Q2 2020 Banner Corp Earnings Call
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I would now like turn the conference over to Mark Grescovich, President and CEO. Please go ahead.
Thank you Kate and good morning, everyone. I'd also like to welcome you to the second quarter 2020, <unk> earnings call for Banner Corporation.
As is customary joining me on the call today is Rick Barton, our Chief Credit Officer.
Joe Rights are cheap commercial credit officer, Peter Carter, our Chief Financial Officer, and Rich Arnold our head of Investor Relations.
Rich would you please read our forward looking safe Harbor statement.
Sure Mark.
Good morning presentation today discussions banners business outlook I won't include forward looking statements. Those statements include descriptions of management's plans objectives, our goals future operations products or services forecast the financial or other performance measures and statements about banners general outlook for economic.
Other conditions. We also may make other forward looking statements in the question that's or period. Following management's discussion. These forward looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today.
Especially on the risk factors that could cause actual results could differ are available in the earnings press release that was released yesterday and I recently filed form 10-Q for the quarter ended March 31st 2020.
Forward looking statements are effective only as of the date, there made and better assumes no obligation to update information concerning its expectations.
Okay.
Thank you rich.
It's certainly been an interesting first half of 2020 and I Hope you and your families are well as we all battle, but cobot virus and its effect on our communities and the economy.
Today, we will cover four primary items with you.
First I will provide you a high level comment on the quarter.
Second the actions banner continues to take to support all our stakeholders, including our banner team our clients our communities and our shareholders.
Third Rick Barton will provide comments on the current status of our loan portfolio and accommodations, we have made to assist our clients.
Finally, Peter counter will provide more detail on our operating performance for the quarter and the continued build of our loan loss reserve associated with the estimated economic impact of the covert virus on our clients and capital actions taken in the quarter consistent with our longstanding strategic price.
Already.
Having a moderate risk profile.
I want to begin by thanking all of my 2100 colleagues at our company that are working extremely hard to assist our clients and communities during this difficult times.
Banners lived our core values summed up as doing the right thing for 130 years. Good is critically important that we continue to do the right thing for our clients our communities our colleagues our company and our shareholders to provide assist consistent and rely.
I will source of commerce and capital through all economic cycles and change events.
I'm pleased to report that is exactly what we're doing.
I'm very proud of the entire banner team that are living our core values.
Now, let me turn to an overview of the second quarter performance.
As announced banner Corporation reported a net profit available to common shareholders of $23.5 million or 67 cents per diluted share for the quarter ended June Thirtyth 2020.
As compared to a net profit to common shareholders, a 47 cents per share for the first quarter of 2020 and $1.14 per share in the second quarter of 2019.
This quarter's earnings were impacted by a number of items, including the allowance for credit losses build based on the estimated impact to the cobot virus on the economy.
Strong mortgage banking revenue and a net change in the fair value financial instruments.
Peter will discuss these items in more detail shortly.
Directing your attention to pretax pre provision earnings and excluding the impact of merger and acquisition expenses cobot expenses gains and losses on the sale of securities and changes in fair value of financial instruments earnings were $57.9 million for the second quarter two.
The other 20.
Paired to $53.1 million in the second quarter of 2019, an increase of 9%.
This measure I believe it's helpful for illustrating the core earnings power a banner.
Second quarter 2020 revenue from core operations increased 6% to a $147.3 million compared to $139.4 million in the second quarter of 2019.
We benefited from a larger and improved earning asset mix a good net interest margin and good mortgage banking fee revenue.
Overall this resulted in a return on average assets <unk>, 0.68% for the second quarter of 2020.
Once again, our core performance. This quarter reflects continued execution on our Super community Bank strategy that is growing new client relationships, adding to our core funding position by growing core deposits and promoting client loyalty and advocacy through our responsive service model.
To that point, our core deposits increased 34% compared to June Thirtyth 2019.
Non interest bearing deposits increased 44% from one year ago and represent 44% of total deposits.
Further we continued our strong organic generation of new client relationships again this quarter.
Reflective of the solid performance, coupled with our strong tangible common equity ratio, we issued a dividend of 41 cents per share in the quarter.
Also in light of the uncertainty in the future economic climate, we have continued the suspension of our share repurchases.
Well, we have limited operations in our branches our workforce has been mobilized with nearly 60% working effectively remotely and the remainder available for in person meetings by appointment working our drive-thrus, ensuring our ATM remain accessible when functioning and others performing API.
Durational duties.
We have also created special programs for employees deemed worksite essential and we're providing additional paid time off for exposure or sickness.
To provide support for our clients. We have made available several assistance programs. These include weight penalties for early IRA distributions up to $100000 and C. D withdraws up to $25000 and increased daily limits on mobile check deposit and ATM withdrawals.
