Q2 2020 Crossfirst Bankshares Inc Earnings Call
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Thank you for standing by and welcome to cost for us to teach when each when earnings call. At this time, all participants and your listen only mode. After the speakers crushing station there'll be a question answer session asking question. During his section you'll be depressed tighten the number one on your telephone if you recall.
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Welcome and thank you for joining us today on the color, Mike Maddox, President and CEO, Dave O'toole, Chief Financial Officer, and Randy wrap our Chief Credit Officer as a reminder, a telephonic replay of this call along with our earnings release and presentation will be available on our Investor Relations website for an extended period of time before we begin.
Let me remind everyone that this call may contain certain statements statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
We caution investors at actual results may differ materially from the expectations indicated or implied in our forward looking information we provide a comprehensive list of risk factors in our SEC filings, which I highly encourage you to review any forward looking statements apply only as of today and we undertake no obligation to update them except as required.
Well securities laws reconciliations of non-GAAP financial measures to the nearest comparable GAAP measures are included in the release or presentation.
Piece of which are available on our Investor Relations website, all earnings per share metrics discussed on today's call are provided on a diluted share basis I'd now like to turn the call over to our new CEO Mike Max.
Thank you Matt.
I'm really excited to be here today at the close or my second month, as President and CEO of Cross first bancshares to discuss our results as we continue to navigate the pandemic in associated economic uncertainty.
I'd like to wish him the best to our employees customers and shareholders and their families and hopes that are they are staying safe and healthy.
Cross first bank is committed to doing all we can to contribute to the health and wellbeing of the communities in which we serve.
I want to take a moment, especially the thank George Jones for his leadership at the last few years and for making our leadership transition smooth and successful.
As a part of the management succession, Steve Peterson, who has been serving as our president of our Wichita location has been promoted to chief banking officer and will be located in Kansas City.
Steve is consistently performed by managing and growing our what's your top market for over 10 years and we are happy for the leadership he brings to our company.
He will oversee the revenue generating portion of the bank, which includes marketing and the oversight of our five markets.
As we begin to next chapter of cross first we want to build on our foundation and continue to drive responsible and profitable growth.
Well other banks work on branch rationalization strategies, our branch light model.
Relationship banking focus and technological capabilities have allowed us to efficiently serve our customers throughout the pandemic.
Over the next couple of years, our organization won't be heavily focused on enhancing efficiency optimizing our capital structure, improving our return on equity and delivering earnings per share growth.
Having said that the bank will not deviate from its core mission and we'll continue to work with that support our customers through the course of this pandemic.
Despite the headwinds to continue to face the banking industry I'm really proud to announce our 25th consecutive quarter of operating revenue growth.
Although we experienced a year to date net loss of 3.5 million our year to date pretax pre provision net profit of $30.9 million is the best in the company's history.
[noise], which includes a noncash $7.4 million goodwill impairment charge and a significantly higher than in the same period of the prior year.
Operating revenue for the quarter rose, 20% year over year to 43.8 million and increased 9% from the prior quarter.
We're navigating through the challenging environment and have provided you an update regarding our covert 19 response.
We are continuing to operate under our pandemic plan.
And we currently have approximately 90% of our employees working on a rotational schedule with time split between home and our offices.
We continue to take necessary precautions for the safety of our team members who are back in the office serving our customers.
Our lobbies are operating by appointment only.
And the company will continue to remain flexible regarding the branch reopening process.
We have an unwavering commitment to help the local businesses and communities, we serve but we do not want to jeopardize our employees or client safety.
During the quarter the bank prudently added $21 million to the reserves, bringing our a triple well to loans just 1.6%.
Which impacted our bottom line that income and related performance metrics.
While the current economic environment has necessitated this decision we remain steadfast in our ability to take advantage of future opportunities given our focus on quality credit combined with strong capital and liquidity levels.
We continue to monitor.
Our at risk segments, and modifications to identify any challenges and to proactively offer our borrowers solutions.
We reported efficiency ratios of 71% for the quarter and 63% year to date.
For the quarter, our non-GAAP core efficiency ratio was 53%.
Which continues to show tremendous quarter over quarter improvement.
As the company approach is 5.5 billion in assets, our assets per employee ratio rose to $15 million.
The highest level and the company's history.
Although we reported a net loss of 14 cents per share at the end of the quarter.
Our tangible book value per share rose, 5% five cents per share to $11.65.
Our common equity tier one ratio remained relatively flat in the quarter after building approximately $21 million of reserves.
