Q2 2020 Associated Banc-Corp Earnings Call
Good afternoon, everyone and welcome to associated Banc Corp, second quarter 20, <unk> earnings Conference call.
My name is Devon and now we're operator today.
All participants are in listen only mode.
We will be conducted a question and they're just session at the end of today's conference call.
Copies of the flights there will be reference during the call are available on the company's website at investor that associated Bank Dot com.
As a reminder, this conference call is being recorded.
As outlined on slide one during the course of discussion today management may make statements that constitute projections expectations beliefs or some of them are forward looking statements.
So <unk> actual results could differ materially from the results anticipated or projected any such forward looking statements.
Additional detailed information concerning important factors that could cause <unk> actual results could differ materially from the information discussed today.
As readily available on the FCC website, and the risk factor section, although still see at its most recent form 10-K subsequent SEC filings.
These factors are incorporated herein by reference.
For a reconciliation of the non-GAAP financial measures to GAAP financial measures mentioned in the conference call. Please refer to page 23 on the slide presentation. That's a page 10 on the press release financial tables.
Following today's presentation instructions will be given for question answer session.
This time I would like to turn the conference over to Flynn, President and CEO for opening remarks. Please go ahead Sir.
Thanks, and welcome to our second quarter 2020 earnings call joining me today, our Chris now, it's our Chief Financial Officer, and Patti Hart, Our Chief Credit Officer.
So see it had an unusual that successful second quarter.
Hello, My thousands of colleagues have responded to the challenges.
We focused on protecting the health of our customers and colleagues while meeting the needs of our customers. We met those needs with P.P.P. loan payment deferrals fee waivers and the distribution of stimulus funds.
We shared our ability to meet the future needs of our community some customers with a significant increase in our capital through the sale of associated benefits and risk consulting.
Yeah, the preferred stock issuance.
I've seen record inflows of deposits have abundant liquidity with the revenue challenge brought on by near Zero interest rate, we managed our expenses down.
Well no one could predict the ultimate impact cobot pandemic on credit we saw some encouraging early signs from our borrowers.
So let's look at our financial results.
Turning to slide to our second quarter GAAP earnings were 94 cents per share.
Including the $163 million gain on sale of associated benefits and risk consulting.
Average loans grew considerably during the quarter, largely driven by P.T. loans and commercial line draws.
Funding along with government stimulus programs and overall increased savings rates led to higher deposit balances as well.
Our loan deposit ratio was 94% of ended the quarter, 90% without PPP and 61% of our total deposits were made up of low cost deposits.
Well, we haven't seen significant changes in credit metrics yet.
Our reserve for loan losses increased 35 million during the second quarter as of June Thirtyth.
Our allowance to loan ratio was 1.73% for 1.8% excluding P.P. loans.
The sale of baby, our C and the issuance of $100 million, a preferred stock lifted our capital ratios.
He T. One increased 89 basis points from the first quarter two attended a quarter our tangible book value per share also increased moving up 11% from last quarter to $16.21.
[noise] average loan balances trends are shown on slide three.
Commercial and business lending grew nearly $1.7 billion driven predominantly by P.P. bonds and active mortgage warehouse market and increased draws on general commercial lines of credit.
While we saw unusually high commercial line draws at the end of the first quarter.
The second quarter progressed.
These lines paid down.
Growth in CRT was primarily driven by new loans plus continued funding of construction loans.
On average residential mortgages declined during the second quarter as we continued to sell new production and some portfolio loans to the agencies.
Turning to slide four we show in the period loan trends, which will highlight second quarter activity.
We ended the second quarter with $24.8 billion of loans, a net increase of 467 million from the first quarter included in these balances was over $1 billion of outstanding P.P.P. loves. This was partially offset by 559 million a pay downs on general commercial lines during the quarter.
We view the repayment of these lines as a sign or customers have a more optimistic outlook regarding their liquidity than they did at the end of the first quarter.
As previously mentioned our commercial real estate portfolio has continued to grow during the quarter at quarter end, we still had nearly $2 billion of unfunded commitments, which we expect will continue to fund up over the balance of 2020 and into 2021.
We expect to continue to grow our commercial real estate balances over the course of the year.