Yeah.
Further banners provided SP, a payroll protection funds totaling $1.12 billion for 8665 clients and provided deferred payments or waived interest on 3314 loans totaling $1.1 billion.
Finally, we have made significant contributions to local and regional nonprofits and provided financial support for emergency and basic needs and our footprint.
Let me now turn the call over to Rick to discuss trends in our loan portfolio and his comments on banners credit quality Rick.
Thanks Mark.
Since our first quarter call banners bankers and credit risk managers have Dennis appeared job of dealing with the kaleidoscopic environment created by the Combet 19 pandemic.
From handling the unprecedented volume.
PPP loan requests to managing stressed existing client relationships.
Work their work has been focused.
And executed with calm precision.
And on top of those challenges they have participated in a series of deep dive loan portfolio reviews.
I have allowed us to gauge and measured the credit risk being created by the pandemic.
It is a humbling experience to work with them each and every day.
With that said the balance of my remarks this morning.
Will include the usual recap of the company's credit metrics and loan portfolio and detail on are continuing response to close at night team.
When reviewing our second quarter credit metrics it needs to be remembered that they have been held pipe. Most alone deferrals, we have granted to many of our customers.
And the various fiscal stimulus programs enacted during the quarter.
Delinquent loans in the second quarter decreased 31 basis points over the linked quarter and total 0.35% total loans receivable.
This compares to 0.40% as of June Thirtyth 2019.
This metric in particular has been the beneficiary of our deferrals in fiscal stimulus.
The company's level of adversely classified assets did spike during the quarter as we proactively downgraded loans in early impact sectors and many of the loans that were put into deferral.
This is in keeping with our culture a proper risk recognition.
Our nonperforming assets decreased during the quarter from $46.1 million to $39.9 million.
Which is reflective of the continued strong collection activity by our seasoned workout group.
Non performing assets represent 1.28% of total assets as of June Thirtyth.
And include $37.4 million, nonperforming loans and $2.4 million scenario and other owned assets.
At 331 2020.
Non performing assets were 0.36% of total assets.
The second quarter loan loss provision was $29.5 million compared to $21.7 million for the first quarter.
The drivers behind Us Hcl provision, where they already mentioned loan downgrades $12.8 million.
Changes in the Moody's economic forecast, we used in our seasonal model Cecil model $5.7 million.
And management driven qualitative adjustments.
$7.4 million.
After the provision the sale reserve totals $156.4 million or 1.52% to total loans.
Net of PPP loans in loans held for sale. The reserve is 1.71% of all remaining loads.
Compares to the reserve of 1.41% for the linked quarter.
The reserve for credit losses currently provides significant coverage of our nonperforming loans at 425% up from 299% last quarter.
Loan losses of $4.3 million during the quarter were partially offset by recoveries.
$841000.
On an annualized basis. This equates to a loss rate of 16 basis points when PPP loans are excluded.
The size of the makeup of banners loan portfolio changed a little during the second quarter of 2020.
When PPP loans totaling $1.1 billion are excluded from total loans.
Last quarter, we emphasized the pre pandemic moderate risk profile of our portfolio.
Yeah positioned us well for the emergence of the credit cycle.
There is no need to restate those comments this morning other than to note that our approach to credit management and underwriting remains unchanged.
Through requiring it cobot 19 analysis for all credit actions.
The rest of my comments. This morning, we'll focus on banners response to the pandemic and provide details on higher risk portfolio segments.
We have already discussed the PPP loans made 90% which were to existing clients.
We are now preparing for the loan forgiveness stage this program.
And our anticipation that this is that this will be successfully executed.
In response to the pandemic.
We granted payment relief on 3314 loans totaling $1.1 billion.
Through June Thirtyth 2020.
Almost all of these deferrals had a 90 day tenor.
At quarter end 1180, if these loans totaling $408 million.
We have yet to expire.
Currently the pace of new deferral requests is very modest.
However, we do expect further requests for new deferrals, given the current state of the pandemic and the slowing or reversal phased reopening plants.
That said it is worth noting that as.
June Thirtyth, we had only process three request for payment relief extensions.
During the July the extension.
Requests have increased slightly and additional deferrals has been granted to 26 clients with loan balances totaling $32.7 million.
And to clarify that is 26 clients.
I had been given a second or renewable as their loan deferrals.
In parallel with processing pp Lynn loan requests and payment relief actions.
Our bankers and credit risk management teams completed the already mentioned portfolio reviews, covering 86% apart commercial and commercial real estate power borrowing relationships.
These reviews focused on total collapse liquidity and cash burn rate.
Operating projections, including underlying business assumptions of our clients.
Current estimated collateral coverage.
