipment expense increased zero point $9 million or 4.2% between the comparable quarterly periods.
Intangible asset amortization expense decrease your point $4 million or 9.7% between the periods on a linked quarter basis total operating expenses, excluding acquisition expenses decreased $5.8 million for 6.2%, primarily due to a 3.6 million dollar 6.1% decrease in salaries and employee benefit.
A million dollars or 9.2% decrease in occupancy and equipment expense and a $1 million were 40.2% decrease in business development and marketing expenses the effective tax rate for the second quarter 2020 was 20.3% up from 20.2% in the second quarter 2019, and 18.8% in linked for.
First quarter 2020.
From a credit risk and lending perspective, the company has taken actions to identify and assess and assess its cobot 19 related credit exposures based on asset class and borrower type with respect to the company's lending activities. The company implemented a customer forbearance program to assist both consumer and business borrowers that may be expiring experiencing finance.
Hardship due to opened 19 related challenges at June Thirtyth, 2020, approximately 700 million or 9.3% of the company's outstanding loan balances were under active corporate related forbearance as of last week. The outstanding loan balances under active for Vance dropped below $150 million. The company anticipates at the end of the third quarter the number of.
Active forbearance agreements will decrease further, but the number and amount of delinquent loans will likely rise.
At June Thirtyth 2020, nonperforming loans decreased two 0.36% of total loans outstanding. This compares to 0.39% of total loans outstanding at the end of the second quarter 2019, and 0.46% at the end of the linked first first quarter of 2020 total delinquent loans, which includes an opera.
Performing loans in loans 30, or more days delinquent total loans outstanding were 0.72% at the end of the second quarter 2020. This compares to 0.87% at the end of the second quarter 2019, and 1.11% at the end of the linked first quarter of 2020, the delinquency status for loans on payment deferment due to the co.
At 19 financial hardship for reported at June 32020, based on their delinquency status at the end of the first quarter and less subsequent to March 31st 2020, borrow may all required past two payments to bring the loan to current status.
The company's allowance for credit losses increased from $55.7 million or 0.81% of total loans outstanding at March 31st 2000, $20 million to $64.4 million or 0.86% of total loans outstanding at June Thirtyth 2000, $28.7 million increase the allowance for credit losses included three point.
$6 million, an additional reserves due to the steuben acquisition and $5.1 million due to primarily to expected cobot 19 pandemic related losses, the allowance for credit losses at June 32020 represented approximately 10 times the company's trailing 12 months net charge offs.
Looking forward operationally, we will continue to adapt to the changing market conditions.
Remain very focused on asset quality and credit loss mitigation, we anticipate assisting the substantial majority of the company's PDP borrowers forgiveness request during the third in the fourth quarters of 2020, the eligibility of the borrowers forgiveness request in the Sps ability to provide loan forgiveness in a timely manner is uncertain at this time for these reasons it is uncertain as to tie.
I mean for which the company's remaining $13.1 million net deferred PTP fees will be recognized through the income statement. It seems likely that the pandemic will continue to negatively impact the level of business activity in employment. These factors will continue to adversely affect certain bars ability to service that may increase loan delinquency and credit losses levels for the remaining two.
Quarters of 2020 potentially be on.
Loan demand may be impaired by weak economic conditions were also certain uncertain as to whether or not the high level of deposit liabilities. We maintain spent down or increased further by additional stimulus. We do expect the company's deposit service revenues to increase slightly in the third quarter barring another shutdown of non essential businesses and the company's market footprint, Although we remain focused on.
Containing operating expenses it is likely that they will increase in the third quarter as the company has resumed certain marketing and business development endeavors, the company's dividend capacity remains strong.
According the company expects to continue to pay quarterly dividend consistent with past practice.
That will lead to Cobot 19 crisis has changed near term outlook for society in general as follows the expectation expectations around economic conditions with this said, we will continue to support our stakeholders and thoughtful discipline and compassion of men are believed the company is well prepared to towards effects.
Thank you I'll now turn it back to our hosts call to open the lines for questions.
Thank you.