While our overall risk based capital ratio increased quarter over quarter.
We did experience some previously anticipated migration in our loan portfolio that has suffered subsequently impacted our asset quality metrics.
Randy wrap will go into more detail regarding our loan portfolio performance in a few moments.
Our teams continued to deliver healthy organic deposit and loan growth.
In the quarter, we grew near to nearly 5.5 billion in assets.
Excluding the PPP loans, our quarter over quarter alone growth grew conservatively at 1.2%.
In addition, our overall deposits grew by 8% and D.A. balances increased by $183 million.
As we were able to capture deposits from PPP loan proceeds and customers.
As of June Thirtyth 2020 demand deposits represented 18% of our overall deposits.
Which is a significant improvement quarter over quarter.
We're also extremely excited to announce that our Frisco, Texas locations opened on July 13th.
And we plan to relocate our Missouri office to a new country Club Plaza location in Kansas City, Missouri by the end of September.
As of June Thirtyth, we have a funded approximately $369 million, our PPP loan proceeds, including $79 million to new business customers.
We have transition many of these customers into stronger long term relationships and they have contributed to the large increase and our DTA accounts.
Our average loan size for the PPP program was $312000, which shows how our team is truly focused on helping support small businesses and our communities.
Furthermore, Cross first continues to support organizations that are helping individuals facing unprecedented challenges at this time.
Against the backdrop of this unprecedented economic situation, our second quarter performance highlights our continued operating leverage growth.
As well as our increasing earnings power from efficiency.
Both of which have allowed us to effectively build reserves.
While the range of credit outcomes as wide and highly dependent upon the length of the pandemic unrelated downturn.
We remain determined to support our employees clients and communities in our local markets.
We are focused on prudence, and managing our capital safety soundness and asset quality to be good stewards of the capital entrusted to us by our shareholders.
I'd like to end by thanking all of our employees, who continue to serve our customers during this crisis.
Our team here it has demonstrated unwavering dedication through these difficult times.
I look forward to answering your questions at the end and now I'd like to turn the call over to our Chief Credit Officer, Randy rap for a more in depth discussion on credit. Thank you.
Thank you, Mike and good afternoon.
As slide nine illustrates our nonperforming assets to total assets ratio ended the quarter, 0.74% compared with 0.59% at March 30, Onest due to several energy loans and several small see an eye loans being moved the nonperforming status.
During the quarter, we completed the majority of our spring borrowing base Redeterminations for our energy portfolio and as a result of lower oil prices the portfolio experienced some grade migration.
Driving the need for additional reserves.
In Q2, we reported $1.3 million in net charge offs, including a $1 million charged down of a previously identified nonperforming energy credit.
Next I want to take a minute to discuss the migration within our loan portfolio and the level of payment modifications within it summarized in our slides.
We have provided a high level summary of loan migration information by quarter, noting that the majority of the increase in substandard loans during the quarter was due to migration with the energy portfolio.
We also experienced some migration into c. and I portfolio, primarily as a result of the negative impact of the co bid 19 influence.
We processed a significant number of loan modifications during the quarter and for most clients who requested payment deferrals, we modified their loans to help preserve cash flow capital and liquidity.
As of June Thirtyth, we modified almost 330 loans representing over $700 million.
We are working side by side with our clients to help them through this unique period, which should benefit cross first our communities and our clients in the long run.
It is important to highlight that of the loans that have been modified almost 90% heavy pass rating.
We have an expectation that they will continue to perform in the future.
We believe we have taken a very proactive approach in evaluating credit quality across the entire loan portfolio and considered risk rating changes in the evaluation of our allowance for loan losses.
Adding a $21 million provision, we finished the quarter with an allowance to total loans of 1.61%.
An allowance to total loans less the PPP loans, which we expect to be fully forgiven of 1.76%.
The increase in the reserve for the quarter was related to changes in risk ratings and deterioration in economic conditions, driven by the impact of cobot 19, and energy volatility on the U.S. and global economies.
As previously discussed our classified assets for the quarter increased mostly due to migration within our energy portfolio and at the end of the quarter, we have built reserves equal to 4.5% of the total energy portfolio.
The increase in the allowance for credit losses takes into consideration our best estimate of the impact of slower economic growth and elevated unemployment.
Which is partially offset by the benefits of government stimulus programs as of June Thirtyth.
Estimates are based on current portfolio performance, along with many quantitative factors and qualitative judgments and we believe it is prudent to continue building reserves during these uncertain times.