The reviews were designed to gauge broken medium and longer term repayment risk.
Deep dive portfolio reviews have been an integral part of general and problem loan credit management had banners since 2010.
The served us well during the great recession and had been an invaluable to to us in achieving and maintaining a moderate risk credit portfolio.
Joe Rice.
Our senior commercial credit officer, who is on this call has been an active participant since 2010 and all of these quarter lead portfolio reviews.
Providing keen credit insights and leadership.
Because of the current uncertainty surrounding the pandemic.
These reviews will be repeated each quarter for the foreseeable future.
The reviews will be central to setting future Hcl provisioning and troubles loan management and loss mitigation.
I now would like to make some comments about those loan segments, we have identified as having been most immediately.
Impacted by the Covenant 19 pandemic.
The hospitality segment is 2% of total loans.
166 million or 67% this portfolio had been granted 90 day deferrals.
Which 43 million have not yet expire.
As we expect the recovery horizon for hospitality will be measured in years, we do anticipate request for both renewal and new payment relief.
The majority of this portfolio is nationally flag or strong regional brands.
Pre pandemic weighted debt service coverage and loan to value metrics of this portfolio were 2.5, and 50% respectively, indicating that our clients do not need to return to historic norms to resume debt service.
The recreation and leisure segment is 1.5% total loans.
With a concentration of approximately 60% in fitness centers with most of those still closed.
As of June Thirtyth, 2020, $77 million were 59%.
Sense in payment deferrals.
Granted.
In this segment.
Which is $5.6 million have not yet expired.
Since quarter end, 20% of the original deferrals has been extended.
This portfolio segment also had strong pre pandemic metrics with weighted average debt service coverage at loan to value ratios.
1.9, and 60% respectively.
Healthcare exposure is 4% up the loan portfolio.
Approximately $87 million or 18% and payment deferrals were granted in this segment.
Through June Thirtyth.
With $18 million of those deferrals yet to expire.
Our portfolio reviews to date indicate that these clients will not require additional payment relief.
Restaurant and food services exposure is 2.5% of our loan portfolio.
Which two thirds is commercial real estate secured.
The portfolios diversified by both geography, and tight and there is limited franchise exposure.
65% are classified as full service restaurants, 10% This limited service.
And another 10% as trenching establishments.
Banner initially provided payment deferrals of nearly $83 million or 36% at this segment and have those deferrals 12 million have yet to expire.
While most clients have reopens fashion in some fashion is too early to assess their longer term operating viability.
Accordingly, it is reasonable to expect newer renewed deferrals in this loan segment.
I read table trade exposure that includes see an eye as well as owner occupied investor commercial real estate.
Is nearly 11% of the portfolio.
This portfolios diversified across our footprint and includes no mall exposure.
Payment deferrals of nearly $257 million.
EBIT or 24.5% had been granted to this up.
Segment as of June Thirtyth 2020.
These deferrals $142 million have yet to expire.
With recent pandemic trends, we do expect approval extensions in this portfolio.
It is too early to gauge what level.
Before closing my remarks. This morning, I would like to reiterate that we entered into the pandemic induced economic cycle with strong credit metrics and an established credit culture.
This will continue to be a source of strength as we deal with the inevitable thier deterioration in credit quality.
And the emergence of loan losses.
As the pandemic continues.
With that I will turn the microphone over to Peter Connor for his comments Peter.
Thank you Rick and good morning, everybody.
As discussed previously and as announced in our earnings release, we reported net income of 23.5 million or 67 cents per diluted share for the second quarter.
Fair to 16.9 million, our 47 cents.
Diluted share in the prior quarter.
The 20% increase in per share earnings was driven by a combination of improved core earnings.
Positive fair value adjustments and an adjustment to the effective tax rate.
Core revenue, excluding gains and losses on securities and changes in the fair value of financial instruments.
Carried at fair value increased $2 million in the prior quarter.
As a result of substantial core deposit growth increased residential mortgage income and PPP loan income.
Well core expenses declined $6.6 million from the prior quarter due to increased capitalize twond origination costs and lower provision expense for unfunded commitments.
Loan loss provision expense increased 7.8 million due to additional reserve build driven by further deterioration in the economic outlook negative Mon risk rating migration, along with coverage of net charge offs recorded during the quarter.
Turning to the balance sheet.
Total loans increased 1.1 billion.
Try at quarter end as a result at PPP loan originations.
Excluding PPP allowance and held for sale loans held for investment portfolio loans declined 124 million due impart to lower wind utilization and lower commercial loan production along with prepayments on the one the floor residential mortgage portfolio.
Held for sale loans increased by 76 million due to a large volumes of residential mortgage loan originations produced in June carried over quarter end.