We will now begin the question answer session to ask your question you May Press Star then one on your touch sense.
If you're using speakerphone, please pick up your hands that we're progressing Mickey.
We try your question. Please press Star then to at this time, a pause momentarily to assemble there.
And our first question today will come from Alex Twerdahl with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Pointing out good morning out.
First question just on the additional reserve build this quarter was that mostly driven by just the change in the economic scenario and puts the model or was there any portion of it that was actually related to any loan downgrades in second quarter.
Alex It's a good question most of the.
The reserve build was.
I was really due to its changing economic conditions and continued challenges with the economic.
Forecast as we as we kind of look ahead, but we also tried to.
Estimate what would happen to delinquency given the level of.
Up deferrals, which is really sort of a non economic qualitative factor.
We have seen some modest migration in risk ratings.
But.
Significant yet we expect that in the third in the fourth quarter. However that we'll continue to see some.
Probably some migration downward relative to the risk rating and probably higher level of delinquency, but are.
We'll continue to monitor that and monitor our customers to determine if there's additional provision requirements in the third in the fourth quarters.
Okay. Thanks, and then I appreciate all the additional color that you guys provided in this accompanying slide presentation that some of the more at risk portfolio is but I was wondering if you can just kind of help us all on the line I understand just sort of where your economies are in upstate New York.
In terms of reopening and then kind of as you look at some of them.
Higher.
Categories on that list of that risk the retail in the lodging.
Any sense for sort of what sort of the utilization of some of these properties are right now so we can kind of.
Get a better sense for whether or not.
Kind of where the risks or the kind of things, we should really be focusing on in terms of credit will be.
Yes, its mark I would just.
Broadly.
Yes, Joe.
Serving maybe to comment a little more detail, but say that are our markets. We were fortunate we've had lower infection rates.
Almost across all our markets even.
And in every state essentially in lot of that driven by the fact that are less non metro cloud less metropolitan.
So I think that was a that's been a help for us that there has been the severity of.
Infections, and Lockdowns and the related related impacts.
Most of our markets are are open for business.
Except for certain high risk business is still.
Like.
Jim.
And bowling alleys and some other things.
But most most of its open.
Which which has been good clearly it was interesting the trend in.
Which is really directly tied to economic activity, which is which is debit swipes. So we I mean, we can pretty clearly see when we had to kind of the lock down across most of our markets.
In what was that April I guess.
The debit activity.
The norm us.
Also overdraft as well, but then kind of recovered pretty nicely when things started to open back up.
So.
It's hard to predict right now I mean, everything looks pretty good credit metrics are good.
The the fact that we I mean I was surprised that are deferrals went from 700 to 150.
And then that we've had very few requests for.
Second deferrals, which we're going to address on kind of a case by case basis in terms of either yes or no.
You know when you look at even sort of like the at risk portfolio like retail is a good example, a lot of its essential businesses that have reopen so.
I think.
Cautiously optimistic about some of the credit I think.
Look at the.
Lodging portfolio.
Probably one that's a little more at risk for US what is the John a couple of hundred million.
That's probably a little more at risk. However, if you look at what are.
Lending structure is like in terms of equity and you look at the occupancy kind of rates in the hotel industry have been coming back which is good hopefully that continues that's probably one of our more at risk.
Properties I think also again, Joe correctly from Rob, but Thats, one of the sub sectors, which has seen more a higher percentage of request for deferrals.
So I think.
We seem to be doing okay. I mean, my Mike can you just theres so much uncertainty around not just kind of the economic damage has already been done and what does that look like because we don't know that yet because there has been so much stimulus. It's just it's very difficult to predict what's going to happen when the stimulus wears off so I think.
The damage the economic damage is already done is difficult to predict and I think the future is is equally or maybe even more difficult because the variability in terms of which where things go.
I think if you look at what they're doing the vaccine.
Total fast track on that and I would be surprised given the different vaccine platform as the amount of money and you know.
That whole process run that if there is some kind of good news and politically speaking I would not be surprised if it happened before the election.
So.
You mean.
It's hard to predict but.
From where we sit right now we were pretty good shape I think we have not taken the.
