Q2 2020 Wintrust Financial Corp Earnings Call
2020, <unk> earnings conference call will begin in approximately two minutes. Once again. Please standby your conference call, we'll begin and approximately two minutes. Thank you for your patience. It we've continued to hold.
[music].
Welcome to wouldn't trusts financial Corporation's second quarter and year to date 2020 earnings Conference call. Following a review of the results by Edward Wehmer.
Okay, and Chief Executive Officer, and Dave Dykstra, Vice Chairman and Chief operating Officer, there will be a formal question and answer session. During the course of today's call Wintrust management may make statements that constitute projections expectations beliefs or similar forward looking statements actual results could differ materially from.
The results anticipated or projected in any such forward looking statements. The company's forward looking assumptions that could cause the actual results could differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent form 10-K and any subsequent.
Filings on file with the FCC also our remarks made reference certain non-GAAP financial measures.
Earnings Press release, and slide presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure as reminder, this conference call. These being recorded I would now like to turn the conference call over to Mr. Edward Wehmer.
Thank you very much the Waldorf second quarter earnings call.
Pardon me with me as always our Dave Dykstra, Vice Chairman and Chief operating officer. They start our CFO capable of your general Counsel, Jim Cramer President elect Trump.
Average Murphy, Vice Chairman and Chief lending Officer.
[music] why the same formed as usual I'm going to I'm talking funny, because they had a truth removed it's out because they have.
Hey mascot or anything but.
I'm going to give some general comments regarding our results turn over to Dave Dykstra for detailed analysis of other income other expense of taxes. That's me of course in summary comments or thoughts about the future and that always budgets.
Oh, My 45 years being a so through the back industry I thought I'd seen at all.
Oh stupid to me to be Oregon up to think that go with that Dr., resulting unprecedent government economic intervention interest rates fall, it's falling to basically nothing remote Walter Berman pretty much the entire to stay up implementation affairs. These latest and greatest perhaps about how the German loan loss provisioning certainly made less interesting.
Yeah that builds on social unrest and a presidential election, we've got a very very surprised spicy culturally we're working on.
Oh, we need to walk us and earthquakes or floods that make us somewhat cyclical.
The times like this is but it was times like this one or high tech.
Such relationship based distribution model.
Consistent with your reports the credit liquidity diversified asset base actually shine.
There's a strategic agility born out of our structure a culture and we look forward remember the current government throws at us.
Speaking today, such as I have never been more important.
<unk> results for the quarter a quarter can be summarized in a couple of ballpoints, great asset deposit growth spearheaded by over 11000, PPP loans totaling $3.4 billion insulting feel effect.
Even better mortgage results, despite approximately 15 million onetime expenses.
Oh first would be that some point fourmillion MSR valuation adjustment.
Yes, I wonder how little they can go now I mean.
Really read them down to basically nothing so which move up we have a b bond water there.
At some point $3 billion unconditional contingent consideration.
I can say the contingent consideration as a result.
Oh, Spiga mortgage company, a number of years ago.
And and setting up.
Hey liability for the.
Contingent consideration.
With the moves with the strong mortgage <unk> mortgage market.
There are outperforming that we'll get older more money that number is a one time because we basically have.
Projected out where we think they're going to be for the duration of the contingent period. So.
That's close to $15 million, one timers searches mortgage.
Outside provisions bunch of outsize provision as much longer than 5 million despite traditional could consistent traditional credit metrics.
The loan modification crews peaked on appears to be decreasing.
Piecing net interest margin to the low rate environment, that's just liquidity increased and I I do overall asset growth.
Net overhead ratio <unk>, 0.93%.
Some ins and outs here, but 5 million at one time conversion expense related to a who acquisitions that's right George you'd be conversion.
Dave These days actually take it in some detail momentarily.
Pretax pre provision pizza MSR earnings were $173.1 billion, approximately 23 million.
Not including the one time expenses principally for that.
According to what I'm, sorry, including authentic but.
Previously referenced.
We completed a preferred stock offering, which I 270 point Fourmillion, new capital to support growth taking advantage of this whole patients may occur in the market.
And then anything else you may come along.
Very front, we had $21.7 million wordings.
Oh down 66%.
Hi, good earnings per share a 34 cents down 67% talked about the pretax pre provision pretty MSR numbers.
Our net interest margin dropped 39 basis points.
Each of the low interest rate environment, and that's just liquidity.
The other numbers come out accordingly.
Margin really got clobbered down 939 basis points is going to do that rate environment going to basically zero and access overnight liquidity build on our balance sheet.
Alright liquidity total $4 billion up 2 billion from Q1. This resulted in overall liquidity.
And overall liquidity portfolio duration 1.7 years compared to 6.1 years at 630 like <unk>.
We did woke up and liquidity before the crisis or bleed the prudent thing to do as we did not know if someone there'd be any available funding for the P.P.P. launch.
I'm now things are settled down.
A bit will be returning Saudi excess liquidity in Q3.
Knowing that there are alternatives for PPP funding, Okay. That's taking advantage of today most to delever our balance sheet the.
For the time bid.
Today's third quarter, we have de leveraging so about a billion dollars.
Basically this money is basically held at zero zero spread.
Should help the margin going forward.
Also there is some room on the deposit side to reduce rates actually walk through $3 billion in CV deposits, the curbing haven't drilled about 1.6%.
A scheduled to mature be repricing like six months also in July and August additional 1.3 billion promotional couch at 2.2 or 3% will also reports.
We expect the majority of P.P.P. launch before given that in the third and fourth quarters or this year based on surveys we did with our PPP Bowers Congress approves automatic forgiveness, all under $150000 should expedite the processes two thirds of our outstanding loans will be covered by the span.
This will help the margin and other answers I come to short term.
Let me discuss momentarily our commercial cheery pipelines remain strong because those are momentum and in the niche businesses, specifically <unk> green doesn't have to leasing.