Excluding the out the Pacific acquisition, and PBP loans loans held for portfolio grew by 1% over the prior year quarter.
And then core deposits increased 1.7 billion from prior quarter end due to a combination of new account growth.
Pilon proceeds and the continued increase in overall client deposit balance liquidity.
Excluding the Alpha Pacific acquisition core deposits grew 30% over the prior year quarter.
Time deposits decreased by 124 million due to a decrease in brokered Cds, while retail Cds remained flat.
FHLB borrowings declined 97 million as result of deposit growth.
On June Thirtyth, we closed on an offering of $100 million of subordinated notes that add to our regulatory capital position and to act as a source of strength to our bank subsidiary during a period of increased economic uncertainty.
Once the sustained improvement in economic conditions has occurred the additional parent company liquidity will provide enhanced capital management Optionality.
Turning to the income statement net interest income remained even with the first quarter at 119 million.
Substantial growth in core deposits and PPP loan Outstandings resulted in a 9.4% growth in average earning assets for the second quarter offset by a 51 basis point decline in average earning asset yields.
Compared to the prior quarter loan yields decreased 50 basis points due to a combination of low yielding TPP loan growth declines and existing portfolio loan yields as a result of the decline in market index rates during the quarter, along with a lower contribution.
From acquired loan discount accretion.
Of the quarterly loan yield decline PPP loans accounted for 15 basis points.
While our loan accretion accounted for four basis points and the remaining 32 basis points was the result of loan repricing.
Driven by the reduction in average market index rates compared to the first quarter.
Jerry yields declined 24 basis points due to acceleration of prepayments on mortgage backed securities.
Total cost of funds declined 15 basis points to 31 basis points as a result in lower deposit costs and wholesale funding costs.
Total cost of deposits declined from 35 to 23 basis points in the second quarter.
Due to declines in retail deposit costs, and a larger mix of noninterest bearing deposit balances.
Brokered Cds accounted for two basis points of total deposit costs.
Compared to four basis points in the prior quarter.
The ratio of core deposits. The total deposits increased 91% in the second quarter up from 89% and the first quarter.
The net interest margin declined 35 basis points to 3.90% on a tax equivalent basis.
Oh, the total decline the PPP program accounted for eight basis points acquired loan accretion three basis points.
And the increase in core deposit liquidity not associated with that PPP program accounted for six basis points.
With respect to the margin outlook, we anticipate an increase in effective loan yields generated from the TPP program to begin having a positive effect at the end of this quarter and ramp up in the fourth quarter commensurate with an increase in loan forgiveness activity along with some corresponding outflow deposit.
Positive liquidity build up we saw in the second quarter.
Noninterest income increased 8.7 million from the prior quarter.
Noninterest income excluding losses on sales of and changes in securities carried at fair value increased 1.9 million.
Deposit fees declined 2.3 million due to lower transaction volumes and fee waiver accommodations in response to the pandemic.
Total mortgage banking increased significantly by 3.9 million due to an increase in residential mortgage gain on sale driven by record volume and strong gain on sale spreads.
The percentage of refinance volume increased to 58% of total volume up from 46% and the prior quarter.
Overall gain on sale spreads in the high 4% range similar to the level in the first quarter.
Within this line item multifamily contributed less than 100000.
Due to a decline secondary market liquidity and reduced loan production in the second quarter.
Miscellaneous income decreased 1.1 million due to declines in SPJ and swap fee income along with lower gains on other real estate assets sold.
Turning to expense.
Total non interest expense declined by 5.6 million from the prior quarter.
Excluding acquisition costs and pandemic specific operating cost core non interest expense declined 6.7 million.
Salary and benefits expense increased 3.5 million due to normal merit related salary increases.
Lower position vacancy rates.
Overtime and mortgage commissions.
The credit for capitalize more origination costs increased by 5.3 million in the second quarter due to the PPP program and to a lesser extent a modest increase in normal portfolio loan production.
TPP originations represented 2.9 million of the total capitalize on origination cost in the second quarter.
Marketing and advertising expense declined 1.2 million as direct mail and marketing campaigns were curtailed in response to the pandemic.
Provision expense for unfunded loan commitments declined 2.6 million due to a release in the unfunded commitment reserves driven by shift in the mix of unfunded commitment commitment balances by loan segment.
Miscellaneous expense declined 1.2 million due to employee conference travel and training costs.
Acquisition costs declined 800000 from the prior quarter to 336 out of them and Kobin related costs increased 1.9 million principally comprised of premium pay for essential frontline staff.
Remote work environment setup costs and community donations.
Finally, we are resuming efficiency initiatives that had been postponed due to the pandemic.
Among these initiatives are the consolidation of the Islanders bank charter into banner bank in the first quarter of 2021.