Turning to slide five let's look at our portfolio composition at the end of the second quarter.
In the second column, we identified our key cobot loan exposures, which I'll highlight on the next page.
We've also broken out our deferred loans in our non accrual loans, which remain minimal.
As the Pandemics impact on the economy expanded you're in the second quarter, we responded to our customers needs by underwriting P.P.P. loans and by deferring and modified certain loans as shown on slide five.
Approximately 35% of key cobot commercial loan exposures have received a modification or deferral, 19% received the P.P.P. loan and 4% receivables.
Now, let's look at our key cobot commercial loan exposures on slide six this is an updated the slide we introduced in the first quarter.
We continue to monitor risks in the loan portfolio. The table on slide six details our exposures the several categories of commercial loans potentially impacted by cobot 19, and lower hydrocarbon prices.
The $2.2 billion represents less than 9% of outstanding loans at the end of the second quarter.
They get up 5% of our loan book retailers and retail commercial real estate remain our largest area of exposure.
664 million of these loans are to retail real estate of which the majority is collateralized by mall shopping centers and non grocery store anchored strip centers. These loans had an average loan to value ratio of approximately 57% at origination providing a significant cushion for Peter.
Natural deterioration.
We would highlight amongst our retail oriented rates, which are predominantly investment grade credit balances paid down about 54 million from last quarter to about 400 million.
Oil and gas loans also declined 35 million from last quarter and account for 1.7% of our loan balances.
In the second quarter, we grew reserves further on this portfolio. Despite the price of oil creeping back up from the first quarter, we still remain concerned about the outlook for this industry.
Outside retail in oil and gas Armenian exposure is limited hotels and restaurants, our next largest portfolios and each of these categories represent less than 1% of total loans.
Overall, we believe our exposure to covert affected industries remains manageable.
We're seeing positive dynamics, and our exposures remain relatively unchanged quarter over quarter.
Now, let me comment on our Kobin release efforts for our commercial customers highlighted on slide seven.
At June 30, we had just over to 820 million of completed commercial loan deferrals blown deferrals included 638 million of commercial real estate, primarily comprising the hotel retailer borrowers representing about 11% of the commercial real estate loan book commercial and business lending.
In 184 million or deferrals or about 2% of that book.
New commercial loan deferral requests slowed as the quarter progressed and many customers with deferrals ending in June have not asked for additional assistance.
Our consumer related covered relief efforts are highlighted on slide eight.
We finished the second quarter was 725 million of consumer loan deferrals or 8% of the total residential and consumer loan book.
New deferral requests have slowed substantially since the peak in May and essentially ceased since the latter half of Jim.
We also supported many of our customers with waived or refund of fees during the pandemic.
Since implementing our cobot 19 relief program, Weve refund or wave nearly 2 million in fees for consumers and small businesses through June 30.
Turning to slide nine early signs are positive as many customers who receive payment deferrals are returning to normal payment structures.
Despite having been granted payment waiver is about 27% of consumers with completed loan deferrals have made at least one subsequent payment.
In corporate banking and small business $46 million of loan deferrals ended during June.
Those over 90% of customers are expected to resume making payments based on early discussions we expect nearly all of the remaining customers with deferrals and corporate banking in small business to return to making payments.
Commercial real estate had 116 million alone deferrals expire during June.
About half of those customers are expected to start making payments again, the other half consistent neither of hotels or retail properties have requested further extensions.
The additional loans on deferral, we expect about one third of these customers to require some form of assistance with the majority being in the hotel sector.
Turning to slide 10, you can see we have built reserves by about 35 million during the second quarter. This brings our total allowance to $429 million at the end of June.
Our reserve covers 1.7% of total loans or 1.8% excluding PPP laws.
We've modeled our reserves against the June Moody's baseline with their own qualitative overlays additional reserves were set aside for certain industries affected by the cobot 19 pandemic.
Reserves on cobot affected loans covered 6.2% of loan balances compared to about 1.4% for noncovered affected loans.
As you can see the bulk of our reserve build is attributed commercial real estate and oil and gas.
During the quarter, we built up RCR he reserves by 27 million, reflecting the increased risk profile, we see in our retail and hotel portfolios.