The provisions that some of our peers have.
I think some of that.
We kind of follow our model.
And some of I think some of the charges that have been taken look almost I think Joe This is George speculative.
You know to send the message that hey, we have the reserves, if we need to buy and we kind of a different approach, which was well take the provision we need to take based on what the model size and what we're seeing in our markets.
Without kind of trying to speculate on where the where where things Michael but I think business to circle back to your initial question. Alex I think business is okay. We continue to have kind of a lower infection level that a lot of other places which has been good for us and good for our customers as well.
So.
[music].
I think if we did some kind of break here in terms of either the infection or vaccine things will be great. If we have to kind of re lock down if theres a surge in our markets. There is a really down that we'll we'll take a step back. So I think there's lot of unpredictability, there, but Joe I don't know if you want to comment just on more of a kind of customer level, here's what we're seeing and.
Selling and maybe even comment on the lodging portfolio because that seems to be where most of the deferral requests have come from or so.
Let me just I'll touch on both portfolios excuse me.
So on the retail portfolio.
Particularly the non owner occupied Sierra.
Just to put some context around this so the top 10% in top to top 10 clients that made a bit portfolio approximately $60 million and 41% of this.
Occupied.
Much of that much of that.
National or regional play.
And they're not malls Cesar visa or.
Large properties will multiple stores with their own whether on the.
The LTV in that portfolio.
For the largest top 10, 71%.
And just from 79 at the high to do an average low.
40%, so nice diversification from a loan to value perspective in my two cents. What we don't know is would impact the online shopping going ahead is it going to continue and therefore, you're not going ahead of the people going to the to the physical locations the physical stores to shop still uncertain.
And on the hospitality as Mark said it is our largest.
Just to put numbers around that 53%.
[music] impacted dollars lodging.
In 25% impacted dollars retail so 75% impacted when those two portfolios for us.
The numbers of the numbers of loans that were impacted.
On 23, 21%. So we're keenly focused on those two portfolios and I'll tell you that the the deferrals to first ones in.
First of all around the first one is coming in second go around.
The hospitality properties and we're taking one one of the time I'll, let you know that fit.
Of the most current deferrals that we're doing so the second round deferrals.
I think it's important to understand the second call deferrals, 50% of then received a principal interest deferral.
10% of them almost 10% of them are going to be making a modified principal payment and interest payment and the remaining balance of 40 or 42%, we'll have a well be making an interest payments. So a good for says or 50% of our portfolio was going to be making some level of payment whether its interest or modified principal and interest payment.
And the other 50% Susan.
He said.
On the fee and I'd deferral.
With respect to credit quality, we approach the first round the first the first the through period.
You worry.
Sure.
Pass credit we downgraded do.
Much credits on that on the first of all wrong, we're looking harder and harder at the risk ratings.
The second go around and we're moving the credits is a we deem appropriate.
I think Joe just to add one thing to that if you look at the lodging portfolio the.
The current loan to value on that portfolio.
It's 55%.
Well, there's there's some fairly good.
Equity coverage there in that portfolio and these are for the most part good developers with good flatter said.
So I died by.
I don't lose the sleep over where we're going to be were where we're going to end up in our lodging portfolio.
Great that was very helpful answer and then just a final question for me just can you remind us.
What your dividend policy is obviously, you've got plenty of coverage today, but remind us or the policy is in your willingness to continue increasing it on annual basis.
Especially at the revenue environment continues to be challenged.
Sure.
Well, we think the dividends important.
We think it's important to to be balanced in that dividend.
Don't want our.
It was a balance between return to shareholders of capital and capital retention to use in the business. So I think it's important that earnings grow over time. So that you can grow that dividend because you can't just raise the dividend without growing earnings and.
As you know and we're proud of we've raised the dividend every year for 27 or 28 years something like that.
So.
That that certainly were bias towards growing dividend.
But also mindful of.
That balance between capital retention.
And return to shareholders.
But I guess said another way you guys it'd be willing to raise the dividend.
At least for year to even an environment, where revenues and earnings could be going down just given how comfortable are bigger capital position today that is that fair way to think about it.