And with ongoing retail branch rationalization and completion of the streamlining of the commercial and small business delivery platforms over the next 18 months.
We believe these initiatives aligned well with the recent acceleration in client acceptance of digital delivery channels and the percentage of workforce that will work to mostly as a residual impact of the pandemics.
This concludes my prepared remarks Mark.
Thank you Rick and Peter for your comments that concludes our prepared remarks, and Kate we will now open the call and welcome your questions.
We will now begin a question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the key to withdraw from the question Q. Please press Star then too.
First question, it's from Jeff Rulis D.A. Davidson. Please go ahead.
Thanks, Thanks, good morning.
Good morning, Jeff.
I guess first question could be core or for Rick on the on the deferrals just thank you.
12% of loans on deferrals of 630 wanted to just clarify that the 62% of of those deferrals that had expired.
Thats fully baked into that took 12% number is that correct as as in those that.
Perhaps did not re up.
That's reflective of the 12%.
Hi, Thanks for the question Jeff.
As we've done through the deferral process I.
As Joe Rice, our senior credit.
Officer for pop commercial loans too.
The the keeper of statistics as far as approvals are concerned.
So I would like to have her.
Answer that question for you gel.
Thanks, Rick Good morning, Jeff, Yes, the 12% was the original deferrals and then the remaining on expired are not that we do expect that there will be increased.
Extension requests coming in this quarter.
Okay, just trying to net that out I guess those that don't.
A request extensions on net you in other what maybe a simple way of asking you think that 12% it's going to be.
The peak and while you might get a handful of.
Extension requests.
You still getting some that that do not there for the 12% comes down or maybe I'm missing the.
Message.
No absolutely that's correct based on what we know today from R&D portfolio reviews, we would expect that number to come down it will increase from the 3% to 4% that are currently I'm expired.
Fiber to.
Expired coming back in but it will it it's expected to be below that 12% original okay.
As Rick outline just in the higher risk.
Maybe hospitality and other than those are the areas you'd expect.
Extension requests.
Absolutely the extension request hospitality fitness centers restaurant retail trade and it really depends on the pre opening up the economy, our footprint and the level and trying to buyers.
Our primary areas, we would expect.
Extension requests come in at this point.
Thanks.
And Dave you Jeff.
This is mark let me just add to that that recall that our policy that we put in place as we started the deferrals was a 90 day deferral right. So even though we may get some extensions are still not going past, the 90 day or the 180 days.
Thanks.
A question on the expense side.
Peter I think if you have you back out, but the cobot costs and merger costs, you get to about 87 million.
And then if we if we think about the provision recapture.
Maybe not recurring and then.
What was the capitalized benefit from PPP was that in that I think it was 2.9 billion that we said.
Yeah, that's right, Jeff Yeah, we that that 2.9 million as a nonrecurring benefit to expense really tied specifically to the PPP.
Programming and the the flurry of originations we did and.
Originating 8600 PPP line, so that that piece you could assume will go away in future quarters.
Okay. So that kind of gets me to about a 91 million dollar basis that sound roughly correct.
Yeah, Yeah, that's roughly correct I think the other dynamic going forward, we're going to be.
A couple of things one as you know the pace of just general portfolio originations for the rest of the book, which are really tied to the pace of economic.
Reopening.
And overtime, we should see that that volume of capitalized loan origination expenses on that.
The same portfolio continue to improve.
As reopening occurs and then secondly, we you know as you might expect a lot of our travel on conference and employee business development expenses have been muted in the remote work environments and and in some of the reopening the limits of traveling reopening so we'd expect again as the economy reopens, we'll see some of that employee and track.
Well and marketing expense begin to resume normal levels that we've seen in the past.
Okay.
Great.
Maybe one last well I got you Peter on the on the tax rate was.
Does that kind of a higher than normal sort of tax efficient investment.
ER or any thoughts on the tax rate I had yeah. If we if there was a catch up effect that really related to the the tax exempt revenues as a proportion of total revenues.
And capturing.
That in the in the quarter going forward, we expect the effective tax rate servers in more than a 20% flat rate going forward. So that's sort of your guidance going forward.
Okay, well step back thanks.
Thank you Joe next question.
The next question is from Gordon Mcguire at Stephens. Please go ahead.
Hi, good morning.
Good morning Gordon.
Peter I appreciate the commentary about resuming the efficiency initiatives, I guess, particularly with the consolidation of the subsidiaries, but I'm curious if you could give us a little more color around what that looks like in a in a co vid world.
Maybe size up whether you think the magnitude of what you can do over the near term is different from where you would have thought in January or or just how how that process takes place compared to what you would have thought heading into the year.