We still expect the margin notwithstanding the fact, the PPP launch the settlement to 2.72, 0.8% range funded as clear as there's certainly no around a two of PPP stimulus that interest income should also increase.
Other income or expense they won't cover a detail, but needless to say our mortgage company. It to cover off the call 2.2 billion of production over 102 million a glimpse into them almost double the previous quarter.
Margins were strong in this business only negatives was a $7.44 million MSR valuation.
Downward MSR valuation adjustment at some point threemillion contingent consideration expense.
As I said earlier in the letters Ironically, the good thing because.
We expect above normal credit or a mortgage volumes for the foreseeable future.
[laughter] pardon me wealth management fees were down over 3 million due to market fluctuations most freestor based on the prior quarter and lead acid levels assets under administration sensory actually grew 2.9 billion quarter versus border. So expect to rebound in fee income in quarter, three burning any other while gyrations or other things, we don't anticipate in the market.
Under the provision prison for credit.
We're just for the quarter $435.1 million versus $53 million in Q1 and $25 million in Q2, Hello Cecil.
Approximately 20% of that provision can be attributed to portfolio changes the majority of which are the result of loan modifications.
The major that originally makes economic factors use our models.
All traditional credit metric stayed relatively constant the charge offs totaled 15.4 million for 20 basis points 9.2 million of that a those charges related credits. It had specific reserves assigned the previous quarters and pay the MPS will 198.5 million <unk>, 0.39% of total assets.
Good to 199.4% at March 31st majority increase you laid the premium finance commercial premium finance loans will discuss later.
The ticket size of our premium for that's all who's up a lot.
Accordingly, the no the amount of nonperforming commercial print Transloads made up most of that increase.
I should note. However that every one of those are 99% of those.
Their age the losses are taken earlier and those are confirmed we're confirmed return premiums cover the outstanding So really kind of in fleets are number by the gap is gap.
Loan modification to the quarter to 1.7 billion, a 9.2% related loan totals will the growth curve related at all Unbilleds flatten them is falling off so far in Q3.
Quoted a lot of information out our exposure to slide salutary industries and loan modification generic release, rather than regurgitate all that information to you know we eat that is rich Murphy, our chief lending officer can handle inquiries in the Q <unk>.
Total credit reserves on a core loan portfolios to the 1.85% related the balances previous <unk> premium finance wells during 14 basis point reserve, which was appropriate given $7 billion a life portfolio.
It's never has not gotten what has never had a loss.
Oh and purchase loans during 230 basis points dessert.
Yes, the sand the all we have kept going reserves, our provision and provisions and numbers, we nowhere close to the arms recorded.
Not that we are now even up to think that these extraordinary test will not result, no credit losses.
But I guess time will tell where the cecil's accurate.
Or whether the industry will be subject in the women's and the quantum model makers.
Yes.
Our moves as a girlfriend or has a hang over you never know what they can do the industry now based on this new models. They have that were well reserved now we'll see what the future right.
The balance sheet side.
Great growth of $4.7 billion.
Loans grew $3.5 billion with hub, but then the second.
Average loans, obviously are higher than.
Period end loans, so we should prudential's I'm sorry higher than average also we should be able to achieve the benefit of that going forward I loan to deposit ratio of 87.8%.
In the high Seventys when you deduct PPP launch so we have warm through plenty of liquidity and.
Yeah willing to invest that in our in our launch.
We discuss their excess liquidity in the overall effect on liquidity management our margin earlier.
Well go not including a $3.4 billion PPP all has driven our premium finance portfolio commercial printing. So that's $1 million to $535 million was driven by higher average ticket sizes 38400.
What's the average ticket size and this quarter versus 31, five in Q1, and 30.2 from year ago bodes well for future quarters. The life insurance portfolio also grew at 100 and almost $280 million.
And we'll say Lontra basically flat for the quarter core commercial loans were down $502 million approximately 300 million had decreased related to line usage returned to normal levels.
Did you ended the quarter as the on the first quarter with 56% line usage.
We went down to 49%.
Second quarter.
As many clients do on their lines in the first for the answer liquidity present uncertain future, we estimate another $300 million plus or minus a PPP proceeds were used to pay down other debt and those of us back with actually show growth for the quarter speaking of PCB launch to date, we have 11632 loans.
For 3.41 billion.
I cannot be proud of our team for satisfy all these clients and not clients did a great service. We are currently working on landing Polish relationships with over 450, new prospects would that be well could that be sure about larger competitors.
This is older. This is approximately 1.5.
This represents 1.5 years of new business.
Sheltered from the Halo effect, where people's good work as a result, 90 day pipelines are very grateful.
Got it just because actually the quarter as we mentioned, we completed our preferred offering and $278 million towards $87 million tier one capital that was four will support our will also take advantage of any asset dislocations that may result is uncertain times and provide a cushion Friday I expect to contingencies that may arise.
Yes made through one or two capital ratios were 10.1% and 12.8% respectively to turn the call today to provide some additional detail other income and other expense.
Right and thank you very much and touched a little bit on some of the non interest income and expense sections I'll, just give a little bit more detail.
In the non interest income section, our wealth management revenues decreased $3.3 million to 22.6 million in the second quarter compared to 25.9 million in the first quarter of the year and down 6% from the 24.19 recorded in the year ago quarter.
Decline is impacted by the volatile equity valuations during the first half of the year, which impacts the pricing on a portion of our managed asset accounts and also due to some lower trading in the brokerage accounts.
Given current market conditions as Ed indicated we would expect those revenues to rebound in the third quarter.
Mortgage banking revenue increased by a whopping, 112% or $54 million to $102.3 million from the second quarter.
From the $48.3 million recorded in the prior quarter and was also up strong 174% from the $37.4 million recorded in the second quarter of last year.
The company originated $2.2 billion of mortgage loans for sale in the second quarter. This compares to $1.2 million originations in the first quarter.
The year and also the second quarter of last year, So up a billion dollars from last quarter and the year ago quarter end production.
