Q2 2020 OceanFirst Financial Corp Earnings Call
Welcome to Oceanfirst financial Corp. earnings Conference call.
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Yeah.
Good morning, and thank you all for joining us on Jill Hewitt Senior Vice President Investor Relations Officer, Oceanfirst Financial Corp.
We will begin this morning's call with our forward looking statement disclosure.
Please remember that many of our remarks today contain forward looking statements based on current expectations refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause results to differ materially from these forward looking statement.
Thank you and now I will turn the call over to our host this morning, Chairman and Chief Executive Officer, Christopher Maher.
Thank you Jill and good morning to all been able to join our second quarter 2020, <unk> earnings conference call today.
This morning, I'm joined by our Chief operating Officer, Joe with Bell.
Let's go officer graceful watching the Chief Financial Officer, Mike It's Patrick.
We appreciate your interest in our performance and are pleased to be able to discuss your operating results with you.
This morning will cover our financial and operating performance for the quarter and provide updates regarding pandemic conditions in our markets and the progress, we're making to return to more normal operations.
Please note that our earnings release was accompanied by a set of supplemental slides that are available in the company's website.
We may refer those flights during this call.
After a discussion we look forward to taking your questions.
In terms of financial results for the second quarter GAAP diluted earnings per share were 31 cents quarterly reported earnings were impacted by merger related expenses and branch consolidation expenses totaled $3 million net of income tax.
As a result, we take core earnings of 36 cents a share.
Given the headwind of our Coke and related credit provisions and operating expenses, we were pleased with a quarter in a position the company to prove a number of financial metrics in the next few reporting periods.
Regarding capital management, the board declared a quarterly cash dividends of 17 cents, the company's 94th consecutive quarterly cash dividends.
17 cents dividend remains a conservative payout of core earnings.
There are no plans to reduce or eliminate for common dividends at the present time.
Capital levels remained strong with tangible capital assets total assets of 8.8%.
Please note that this ratio was negatively impacted by the PPP bone growth, which decreased the ratio by 37 basis points.
The Tc ratio, excluding PPP would have exceeded 9%.
At the current earnings rate, we expect to continue to build capital levels for the duration of 2020.
During the first quarter. The company was able to repurchase 648851 shares of common stock, but suspended the repurchases on February 28.
Share repurchases are possible in the future.
We will preserve capital until the full impact of the pandemic is well understood.
The company is slightly more than 2 million shares remaining in the current share repurchase program.
Given the capital issuances are we there earlier this year, we maintain approximately $200 million of liquidity at the holding company, which provides the capacity to take advantage of opportunities that may arise that depends demick eases the economy returns to a more steady state.
Given the environment, we faced in the second quarter and the uncertainty regarding the pandemic and economic recovery.
We will do our best to convey our views on the operating environment as well as the company's performance and risk position.
The current crisis will unfold over the next few quarters and impacts may extend well beyond that.
At present, our markets are experiencing a much better public health situation than they were just a few months ago.
The economy has begun to rebound at our loan portfolio is holding up well.
However, all those conditions are fragile and any setback in regional public health conditions.
Faltering in fiscal support programs for business conditions could rapidly erase the gains made today.
It is far too soon to be optimistic although progress has been made and we continue to be confident that the company is well positioned to weather the storm.
Let's spend a minute reviewing market conditions in our area of operation.
When we last spoke in April this year, New York, New Jersey, with the epicenter of the crisis in the United States.
I'm pleased to report that substantial progress has been made to address both the public health crisis.
And to begin the economic restart in a prudent.
Sustainable manner.
The only new Koby cases in our primary markets have decreased substantially.
With the current seven day average running 70% lower than our peak experience in April.
New case reports are stable and have not increased despite several phases of reopening.
Of course, we must remain vigilant the great progress has been made and the infection rates is relatively flat.
In terms of economic reopening the regional approach has been cautious and thus far that approach is working.
Our clients are reopening their businesses in a safe manner and rebuilding operationally and financially.
Stimulus programs in particular, the PPP program and the 600 dollar unemployment supplement have hit there mark.
We see direct evidence that the majority of our clients both commercial and consumer have built a liquidity surplus.
Among other positive measures average checking account balances have increased measurable.
And debit card spending is now comfortably exceeds pre pandemic levels.
In addition, the seasonal Jersey shore markets are very active with high volumes of visitors from across the region.
The experience is different but seasonal rentals are exceptionally strong.
Potential sales are well ahead of last year, and even hospitality is managing to make the most of the new operating models.
We saw similar patterns in the aftermath of 911 and the great recession is driving vacations increased dramatically as more cost effective and safe for travel alternatives.
We have significant concerns that there will be setbacks ahead.
But our clients have been resourceful innovative and resilient.
Over the first six months of 2020, just two oceanfirst clients have filed bankruptcy.
Figure that is considerably more favorable than our historic experience and better than national or stay trends.
On a cautionary note condition and our New York City market raised some concern as many commuters have yet to return to Manhattan office space.
The lack of office occupancy will continue to weigh in on recovery efforts in that market.
Given our franchise distribution, the suburban and Jersey shore markets or a much larger component of our business than the urban centers in New York in Philadelphia.
So we expect the impact to oceanfirst be mute.
It's Gracewell line later, our approach to forbearance management is working as intended.
Our non forbearance loan portfolio continues to perform with negligible delinquencies net credit recoveries and very little migration to classified.
Even oreo levels or a rounding error on our balance sheet.
As a result, we're confident that forbearance pools have identified the loans to present, the most significant potential credit risk on our balance sheet.
Also positive a significant portion of the Fourg forbearance borrowers have indicated their attention their intention to return to regular monthly payments at the conclusion of their first 90 day forbearance period.
Of course, we're not out of the woods and the next few months are critical in December.
Provided we have no major set back in the reopening process. The forbearance period for most loans will expire in the fourth quarter.
At that time, we expect to have information to adjust risk ratings as appropriate.
Turning to our financials there are several unusual items to discuss.
The first is our liquidity position.
Containing a surplus liquidity position is critically important during the crisis.
We overshot our goals in this regard as it resulted decisions made early in the second quarter and deposit performance that exceeded our expectations.
As the PPP program was launched and our application portal began accepting requests for funding.
Third he was immediately clear the demand for what loan to be very significant.
We made a public commitment to the program and immediately move to secure funding to meet that commitment by issuing $281 million or brokered Cds.
These Cds or ladder and will come due in the next few quarters.
The decision to issued these Cds was made prior to the announcement of the Federal Reserve PPP loan funding program.
In addition, we made a practice of funding PPP loans directly into Oceanfirst operating accounts.
Decision and our clients careful liquidity management resulted in fire in a 500 million dollar deposit inflow a good portion of which remained at the bank as of June Thirtyth.
Finally, despite significant interest rate reductions ordinary course deposit growth totaled $291 million.
This growth was driven by the addition of some well priced treasury accounts in New York and.