It may be I think it's difficult to predict Alex because I think a lot depends on.
Where the credit results and up what happens.
At least in our estimate out into the foreseeable future with with margin in the interest rate environment.
What happens the tax rates, it's not inconceivable that we have a different tax structure.
Then we then we then we currently have so when we take all of those things into consideration before the the board makes judgments on.
On the dividend the dividend policy.
So.
All of those it's a little bit to compensate I just I, we don't want to get into a position where were our our we're willing to kind of let's say tolerate.
Near term payout ratio this either a little lower or a little higher than kind of historically ideally like it's time to be in the 50% range.
We have high earnings in low organic growth, so we don't need to retain as much capital.
To to capitalize organic growth.
So thats a very good position to be in but I would say.
You asked the question about policy.
I think.
40% to 60% I would say is kind of a reasonable range for us than we'd like to be in the middle of that overtime to things do happen for different reasons.
Whether its tax rate changes or the impact of M&A M&A or other operating things that could impact kind of your earnings and so there's a theres a lot of factors in play I think our bias is towards continuing to raise the dividend, but I think if we.
If we saw severe.
Storm clouds on the horizon for some reason the the pandemic gets worse the economic outlook.
Comes get worse as a result, the tax rates go up.
And we find ourselves where our current dividend policy is substantially outside.
What are kind of preference would be in.
I think we would probably do that on the short term on the short term basis, but.
So I would say payout ratio of 40% to 60% give or take is where we want to be with a bias towards raising it if we can and we believe that it's it's sensible.
Thank you for taking my questions.
Thanks, Alex Thanks.
And our next question comes from.
When spending and that's good.
I had.
Good morning, guys. Good morning are there.
First I wanted to start with a couple follow ups on the lodging portfolio and I. Appreciate the detail you gave there and it seems like you're not too concerned.
Concerned about this point and you mentioned the strong LTV ratios.
Curious it at this point can you give us a sense of distribution of the primary uses either kind of business or recreation.
For that portfolio and also just any insight you might have into the current occupancy rates across the portfolio.
Yes, so so Eric we occupancy rates there.
Our taking off was still not where they need to be so I would say there they are in 35% to 40% occupancy by and large.
Mm.
Whether its.
Whether its business or.
Staycation traveling I.
Have a feel for.
What might be driving the.
Driving the occupancy.
Anecdotally.
And speaking to some of our clients, particularly in.
Destination take marketplaces.
They're seeing a pick up over the last.
Over the last couple of weeks with people give you a little bit more comfortable with with.
And the wary of the masks.
And.
So there is in the extensive be hoteliers are going to to keep in properties Queen and sanitize. So there's there's certainly those locations that are destination, they're seeing a much larger pick up in occupancy bid would in a more business environment and remember most.
Most businesses.
Yes.
Lots down employees is that a lot of travel there hadn't been allowed in travel.
Hopefully that'll change your shortly we'll see some business pick up as well.
Thanks for the color there and then on that smaller piece, the roaming and boarding houses I guess what are your sense for the universities and colleges that my support those for those reopening in the fall and what that how that portfolio might trend.
Well.
As we sit here today, there's an awful lot of talking about the opening up.
And bringing bringing students back on campus.
With that happens.
Because theres a population is how it's in that it's in that portfolio again, I would tell you that.
We pick solid sponsors with.
Alternative cash flows and liquidity.
And the ins portfolio no different.
You get some helped by having them bring brings assumes that would be every terrific.
Then switching gears to that net interest margin and start quarter seems like Theres, a couple variables that can impact it.
You'll get a full quarter impact of that do then coming in which had a higher net interest margin and then I guess theres the questions in terms of excess liquidity how much you continue to hold and then also the impact of the PD Lones PBP loans as well as the related deposits just curious.
Thoughts for what we might see the net interest margin how it might kind of move relative to Twoq you at this point.
Okay. Erika this is Joe so terrorists I could take that question.
Yes, I think you've you've identified all the variables that that could impact us in the third quarter.
We have you kind of Peel back the excess.