Yeah Garden its Peter So yeah I think your question on how it has our outlook changed on efficiency opportunities given the pandemic I think one.
One thing you'll see that we're going to be able to be a bit more aggressive on branch rationalization than we would've assumed a january.
Oh gotten a good Watson and client behavior and in a limited branch operation environment.
And been able to identify some additional locations that.
Our represent opportunities for consolidation. So I think we are going to be an acquisition to accelerate some of what we had contemplated would take.
Perhaps longer in a shorter period of time with respect to our branch network.
And then two I think our our employee expense, especially the travel related costs and perhaps some of the business development related costs. It used to tie to physical presence and travel in terms of meetings a client facing activities and conferences I think we'll see a reduction in that some of that will now.
Come back and we'll see a permanent run rate, but somewhat less than we've seen in the past. So I think we'll see some benefits there and then and then we're also wrapping up you know we've got we've discussed streamlining the commercial and small business platform and prior falls in that that's been going on all along but we we still have some.
Efficiencies to capture that will will manifest over the next 12 months on that side of the business and so those are it's a collection of initiatives that go on <unk>, you will not you'll never see a stair step in a big.
Reduction expense, but these will accrue over time to generate scales, we grow assets.
And continue to create operational efficiencies for the company on an incremental basis quarter to quarter.
Okay.
And then the timeline for the consolidation of the banks, how you expect a.
The merger charges the flow through of the next couple of quarters, and then and then the progression of cost saves there.
Yeah with respect to the Islanders merger that we announced last night. So that's plan and scheduled to close in the first quarter 2021, So both the closing integration and conversion activities will happen on the same date.
Since a that banks already part of the banner family.
We can we can close it that way, we anticipate $2 million of integration and conversion related expense to to consolidate that charter.
And going forward, we anticipate about the same number $2 million a year and expense efficiency savings.
Fully annualized basis.
Okay. So the the merger costs should all occur when its consolidated in the first quarter in and that's that's presumably when the savings would be flushed out as well.
Yeah, Yeah, so you'll see the most of the 2 million we'll post.
In the first quarter, and maybe a little bit either side, but the majority of it will post in Q1 and the efficiencies will be rendered beginning in the second quarter of 2021.
And then the balance sheet I saw had a 340 million of equity securities that that looked like they popped up towards the ended the quarter what does that.
We yeah, we've continued to.
Invest some of the excess liquidity.
In shorter duration securities. We you know given that the surge in deposit liquidity, we've taken the position that.
That.
That surge in deposit liquidity may not last long term some of it well, but some of it will roll off balance sheet and a lot of it came from the fiscal stimulus programs.
PPP program itself and the general flight to quality and liquidity build up across our client deposit base. So we've we've taken the position of keeping that excess liquidity invested in short term.
Securities or with the expectation that some of it.
Well roll back off balance sheet. So we don't want to take any duration risk.
The success of I'm, assuming that some of that deposit liquidity will flow back out into the economy has the pace of reopening continues.
Understood I appreciate it I'll step back thank you.
Thank you Gordon.
The next question is from Andrew Liesch of Piper Sandler. Please go ahead.
Hi, Good morning, guys. Thanks for taking the questions.
Especially on the other securities portfolio here.
Just curious what what do you have been buying I recognize you want to keep that portfolio pretty short here, just given some liquidity needs as less excess liquidity.
Probably flaw, but just curious what what do you have been buying.
Yeah, we and we've been buying a you know a mix of a we've got a money markets.
Investments.
Find that we've been putting the really short term funds and you know that we expect a that we would need from a week to week liquidity perspective, that's obviously got yields below 1% and then the rest of its been laddered into our more traditional mix in the portfolio of immunities some CRD investments.
Some MBS, but in general obviously, the yields were getting today.
Our below the average portfolio yield so we've tried to keep it short but also balance.
Some duration with what's available out there, but it's I would characterize it as being shorter that news the new investments or.
Have a shorter duration than the legacy portfolio.
Okay.
Thanks, and then just curious how the mortgage business is trending this quarter versus though it yet.
The strong its fund performance last quarter, just any update on how Wi Fi in that purchase business is performing in your market.
Yeah, we yeah, we've had a record year, we will we will have very close to a record year here coming up in a third quarter, even before we end the year and mortgage so we had a very strong first quarter, we hadn't even stronger second quarter.
And you know Weve, obviously some of the improvement has been due to the increased refinanced demand. It's now Oh, well north of Thomas almost 60% of the volume, but we've also seen resilience in the purchase volume as well so in the spring, we've seeing strength and a purchase related mortgage volume along with a big and.
Increase in refinance volume that you know follows the the tenure yield.
Down we continue to see very strong pipelines going into the third quarter.