And certainly includes some elements of government stimulus.
Considering our excess liquidity position, we paid off every federal home loan bank borrowing due to mature in 2020 and in 2021 and still managed to end the quarter with $720 million in cash.
Obviously that weighed on returns and that our leverage ratio.
Joe will walk you through our plans to address the excess liquidity position in future quarters.
In addition to the excess liquidity the PPP loan portfolio expanded our balance sheet negatively impacted margins and returns.
These loans repaying the coming quarters, the negative NIM impact will be mitigated and capital ratio should normalize.
Recall that ERP loans that are not pledged to the federal reserve PPP liquidity facility are included in the leverage ratio. Although they are excluded from the risk based capital ratio.
In addition, due to the U.S. government guarantee we have not allocated any credit reserve for the PPP portfolio.
Joe Grace will discuss number of topics in more detail, but let me outline the areas of focus for us in the third and fourth quarters.
During the third quarter, we are focusing on forbearance wind down and further deposit cost reductions.
Clients are indicating that a significant portion of the forbearance loan portfolio will return to monthly payments this quarter.
But the monitoring of that process will be critical.
As loan officers navigate the process. They collect the operating data that will be needed to determine the appropriate risk rating of any loans that are unable to return to monthly payments. After the 180 day forbearance period completes.
Many of these businesses have only reopened in late June and July So we'll take several months of operation to establish the data we need to evaluate credit risks.
Based on the calendar risk rating changes are likely to be concentrated in the fourth quarter.
In addition, we will use our excess liquidity position to further reduce deposit costs and do our best to stabilize or recover some ground into net interest margin.
As Joe will point out later repricing the deposit portfolio, especially in the midst of integrating two acquisitions require some patients progress has been made and will continue.
During the fourth quarter, we plan to address the forbearance warrant portfolio and expect to be making a number of risk rating adjustments at that time.
As long as interest rates remained stable, we should achieve further deposit cost reductions.
Finally by the fourth quarter, we should have the customer transaction data to support additional expense reduction initiatives.
Given the importance of credit risk management, I'll turn the call over to Grace will outline how we view our credit risk position.
Thanks, Chris.
Mentioned, our credit metrics remained strong and stable during the second quarter.
We had record loans 30 to 89 days delinquent change as well as continued low nonperforming loans relative to total loans.
TDR classified balances remained stable and low and even Oreo balances were nominal a $248000. We have net recoveries of about $230000 this quarter and our loss rates continue to decline.
As a result, we feel confident that those customers experiencing pandemic driven distress are in alphabounce pool and that our forecast for forbearance balances in the third quarter effectively captures our near term risk position.
Yeah, probably accommodative to one borrower has not only helped our clients and our community.
Also helped us better assess our near term was position.
Although as Chris mentioned any setbacks in regional public health conditions any faltering in fiscal support program or other structures on business conditions could change this assessment.
Earlier in the quarter, the forbearance cool peaked at $1.6 billion, including 1.240 billion in commercial and 329 million in residential loans.
Since that time, the balance has declined as only a portion of these borrowers requiring additional forbearance period and subtract your question about near zero for several weeks.
We expect almost two thirds of our commercial customers onto their on to return to regular monthly payments in the third quarter.
This estimate is based on conversations with 90% of our commercial forbearance tool.
Currently the identified second commercial forbearance pool totals 386 million.
These loans have a weighted average LTV of just 53% a weighted average debt service coverage ratio of 1.9.
Average deal size of just 2.1 million.
Within our forecast peak exposure the restaurant hospitality industry represents the largest component at approximately $200 million.
These credits have a weighted average LTV of just 50% and a weighted average debt service coverage ratio of 1.9.
Included in these figures is the 68 million dollar hours bar portfolio in New York City, which are generally secured by mix G property and have a weighted average LTV 44%.
Our forecast peak exposure secured by retail property to $77 million.
Portfolio had a weighted average LTV of 56% on a weighted average debt service coverage ratio of 1.4, we average deal size is just $2 million.
Moving onto residential forbearance. This cool peaked at $329 billion.
About one third of these to return to regular monthly payments in the third quarter, leaving a projected peak residential checking for bonus pool of $237 million to be addressed in the fourth quarter.
Good day 161 million has formally requested a second forbearance period and the risk profile of these borrowers is consistent with those of the initial pool, including a weighted average LTV at 70% and a strong weighted average FICO score of 734.
82% of these credits have never been doing but over the life of the loan.
Strong weighted average LTV to both commercial and residential for bad luck demonstrates the conservative underwriting practices I mentioned last quarter and while the full extent of the impact of the pandemic on property guidance remains unknown Ltds at these levels provides significant downside protection.
We feel our exposure to losses model should the pandemic recession extend into multiple quarters.
I would emphasize last quarter, our loan portfolio its risk profile, it's fairly conservative given our long standing emphasis on diversification and sound underwriting practices, including strong collateral support.
Portfolio was overwhelmingly secured by real estate underwritten with conservative loan to values, our commercial portfolio its diverse emission exposures and property type.
And we'll mbd exceeding 5% and no individual property type exceeding 10% of total loans.
You know lending, it's a modest 10% the portfolio.
There are proceeding from last quarter's call, but we have no energy auto equipment finance credit card or leveraged loan exposure.
Notably none of our 10 largest commercial relationships are on forbearance and only two of the top 20 require some degree of forbearance into the third quarter.
And only a single commercial client has informed us that they plan to go into liquidation share.
Credit risk profile with a direct effect on our charge offs and subsequently the required level of loan loss reserves.
The allowance for loan losses increased $8.9 million this quarter to 38.5 million for your 0.46% a total loans covered nonperforming loans 1.8 times.
Balance together with unamortized credit marks a $35 million totaled 93 basis points of total loan exclusive of PTP loans on which there was no reserve given the U.S. government guaranteed.
All allowance for credit losses growth was driven by 6.7 million dollar increase a qualitative reserves.
Shift toward quantitative reserves when compared to the prior quarter reflect had much weaker economic forecast issued on June June 17th Oxford Economics.
This is forecast to more closely aligned with other sources at that time, such as S&P and Moody's and thus did not require qualitative adjustment to account for forecast differences.
Even with that shift qualitative reserves comprised 40% the allowance for loan losses, that's appropriate and touching uncertain time, but it does illustrate the conservative product mix and long history of strong credit metrics.
We made qualitative factor adjustments to address the koby 19 impacts, including the impact on our core balance portfolio, adding another $3.3 million to the allowance this quarter.
In most cases, it's premature to assess individual ball ratings as the breadth and impact the government support actions remain uncertain and fully.
Scott Good last quarter's call, we expect risk rating migration as the cares actually Barents period end.
As such we expect qualitative reserves make further decrease as this risk rating migration is reflected in the quantitative research.