Cash and cash equivalents, we had on the balance sheet in the second quarter of 20.
You know in sort of just call that a call that a push for the quarter in other words basically a neutral effect.
The core margin was down about six or seven basis points, who is the high 300, fiftys, excluding all that excess liquidity.
In the quarter I'm, so that so our core margin did a road a little bit from the first quarter two the second quarter with respect to the third quarter, if we do.
Recognize and I mentioned $13 million of net deferred PPP income if we recognize.
Some of that I think you'll see the posted margin or the printed margin go up a bit in the third quarter.
Peel that back in enrolling the Steuben transaction I would probably characterize the third quarter.
Net interest margin expectations is about a par a with the second quarter.
Obviously, the continued flat and a very low yield curve will present challenges as as we move ahead went to the fourth quarter and into the first quarter of next year.
We have like a little slope, obviously as all banks would but right now that's going to continue to two at sort of put a lid on the ability to grow.
Net interest margin, even if we see.
Even if we start to see some modest modest loan growth in the second half of the year or even if it's.
So little bit of growth I think we'll generally.
I want to be difficult to really grow the margin because of the because of low interest rate environment.
That's helpful. Thanks, Joe and then.
One last one as I think about.
The last year, so close to Kinderhook, and then do that and.
Certainly the M&A environment has changed a little bit we saw a few transactions and to Q, but certainly down from historical standards.
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Advantageous situation are you still have a very strong currency relative to many other banks out there today, just curious how you're thinking about.
M&A today, and what the pace of discussions are relative to past quarters.
How many how you would evaluate those targets today, given that the unknowns and that the economic outlook.
Yes, No fair question I I I think we.
The way we look at M&A is its.
Given we operate in low growth markets M&A is not unimportant in terms of our ability to deliver double digit returns to shareholders over time in the model formulas fairly simple, it's let's get 3% to 4% organic lets get 3% to 4% M&A overtime.
And let's payout.
A decent dividend to shareholders and Thats a double digit return. So it's a it's a fairly simple formula maybe a little harder the executing real life than the formula but.
M&A is an important part of that so we never not stop thinking about.
Hi value opportunities to our shareholders, whether that's in the.
The bank space or the financial services Slash non bank space.
And so we would continue to look at those opportunities as I said last quarter.
We would certainly and are always in the process of.
Having conversations and then.
Well you waiting opportunities I think it's kind of slowed down a little bit obviously.
Over the last.
Few months.
I think there there's a there's theres green shoots starting to appear.
I, just I think that a lot of a bit of of banks that maybe aren't starting from a position of strength, let's call. It are going to have a harder time, particularly if the you know there's they don't have enough capital.
They.
They are there if their interest margin is probably not going to grow.
Our in to the future.
And so I think you're going to see there they've gotten beaten down on on price and multiple and so I think theres going to be it may it may take into 2021 for this dynamic to play out, but I think you're going to see a fair bit more M&A opportunity at some juncture.
We're in the future because I think you're going to see again, thanks art starting from a position of strength.
Looking out into the future.
Going forward, a year or two and concluding that they're going to have a very difficult on to create incremental value to shareholders. So I think that we there'll be a fair bit more M&A opportunity, but it's something for us it's ongoing it doesn't.
Matter actually in terms of the cycle.
We usually have less success when the trees are drawn to the sky, though so.
No.
I'm, not saying I'm encouraged but but but this is the environment, where we seem to historically have had somewhat better opportunities than the other environments. When the trees are drawn to the sky. The multiples are already high and prices go even higher and then we we don't want to play in.
The overpaying space so.
But I do think as you mentioned our currency.
Even I.
I mean, we had a reasonably good.
Relative advantage going into co bit now, we have an even greater relative advantage.
So.
Hopefully that will have the the opportunity.
Eric for that to help us hopefully we get that opportunity.
We'll see but in some of this no. That's that's an important element of our our broader strategy as I as I said in something that we'll continue to to dialogue around and we're always we're always talking and we're always evaluating.
Thanks, So much for all three you for taking my questions.
Thanks there.
Your next question comes from Russell Gunther with da Davidson. Please go ahead.