The increase in the categories revenue from the prior quarter resulted primarily from that increased volume as well as expanding production Margaret margins, which led to an increase in production revenue of $44.1 million.
Capitalized mortgage servicing revenue also positively impacted the mortgage revenue as capitalize MSR is net of payoffs and pay down activity was approximately $9.3 million higher than the prior quarter.
These ER positive breast revenue measures were offset by a negative MSR adjustment net of the hedging contracts.
During the second quarter of approximately $7.4 million compared to a negative MSR adjustment of $10.4 million in the prior quarter.
The mix of loan volume originated for sale that was related to the refinance activity was approximately 70% compared to 63% in the prior quarter. So the refinance volume increased slightly during the quarter and the pipeline is predominantly filled with refinance applications as of now so we expect to have another step.
Our own third quarters and indicated as a continuation of that refinance activity is represented in our strong committed pipeline as of this time.
However, production margins may compress a little bit more recent lofty levels. They tap out over 4%, we expect them probably dropped back down into the 3% level, but we'll see what happens for the remainder of the of the quarter.
Table 16 of our earnings release provides a detailed compilation of the components of the mortgage servicing revenue and MSR activity and levels.
Other noninterest income totaled $14.7 million in the second quarter down approximately 3.6 million from 18.2 million recorded in the prior quarter.
The lower revenue in this category was due to lower capital market activity from loan sales and syndications lower amount of card and merchant.
Sure May services due to lower Tivity card activity.
And losses on investment partnerships.
Decreases were partially offset by $3.2 million of higher BOLI income is bully investments supporting deferred compensation plans were positively impacted by equity market returns during the quarter.
I should note, though that the BOLI income in the second quarter.
Resulted in a similar increase in compensation expense as the deferred.
Compensation and.
Bully investments.
Move in tandem together.
Turning to non interest expense categories noninterest expenses totaled $259.4 million from the second quarter.
Approximately $24.7 million or 11% from the $234.6 million recorded in the prior quarter.
Relative to the prior quarter there were three main faction theres that contributed to the increase.
First of the company recorded approximately $6.9 million of additional contingent purchase price consideration related to the acquired mortgage banking operations and so that's the difference between the contingent consideration expense in the first quarter in the second quarter and $6.9 million.
Second we incurred approximately $14.6 million of.
Additional commissions and incentive compensation stream this quarter relative to last quarter.
Primarily due to the mortgage business and third approximately $2.9 million of additional FDIC insurance assessment was recorded due to the growth in the balance sheet impact as a BBP loans on our leverage ratio. So if you add up those three items.
Combined to $24.5 million 24.7 million dollar increase so essentially all of the increase was related to those three items.
With that being said I'll talk about these and a few more items on a bit more detail.
The salaries and employee benefit category increased by $17.4 million in the second quarter from the prior quarter. This year. The majority of the increase as I mentioned related to incentive compensation accruals, which are approximately $14.6 million higher than the prior quarter does that change being largely driven by additional commissions on significant.
We have mortgage loan production closed during the quarter.
Additionally, salaries expense was up $5.8 million from the first quarter. The primary causes of that was related to $3 million of deferred compensation cost tied to the bowling investment gains that I'd mentioned earlier.
And Additionally, the company incurred approximately $1.6 million of overtime and temporary help expense on the current quarter to support the significant mortgage volume being processed through the system and incurred approximately $2.6 million of elevated pay for co bid related compensation matters.
Offsetting these increases was a higher level of deferred salary cost recorded significant loan volume during the quarter.
Heard primarily related to the PPP long category.
Further offsetting the aforementioned increases in salary and incentive compensation expenses. The employee benefit expense was approximately $3 million lower in the current quarter than the prior quarter, primarily due to reduction employee insurance claims as.
We're seeing that our employees or are doing less discretionary doctor visits during.
Pandemic.
From home time periods, and social distancing time periods.
Data processing expense increased approximately $2 million from the second quarter compared to the prior quarter due primarily to a four and a half million dollar conversion charge related to the countryside Bank acquisition versus 1.4 million of de conversion charges incurred in the prior quarter, So delta there $3.1 million.
I should note that all acquisition related conversion and de conversion costs are behind us.
For all the completed acquisitions and accordingly, the third quarter should be board of any such charges.
As I mentioned FDIC insurance expense was up $2.9 million in the first quarter compared to the prior quarter.
Increase is primarily due to increase assessment rate center subsidiary banks as a result, a balance sheet growth and lower leverage ratios.
Although relief, which provided for FDIC insurance premiums related to increases in assets from PPP loans for the asset size component of the assessment relief was not provided for the leverage ratio unless the bank utilize the feds PPL of funding program.
Because we did not need the PPL our funding program, though.
Fund our PDP long, we did not receive the FDIC insurance release on the leverage ratio component of the rate determination.
So it's unfair is that may seem relative to bank that that funded using the fed's program. It is that is what it is on our assessment rates were higher for that reason and also due to other growth on the balance sheet.
Professional fees increased to $7.7 million in the second quarter compared to 6.7 million in the prior quarter.
The pressure will fee categories averaged approximately $7.3 million over the last five quarters. So it's in line with our average.
And it's a variety of relates to a variety of.
Matters, such as legal services related to litigation problem loan workout consulting services and.
Legal services related to acquisitions.
Advertising marketing expenses in the second quarter decreased by $3.2 million when compared to the first quarter the year.
The decline was primarily related to a decline in sponsorship spendings, including our sponsorships of various major and minor league baseball teams, which have not been active.
As well as other summer event related sponsorships, which had been canceled through the krona virus pandemic.
This expense category also had a lower level of mass media advertising costs as a result of reduced mass media spending which was not incurred due to the cancellation of the major league baseball events and our related.
Media surrounding those.
Yes.
Oreo expenses increased by approximately $1.1 million and second quarter.
As the company recorded a gain of approximately $1.3 million on a sale of an Oreo property during the prior quarter and only a small oreo losses recorded in the current quarter.
So although this expense category increase the total expense for the quarter was only approximately $237000.