Our focus over the next 12 weeks will be to continue winding down the forbearance pool identify TDR to non accruals as appropriate and liquidate risk position that can be exited at acceptable economics.
Our credit metrics, excluding for balance loans are exceptionally strong.
Okay, and the forbearance loans accurately identify the near term credit risk pool.
Loans are carried rapidly in our best estimate of the fourth quarter peak, it's $500 billion in commercial and $237 million in residential or 9% of the total loan portfolio.
As only a portion of these will transition to TDR or nonaccrual status. The number appears very manageable in terms of our earnings total balance sheet and our capital conditions.
Our $181 million capital raise provides additional support in this environment.
While these funds remain at the holding company and we have no immediate plans to downstream. These funds to the bank they're available should circumstances warrant.
On a final note ill reiterate that we are a conservative lender that is focused on well secured credit and low risk segments. However, we will be impacted by regional economic trends. We're now regional reopening appears to have stuck a balance between returning to work, while maintaining effective public health protocol, but this balance a delicate.
May be tested in September at the school here again.
With that let me turn the call ever to Joe for some comments on the business.
Thanks, Chris.
I'll discuss our loan business, including PPP as well as some comments on the interest net interest margin.
Deposits expenses and operations.
Loan originations of 975 billion drove record loan growth of 450 million for the quarter. After a 105 million it performing residential loan sales.
PPP loans totaled 504 million of the total originations and 479 million in Outstandings at quarter end.
Our team did a remarkable job and quick fashion in building the capacity to do these loans and automating the documentation to close efficiently in the face of the pandemic.
We've now built an automated system to take our client applications for forgiveness.
Really await the opening of the FDA portal or delivery of those requests.
Regard to the fee to be earned on these PBP loans.
Back to recognize over 50.5 million in the coming 12 18 months as loans are forgiven are repaid.
To date, we've recognized roughly 1.7 million fees from PBB loans through June Thirtyth.
Which is reflected in net interest income.
On originations from the commercial team were strong at 217 million as the bank experienced very little pipeline fallout. Despite current economic conditions.
Commercial pipeline is off its highs from last quarter, but still 20% better than a year ago.
Residential business is very strong as we experienced record originations for the quarter at 242 million.
And the pipeline remains at elevated levels Illico Christians earlier comments and add at the local real estate market is benefiting from limited inventory.
Motivated buyers at all time low rates.
We're taking the opportunity to sell many of our 30 year conforming originations solid gains generates a mortgage banking income while managing balance sheet exposures.
And this rate environment with solid gains available from loan sales.
And the ability to manage interest rate duration risk.
Sales occurred on the flow basis monthly as well as a bulk sale a 45.7 billion.
Our swap fee income was lower than Q1, but it was still a solid quarter with almost 2.5 million in revenue.
Year to date, we are well ahead of last year as customer acceptance of the product remains brisk.
Originating these loans at floating rates with the synthetic fixed rate swap product. That's had some adverse effect on net interest margin as rates across all time lows.
It provides flexibility for the balance sheet and asset liability management.
We generate that fee income upfront.
You're avoiding the temptation to build margins by sacrificing our neutral interest rate risk position.
Ill add some comments on fee income generally which was down over 2 million quarter over quarter.
Due to the decrease in swap fees from an outsize first quarter and reduce fees and service charges on deposit accounts.
Reduced service charges are far more active waiver or rebate.
Fees to our customers affected by Koby magazine.
And to a lesser extent less non sufficient fund fees as a savings rate across the client base increased measurably.
Year over year were almost 6 million to heavy GE income.
And positively bank card income is up in the quarter and year to date as consumers adopted the use of their cards for digital purchases.
Moving to the net interest margin.
Core NIM declined by 20 basis points due to a few factors.
These include the new loan activity at lower market rates.
It was dominated by the PPP loads.
The interest cost on our recent subordinated debt issuance and our balance sheet liquidity position during the quarter.
Ill discuss skews to each of these briefly.
No originations of 470 point.
Lilly BBB or offer at rates competitive in the market, including as noted earlier swap loans with floating rate LIBOR spreads.
Personally affected margin.
Venture rates among the lowest on record.
But PBP loan originations yield the 2.81%.
Were comprised of a 1% interest rates and 1.8% in fee income recognized in the quarter as part of the effective yield.
Together, the new loans, and PPP originations reduced NIM by seven and two basis points respectively.
Sport needed debt issuance impacted NIM by six basis points.
And our decision early in the pandemic to keep some additional liquidity on the balance sheet.
By raising 281 million a broker Cds to risk mitigation impacted the margin by 13 basis points.
100 million of the brokered Cds at an average rate of 1.7% run off in October.
With another 75 million dollar tranche at 1.15%.
Ensuring in January of 21.
Fortunately for us, we didnt need the need the additional liquidity given the deposit growth.
I am not only the PPP loan proceeds.
But also our own organic deposit build from new and existing corporate treasury clients and retail core growth.
Our cost of deposits for the quarter decreased 13 basis points of 57 basis points as deposit rates from all areas of the bank were cut.
The country Bank deposit book, So a decrease of 57 basis points for the quarter.
Since the country acquisition on January Onest, we've seen deposit costs decreased by 73 basis points in that book.
Two river community Bank has seen a year to date decrease of 46 basis points.
On the Ocean first legacy books down by 11 basis points.
We still expect further reductions as time deposits at country in two or community bank continue to mature and a repriced lower.
Aforementioned brokered Cds runoff.
I Hope you can appreciate our pacing of the changes that country into river.
Being very careful preserved the client relationships that we are central to both acquisitions.
Our loan to deposit ratio of 93% as of June Thirtyth provides plenty of room for loan growth.
And disciplined deposit repricing.
Expenses were well managed and include 1.1 million Indiscreet Cobot 19 related expenditures for the quarter and 2.1 billion year to date.
We remain confident in our quarterly expense run rate and we'll recognize savings from the branch consolidations completed may while spending wisely on digital account acquisition and continued employee.
Customer safety.
We are actively managing headcount in the current environment.
On March 30, Onest through yearend, we expect a number of employees could be reduced by approximately 9%.
Comprised of two ever can be bank consolidations.
Some country banking to revert back office personnel.
Normal attrition and a recently completed voluntary retirement plan program.
The merger integration procure community Bank was completed mid may as scheduled.
Converted the core system and consolidated eight branches in the two river markets as well as five legacy Oceanfirst branches.
Country Bank will be integrated in two stages.
Hundred branches will be rebranded Oceanfirst.
In the fourth quarter and the final systems integration will be completed in early 2021.
In regard to Daily branch operations, you May recall that we were one of the first banks to close branch lobbies and limit activity to drive through teller transactions only.
We reopened our branches for full service in person transactions in stages, beginning June 15th.
Our operating at normal capacity utilizing appropriate safety protocols, including the use of personal protection equipment limitations on the number of customers in the branch any onetime.
Activity, it's been about 80% of pre cope with levels.