We are actively managing our portfolio, but the remains uncertainty around the long term outlook and how much of our reserve allocation will materialize into actual losses.
As Mike mentioned, we have again included exposures to certain at risk segments, given the current environment in the supplemental materials.
We have a strong relationship based credit culture across first bank as well as proactive management cash flow focus lending and meaningful portfolio diversification.
As Mike also stated we are well capitalized and a stress the portfolio for potential losses.
This time, we do not have any plans to adopt Cecil in 2020. So we continue to run parallel analysis on the potential impact on our reserve and capital.
Our balance sheet is strong our customers are diverse and our credit underwriting standards remain thorough I look forward to answering any questions you might have in a few moments.
I would like to now turn the call over to our Chief Financial Officer, Davao tool for a more detailed discussion of the financial results.
Thank you Randy and good afternoon, everyone.
During the quarter, we invested significant time and resources measuring our company's capacity to absorb loan losses in times of stress.
With our strong capital base and consistent growth in core earnings we expect to be able to continue to grow and expand the franchise.
We have aggressively stress tested our credit and capital using a myriad of fed defined and other more stressful cobot 19 recessionary scenarios.
Within our earnings presentation. We have included an illustration Schilling, our capital base affected under different economic conditions.
Using the assumptions outlined in the presentation.
Currently we have 71 million of loan loss reserves and 580 million of regulatory defined common equity tier one capital.
Four of which 242 million is excess over and above the regulatory buffers.
We modeled in immediate absorption of our capital with 13 quarters of losses utilizing historical loss factors provided by the federal reserve for banks between one and 10 billion.
Although there can be no assurances as to the future results given the economic uncertainty the results show that cross first remains well capitalized and can comfortably accommodate the modeled pandemic scenarios.
As Mike mentioned, we had another positive quarter of operating revenue growth, primarily because we successfully minimize the reduction in net interest margin.
While responsibly growing our balance sheet.
Net interest income grew 8% on a linked quarter basis to 41.2 million and 18% from the second quarter of 2019.
Tax equivalent net interest margin decreased five basis points from 3.24% to 3.19%.
As of the rate paid on interest bearing deposits decreased 74 basis points on a linked quarter basis.
Largely offsetting a 70 basis point decline in loan yields during the same period.
Net interest margin for the quarter was helped from the banks PPP loan activity.
Largely due to the portion of the processing fees that we were able to recognize in the quarter combined with the interest income from the loans.
This income had a positive five basis point impact on net interest margin for the quarter and we'll continue to contribute to interest income throughout the loan forgiveness period.
As you look at the information we have provided our year to date loan yields have declined 109 basis points from a year year to date 2019.
And our year to date interest bearing liability costs have declined 87 basis points.
As a result of the declining interest rate environment.
This led to an 18 basis point year over year margin compression.
We anticipate that our net interest margin will remain under some pressure as long as low interest rates and a flat yield curve persist.
We have room, however to further decrease our deposit costs to mitigate the expected slowed drift downward in earning asset yields.
Earlier in the quarter brokered subscription deposit rates stayed elevated which made federal home loan bank advance funding more attractive.
Therefore, federal home loan bank advances increased 48 million, while wholesale deposits decreased during the quarter contributing to a slight increase in our loan to deposit ratio.
The marketable securities portfolio continues to perform well and had approximately 33 million unrisked unrealized gains at June 32020.
The taxable portfolio, consisting of MBS and CMO securities experienced very high prepayment speeds and generated 33 million.
35 million in cash flows during the quarter.
A portion of these funds were reinvested in new securities, where the fully taxable yield of 2.24%.
The portfolios fully taxable yield year to date was 315.
During the quarter, we sold 13.7 million of municipal bonds, which both improved our credit exposure in this sector and created 322000 gains.
Given the current economic environment, we continue to maintain a portfolio of fixed rate investment grade securities that are monitored with the assistance of an independent third party advisor.
Total operating revenue for the second quarter grew by 20% compared to the second quarter, 2019, and 9% compared to the previous quarter.
We reported 30.9 million a pretax pre provision year to date profit compared to 27.2 million for the prior year.
And it would have been $38.2 million year to date, when excluding the goodwill impairment charge.
While we continue to provision for circumstances around the macro economy, our core operating performance remains quite strong.
Net income quarter over quarter and year to date is obviously down due to provisioning for uncertainty surrounding the pandemic.
Noninterest expenses on a linked quarter basis are relatively flat when we take the onetime goodwill impairment into account.