Additional reserves were also built up on oil and gas loans, which increased by 6 million and now cover 19.4% of the portfolio.
Turning to slide 11.
You can see our credit metrics have drifted up slightly but remain fairly stable.
Potential problem loans increased $73 million driven by general see an eye and commercial real estate within the key cobot commercial loan exposure is portfolio.
Non accrual loans increased 35 million, but are only slightly elevated over the second quarter of 29 team.
21 million of the increase came from oil and gas with most of the rest coming from commercial real estate.
Our net charge offs continue to be almost exclusively in the oil and gas space.
Oil and gas reserve increased 273 basis points from last quarter.
The loans in this portfolio are all shared with other banks and our high level of reserves reflects a conservative view of the ultimate outcome for some of these credits as we wind down the business.
Turning to slide 12 average deposits were up nearly 1.9 billion or 8% over the first quarter.
Most of this growth came from low cost noninterest bearing checking accounts and savings account.
Deposits remain elevated due to PPP loved staying in accounts government stimulus money and generally higher savings rates amongst consumers.
Our low cost deposit mix continues to improve as these balances made up 61% of overall deposits at the end of the second quarter.
Turning to slide 13.
Second quarter net interest income was 190 million and year to date margin came in at 2.66%.
Pressure on the margin is being driven by asset yield compression relative relative to our ability to reduce liability costs as a result that that cutting rates to near zero.
Total cost of interest bearing deposits dropped to 25 basis points in June.
As we reduced pricing across the board.
While second quarter NIM declined 35 basis points from the first quarter, we expect NIM to stabilize in Q3 and recover somewhat in Q4.
Total interest bearing liabilities fell to 57 basis points in June driven by the remix of our deposit base in interest rate reductions.
Turning to slide 14 second quarter noninterest income came in at 254 million.
The mortgage business remains active resulting in an increase of 6 million from the first quarter.
Gross mortgage banking income was 20 million offset by 8 million of MSR impairment, resulting in 12 million net mortgage banking income.
We saw a decline in service charges and deposit account fees during the second quarter about 4 million driven by less customer and economic activity during Q2.
We expect activity to recover as we go through the year.
The gain on sale of assets was 157 million during the quarter. We further broken that down on the next slide.
We closed the sale of a BRC on June Thirtyth. The sale resulted in 266 million of proceeds and a GAAP gain of 163 million after personnel and transaction costs were accounted for the net after tax gain was 104 million and second quarter earnings per share excluding the gain was 26.
Sense.
Separately, we recognized about 6 million in losses on non Avi RC related write downs. The bulk of this was driven by the write down that equity interest in a company related to a restructured oil and gas lawn.
Turning to slide 16.
We look at our customer activity.
Branch activity is slowly started to come back since April however, customers have moved away from using the lobby and continue to use the drive-thrus.
Prior to co bit about 65% of transactions took place in the lobby the shifted to only 30% as of late.
Customers were also resuming normal spending levels and as debit and credit card spend increased 23% from April 10.
During the cobot outbreak, we've seen a strong shift to mobile banking, even with branch lobbies reopening active mobile application users have increased 15% from January to Jim. This is a positive trend, which we feel will provide efficiency opportunities in the long run.
On slide 17, you can see our continuing downward trend of expenses.
Total noninterest expense was 183 million down 9 million from the first quarter.
The decrease it expense was spread across several categories personnel expense was down 3 million due to lower benefits fringe, an equity plan expenses, partially offset by higher commissions.
Occupancy was down 2 million since we weren't plowing snow.
Business development and advertising were down 2 million as we had less business travel and market activity during the quarter.
As shown on slide 18, or regulatory capital levels remain strong.
The sale of Baby RC added 41 basis points to RCT, one ratio and 27 basis points to our Tc ratio.
Overall CPT one increased attended a quarter from 9.36 on the first quarter.
Our tangible common equity ratio also increased to seven in a quarter up from 6.9 in Q1.
As I mentioned tangible book value per share is now $16.21 up 11% from the first quarter.
We expect capital to continue to build through the remainder of 2020.
Finally on slide 19, we discuss our outlook, which includes several updated items.