But it's too early to determine the longtime trends.
I will finish up with some comments about the markets, we serve and second half expectations for loan growth.
We expect loan growth for the remainder of the year to be modest or flat with dependence on the economic recovery.
Industry openings at people returning to work.
We continued to see opportunistic borrowers with liquidity looking for deals while many other struggled to reopen.
Seasonal businesses have benefited by good weather and pent up demand or drive to vacation or long weekend.
Construction has resumed wholesalers to building industrial supplies and other trades are very busy and profitable.
Our restaurants are markets are adapting near breakeven at best.
Hospital hospitality remains well walk breakeven occupancy levels other than seasonal shore hotels and extended stay properties.
Retail is spotty based on geography.
Certain retailers such as car dealers in the larger big box stores seeing pent up demand.
Some clients report difficulty in attracting workers back to the workforce.
CRB urban areas, New York City, and Philadelphia saw suburban office is surprisingly unaffected.
And warehouse distribution and other transportation logistics are strong.
While retail other than discount stores in shopping centers anchored by grocery are seeing inconsistent.
Yes.
With that ill turn it back to Chris.
Thanks, Joe before we open it up the questions. Let me just closes the following summary.
There was noise in the quarter in terms of excess liquidity, the PPP program weak deposit fees to the coated and even the two river integration.
That noise is temporary and should work itself out in the coming quarters.
We have a clear handle on our current credit risk position.
The majority of our loan book did not require forbearance and is performing well.
Before verifone portfolio appears position to decrease materially over the near term.
Given conditions today, we're confident that we have hearings powering capital position to address credit risks, we face the coming quarters.
The us closer position to be reduced further that effort will be critical to defending our margin as we move forward.
Operating expenses will benefit from the elimination of 13 branches this quarter as well as additional cost saving strategies that will be addressed in coming months.
We're in a position to improve operating performance over time and earnings should recover as a credit cycle moderates, which may result in decreased credit provisions.
Our ability to forecast either the ended the pandemic for the strength of the economic recovery is very limited.
We are closely watching public health conditions that are market.
Improved dramatically, but could turn at any moment.
Fiscal stimulus, which has played a pivotal role in supporting the economy.
The continuation of that support must continue in the near term in order for additional progress to be made.
Collateral values, so far residential real estate is holding or increasing in value.
And even CRT cash flows are remarkably steady.
Our credit risk models are quite sensitive to collateral values. So we're monitoring them closely.
At this point, let's move to the Q and a portion of the call. Thank you.
Thank you we will now begin the question answer session to ask a question you May Press Star then one on your touched on that.
If you are using its speakerphone, please pick up your handset before addressing the key.
What's Jive your question. Please press Star then Tim.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Frank Schiraldi with Piper Sandmaxx. Please go ahead.
Good morning, 40 from.
[laughter] no I'm trying to get a sense as always about provisioning and you know the be seems like the model stabilized a bit.
So if that's the case a is it fair to say the qualitative builds are mostly behind and from here. It's just really quantitative factors and credit migration specific credit migration, that's going to drive a provision in going forward.
I think Thats fair, Frank absent a change in the environment right, where we have a big change in the reopening process or something like that that doesnt appear.
At present to be an issue.
We have been building a qualitative reserves knowing that as these loans come at a forbearance some of them will become TV ours or even nonperforming.
And at that point, the quantitative factors will be taking over you'll be making risk rating changes and the quantitative portion of your reserve will probably increase but at the same time as you're getting that certainty one of the qualitative reserves, we've established or due to the uncertainty. So you may see you'll see one category growing in the other category hopefully reducing.
And there is no we can't be really precise about the allocation of that of the timing of that.
But were you know we're encouraged by what we've seen and actually race you might just to talk a little bit about the process of the conversations you've had with clients in order to establish your comfort with where where we are today in terms of those reserves.
Sure. So it's part of our monitoring of the forbearance exposures the.
On the team and then the lenders reached out to I think I mentioned, 90%.
Commercial borrowers and then we had discussions with.
Members of senior management team on both sides credit and lending talk about each credit at least the miteks mergers will begin with everything over two and a half million dollar since a significant portion of the commercial per parents and students conversations.
I was informed.
On.
How can inform what Q factor adjustments, we should make to capture the risks.
As mentioned than you were talking about.
It seems like then if if if the risk weighting story is probably going to be more before Q story.
I think that's kind of what do you indicated kristen.
Seems like I don't want to put words, you met the Threeq you might be a little bit at the low end.
In provisioning as long as the qualitative still holds up but when we start to see migration into lower risk weightings and.
Perhaps.
You guys gave I think a best guess of where I'm not sure what graces, 9% I heard by the end of year, I think but but what you know.
What are your best guess is in terms of.
Provisioning levels versus earlier this year versus the first and second quarter do you think fourq, you could very well be higher as as the quantum because cecil really as a quantitative model right more so than qualitative so could that overwhelm the qualitative improvement I know that's tough to say here.
In July but just wondering what are your thoughts there.
It is it's a very tough to say Frank because Oh, we don't have our crystal ball.
But we have these conversations with clients were delving into their liquidity position.
Delving into.
Leveled operation, whether they plan to reopen are not open.
We're trying to evaluate.
Real estate values and things like that so.
If we thought that we were facing a wave of additional provisions later in the year, we would be taken them now that's the whole point a seasonal.
So, but but we do recognize the uncertainty and I think what you've seen our provisioning now in the first quarter.
Reflects that uncertainty and were.
Based on the calendar today.
It would appear that most of these things are going to be worked out.
By the fourth quarter, and then we're going to be left with what is the TDR pool, the and the.
You know nonaccrual loan pool, and then our precision around reserves than I think will be much better you should at that point you shouldn't be sitting on a reserve that as a big qualitative piece it should be a reserve that is.
In many cases, so quantitative so we think recalibrating that right, but theres a lot of questions and.
There could be a lot of changes between now and then.
Okay and then just finally on the loan growth Joe I think you mentioned, maybe moderate to flattish.
Just wondering if that is correct.
Given your pipelines, 20% stronger than last year, and I guess, two river income country help that out but.
We look at the loan growth.
Graph here.
On page 11 is it kinda is that kind of the story, you're going to see some decent sized loan originations and then you're you're saying that this amount of payoffs to offset that and then just curious where those if centered on any geography in terms of the originations. Thanks.
Interestingly Frank the first after the year, we saw a pretty even growth.
Could you try to all the regions. So the legacy footprint of the bank probably generated 40% and then we've got 3% of the growth in New York, 30% in Philly. So it's nice machine activity from everybody, which is good and I think what we're going to see is.
Continued opportunity we're open for business, which is good we hear a lot of anecdotal commentary about the about people not entertaining opportunities for either clients or God forbid.
Entertained subject for new clients so.
That's a positive for us the pipeline is down a little bit quarter over quarter year over year, you're right. It's up 60 million Bucks is up 20%.