Miscellaneous expense category totaled $24.9 million in the second quarter compared to 21.3 million in the first quarter.
Increase of $3.6 million. This increase was caused by the aforementioned $6.9 million of additional contingent consideration related to the previously acquired mortgage banking operations.
The increase is the result of higher anticipated contingent person purchase price payments.
Holding from both.
Current.
I'm close so far in 2020 as well as forecasted revenues out through the end of the respective earn out periods for our previous mortgage banking.
Acquisitions.
Offsetting that charges, a lower level of travel and entertainment expense and a variety of other smaller fluctuations.
So without the contingent consideration accrual of miscellaneous expense category would have actually declined during the quarter and as Ed mentioned and we think we have taken care of the contingent consideration based upon current mortgage.
Volume projections.
So other than the expense categories I just discussed all other expense categories were down on an aggregate basis by approximately $169000 from the first quarter.
As Ed mentioned, the net overhead ratio stood at <unk>, 0.93%, which is down 40 basis points from the 1.33% recorded in the first quarter.
Aided by the growth on the balance sheet on a strong mortgage quarter on a year to date basis, the overhead ratio was 1.12%.
And again aided by the balance sheet growth in the mortgage results. So.
With that I'll talk about the tax rate just briefly.
As I'm sure. Some we will have a question on that.
We generally think of the tax rate of being in the 26% to 27% range.
This quarter was at 29.46%.
And really the result of the increase FDIC insurance expense, which is not.
Fully tax deductible.
So that caused an increase in the the rate.
Because of the increase expense and because of a lower.
Pre tax or any numbers due to the provision adjustments so that the denominator with smaller and the numerator was a little bigger because of the disallowed FDIC insurance, so with that I'll wrap up my remarks turn it back over to add thanks, Dave.
Interesting times as I say, we're well prepared for whatever comes our way our capital leverage levels are robust.
Forgiveness of PPP loan should accelerate recognition of fees and we're prepared for route to listen when the government everywhere approves the halo effect from that effort should provide additional core loan.
And deposit growth by loan pipelines as mentioned remains very strong.
Commercial print premium finance.
Sure continues its still benefit from that hard market we're Alan.
Tailwinds in the mortgage business should allow for both normal business for the rest of the year.
Credit metrics remained strong reserves are at their highest level because the customers in company history.
No as I said earlier and that they would have to lead the current situation we've creditor than scale.
As of now we don't see it prepared if it turns.
First losses, your best loss will continue to.
To our practice of calling our loan portfolio.
Too early identified cracks and deal with issues.
Historically operated a credit metrics have been a fraction of peer group.
Your consumer lending practices product mix and diversified portfolio expect that to continue.
Paul deferrals, which were below peer metrics to begin with our declining.
Hey, managing liquidity to optimize earnings will now in the future of retaining adequate levels to accommodate and uncertain future.
We believe that there'll be dislocations will result in the current state of the world. So that was the acquisition market on woken up until some of the uncertainty goes away. We always said, we take what the market gives us right now, it's given us organic growth opportunities.
Our goal is to prudently grow through this period time as the zero interest rate environment will not provide much opportunity to grow the margin will continue to print prepare our balance sheet for higher rates.
Nobody knew what to me it feels like the Dyson Sevens altogether.
That would be breaking that middle Bell bottoms or disco records anytime soon but it appears a higher interest rates around our future based on the level of the activity of the government printing press. So we're preparing for that we're trying to optimize earnings but keep the balance sheet ready for higher rates tens of billions owned them going lower certainly OS is coming.
Which by the zero rate environment.
And the opportunity then we'll hire yes.
Canes is true.
We should be there so with Adam has turned over to ask Dennis you you're always be considered of.
Our best efforts and we appreciate your support now time for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the Q. Please press the pound keep our first question comes from the line of Chris Mcgratty from KBW. Your question. Please.
Hey, good morning, everybody.
Okay.
Or Dave.
Yeah look for net interest income.
I'm interested at the uncovered appreciate there's a lot of moving parts with Triple B I get the first question is regarding.
The 91 million.
Thank you booked in Q2.
And how should we think about the cadence of that or $91 million.
Yes, so little bit approach, we took on this which we think is.
Is.
The right way to do it under GAAP is we're doing a level yield method on the PPP loan fees.
And we did a survey of all of our customers and got input from them as to when they thought they would to submit their application and what sort of forgiveness level. They thought they would.
Have and based upon those responses on based upon.
Communications with our customers.
We think that most of that will probably 80 at least 80% of the loans would be for given and we would get our funds from the SP by the end of the year, and so which and then the rest we would assume would go out over the remainder of the contractual terms of the loans at 20%. So we put that schedule together.
And we created a level yield chart, which we can adjust as time goes on here as we know the SBA.
Could change the rules they could go to this one page form and have.
Some of these smaller loans repaid much quicker and they could prost potentially process a much quicker, but we've gone on the assumption that 80% will be paid off by the end of the fourth quarter.
Through the forgiveness process and the rest would be projected forward and so we have taken the fees and based upon that schedule. So in the second quarter, we recognized approximately.
$25 million $91 million this represents two and a half launch.
Okay.
Okay. So 60 slip 66 is the remainder that right.
Yes, yes, I think as we continue to book loans its.
We're booking a probably an average of $1 million a day.
We are we are open the portal, but.
We are contacting customers.
And take advantage of it and we continue to both more of these launches.
The available so little bit more I didn't Canada has to be will add materially to it but.
There's still some more coming in.
Okay, I think that in your remarks you.
Once you get through the next six months.
Correct recovery I think you said to 70 to 80 is kind of our exit margin for the business in this rate environment that is that the right way to think about it.
Once again.
Yeah, I think that's fair.
Depends on where life goes back a little pipelines are very strongly and a lot of liquidity on the balance sheet right now put to use I mean that 80% loan to deposit ratio, taking the PPP loans out.
We.
We have room to grow.
That side of it.