Our general expectation as.
We have a fairly seasonal mortgage business normally that slows down in Q4 Q1, and so this said we would anticipate.
<unk>.
A reasonably strong Q3, and then a traditional slow down as we get into fourth quarter and as the refinanced line begins to add a we'll see some of the effects of that lower line going into.
The second half of the year as well.
Great. Thanks for taking my questions I'll step back.
Thank you Andrew.
The next question its own Jackie Bohlen of KBW. Please go ahead.
Thank you for all the polar on that I just doesn't I understand are you looking at it the combination of all of those items are you looking at them more as cost reduction strategies or as something that will slow the pace of other gross.
Yeah, Doug it's Peter <unk>, the <unk> I would characterize we do have some offsetting invest <unk>.
<unk> infrastructure the company that we've discussed previously so there'll be some.
I think and continuing investments in our digital banking platform on mobile banking platform some of the.
Residual branch delivery platform in the form of automation and improved client experience solutions, a that'll that'll show some increase but those will be offset by these other reductions were discussing so we.
Again, it's it's going to be a in the long term a play around scale, where we as we continue to grow assets, we put the infrastructure in.
To add another $5 billion of assets with a much smaller increase and expense I would have had otherwise so right now that I would characterize the efficiency initiatives are going to.
Basically act as an offset to the other infrastructure investments we've been discussing that will enable continued revenue growth and scale for the company.
Okay. Thank you that's very helpful.
And I mean, not to beat a dead horse here, but I just want to make sure that I understand on the deferral I wanted to talk about it from a dollar value perspective, rather than of course, and judge honestly I apologize that little unclear on the buyer discussion. So if I look at that 1.1 billion and you talked about 408 million that are not expired.
If I just do the math there that tells me that roughly 700 million and those have expired on December one is that the proper way to think about it and number two when you talked about the three in June and that I think it was 26 in July for the 33 million that leaves you know over 600 billion in expired differ.
<unk> that have not requested a renewable again is that the right way to think about it.
Jackie This is Joe that's absolutely the right way to think about it.
Okay. So the vast majority of Yoder balls are now have returned to payment.
Yes, they have returned to save a status or they're coming up on their first payment after the expiration. So they expired in July.
Well I feel that that'll have a few more days to make payment but.
Okay.
Okay, great. Thank you.
Sorry, just one last quick one I'm.
Average balance for PPP loans in the quarter.
Ah, yes for the second quarter Jackie.
Yeah, Yeah, I believe it's about 700, and a 50 million on average for the port for the quarter.
Okay. Thank you.
Okay and if you have a question. Please press Star then one.
Your next question comes from David Feaster of Raymond James. Please go ahead.
Hey, good morning, everybody.
Good morning, David.
I just wanted to follow up on.
Second question on the re deferrals and ultimately the implications for reserve build I mean, the that level of the low level of re deferrals is tremendous I'm really happy to see that but I guess you know the reserve build came towards the low end of the range this quarter and if we're lucky in that a continued low level of re deferrals maybe.
Good accelerates a little bit from here, but it's still ultimately sounds like it's going to be pretty low I guess do you think most of the hadn't liftings largely done with was the reserve build and that there might only be some modest build in the second half a year is maybe you get some risk rating downgrades from from referrals.
David This is Rick Barton, let me take the first swipe at answering your question, which has been one.
I think.
As I mentioned in my comments, we've been pretty candid about.
Risk recognition.
In the high impact industries and.
Those loans that are under deferral and if we have.
Made to judgment that.
They should be downgraded we have already taken those downgrades rather than.
Allowing the.
Deferrals to run their course.
Both jelen myself up have been after this for quite some time in our careers and I think we Ari.
Good judge of credits that are going to have.
Longer term rather than just a short term.
<unk> operating issue, so we have identified and taken those.
Downgrade side as we've identified.
The weaker loans in the portfolio.
And it is safe to assume that as we.
Go forward and the but of course is a pandemic CAD becomes more clear that has.
Credits.
Seek additional deferrals or new.
Deferrals come in which had demonstrate.
Operating weaknesses in the core business that.
There will be.
Continuing.
Stream of adversely classified assets being identified.
Pat.
Two and how I began.
We see on based on what we know today that much of the heavy lifting in terms of.
Adversely classified loans has already been accomplished.
Okay. Okay.
That's extremely helpful. And then I just wanted to get your thoughts on on organic growth going forward.
Loans Expedia you highlighted were down it seems like this was partially a function of declining seen our utilization, but I'm just curious as to what trends are seen you know how much of the decline quarter over quarter was maybe strategic where you are tightening the credit box versus payoffs and paydowns or asset sales or simply.