And I'll give an example, we just we just another $50 million lower pools week. So.
Bullish, but we're also selling residential loans in secondary market. We believe for balance sheet management, we should continue to do so so I think that.
I think that it's prudent just to recognize that there may be some fits and starts on the economy as well.
Got you okay. Thank you.
Thanks Frank.
Our next question comes from that will go up there with D.A. Davidson. Please go ahead.
Hey, good morning, guys Russell.
Could you guys spend a little time addressing.
[noise], how the customer transaction data you gather that you believe can lead to some cost reductions later in this year and into 2021 can you just provide a little more detail in terms of how that informs your view on the expense run rate and then into next year.
Sure. So we've been Russell very aggressive closing branches and consolidated 53 branches in the last few years. So we've not been slow to pull the trigger when we see patterns that it makes sense to us and I want to emphasize that most of those cases, we were following our customers. We so as customers move to digital.
Channels, we want to put our expenses in our people and our tools and our technology in the channels they want to being.
So then the pandemic comes along and we see a spike.
Use of mobile banking and the digital channels.
That would suggest that we now have a much higher number of customers that are willing to bank without a bridge or certainly not sensitive to having a brand traffic and branches close by.
But.
Given the stress the environment given depend diavik given that we just closed 13 branches, we don't want to be heavy handed and go and rushed to make a decision today.
That said, we look at the early Brent the French counts that Joe mentioned, right, there about 80% or pre pandemic.
And that's not uniform February bring some branches or have older customers back some don't and we're watching this pattern to understand which of our branches might be candidates for consolidation later in the year. So I think thats kind of the crux of it we don't we just don't one.
We've been a fast in early mover. So we think we can take 90 days 120 days understand with the customers are telling us and then react in ways that.
Helps the company, but doesnt sacrifice our customer satisfaction.
And I appreciate that Chris and Thats kind of what I am wondering given that you guys have been so ahead of the curve here.
Both on the the digital platforms also on the branch reduction as well.
Just trying to get a sense of how much meet this might possibly have.
As it would benefit earnings next year or are there other franchise investment that may.
Absorb some of that potential cost savings.
Well it is always that to your point about investment there is a net save typically as we do this but we do invest and the other areas and we made a lot of investments into the digital side, we're not staring at any joint capital investments in digital I think we're very happy with what we've built and we incrementally improve those kind of on a quarter to quarter basis, but it is personnel.
EPS, where if we consolidated branch that might have a half a dozen people in it.
Saved is not a half a dozen people because we move people into the call center or into our video banking group that does face to face interactions with people across video.
Yes, the early transactions after we reopened lobbies were quite strong.
Appear to have fallen off pretty dramatically now in the last week or so so it's unclear was there a bubble of customers that missed the branch and limited we reopened them in mid June.
Rushed into take care of something and they won't be back.
Or is this just noise, we see in so I don't think its could take us a long time to figured out but we want to be careful you know the strength of our franchise has always been our funding and our funding comes from those strong relationships, both commercial and retail.
So you don't want to hurt you want to hurt the baby.
Got it makes sense I appreciate your comments there Chris and then just final question for me is really a follow up and I just just to confirm what with Grace was talking about and the conversation around the reserves. So.
End of a pro forma deferral around the end of the euro of nine persisted 9%.
No that captured in your reserve today and in that it sounds like in the qualitative factor.
Is that expectation currently reserved for or is that going to show up.
For mental in the fourth quarter as that risk migration formalizes.
So I would tell you that we've made an assumption.
That is an internal assumption that we're not going to kind of share that a portion of those credits will become TV ours are non performers when either reserve cover that.
And.
No if were spot on to that then we've got the reserve is perfectly calibrated I don't expect that I expect is probably going to be a little higher would allow.
And it's all going to be based on that final yield.
The ratio at some figures about the coverage of the pillars of the.
Deferral portfolio that I think are probably informative.
Sure. So I I thought it might be helpful can see.
Served against our expected peak forbearance, just another way to look at the adequacy of the allowance.
Current the balance of 38.7 million in the Hcl that's for loan.
Take out our day, one see some reserves of 21 million that leaves just under $80 million and that is 2.4% of our forecasted second forbearance pool.
So it's.
Short answer Russell is it's like it's a general theres not specific credits.
That we're saying Oh, I think that one night.
Thank you might be downgraded so like a column of those that we then.
Calculated reserve against.
The conversations I was referring to before really really were striking to me that they werent obvious downgrades. There's companies are doing better than they thought they had liquidity.
But it's Chris enterprise in his comments, there's a lot influx Dell and things could go.
In a variety of directions.
Hi, there is an option that risk.
And as we go along and I think 2.4 against our estimate for second forbearance totals is pretty healthy.
Just want emphasize to the process.
If we have known.
Bad information on a credit.
We're going to downgrade.
So we're not waiting to do a downgrade.
What's happening is we have a lot of situations, where we have no information that good it's not bad.
Let's take a restaurant that may be open the last week in June or the first week in July we have no idea, whether that's going to be a good story or a bad story. So.
We're deferring action until we have data, but as we went through even during the second quarter. We mentioned I'm just kind of odd we had only a single liquidation issue in our commercial base, but that credit for example, that's known bad information right, they're not going to reopen it happens to be a fitness center.
So we took action that we marked it we we did what we needed to do so this process is not.
Putting off making decisions, it's making every decision weekend when we get the information we need to make that decision and we know that most of this is going to require few months worth of operation for our commercial clients.
We'll analyze that information just the calendar winds up being that's probably more of a fourth quarter timing that third quarter timing.
But we're not deferring the decisions I want to be really cleared up that where we know we have bad information, we're now ready those wells.
Chris that's very helpful and great. Thank you both for taking my question.
For the rest.
So again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Christopher Marinac.
Jay.
Please go ahead.
Thanks, Good morning this.
Just wanted to continue on.
The same water question in your Grayson mentioned, the additional reserve AG or when I was curious how we think about the acquired reserves at the additional disclosure that given the last couple quarters should that come down slowly or quickly and then as those loans transition how does that play into the overall preserve coverage of the future.
[noise] [noise] Hi, Chris are you talking about the I'm, sorry, I'm not sure I understood. The question you talked about the qualitative component where the credit marks on acquired loans.
Really the credit marks and obviously, if we add all headed.
To the existing reserve and exclude PPP your around 1% and just curious how thats going to look a couple of quarters from now it does loads they pay off or if theres acceleration, how does that play into how your reserve.
Scott considerations so in other words with me.
With regard to keep the overall level at around 1% or the plan on building.
Great. Thank you know the answers that question is going to depend on the at risk characteristics of the profile of what's in portfolio at that time, so the riskier beds credits.
We're too to pay off or roll off or be gently exited or are not necessarily been gently.
And that dramatically change the overall risk profile and risk of loss and the number.
Just a total portfolio with.
Potentially come down.