Hey, good morning, guys.
Good morning Russell.
A quick follow up on we think about sort of that hundred 50 million pro forma deferral number could you give us a sense for how that breaks down what what type of loans are exposures that is primarily consisting of.
Yeah, I'll take that Russell so.
A breakdown between.
Various lines of business, if you will so.
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Business.
Loans about a $130 million.
The.
Consumer mortgage home equity consumer direct.
Indirect makes a difference in oak would've been over 13, other $50 million and keep in mind that are approved.
Particularly around the consumer product is then we would participate in providing the way round one deferral.
When it comes around too.
We will see very few I wouldn't seem to have a very few.
Second round.
Consumer deferrals be Randy will use other loss mitigation type.
Because the handled and so as we sit here today 130 in business and the differences in consumer portfolio.
Okay, Great and then of the 130 million that in the business. If we think about it in terms of.
The covance sensitive sectors that you guys identified on the on the slide how how would that breakdown.
So.
You have lodging and retail.
Percentage basis, 53% lodging, 25% retail.
Are you factoring any drop drastically manufacturing.
7.5% many discontinued go down.
Insignificant.
Sure.
Now that's very helpful. Thank you so much and then.
Just in terms of how you guys are thinking about this exposure I mean are these.
Credits that you believe our at risk simply because they are in a forbearance program and therefore that is captured in your current reserves or is this more of a risk migration that you referenced over the next couple of quarters and depending on that outcome.
It would impact feature provision.
So I can.
Russell This is Joe the terrorists.
Regarding the future provision I think.
We'd like to have a little more visibility relative to you know when we come through this first round the deferrals, what the second round will look like.
I think also as we get toward the end of this third quarter, we'll have better sense of true delinquency.
Well sort of en masse that if you will buy not granting.
You know deferrals in the second round and if we kind of run that through our model and it results in additional provisioning.
We'll record that I think Mark Staley, you know we wanted to be very went to rely on our model and create the expected losses, not the speculative losses and quite frankly, the visibility as it has not been great.
Simply because there has been a lot of stimulus injected into the economy for that matter into the bank accounts of our of our depositors'. So we do think theres. Some pent up repayment capacity there how long that last time will tell and for that matter. If we have a second round to stimulus will there be additional.
Ability to.
To cover those cover those payments. So I think if if we started to see higher levels of delinquency some additional risk migration.
Third quarter will provision appropriately, but we're trying to capture everything that's that's expected at this point.
But a lack of visibility just makes that a little bit difficult to determine what the future provisions might be.
But you know certainly the credit metrics at the end of the second quarter I'll look pretty good from an NPH perspective, and from a net charge off perspective, so that was a that was encouraging.
Great. Thank you for that Joe.
Last question for me would be around the kind of run rate expenses you mentioned.
You'd expect them to move a bit higher for a number of reasons next quarter, but you could you give a sense in terms of where you would expect that to shake out considering.
Just some normalized migration there contemplating any cost saves from sea Ben.
Just how that Threeq, you noninterest expense number might look.
Yes, that's a that's a very fair question so our operating.
Opex run rate prior to co via that we were kind of calling in the 90 $394 million range in a quarter exclusive of Steuben.
Obviously, the the world changed on is very quickly. So we were able to recognize significant savings on the operating expense line item, particularly into second quarter out some of that was a payroll based it was you know medical plan utilization.
Virtually all the travel if you will have a lot of our track should say employee travel and those cost came down significantly as did our.
Business development and marketing expenses, so sorry going back so we're sitting at 87 and a half million dollars this quarter, which was lower very low relative to what we expected our full tilt run rate to be which was 90 394 are forced to ban.
What I would expect is that in the third quarter, we're going to see a significant increase in the payroll and medical costs were going to have higher utilization. We have an extra payroll day. A couple other items are going to drive up the the payroll costs were resuming our business development activities.
Relative to this second quarter, we were down about a million and a half I believe over this same quarter last year. So we're basically kind of picking back up on the business development.