We expect our margin to stabilize in Q3 and do improve in Q4, as we see PPP loans pay down.
For the full year, we expect our margin to come in between 255 and 2.6%.
This assumes the pay down of our PPP launch in Q4 in early 21.
Mortgage banking will continue to be elevated in Q3 and service charges will start to return to normal levels as covered related fee waivers have expired and consumer activity continues to pick up.
Our quarterly expense run rate is expected to be about 175 million due to 15 million in quarterly expense reductions from the sale of baby RC.
With an outlook for low rates stretching through next year. We're currently taking a look at our expense base beyond our current guidance.
And we'll have more to discuss later this quarter.
Based on expected view of economic activity within our footprint, we anticipate loan loss provisions over the second half of the year to be less than they were in the first half.
And with that we'd be happy to answer your questions.
At this time will be conducting a question and answer session. If you would like to ask question. Please press star one on your telephone keypad.
Makes sense I will indicate your line is and the question Q.
You mean first start to if you looked your move your question from the Q.
All participants using speaker equipment, it may be necessary to pick up the hence it before person start keys, one moment, please as we pull for questions.
Our first question comes on line of John Ashcroft with RBC. Please state your question.
Hi, Thanks, good afternoon.
Okay.
Just big picture question first so you talked about.
Encouraging early trends and then they're thinking another common.
It's a positive dynamics.
Are you should just referring to some of the branch count consumer type activity, you highlighted and where you're talking about something else some more activity and optimism was your.
Our commercial book in commercial real estate.
Well, it's it's several things John so.
Certainly the fact that debit and credit card usage has trended up pretty dramatically here over the last month or so.
Is encouraging.
But in particular as we look at the 90 day deferrals that we gave.
At the start of all this which were starting to expire in June and we'll continue to expire.
This month the next month.
Most of.
Those borrowers who got deferrals are going back to making payments.
Which is is very encouraging now we're still waiting on the consumers, who we gave six month deferrals too, but more than a quarter down even though they had deferrals that making payments.
So as we as we.
Launched into this unusual situation of granting deferrals and waivers.
[music].
We didnt really know what to expect as we got to the back end of that and we're.
ER.
Certainly gratified that.
These these customers are able to resume their normal payments.
Okay.
Oil and gas I hate it to bring it up.
You talked about it or go ahead.
Bye.
If you feel it feels like with your reserve levels.
Some of the charges you chicken.
I would be close to being under the plan on this in terms of at least.
Impacting the quarterly provision in the quarterly run rate.
What would need to change to make it worse in your mind yet. It's a good question. If you look at the level of reserves we have.
In addition to the charge offs were taken against a book that remains we've got this portfolio marked at about 66 cents on the dollar roughly.
It's been interesting this last week as as other banks have reported there's a real divergence of views on what's going to happen here, we had one peer bank.
Makes the decision to sell the large bulk of their energy portfolio in their reserves secured loans I'm at a very significant discount but not.
Outside of where we have our bookmarked.
And we had another peer bank.
Which has much much lower reserves against a much larger book.
Expressing a lot of optimism as we go through the summer ended fall Redetermination period. So there's there's really a wide spectrum of views on how all this is going to turn out amongst banks and.
We think it's been prudent as we've been marking this book down taking charges reserving substantially against that we should be very well positioned.
To your point.
To to get through this without a hell of a lot more pain.
But bad enough is [laughter], but I think we're in a pretty decent spot, but with the mark that we have today.
And then just one last one on we'll take a shot at it but.
Q3 provision.
It's hard to projected but what would be kind of the key drivers to your model.
I'm assuming.
The economy is relatively stable in terms of driving the need for more.
Colin.
Economic factors are building.
Yeah. So you heard us express that.
Based on our assumptions, we think that back half of the year provision will be less than the first half and that's based upon an economic economic activity continuing as it is today and not having to experience you know a widespread shutdown of economies in our footprint so absent.
That.
We feel pretty comfortable with the guidance that we provided.
I don't stuff, but alright, thanks, guys appreciate it.
Yep.
Our next question comes on line of Scott Siefers, What's Pakistan. Please state your question.