Can shrink a little bit because we are focused on liquidity because back at the if you remember the end of the first quarter, what was going out and we saw the appropriate to have an oversized about liquidity just in case, we didn't know that they're going as well that pvp loan funding we could.
The government side your best counterparty can't trusted rely on them for anything so relied on ourselves. There. So there are lot of moving parts here, but we think that that's about the number we got good Walker.
Okay, and then just maybe a couple of housekeeping.
The FDIC insurance costs, Dave does that does act gradually go back to where it was at least loan pay downs, how does it how does that work.
Well.
As the loans they we get.
The reason, we got Ding was not because of the size of the balance sheet because they did allow you to exclude the PPP loans on the asset component of that calculation, but where we got dean was our leverage ratio. So is it the leverage ratio increases then our FDIC insurance rate would come.
So.
So as we make more money in the leverage ratio goes up.
Hopefully.
We could do that or if we downstream some capital under the banks you could potentially reduce it but I would suspect that it would be similar amount in the third quarter.
Because the leverage ratio isn't going to shoot to the moon, even up those.
PDP loans pay off.
From a.
Leverage ratio perspective, they'll still be in our average assets. It will just switch from along to liquidity So got it.
Well look what really happened was I mean that never back in March though he was going island, we made the decision to pull some dividends out because we haven't done our capital offering yet to know we'd be able get one off cash at the holding company is came there. So we did we did that jeopardize advice, we did pull their capital levels down as they aren't as a piece.
The loans go up and obviously had a lot of cash at the holding company, we very well could.
Puts them in and.
I mean that leveled out but that should be determined but I, we thought as a prudent thing to do the.
To bring cash out too.
As they have it it's all that got because.
The cash is King Abdullah cover your if you don't have et cetera, Thats Battle, we don't want that.
Got it and so that'll stay steady, but that's kind of nine contingent number will come out come out Dave next quarter, I said, well that's correct.
Unless for some reason the mortgage market way way higher.
Because we're forecasting out over a few year period for these deals. So we're making our best guess based upon talking to the business people, but.
It's something I would think that that would not go higher it could get tweaked, a little up or down its volumes change a little bit but that should be.
That's sort of like Cecil you're making your best guess right now based upon forecasts and it is what it is but I can't imagine that we can actually handle much more volume than what we're doing right now so I I think that should be a good number.
And not recur.
Great. Thank you.
Thank you. Our next question comes from the line of John Ostrich from RBC capital markets. Your question. Please.
Thanks, Good morning, guys Hi, John.
I wanted to ask about the reserve build.
Especially that $96 million and economic factors I'm curious if you.
Yes, we're surprised by that amount, particularly relative to last quarter.
And when you look think about your qualitative overlay what would need to change for you guys to have another build in that in that economic factor.
Well.
I guess on little surprised by the magnitude of it but the models.
But it out but if you look at the Moody's models really the that they had the economic factors that we use generally is the.
Commercial real estate price index, which is the thing that drove most most of that and those projections were down.
Quite a bit at that at the at the end of the second quarter versus the first quarter.
And it would be double a credit spreads impact is too and those were little bit.
Wider.
And Judy GDP impact some of the factors as well as the Dow Jones, So the big impact there was a commercial real estate price index impacting the macroeconomic factors. So.
If if you saw the commercial real estate price index.
Terry rate further could be that we might have some additional expense, but uh huh.
It is.
A line sort of a line in the San at June Thirtyth, that's that's our portfolio and that's supervision and so assuming conditions stay relatively stable going forward you shouldnt have much more provision unless you grow your balance sheet. So the reserves are out there and we think we've got them.
Pretty good if for some reason the commercial real estate price index improves a little bit the forecast for that improves a little bit.
You could actually see some relief on that number.
If that number gets substantially worse than there might be a little bit more pain, but.
We as Ed said, you know if you look at the our charge offs you'd look at our past dues you look at our Npis you look at the curve.
Flattening and new.
Deferral requests coming down and and actually the overall deferral requests declining.
You don't get the feel right now that.
Youre going to need to add to that reserve anymore that the that the economy is getting worse. So.
A little bit surprising to us, but 80% of that that increase in the allowance was really related to.
GDP being worse in the second quarter, and and and more importantly, the commercial real estate price index. Yeah. Those are the two big factor. So those are the ones. We track we do some qualitative overlays.
Two it based on certain portfolio characteristics, but.
That's what's driving the increase and.
That's what you should sort of following the other 20 here.
But the other 20% of related to one since Avenue downgrades in the portfolio social downgrades occurred because alone. So we're trying to talk about where we're walmarts, our because we see them going down that.
Yes, I know I think that we as we talked about in the last earnings call in the highly affected industries, we saw C met activity really.
Pretty aggressively during those first couple of weeks of April, particularly in the franchise basin.
We tracked at very closely.
We follow it.
Current team.
Segment.
And what we're seeing now if we get through the first 90 days now into the second 90 days as those come off we're seeing a fairly steep decline.
The.
Customers asking for that next round, so that coupled with as Dave pointed out.
Really new request for deferrals or.
Very very slow so we're starting to see those.
FEMA percentage dropping up pretty dramatically so.
Is that also pointed out those risk ratings nickel with both the bad.
Hopefully.
That is a very good sign that those will be upgraded as cash flows improved I'm certainly in the franchise portfolio as we talked about last quarter that we're seeing material improvement in just overall level of cash flow operating performance in that segment. So.
Were mildly encourage right now looking at the battle.
Okay. Good that helps it seems like its.
Backs off quite a bit are much better for Q3.
And then Dave you you backed us off a little bit on the mortgage banking margin I understand that but.
What are you thinking on volumes I mean, sometimes it trails off in Q3, but it sounds like you've got such a pipeline of refinance that you're not suggesting that.
Well, we don't necessarily have visibility to the ended the quarter, but.
$2 billion, plus or minus I think we probably will have another $2 billion quarter. If if applications continue to come in at the level. They are right. Now if you look if you look in our press release. We showed we have about 1 billion nine loans that are locked in the pipeline. So you know some of those will be.