I think it's Mike let me take.
A shot at that too, it's a 35 million 11 million of that its specific credits.
So that we mark so to the extent that those credits.
Defaulted net charge off we could offset those charge off at this $11 million.
Then.
That does that.
Thats specific alone and then is that a 24 million that's more general and that it's got accreted into income over the life of alone and that John most of that come down over the next three or four years.
And I wanted I want to clarify something to that our forecast for peak second forbearance of just under 9% of total loans. We don't we certainly don't expect all of that to become non accrual or TDR loans.
In fact, you know.
It's anybody's guess at the moment like Chris just described the conversations we're having with these borrowers but.
But there's enough positive story and that's part of the difficulties and estimating the allowance I can't imagine it's all of them I mean, I'm not I will venture a guess here in this environment.
But it's certainly not going to all of them.
I have great.
That's helpful. Thanks. Good my follow up is just about the LP booth that youve reinforce the last couple of presentation.
Hello.
Total evident where you have had property sale.
And just sort of confirm those values in recent months.
Yes, I think it's the values depend the great deal on the segment. So there's some oddities about this recession. If you will do is different than other recessions we've experienced.
First is the residential property values and not only holding up well they're probably.
They are probably understated because I think the values have come up but they've come up sharply in the suburban markets we're talking about.
In most of the markets, we operated you're seeing 10% to 15% year over year price gains and I know that happens in some parts of the country that usually doesn't happen in that in the northeast or certainly hasn't happened since the great recession. So.
Residential pools, I think the ltvs are fine and probably conservative or understated.
On the commercial side, we've not seen as many properties moves so it's really hard to get a precise kind of valuation.
But it is very much based on the property type so to the extent we have our assumption is that our ltvs and things like.
Industrial warehouse logistics up even multifamily the leased for our multifamily portfolio. It's been reasonably steady red collections. So that you may be cap rates come up a little bit, but it shouldn't be a disastrous experience. So we won't know for sure until we see properties trait.
But our exposures and what we're most worried about the rest of the industry right is what is a restaurant property worth of what is a hotel property worth.
And Fortunately, we don't have that this isn't even smaller portion of even the forbearance portfolio.
Right.
Great. Thank you, Chris and Grace I appreciate it all right. Thanks, Chris.
Our next question comes from Collyn Gilbert with KBW. Please go ahead.
Thanks, Good morning, everyone.
Chris just to add to sort of segue from that last comment that you just made and it's kind of a big picture question, but you always have really thoughtful answer is in the way you think about all of that so I'm going ask you.
As you know you as you indicated obviously oceanfirst isn't very good at consolidating branches and that's good maybe can be part of the plan going forward.
Thought as to in the future for what maybe Oceanfirst, it's going to experience or what the industry could see in terms of the re purposing of a lot of this branch real estate bank real estate as as the industry looks to consolidate away from that and you guys as well, but any thoughts on what happens to that real estate.
I mean, you just sort of indicated two we're not sure really what.
Property values within a restaurant or a hotel would be worse like how do you think about your own branch real estate and how that gets re purpose.
That's a really good question I think there are well first we're not in the camp that you shrink all the branches and you have tinier branches. So there's a lot of discussion over look I changed my average square footage of for branch.
Yeah were more in the camp of how many branches to you need to support a geography because of people only coming in once a month or so were once every six weeks they'll drive a little bit longer and especially in our suburban market.
If you are coming to a branch you got in a car and if you got in a car and you're going an extra three traffic lights or half a mile in one direction or the other it really doesn't matter very much I mean, you might be.
Little bit put off you changed the location, but you don't need to have the same density.
So were more in the camp of.
You consolidate the locations and you get really good at digital not having a lot of smaller locations are more efficient locations.
I will tell you that we were in the hard way.
That branch real estate, what it is no longer occupied by a bank.
Not particularly valuable, especially outside the urban markets. So.
One of our first acquisitions.
We took in properties at a certain value close branches and.
We did not realize the of the real estate value. We felt so we've been much more careful about.
Valuable real estate and lease exit costs and things like that and one of the reasons, we've been aggressive about trying to get it out.
Is that it does its a drag on the balance sheet that there are exceptions to that I know peers that are in urban markets, where their branches are actually held well below book value and they have embedded gains if they wind up exiting.
But for banks like us kind of a push we have.
We've actually got into a disciplined though of having a group within the bank that does nothing but liquidity bank facilities.
Can tell with 53 of them, that's a lot of places to leases to negotiate down or sales to make and.
But it won't be it again.
Tell you just have a funny story one of the more aggressive bidders on one on one of our branches was a.
I kind of this distribution company that loved the idea of both the drive through into vault.
So maybe that's the future branches.
It's interesting.
Okay. That's helpful.
Just two other question one on deposit costs right quite hear your messaging that you want to be.
Cautious there any of you know a customer base you need to preserve but can you just give us a sense of what you're kind of current CV operating rates are just trying to gauge kind of that magnitude that you could see some of those deposit rates dropped.
Hey College Joe.
Probably a great example of where we're going.
Is where we've been right so country and two river acquisition is country, especially but I'll just try to give you a couple of thumbnail numbers real quick.
For the remainder of the year. So from now through the end of year right 571 million worth the Cds repricing average yield on those Cds today is 149.
And then 2021 I have almost 664 million at an average yield. The 169. So those are going to come down markedly I think our one year CD today is 50 basis points.
And our that's the probably the highest rack rate I offer so unless you want to go up six or seven year. So.
I expect full to continue to reduce.
As a costs and we're doing that as well in our government municipal business that is very sticky business. That's a business that we do really well.
Much like some Cds or some guarantee pricing we continue to reduce that.
Quarter over quarter as these guarantees come due and we're not seeing any any run off where people understand so.
It's it takes a little bit longer for us because we already had such a good funding.
Base at lower yields, but we can work it down even further.
Okay. That's helpful. And then just last Oh go ahead, Tom if we stayed in this environment and it might take quarters for us to get there.
But I would look back to devote our deposit costs.
The last cycle, so, which we had a number of quarters, where we were below 30 basis points and total deposit costs and not saying, we're not going to be there in the next quarter too, but that's kind of the trajectory you could see us.
Down pretty well.
Got it okay, well get lower than we did the last cycle.
Yeah, well with all this liquidity I I I would.
Not just for you, but for the industry I would hope so I think south.
Okay, and then just on the on that TPP I know, it's hard to determine and hard kit to gas, but just for modeling purposes, and how you guys are thinking about it what's your sort of what are you assuming in terms of forgiveness and the next few quarters. So how that trajectory it's kind of luck.
In terms of percentage it like any this quarter.
I think it all depends on how effective the SP is in terms of their portal I think as we mentioned, we've got a quarter up and running we've got electronic documents from our customers.
Theory, when they open that up that we can hit send you should see some pretty rapid.
Forgiveness, I will say that we have not been extending the maturity of our PPP rose. So we're not in that camp of giving people five years.