Other expenses will start to come back I think the travel related and expenses will come back a little bit slower as the economies open up so our expectation for the full tilt run rate, including Steuben.
It was $95 million to $96 million I don't think we'll be at full tilt necessarily in the third quarter.
But once we get back to full tilt assuming there is a vaccine I think thats a fair.
Fair run rate, so I would expect us to ramp up from 80 to 87.5 million at some point in the next couple of quarters back to that 90 $596 million level.
Thank you very helpful. That's it for me guys. Thanks again.
Thanks Russell.
Our next question comes from Matthew Breese with Stephens, Inc. Please go ahead.
Good morning.
Morning.
Just curious on the on the deferrals down to 150 million the cure rate on that is obviously very solid is the decrease all attributable to.
Resumption of payment or was there any transfer to nonaccrual or TDR type categories.
It's all in resumption of payments.
The deferral period coming that come and gone.
Understood Okay.
And then Joe you mentioned on.
In regards to Threeq you NIM.
Now that you would you might be able to just hold par all things considered.
Were you referring to the the reported NIM this quarter of 337, the whole par or the liquidity adjusted NIM in the high 300 Fiftys.
Yes, no at this very fair question, so liquidity stays where.
It is in the third quarter relative to where we were in the second quarter. The you know that the NIM at 337 is expected to stay about there are 337. So is the core number was closer it was a high threefifty is about 357.
So the core NIM I think would also hold up very similarly in the in the third quarter.
So both I think would hold in the third quarter all things considered.
Okay does that also apply.
Net interest income expectations in this 92 million can can hold for awhile and then secondly longer term what is your view on ultimately deploying that liquidity how long do you think that'll take.
Well I think that liquidity question is.
On the very uncertain at this point I mean, I would expect that some of our.
Some of that cash that's sort of pent up on the in the depositors.
Accounts will start to run off potentially just because the tree activity is going to pick up commercial pick up.
They're going to begin to make some loan payments.
Kind of Conversely, if there is a second round the stimulus sell reload effectively on a and some of that that liquidity.
So that's that's a tough call to make relative to which direction it's going.
And as far as the opportunity to deploy that.
The present time those opportunities are fairly limited.
The yield curve is very flat at this point in time and it really hasn't been a great a trade if you will.
On the longer ended the curve if the fed continues to.
Manage the yield curve al to 10 years and keep rates very low there will be challenges relative to deploying some of that.
Some of that excess liquidity, but.
Barring another round of stimulus I would expect some of that to two to trickle out over the coming quarters as consumers start to spend that and pay down debt.
I think at 430 today, there is an announcement relative to some proposals on on the next round the stimulus in my understanding is.
Parties are kind of far apart so out but that will help determine what the liquidity profile will look like in the coming quarters.
Okay Alright.
Last one.
Yeah. The employee benefit services line has held up really well see why it's much more stable than I would've expected and I always thought this business was assets under administration driven.
Is that the case or the fees more contractual versus a way and then is the $24 million to $25 million quarterly run rate is that is that something we can use going forward.
I would say, yes, it's it's it's it's much less business is much less dependent on market equity market performance than the wealth management business.
So.
We expect that business.
To to.
Continue to grow modestly overtime.
As it as it as it has there is there is a certain element of that business not sure exactly what the percentages you ought to know if you know at but of it is directly tied to the market, but it's it's not that much right.
So in the business is doing okay. We continue to win opportunities and we continue to organically grow.
Some of those those core businesses that are in that are in good markets. So I would expect to.
Certainly the second half of year, and I think we had some I'll call them deferred wins that we expected to book.
Or close in the first half of the year that didnt happen because of Cove. It that are now expected to close in the second half of the air So there might be a little bit of.
Pent up.
Revenue opportunity in the second half of the near as well, but we would expect those businesses to continue to.
You know to do okay, regardless of equity market conditions.
Got it that's all I had thanks for taking my questions.
Thanks, Matt Thanks.
And this will conclude our question and answer session I'd like to turn the conference back over to Mr. training for any closing remarks.
No nothing further thank you call out. Thank you everyone for joining and we will talk to you again in October enjoy the rest of your summer. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.