Leaving just limited or less demand for new credit and just how your pipeline might be heading into the third quarter.
This is Joe maybe.
<unk>.
I'll start by saying that the long growth, we would expect continued to be flat in the near term to pipelines are.
Okay, but you know there's been less activity.
Overall in the new long.
Well.
Any future growth guidance that we would then would be you know based on the economic recovery that we see in the market.
Yeah, and let me let me just add David This is mark that you know as we dissect some of the loan portfolio a bulk of the decrease in the loan portfolio has been the result of line utilization.
Decreases so you know it's business as the economy, it's come to a grinding halt obviously working capital needs of diminished.
So we would we would suspect that that's going to continue for a period of time so.
Projection is that you're gonna have pretty much flat balance sheet.
[noise] for a period of time.
Okay.
It's helpful. And then last one for me just any you touched on a little bit I'm, just curious to get your thoughts on.
The overall expectations for the levels of forgiveness.
And maybe the timing of forgiveness, you know you touched on a little bit, but and then maybe just the overall fees net of but that's not up like a the origination expenses that you would expect going forward. Thanks.
Yeah, David It's Peter Yes, so we we based on that in a that the the new guidelines and that's the a which have evolved.
Over the last couple of months.
And the forgiveness timelines that they've.
Guided to we think we'll we'll see the bulk of our forgiveness occur in the fourth quarter. This year, but maybe you see a bit of it began after the third quarter. So the bulk of the [noise].
Forgiveness pay downs will.
Anticipate.
Catching us in Q4 and spill into Q1.
A lesser extent and then the.
As you saw the mix of our our PPP loans is fairly granular. So the average loan processing fee on the entire portfolio is about 3.6%.
This is roughly about $40 million on the entirety of the portfolio. So we would expect.
An acceleration of a portion of that 40 million really to show up.
Beginning in the third quarter, but ended the fourth quarter and then we do expect residual balance at this point, it's challenging to predict client behavior, but we anticipate that would be a residual balance it will not be forgiven.
Or pay down that will carry through its 24 months.
Maturity I'm assuming.
Around 20% or so 15% to 20% of that balance will continue out through that remaining amortization period. After the bulk of the forgiveness activity occurs.
Okay. That's helpful and that 40 million Bucks since you references that net of the expenses like that the net impact from the the PBB coming through.
That's the gross number say you want to adjust for the deferral origination cost against that.
Okay got it.
Exactly.
And then to damaging that's from.
Next question is from Tim Coffey of Janney. Please go ahead.
Hi, Thanks, Good morning, everybody up most of my questions have an answer but I just want to make sure I I understood kind of all the coffee maker. So if I look at you know the capitalized loan expenses. It seems like those might come back run a little bit below normal for the next couple of quarters, given the level of activity.
Expecting.
The loan portfolio.
Would that be accurate.
Hey, Tim It's Pete right I think it certainly pick out the PPP component of the.
Capitalize on origination costs and in Q3 to set a new baseline.
So I I would characterize.
Part part of that that somebody activity, we had especially in the mortgage side and you know is likely to come back down a little bit. So I think its it'll be above what we saw in Q1, which was very we had a relatively slow quarter of just traditional production as the pandemic became ups.
Parents or would be somewhere between a the Q1 levels are and somewhat below the PBP adjusted level that we had in the second quarter. So it obviously I'm not going to give you specifics, but I would guide it'll be somewhere within those two brackets.
No that's really helpful. Peter Thank you.
And then on.
Oh, Yes, I think that's those are all my questions appreciate it.
Yeah.
The next question is Apollo welcome Jackie Bohlen of KBW. Please go ahead.
The next question is that a lot from Jackie Bohlen of KBW. Please go ahead.
Sorry, and having a conversation with myself [laughter], yes. Thank you for taking my follow up I, just kind of double check on what I. If you have to fees that were realized through chips, you 20, I'm I'm, assuming that you amortize some of that and then obviously there. So the 1% interest that would earn so I wanted to see the impact the interest income watch from those lines in the quarter.
Yeah, Jack its Peter City for the second quarter that PBP loans, a generated about a 2.75% all in.
Interest yield so that the amortization of the fees we did have.
Against the coupons about 2.75%.
Against that average balance I give you early of about 750.
Million.
Okay, perfect I come back into the income thank you.
Thank you.
Yeah no other questions at this time. This concludes our question and answer session I would like to turn the conference back over to Mark Grescovich for closing remarks.
Thank you Kate and thank you everyone for your question.
Hey that we're very proud of the banner team as we continue to do the right thing as we battled this pandemic and its effects on the economies communities and our own lives.
Thank you for your interest in banner and for joining our call today, we look forward to reporting our results to you again in the future have a great day, everyone and please stay safe.
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