Because we don't think that was what was originally intended.
And we don't think our customers either going to be okay.
Okay.
So.
My guess is you'll begin to see them in the third quarter, probably the bulk in the fourth quarter and if the SP is doing what they're supposed to we should be clear lot of it by the first quarter.
We're in the first quarter 21.
Right right now call Weve.
Almost every single I, probably 99.5% of loans, our two year loans, we didnt really do much of the fiber loan traunch.
And the FDA has indicated to the banks I think it came out yesterday before that they expect to open their portal August 10th.
We've done 3000 loans I think I mentioned earlier, we set up an automated system to have customers start to.
Hi, there forgiveness applications to us in advance of VSP, a portal opening we've already got over 500 applications of the 3000 loans and that's going to ramp up pretty quickly. So I think Chris is right I think we'll see the vast majority of the income that we would accretive for loans stayed open over two years come into the next couple of quarters.
Yeah.
Okay. That's great. That's helpful. I'll leave it does thanks guys.
Thanks.
Our next question comes from Matthew Breese with Stephens, Inc. Please go ahead.
Good afternoon at this point yeah.
Hey, first of all just just kudos for the presentation and particularly the pages pages three and for those are really helpful.
With that we're starting to get a good sense for what do you initial cure rate is on loans coming up on the on the end of the initial 90 days.
65, Percentish for you on commercial side.
Is there any reason to believe that got figure is you know a good or bad number to use for the cure rate on the second round when I can see both sides of this argument, but just wanted your thoughts.
We've had that discussion internally and I would it be careful to tell you that we don't have a number that we're using but that doesn't sound like a crazy assumption.
And it really goes to the content of the conversations and this is Chris described them.
Yes, there's a lot of liquidity out there and I think thats under appreciated I mean, I know we know you look at all the bank balance sheet, you say, there's a ton of liquidity.
Our businesses as we talk to them have more cash than you would think at this point of a crisis right and.
I think the races to the vaccine.
Because many of the hardest parts were going to have in this portfolio.
Are going to be those that will benefit the most from the vaccine and it's really a waiting game if folks have liquidity and we've talked to a couple of restaurant tours.
You say look if I can hang on.
Until there is a true reopening of maybe that's early 2021.
I'm going to be in great shape, because you know a bunch the restaurants aren't going to be here and I'm going to have the seats in the staff and the ability and the margins to have great year. So.
I think if the it's going to depend a lot on how quickly the pandemic eases.
And whether we have these rolling things for a year or whether the vaccine comes out and you get a much faster recovery, but.
We did not expect the cure rate in round, one that we are seeing.
And.
So it's been surprising to us that sit on the consumer side, we're not concerned about the cure rate was lower than we thought in the first tram.
And I think that's.
Our clients and probably people across the industry.
Just being careful about their personal liquidity and saying Gee, if I have an opportunity to defer again.
I'd like to build up some cash reserves and and there are a few prominent.
Finance experts that are actually telling people.
But they should go on forbearance, and then put their loan payments in their savings account.
And we're seeing some of that kind of behavior. So I'm not overly concerned about the consumer portion.
The last thing I'd say is if you think about forbearance general it helps our clients for sure.
But forbearance bills for quick so.
If you if you get loan forbearance and you're not spending it on other stuff you're going to be building up your liquidity position and help you get through this time period. So.
We've been very encouraged by the conversations that Grace noted about 90% of our commercial borrowers.
But it is still a fragile environment, we watch these.
Cobot cases in our markets every single day, so far they have been flattish we're dealing with the reopening.
But if that were to change I would be a little more concern.
And to take the conversation one step further and let's just as you know.
I'm trying to get a sense for.
And what the transfer rate at the end of year from things on deferral to TDR or nonperforming.
Is it safe to say that if the cure rate is the same that'd be the most distilled so if it was 500 million.
Commercial for parents, you apply that cure rate, you're left with 200 million at the end of year that that would be the balance you would transfer to TDR or npis, there would be zero in deferral right.
So we'd be very low levels in deferral I mean, the only situation where we might differ is if there is a very unique in specific covert issue. So if you think about it I don't recall us having any of these loans, but if you think about like a performing arts theater right. There's no way that they will be able to operate until really there's of.
So if if they had a good business and they're going to remain closed for another 90 days, maybe you could make an exception, but I would expect that the majority of the credits we havent our booking people may have different books, but in our book, they're gonna have to either come at a forbearance and returned to normal.
Or you know were risk rate than I do want to make another important point about the allowance though.
So, let's just play that forward and forget about the percentage of.
The wind up being say non accrual.
If loans go non accrual you're going to do an impairment analysis and then we're right back into real estate discussion because the vast majority of our book and this is a nuance to oceanfirst, but we're real estate secured in almost all these loans. So now we're going to do our best estimate collateral values and.
If it's something like a warehouse or multifamily building, when it's probably going to be straightforward.
Trying to figure out collateral values on a restaurant property or a hotel is going to be difficult even in the fourth quarter. So I think then you're going to get into these discussions about okay. It's non accrual what is the appropriate reserve on that non accrual loans.
A reserve on one industry versus another might be quite different we may we may have to hair cut some of our valuations on things like hotels and restaurants until we know more about that.
Understood Okay.
And then lastly, Chris you talked about measure you'll be taking to stabilize the name or even make up some ground.
In the back half year could you give us a sense for where you see that NIM stable lease stupid stabilization point is that does that here were better or is there is there potentially another leg down in threeq.
I think what you saw the big leg down in Q2.
A little bit as it was a self inflicted gunshot one right. So we put on that liquidity.
I am proud, we did and we did it for all the right reasons, but that was the single biggest cost to us was carrying this $700 million or the cash. So we can reverse that so that's not going to happen again, we're not going to have another big liquidity build on top of that in in the third quarter.
So that takes some of the Edmund that we're also not going to do PPP loans again, so we're not going to have that pressure on the margin. So you're really down to this kind of seven basis points or so of ordinary course pressure and then how much of that could we overcome in deposit costs.
In other another measure so.
I think it'll be relatively stable I don't think we're going to be losing or making up a lot of ground that either direction now I think this quarter the.
Drivers this quarter of the NIM issue meeting the liquidity PPP program and the subordinated debt those are not going to recur so they're not going to provide pressure on this call.
Great. That's all I had thank you.
Thanks, Matt.
But then if you'd like to ask a question. Please press Star then one our next question comes from William Wallace with Raymond James. Please go ahead.
Thanks for taking my question not good afternoon.
Couple of follow up questions.
Sticking to this concept of the.
The second round deferrals rolling off and then being able to figure out what to do with what's left.
How how would you guided us to think about the cadence of charge offs will you be charging these loans.
If you move into non accrual, but but only building reserves. If you didn't the TDR, our who will charge offs be really a first and second quarter of next year that just.