On.
Ill.
The.
90 days some of them drag out but based upon the pipeline we have their people could walk away. If rates went down we could have people walk away, but given the pipeline we hadn't the applications that are coming in and the time is taken to close them now.
We I think it's $2 billion, plus or minus but we didnt see many people walk away from their deals.
In the second quarter. They just didn't want to get back in line, so even though rates fell a little bit.
Most people Paul through and just close on their mortgage so.
We'll have to see if that pull through rate continues but if it does I would think yes, I would think plus or minus 2 billion again applications of that slowed so really kind of think about July and August is baked already it's really September and those applications are still coming at the same level. So.
He is good good feeling.
No it took up well for Q3.
One of our Libelled bottoms them I just go records.
Hi, I.
I still have all my teeth wherever we can you are going to step back and forth still I wont buy Steve.
Oh Boy hope, you're doing better alright, I hope you feel better.
Yes.
Thank you aren't next question comes from a line of David long from Raymond James Your question. Please.
Thanks, Hey, everyone.
Hey, David you still have your buildout of Zanja.
You know if you keep your clothes long enough, you'll you'll use them again doesn't matter what they arent the cycles do rotate.
[laughter].
I guess I'm, a harder but yeah.
So the I just wanted to see if I heard you correctly did you say in quarter to date and third quarter that deleveraging has already been about $1 billion on the balance sheet.
Yes.
Okay. Okay got it got it and then I didnt see it in the release the work did you guys disclose.
What the purchase loan marks you guys still have on the books are at this point.
Well, we have a reserve was 2.3% against themselves.
No idea specific.
Specific reserves, we didn't disclose that but it's very small David I don't have the number in front of me, but it's very small.
Okay. Okay.
And then you talked a little bit about the marketing dollars in the sponsorships with major League baseball kicking in here, we think in a couple of days or tomorrow, maybe with a couple of games.
What type of increase our we expected to see here from the second quarter third quarter from those sponsorships that actually will.
You will be taking on.
I guess is about through the $200 billion.
Theres no tickets, it's just the sponsorship sizes so.
We are so we're lucky enough to be in our silver than you might have another definitely do a million but.
Counting on the Sox, playing the consume less and less in the series. So it may go up a little.
So.
Yes, there are nice that so there aren't ticket so it'll probably bump up a little bit in the third quarter, but not like it was in prior years, because you still don't have all the ticket costs.
Got it okay. All right. That's a that's all I had for now thanks guys.
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Thank you. Our next question comes from the line of Nathan race from Piper Sandler Your question. Please.
Yes, Hi, just a question on the excess liquidity build in the quarter.
How much you guys how much of that you guys think is kind of trends Rick I know almost two thirds does tie to.
Uh huh.
PPP and whatnot, but any sense just in terms of the other.
Deposit growth agenda, or how much of that makes to ground and what are kind of your reinvestment plans, just some of that excess liquidity as well going forward.
I'll get back to Tim Crane.
I'll take the first part of that for sure and that we we've seen ins and outs municipal deposits are up quite a bit obviously to your point, there's probably $2.5 billion of PPP related deposits that remain on the balance sheet.
I don't know exactly what to expect but I don't think it's going to go down time, we've seen good inflows.
Press release references Mac safe deposits up about a half a billion dollars in the quarter. So I would expect sort of pretty flat.
Pre any PPP movements.
Or even up so.
And then Dave with respect to utilizing some of the excess liquidity.
I'm really not excited about locking in.
These rates.
On a 5%.
Mortgage backs our loan pipelines are very strong right now.
And.
I never to rely on those premier finances.
Those are nine months will pay alone. So we are churning those every nine months in with $10000 increase and.
Average ticket sizes, that's going to take and they add additional loan.
Picking up additional market share that's going to help the life insurance portfolio is doing very well our overall leasing portfolio, which is throughout the balance sheet is over $2 billion now shows no sign of letting up.
And the commercial side again with a billion.
Total a billion aid or billion died gross in the.
Pipelines.
Coming down to about 1 billion three.
In.
Estimated.
Draws on their exit estimated.
Our success rates.
And you know that billion three or loans as it's a halo effect I mean, it's unbelievable what happened.
They will bring proudly another $1 billion of.
Deposits so.
I would probably if I had a guess I'd say, we're going to be flat.
Assets, maybe up a little bit in the third quarter.
Loan to deposit ratios PPP loans are forgiven will start working their way up again.
And.
We may or may not do.
Some mortgage backs just to.
Two.
Make a little bit more money, but.
I'm more concerned about retaining our GAAP position and now like again these low rates.
I truly believe that maybe that this year, maybe the next year, but.
The amount of money in a in the in the economy right now in those printing presses continued to home, especially if.
Phase two of the release up through.
So you go back in time in those always result in higher rates.
Maybe the rest of world well, but.
Patients got to kick have even with the rest of world. So we'll see.
Yes, I would agree.
Appreciate the commentary it.
And then just thinking about core loan yield.
Okay.
Uh huh.
Yep.
TPP program.
I mean.
In terms of how those came down the quarter Im just again, just trying to isolate the.
The impact apart.
Those lower yielding loans.
How they came down in the second quarter or you're talking about what we're thinking about moving forward.
Yes, no I'm, just trying to understand that magnitude the decline in core loan yields outside of.
PPP and the second quarter.
Oh, well, probably commercial commercial real estate were probably down you know.
From April through June there probably down.
Early in the quarter, they were probably 40 to 50 basis points higher than later quarter.
Okay. That's helpful.
Appreciate the color. Thank you.
Welcome.
Thank you and as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one our next question comes on line of David Chiaverini from Wedbush Securities. Your question. Please.
Hi, Thanks, a couple of follow up questions here.
So you mentioned about the Moody's model in the scenery price index per day projection being the main driver for the provision in the quarter. I was curious are you able to share what that projection is how much our commercial real estate price is expected to come down based on the Moody's model.