Afternoon, guys. Thanks for taking the question.
I wanted to ask one I'm on the margin you noted so stability, which is definitely good then they expectation for some recovery in the fourth quarter.
Gathering that that's based on the expectation for forgiveness of.
The PPP loans or at least that portion of them and the accelerated fee that you got there how much of the notion of recovery in the margin fourth quarter is indeed based on that what would happen to the margin ex any acceleration of PPP fees.
Sure. So as we mentioned I'm on slide 19, we do expect PPP to pay down mostly in Q4, and then into early 2021 and on page four or the press release tables. We show you the remaining on unamortized PPP fee balance.
So you can track at with Us, but yeah, we're saying mostly in.
Q4 so.
Half or more [laughter] and then the balance over the 2021. So you can sort of back into the a the rough number I would note. Our guidance you know I think we were when we spoken probably back in May we thought it would stay above to 60, but obviously since then the PPP program has been basically extend it out.
Right. So instead of beginning to realize some of that a in the Q3 period and then the rest of it in Q4 and less than 2021, we've had to push that out which is why our margin has trended a little lower from our guidance perspective.
Okay and I.
I guess, what I'm getting at is just sort of the steady state margin do you think it's I know, we think it's stable in the third quarter, but presumably outside of UPB would that continue in other words or if we kind of reached a bottom for the margin.
I'd say the bottom is going to be hit in Q3 rights on a month to month basis June was a little worse than than May add it probably trend a little lower in July and then it starts the bounce up right. So the you know itself. It will find its absolute floor in Q3, probably not too far below where we are pretty close but it's not.
Stabilize and then we expect the bounce up as we move through the balance of year and the two factors. There are at <unk> in Q4 that PPP pick up but also we're seeing spreads beginning to widen right. So we will find our floor probably here in July and it'll start moving back higher as we move through the rest of year on.
Spread widening and the BBB and we've got Burps, Tvs, which will continue to roll off and grind lower so there'll be some.
On a structural.
Reduction of our liability cost just as longer dated deposits mature and get repriced.
Yeah. We note you know the I think we show you the average yield for the deposits was 28 basis points and if you look at the slides you'll see the number for June was 25, so that the overall interest bearing deposit cost Cds and money market and checking continues to grind lower as well, which is why again, well well hit bottom here in July.
It feels like and then start moving higher from there so even without puppy, we'd be we'd be trending about where.
We're heading now and maybe a little bit up as liabilities reprice.
Yes, okay. Okay Yep, that's what I was getting out so I appreciate that color.
And then find on just on the mortgage expectation. Our you know your expectation for elevated mortgage revenues are you guys thinking about that on the basis of the $12 million reported mortgage line or are you sort of thinking about it ex the MSR. So like I have a base closer to $20 million.
Yeah. So we've got.
As we sit here right now still have a 1.6 billion dollar pipeline of mortgages to work through.
So that's the highest it's been in two years.
As we sit here today.
Forecasting MSR impairment is always difficult because you've got to pick a pick a rate on a day yeah.
But one would hope we wouldn't see an impairment like we saw at the end of the second quarter. So we would we would be working off of you know more the $20 million number than that 12 million dollar number of late.
Well, Okay alright.
Now I think there in the air and lifted so [laughter]. That's a good a forecast does any of the mortgage business. So [laughter] perfect I appreciate your guys thoughts.
Our next question comes online.
<unk> <unk> with Bank of America TCG question.
Thanks.
After all.
Oh, Oh follow up question.
Yes wants to John I'll, just got some activity all lots in terms of what it looks like in the market CPC an uptick in cases like dogs in certain parts of the countries. Just when you think about your customers footprint.
How do things look today relative to include me have you seen kind of a negative move in the last few weeks or are you seeing steady return to normalcy, just any color would be helpful.
Yes, so you know rightly or wrongly, Wisconsin continues to have activity, even though our co infection rates are as high are higher than they've been.
Because of you as you'll recall the Supreme court throughout the government's ability to control much so economic activity in Wisconsin continues and.
And as you know reasonably robust.
And then you know, Minnesota somewhere in between here and Illinois, because Chicago is still relatively.
Locked down so we've got kind of a wide spectrum there.