Maybe I was thinking about that and then on top of that the way the Cecil model works I'm not sure if you're using using the Moody's forecasts are fed forecasts or whatever but over the forecast period. If the unemployment rate remains at that sort of high single digit what ish type level in the GDP forecast doesn't improve woods.
You would you assume that you would have to maintain your reserves that at current levels. In other words would you have to cover your charge offs entirely or would you be able to use reserves to cover those charge offs.
Well I'll take the first because it's easier than I'll give fraced the second one of.
In terms of when you're going to see that the charge off active you certainly possible that we'll have some charge off activity in the fourth quarter as we calibrate on of loan by loan basis, What's non accrual and then what is the real estate collateral on that non accrual loans that we think that we've got a deficit we've got a charge off.
So there could be some in the fourth quarter.
If that's the end of kind of the forbearance wave so to speak.
And we move into next year, then you might see charge off activity. When the loan is finally disposed of in your Truing up the actual.
Called the auction value the real estate.
Or if you're doing incremental appraisals because property values.
Restaurants change a lot over the first half of 2021, but the charge off activity would happen first when you initially assess the nonperforming loan and determine the appraisal that's a fourth quarter event.
And then if the appraised value were to sink further you could have additional write offs or would you actually liquidate that piece of realistic finished foreclosure whatever that may be you with true it up so.
I think it's going to be a little bit over a few quarters, probably Q4, and then depending on how much.
Of this asset type we have in Q4, you might go in to beginning next year I will say, though that.
One option that will think carefully about is when we get to the end of we perceive is the end of the forbearance pool and.
If we're going have to watch the public health crisis.
The way the economy is going the level of fiscal stimulus where the vaccine is.
If we think that the worst is over in any given quarter, whether that's the fourth quarter. The first quarter next year.
And we think we can exit these in bulk we would not be averse to saying look here's a mark that we think we have why don't we exit a bunch of this stuff so that.
We no longer have have conversations like this with you guys. We can just say book is gone and we've resolved. So I couldn't even begin to handicap either a possibility of us doing that are a timing, but that is a door we will consider.
Okay, and then thoughts on on how the economic forecasts will drive the ability to to utilize the reserves I'll pass it to grace.
Hi, well, so I understand the correct that question correctly, I guess, you're asking if let's say the forecast continues to be apparently negative.
In the first quarter of 21, and so it would indicate more reserve build and we'll be able to.
We have to replenish charge offs at that time I would say this is it.
General question, there's a lot of it depends to it.
It would depend I think on at that time on how that economic forecast.
Parents to our actual risk profile, if if our non forbearance portfolio continued to have the current credit metrics at that time and our second for balance we had gotten through all of that.
Chris just described and really kind of isolated are capped figured out exactly quantify the degree of loss exposure.
Then there might be an argument for not having to maintain the reserve build despite the economic forecasts that would you Didnt then there might be if you factor adjustment in the other direction Nick It was justified.
I'm not sure if I'm hit on your question or not so I'll pause there that's fair I think the answer is it depends.
Oh.
Fair enough.
Okay, and then Chris you had mentioned the you talked a little bit about collateral values and the improvement in the residential market and then the.
Ability on the commercial real estate market, just because of a lack of trades, but I'm curious as you guys underwrite new deals may be it in sectors, they're not they're not directly impacted by co that what you're seeing in the appraisals of the properties what do the appraisers doing with cap rates and what impact is that having on the collateral values.
This is two things one show to chime in as well because he is a little closer in some of these of appraisals, but we're getting general covert disclosures, which are not very helpful. So the appraisers are kind of stamping every appraisal and going well. This is what I think but you know the scope and so I could be wrong. So that's not very helpful. But it probably protect them up I would tell you that some.
Like industrial and all that it's a relatively straightforward you're doing.
Annualized net present value, we have it's very clear with good weve could cap rates it's.
And Joe maybe talk about a couple of the deals we've done recently and have the appraisals and how you have handled ltvs.
Interestingly for us and I'll Echo Chris' comments about the.
But the appraisers.
And making the cobot disclosure and some of that is just because there's no comps right. There is not a lot of tops the contribution or pre cobot.
We're seeing some adjustment the cap rate not meaningful adjustment the cap rate.
And I think our approach.
Our new transactions has largely been.
Stick to the credit appetite that we have which is always tended to be a lower LTV.
Perspective, and if we do and we have auto finance some properties, where we have projected refinance a couple of great retail properties, where there are tenants inline tenants that are on deferral, we take out all of their cash flows.
But from the cash flow.
Matt.
And we discount the values and we tend to look at lower LTV loans. So we're still doing loans at the value of the property may come in where we have a 50 LTV our internal LCV after discounting the.
The retail as aren't paying because they are on deferral rent deferral, maybe a little bit higher might be 60.
I would be 65, but the appraisers coming in at a value assuming that a certain point in time that property will be ridley store or the people begin to pay so we take a fairly heavy hand, so some of these properties.
And we've continued to win transaction. So it tells you that you could be in the market.
With a certain credit appetite instead, well we just.
I will just want to a substantial Amazon distribution warehouse at a very low LTV I think it was a sell the 40 or 40 LTV.
So we still believe you're saying that that's an LTV on a on a on a value that you're being pretty aggressive widen on cash flow assumptions or or cap rate. So it's an LTV on a on a value that year.
Hitting heart are relatively or is that am I hearing you correctly. Okay. Yes, okay. All right and then just one last question just for a point of clarification I believe it was maybe in Joe's prepared remarks, Tom I believe you made the statement that he feels.
Oh starts is comfortable with the expense run rate and so and then there were still a lot of commentary about cost saving initiatives and also the.
Cost saves out of that.
Inverted acquisition. So I'm just confused I guess, what does is 51.1 million after that after the one times is that the run rate that you think we'll see in the back half of the year or or will be.
Steel cost saves and other initiatives that on better underway drive that lower and if so can you maybe help us quantify that because the moving parts of all changed so much.
Yup.
I'll take that.
So that the 51.11st of all could 924000 prepayment penalty.
No.
Hold on bank borrowings.
The core rates is really about 51 pretty close to 51 million even.
We think that going forward, we have some cost that are coming out because the two bigger conversion in may and the 13 badges that a close.
So we expect that to be probably about $2 million. It so coming out of the run rate in the third quarter, and then maybe a little bit more and.
In the fourth quarter with some of that.
Voluntary retirement, but Joe mentioned earlier.
Okay. Thank you that's very helpful I'll step back and let somebody else Escos.
Thank you all.
This concludes our question and answer session I'd like to turn the call back over to Mr. Primark for any closing remarks.
Great. Thank you with that I'd like to thank everyone for their participation the call. This morning.
As I said at the conclusion of the first quarter. Our company has been around since 19 or two for a reason we take conservative credit risk positions were strongly profitable and we maintain ample capital levels.
I look forward to talking again after our third quarter results are posted in October. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.