Yeah well.
What we had in there.
The Siri price index would decline through the fourth quarter and recovers into 2021, but still rude remained below what it was at the end of the first quarter. So.
It does it declines down.
It does go down it's probably down.
I think the commercial real estate price index was.
Near 300 at the end of the first quarter and depending on which Moody's model do you look at but the ones. We were looking at is sort of if you look at baseline or even if you looked at the S. One model.
They are coming down in the 240 to 50 range, so could be down 20% ish.
Great and then helpful.
And then recovery then Rick covering into 2021 is what they show.
Got it kind of Okay. That's helpful. And then did I hear you rate given all the moving parts into utilization rates coming down in the second quarter, but looking out to the third quarter for loan growth did I hear you say think of it as flattish given the paydowns in run off of the PPP will offset some of the growth.
And pipeline build you're seeing in the other categories.
Well, notwithstanding PPP, which we expect to come down substantially.
We believe our core portfolio over nine pp portfolio should grow nicely based upon.
So all of our niche business is doing well and our commercial pipeline commercial real estate pipelines being very full so.
Yeah, We think PPP launched in the third and fourth quarter be gone buying route to.
And I don't know, where we would make up $3.3 billion in that period of time, but we'll manage our liquidity accordingly.
We expect our core portfolio to continue to grow.
But it also would expect unless they do this SP a program quickly here and the SBK actually turns SP is got 90 days to turn around.
The forgiveness applications once they get them, how they can turn around in 30 days or 15 days or you know quicker I suppose but my guess is or they're not going to work at lightning speed just because all have a lot of activity from every bank around the country that did these that most likely you'll see most of that pay off occur in the fall.
Fourth quarter, so probably through the third quarter, we'll have the PPP loans generally in place.
Got it thanks for that and then the last one is more of a housekeeping question you mentioned about how the FDIC assessment.
It was elevated in second quarter, and you expect that to be kind of stable in the third quarter and you mentioned about the tax rate how it's normally 26 to 27, but because of the elevated FDIC assessment, that's where it was in this 29 and half percent range. So as we think about the tax rate going forward should we think about 29 to 30.
Given the elevated FDIC assessment or how should we think about that.
No I don't think so because the denominator really is your pre tax income in our pretax income was so depressed because of the $135 million worth us.
The provision.
So if we go back to normalized provision the denominator is going on.
It could get much larger and should bring that rate back down so I still sort of say 26, and a half. The 27 is probably a decent rate has really sort of depends on the pre tax income number but because it was so depressed because of the elevated provision this quarter that that was the other reason for the increase in Nebraska.
Great. Thanks very much.
Thank you. Our next question comes from the line of Brock Vandervliet from UBI ask your question. Please.
Great.
Hi, guys.
Nebraska, Hey.
Given the wash of liquidity.
Wondering if you have you feel you having much scope to further reduce the.
The CD component of your your funding mix is not large on a percentage basis right. Now just kind of curious if you thought you could get down further.
Hi, guys actually I think it'll come down.
Just as we don't want a lock up these games rates other people don't either.
So I think it will move into money market and what I will lose or the Basel I think people just way.
But yes, I think it's natural that.
Cds would come down a bit.
Okay.
And.
On the deferrals, what do you think.
End game is there.
You can obviously redifer.
Yes.
You decide at some point too.
We underwrite and and modify some of those that.
I I believe under the Cures Act would not be considered a TDR. If you did that but just wanted to.
Talk that through.
Well, we we I'll turn over to rich in the second but.
We are on round, one we share the pain reduction stand about like Candy free agreement, we actually re underwrite and look at them at that point in time, and say boy you could do X y and Z to save cash like somebody else. So weeks, we put provisos out there to share the paying them.
Enhance our position.
The second time round there is more pain. So therefore do you think you hit the nail them head.
I think there's.
As we walk through time here the first round I think a lot of.
Our peers were really we're pretty much youre looking at that is kind of a pretty path.
We looked at it we certainly want to be there to help our customers who were stress.
We also did.
You want it really think about.
Things could we do to make it a better structures in terms of additional collateral.
Personal guarantee things like that.
We refer to it as Rumble scripts in terms of the.
The deferral process as we get into the second go around we're kind of looking too.
Bumped that up a little bit if you if somebody is looking for another 90 days deferral of principal or principal and interest.
We're in those requests are going to get a little bit more elevated.
And.
Endpoint time, we also want understand what is the game playing back to your for your original question. How do you how is the customer planning to get to the other side.
And.
Those are the that is the endgame question for a lot of our customers as I talked about earlier, we're seeing those deferral rates coming down pretty dramatically I think that as the economy has reopened.
Number of our highly impacted industries that really seeing substantial improvement.
And.
As we get into the.
This next phase will really start to be able to see which of those.
Industries within our portfolio still have some really long term residual impact and then we're going to have to kind of one at a time walk through what is the end game for that situation. So but at this point time you know, we're we're mildly encouraged that the people who are coming in for deferral requests they're not they're not.
Interested and throwing the towel there they see a path to.
Being cash flow positive again and.
So we're feeling okay right now pick our matters, we don't want to kick the can down the road.
Just to have an explosion accomplished by later Theres no way out first loss our best lost.
Clients and figured out that way, but as Mark said most of these guys see it end and we do underwriters that point time, if we can do anything in terms of rewriting the loan and doing it that way that makes sense, what do we do it but.
Most of them they were underwritten properly in the first place their business hasn't changed that much to to require that other additional collateral or or.
Things that will benefit us.
Great Great color Rumble strips slick that analogy.
Working those down thanks. Thank you.
Thank you aren't next question comes on line that Michael Young from Suntrust. Your question. Please.
Thanks, a quick follow up on kind of the first losses best last comment just what areas are you kind of more aggressive and just go ahead and moving problems out where you maybe see less opportunity for recovery or.
A better market to kind of liquidate.
At this time, maybe just any color there.
Yeah, I wouldn't say that there is an industry specific issue there I mean I think that.