But you know our forecast is that things will continue as they are across the footprint.
And perhaps you know a little more activity down in Chicago will.
Will lend itself to the to the.
The assumptions that we made when we said you know provision is gonna be.
Lessen the back half quite Chris Ebrahim I might just as you know if you look at the June unemployment rate data. If you look at sort of the coast. You'll find you know Unfortunately places in the teens, but if you look at Wisconsin, and Minnesota, you're looking at eight handle unemployment. So there is a pretty is.
Strong difference between the activity levels on the coast versus the upper Midwest.
Well that's helpful. Then I guess it's remarkable.
Oh go ahead.
No I would say with in Minnesota, and Wisconsin, or the core of our marked an exposure in activity and customer bases of course.
Understood.
And I guess is moving to slide 16, and maybe just elucidate a few quarters I, but I can go well they talks wouldn't domes. If all you bought on expenses coming out of the lost crisis. As you know think about just the changing customer behavior digital adoption.
So how are you thinking about what this means for silicon rationalizing the bench footprint the efficiency opportunities.
Don did.
Yeah. So as I mentioned, we are we are taking a look at the expense base and applying some of the learnings that we've had from.
From this particular this work from home environment.
So we've got a number of.
Initiatives underway internally to figure out what work looks like for us on as we.
Go through the rest of the cobot period and thereafter.
We're still operating.
From home you know, we don't have people in our corporate offices, I mean, Chris and Brian and I are sitting here and there's probably 20 people. When there is the only 500 people in hair.
So we and we don't have any big plans to bring a bunch people back and the fact that matter is the company's operating just fine we're processing a massive mortgage refi boom and all of that.
Is going into our thinking about how we.
Reduce our expense run rate going forward beyond what.
But we've just guided so we'll have more information as we get.
Into the quarter as we continue work on this theres also obviously opportunities to think about how we're serving customers.
You know the mobile pick up the online pick up the fact that even now that we've opened our branches on people now are much more likely to go through the drive you that come into the lobby present, so a lot of different opportunities to think about how how the model works going forward and we're thinking through all that right now ebrahim.
Well, thanks for taking the questions.
Our next question comes on line of Terry Mcevoy Stevens. Please state your question.
Good afternoon.
And then Terry.
The C.T. capital up to 10.25% following the sale and you said earlier capital should grow in the second half of this year, but my question is do you have a targeted capital level used to talk about that in the past and the reason I ask is that if we look on the 21 is it appropriate to think about buyback activities.
I think about putting them into our models, if we're assuming a return to more normal credit trends.
Yeah, that's a little bit early to forecast that right now.
Or capitals, better [laughter], yeah, but given the uncertainties they're out there.
Weve you know, we've said that we're not going to buy back shares.
The balance of the year and as we get toward year end.
And we see what credit looks like and we see where our capital ratio said, you know well, obviously take a look that but certainly as we sit today.
Having.
You know significantly more capital having.
A larger tangible book value and be in Washington liquidity are good. Thanks.
Okay.
And then as a follow up question in the first quarter. The reserve build was mostly see an eye and then if I look at the second quarter. It was mostly CRT. So when you when you think about the back half. It this year in the prospects of incremental building do you think it will be heavily weighted towards one or the other or more of a and even split.
[noise] My guess is that.
I don't know exactly how far it's going to build to tell you the truth.
You know because I think as we get toward the back half of the year.
So I would think some of the oil and gas stuff will resolve itself one way the other although we're well reserved against that so one wouldn't think that we'll have a lot of provisioning to do.
But if I add it gets you know I don't think outside of oil and gas we have a lot of stress in the commercial space. So if we're going to build I'm guessing it will be the retail oriented commercial real estate whether its.
Retailers directly or retail tenants in in properties, that's probably where was it.
Great. Thanks, Phil Thanks, Chris.
Yep.
Our next question comes the line, though Chris Mcgratty with KBW. Please do to question.
Hi, Thanks, a question.
Chris This is going back to that interest income or second one aftermarket question a different if we've got sort six months and TPP is behind us.
How do we think about.
The ability and ultimate gross.
Core non interest income given that give an outlook for growth.