We disclosed in the.
The release you know we there are a number of highly impacted industries that generally speaking, we're feeling pretty good about your one that we see in some of our peers as being particularly problematic or two would be energy and hospitality or been really highly impacted for us. It's just not that many credits.
So we can look at those individually and try to figure out exactly what we're going to do neither of those portfolios do we feel like we have a whole lot of exposure from a loss perspective to at this point in time. So we're feeling okay. I think the one that is probably most.
Interesting to me to see how it ultimately works out is.
The C. R E retail portfolio I think that that's one that everybody has highlighted for this quarter.
Amongst our peers and certainly for US we've done a pretty deep dive understanding.
What bill that portfolio looks like we do think that there's a lot a room in that portfolio from an LTV.
Debt service coverage perspective, we've got a lot of personal recourse in there. So we've got some handles to pull so.
In terms of just going in and doing the wholesale sale of chunks of the portfolio. Yeah. We just don't see that right now I mean, there are certainly ports loans within the portfolios that have shown more stress than others, but generally speaking the borrowers water work with us and we want to work with them. So I wouldn't say, we're cutting in running.
Got any segment of the portfolio right now.
Okay, and maybe switching gears a more of a strategic question maybe for Ed but.
Over the last 612 months you guys have been kind of growing the branch footprint with some infill opportunities and obviously doing some deposit specials I assume most of that activity, obviously has been curtailed or suspended indefinitely, but are there opportunities to kind of go the other way and cut costs on physically.
And then infrastructure and what needs do you have on kind of the technology investment side in light of kind of the pandemic and new customer trends.
On the technology side, we've got we're constantly upgrading our systems. There are one of our main operating tests, which has served better products, they're better delivery system still in the service that's going very well.
And I think we're very competitive there, but the market moves very quickly. So we are we continue to make investments in the digital side of the equation.
On the brand side of equation, we are by the end of the or we will have completed a full review of our smaller branches.
To make sure.
That we either you know.
That we've had we've usually or one or two or market share in our branches when we.
As there are a period of time in terms of.
After a year and a half these should be one or two and market share some did not achieve that.
We'll go into a full review of those branches to see who has a long people there on occasion seller been acquired.
Should we closed them.
So there are always opportunities are we we always look at it but maybe a little bit more fulsomely. This time by the end of year, there maybe some opportunities to relocate.
Close or.
Yes, that's side as the you know you hate to say it but.
If this.
Remote.
Working and.
Distancing becomes the norm.
You need is very people in the branches is used to him. So they will be looking after the end of year looking at more road work I'm amazed at how a remote workers done. So in other words, we are reviewing all of those expenses and just see another go Tim you have a comment on that.
I think thats right, we were not giving up on the branch footprint by any stretch of the imagination and.
We're seeing clients want to use both our branches and the electronic services, which is most banks point out or.
Over the last 120 days or so.
They are still places, we'd like to be as well.
And we think opportunity so I think it'll be selective review.
Okay and last one for me just on on the mortgage kind of comp expense or variable expense looked like it was up about $6 million year over year.
Volumes were obviously strong how should we think about that going forward are we in kind of.
Higher variable comp environment for the rest of the year, just given production volumes or anything like that that we should be baking into the model.
Yeah, well, yeah, I mean, if we did 2.2 billion. This quarter, we do 2.2 billion next quarter, we paid based on.
Quantity of loans closed basically so.
Depending on the average tickets I know expected to be somewhere if you went back you know if you went back down to 1.2 billion and we'd obviously lose more but we don't see that happened in the third quarter and my guess is with rates as low as they are that will have probably a relatively strong fourth quarter two with this because some of the closing.
Dates the locks are much longer and I'll, just because the the systems. So full but it's it's you can't close quite as fast as you used to so I would expect I would expect those numbers to stay elevated but it's fine for them to be elevated because you're making in the revenue on the other side. So.
I would expect they wouldn't change dramatically in the third quarter based upon us expect in a similar production in the third quarter.
Okay. Thanks.
Thank you. Our next question is a follow up from a line of David do you ever any from Wedbush Securities. Your question. Please.
Hey, Thanks for the follow up so you mentioned about retail Syrian called that out.
Curious.
In light of the Moody's forecasts, calling for this year reprice index to be down, possibly and of course, it's only a forecast in very well could not come true, but down 20% can you remind us what the ltvs are four at the retail CRB portfolio as well as CRT overall.
Yeah for the retail see idling of the.
Theory overall, but we did a pretty deep dive on our retail CRB and.
Looked at.
75% of the portfolio in great detail.
And the average LTV there was about 55.6% now keeping in mind that that's based on the most recent appraisal it doesn't necessarily mean that thats, what current LTV is but it.
It does give us it highlighting the fact that there's room to move here.
We typically have been pretty conservative.
Overtime.
The other thing that I think is interesting in that analysis is that the average.
Loan size is around 1.2 million. So it kind of highlights again that what we said in earlier calls that we do try to be pretty granular in that space. We really don't have a lot of exposure to big box and.
To any regional malls. So most of what we have is sort of the infill in community type stuff that was kind of been a bread and butter within our retail footprint.
Great. Thanks.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to had weymer for any further remarks.
Thank you I have one for his remark at that a couple of emails I get deal you're talking about higher interest rates.
Hi, I'm, saying long term I don't know you're going to happen tomorrow or next maybe into next year, but I think it has to happen.
And I think that you have this is such a cyclical business you have to learn from the past.
Although there are different records show that you I think.
Preparing for higher rates makes a lot of sensor my book.
And now I'd say, it's good that but next year.
This year next year, but.
You know onto a bunch of five years seven your deals and one that percent.
Because I think it's got to happen eventually so I want to make that point clear, we've always been somewhat salmon like salmon when it comes to that we talked about longer term and it seems like a swimming upstream, but it's always paid well.
Played off well for so thank everybody for question Joe to contact.
Have a great weekend.
Stay healthy thanks.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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