A little bit more on the deposit repricing and the full effect of loan yields.
Yeah. So again I would say on a on the and a couple of things right. So on the loan side.
We.
Have a margin on most commercial credits as you can see from the tables that is approaching effectively the margin floor. So effectively we hit in Q3 here.
Libraries that zero. So basically we're earning is the quote unquote quoted spread to the customer is effectively the floor. So that's kind of hit that floor and.
Good news is from our contractual structure, we've got LIBOR zero floors in there. So it's not going to go lower and sold on the loan five we're kind of hitting the floor in July and as we roll over we knew and add new we're getting a little bit more spread with each of those actions that we assume or spreads widened a little bit.
As we move forward, that's still pointed out you've got to back book of Cds, that's going to roll and continue to roll down. So as we look at our total deposit book again, our costs as 20 basis points for the quarter, but the CD book was at 144, well that's generally one year in in if you look at our maturity detailed that we disclosed in our call reports you'll see the.
So essentially that's going to roll off and come down towards that 25 basis points. So that the that's a real dollar savings that will just come in over the next 12 months in a lot of that in the next six months, so you're going to see a role that's gonna be beneficial and we'll continue to work on other liability lovers and that sort of on the core just.
Loan and deposit side and then the PPP. We've I think again will be a positive that pop in Q4 now and then into Q1. So all that together says we should see core improving as we move through the year plus PPP.
And then to answer your question on and I.
Chris I'm now we've got a significant backlog of scenery, which will be funded up through this period of time well into next year. That's gonna help we've got a residential mortgage boom and we can choose whether we're going to sell some of that onto the agencies or perhaps portfolio. Some of that we're thinking through that at the moment. So.
It could get some growth there and I.
Of course was a little harder to forecast right now, there's just not a lot of new activity going on people aren't out looking to change their banks and but.
I'll, assuming the economy continues along this path and slowly improves.
We would expect to start ceased commercial loan growth too as we get farther into the year and into next year. So I think with a.
Cost of funds continuing to grind down.
Funding up on C., Ari, perhaps resi mortgage and then hopefully on commercial.
We should start to see some consistent growth and I as we get later into the year and then into next year.
Right, but very helpful. Thank you.
If I could just that's one more on the deferral program.
Can you speak to what you might do different in round two if there are around to the terms of re underwriting.
The borrower that a little bit more helpful. Thanks.
Yeah, so it's going to be very dependent upon.
The borrower circumstances. So for example.
In the hotel space, which is very small for us.
We've got.
A couple of.
Customers, who have substantial outside.
Resources.
And so we're we're hopeful there.
Got you know, we'll be able to stretch out some of those loans and get through this period of time until they get their occupancy backup.
The retailer stuff is highly dependent upon you know how people come back come back to retail stores, but early indications again our.
Our pretty good since people are are generally getting through their deferral period and starting to pay.
And again, a lot of our loans all covered loans have substantial guarantors behind them as well so.
You know the initial.
Push you know with the pandemic was if someone needs the deferral, we'll give it to them, but as we as we come up to that initial 90 days rolling off in June and going forward. These are turning into let's let's have a serious discussion about what it looks like and we're we've been.
I don't know if that were surprised but we'd be pleased.
But the response that we've been yet.
[noise], that's why we Havent general sense of optimism at this point about it.
Great. Thank you and Chris could you just repeat the the fees like I was looking quickly to the deck I didn't see the remaining TV Pvs yep.
There's it's in the press release table, sorry, Chris I wasn't clear and on page four.
And you get in the middle of the page and it says.
Payment protection program fees net and there's 24 million at the end of June that have not yet been amortized and.
Alright awesome. Thank you.
Yep.
Our final question.
Michael jump with Suntrust. Please proceed with your question.
Hey, Thanks for taking the question one to maybe just follow up on the commercial construction book looks like there's about a 4.5% reserve there.
Is that just an abundance of caution or should we read that to me that what's in that construction book is maybe more.
The higher risk segment, maybe can retail or hotel et cetera.
Look I think our seasonal methodology.
Borrowed heavily from.
Our experiences in the last downturn and over time, so construction loans have during downturns, then where people have taken.
Larger hits in the past and our seasonal methodology necessarily sort of looks at the last couple of recessions and factors that in so you know that's partly the issue and I think it was high on day, one as you can see was.
One of the larger buckets, where we increased our reserves on day, one and it continues high because in both associated banks own experience and the industry's experience, that's where when things go you know the construction projects stop there's usually paying for all involved and a if you the environment shifts.
Can you at people are.
Completing projects you know the amount of time they may sit on utilize are underutilized.
Causes sometimes more challenges than other projects that are already occupied et cetera or completed so that's just.
Good.
Just to have a little more reserves in that bucket and and.
Michael to just give you a little color on on what's what's in there.
62% of.
Loan production this year, which is mostly funding up this stuff is in either industrial or multifamily.
Very very little in the retail space.
Which of course would be there the riskiest space.
Okay, that's helpful and.
Maybe just a follow up on the capital commentary, Chris you made the comment inspect capital to continue to build I guess I'm just trying to level set that against you know potential increases than.
Non performing assets as we move forward do the crisis.
You know what point will do you think the risk weightings on those will increase and maybe offset some of the capital build that's correct that's really.
Yes, I think there's a couple of things either mine. So we are assuming that a good portion of the PPP balances come off.
So that's a billion dollars and you know even has only half of it becomes often are certainly making most of it does by the end the year that means our tangible.
Asset so going to come down by more than half a billion off that top.
With me the tangible common equity ratio will just naturally drift higher in addition, as Phil mentioned, we're looking at lending that likely is looking reasonable to add to volume before the end of year. So again, they'll probably be a slight positive, but not enough to offset the more than half billion, a P.P. that will come off.
So we'll have a net improvement just because the balance sheet effectively shrinks.
That'll have less of an impact on the risk weighted assets, because what we'll be adding will be real commercial theory hundred percent risk weight itself and whats coming off as the zero risk weight itself, but we expect to earn our dividend and then and more over the course the back half of the year and so therefore, we will have capital accretion and net balance sheet shrinkage, which will come.
Tribute to higher capital ratios as we move forward.
Okay, perfect and one last just clarification just on the effective tax rate for the year.
26% this quarter, so that gets me to a pretty low tax rate in the back half year I just want to make sure you're thinking about that correctly.
You have to generally I think that we think that yep. We've guided we think that's going to be less than 18%. It's kind of a quirk of the way you need to account for a this the sale. So we recognize the sales this quarter. So we have to sort of fully taxed at the full marginal rate and because some of the a BRC acquisitions in a password tax free.
Acquisitions, we didnt have tax basis and them the way we have on other deals. So the tax rate on that deal with a little bit higher than normal, but as we move through the course of the year you have to average out to a normalized full year tax rate and so you'll just naturally come down over the subsequent quarters and you'll see the overall, we expect to be.
You know something less than 18%.
Okay. Thanks, that's all for me.
[noise] would do have one final question come coming from a line of Jared Shaw with Wells Fargo Cc with your question.
Hi, Good afternoon. This is actually team or Brazil are filling in for Jared.
Two quick questions for me a one on the CR re growth this quarter I guess, where are you seeing the incremental demand for CRT now.
And I guess is that.
Are those industries, where you're seeing demand today is that kind of where you're expecting growth to come in for the rest of the year as well.
Yes, so that the growth you're seeing is generally construction loans funding up and construction loans that have.
Completed stabilized and flipped over into the Investor bucket. So this is stuff that was mostly originated a year ago. There isn't a lot of new origination going on anywhere as you would expect.
And the bulk of it as I as I told Michael just a minute ago was is in the industrial and multifamily space.
Okay got it and then just as you look at the second round of deferral requests will you be asking the borrower four or something in exchange for that second round of deferrals, whether it's a guarantee or increase collateral anything anything like that.
It completely depends upon the circumstances that generally yes.
Got it okay. Thank you.
Yep.
There are no further questions left in the queue now, let's turn the call back over to Mr. to look like for any closing remarks.
Okay, great well, we appreciate you all joining us today and we look forward to talking to you again in October.
As always if you have any questions give us color and as always thank you for your interest in associated.
This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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