We plan to stay the course with minimal net interest margin compression and consistent balance sheet momentum.
Combined with diligent expense management to drive effect efficiencies.
As mentioned earlier, we took a 7.4 million dollar impairment charge on goodwill from a 2030 13 acquisition.
Our interim evaluation of the intangible asset combined with our stock trading less than book value made this adjustment advisable at June 32020.
The transaction was a noncash charge with no tax implications and the accounting treatment was simply a book entry that has no impact on the long term value of the company.
Our non-GAAP efficiency ratio on a linked quarter basis, excluding goodwill impairment decreased to 53.1%.
This improved improvement is attributed to a strong increase in operating revenues and improved expense management.
As a core component of our strategy, we strive for disciplined expense management to sustain positive operating leverage.
To increase pre tax provision profitability.
The 15 million assets per employee measure mentioned earlier by Mike continues to improve and so does our efficiency.
We have a few onetime expenses and ongoing provisioning during the quarter that have impacted our return on assets and earnings per share.
Return on assets for the quarter was impacted not only by the elevated loan loss provision and onetime impairment charge.
But by and larger balance sheet from carrying an additional $369 million PPP loans.
Well, we reported a negative return on average assets for the quarter our year to date pretax pre provision return on average assets was 1.19%.
Which was also reduced by the goodwill impairment.
In closing there has been some noise on our financial statements this quarter, but core operating performance remains strong.
We will continue to stress test, our credit and capital to ensure that we remain well capitalized while planning strategically to optimize our capital structure in the future.
Our business model involving robust growth has not changed.
But we will not grow at the expense of prudent risk management.
Thank you again for joining our call today and as we mentioned earlier, our full results and financial metrics are included in the earnings release and presentation.
This wraps up our prepared remarks, and now I'll turn it back over to the operator to begin the Q and a portion of the coal stay safe and healthy.
Thank you as a reminder, asked a question you only depressed and then number one.
Our next question.
Please standby compared to many roster.
Our first question.
From the line of Braddy daily.
And your line is now open.
Hey, it's Brady good afternoon, guys, Hey, Barry.
Well Starwood deferrals.
16% because of the into the quarter, there's a lot of focus on how many will need a.
Deferral.
How do you think.
How do you think that shakes out as far as the need for a second deferral for that 16%.
Yes, Brady outlet ill, let Randy address that yes, great. It's Randy.
First of all I think it's important I go back and say that when the interagency guidance came out in March we felt like it really said it tone of this was an unprecedented event and surged the banks really work with clients and we we took that the hard. We've also felt like it was important to partner with our clients as they went through this this.
Yeah, again unprecedented period, and so we felt very comfortable with our level of deferrals on the portfolio and as we show in our slide the majority of those were 90 days.
In some of the harder hit industries lodging, we went to 180, but most of the deferrals were 90 days those will start coming due.
Late late this month into August we're already starting to have some discussions with our clients about what's next.
In round one if.
It was in good standing and ask we were pretty lenient on on extending that deferral.
Our tone on round two is there may be some in fact, we need to to differ for another 90 days again, staying kind of within that 180 days.
But that's going to be a little bit tougher ask on the on the next next go round. So we're going to sit down a visible them. Its case by case a couple of industries are still very negatively impacted by this a couple have not been has negatively impacted as maybe they would have thought and we'll start right back on payments. So that's how we're approaching it felt like it was the right thing to do.
You were comfortable with the level we gave.
A second 90 days will be a little bit more.
In depth analysis.
All right.
Bob.
Next I want to.
You talked about the net interest margin.
If you look.
Cost of funding that was down pretty nicely, which helped protect your now.
The only five basis points, that's that's pretty good.
Our.
How do you think about the ability to continue to reduce.
In costs.
And with that.
You expect NIM stability from here or do you.
You could see some were NIM slippage.
We expect some slippage yet in our NIM it shouldnt be dramatic because we do have the ability to continue to bring our funding costs down.
Just with the maturities that are happening naturally in our CD portfolio and our brokered CD portfolio and what we're doing in the wholesale side of the bank.
We are continually lowering the cost of that money.
But we also have some significant.
Deposit buckets that we have room to reduce our rates and we're evaluating that closely right now and we think we can continue to bring our deposit costs down a little bit as well that should mitigate some of the impact of the.
Loan portfolio that will continue to come down I think slower than it has in the last quarter.
Our bond portfolio yields will continue to come down a little bit just due to the speed of prepayment in our taxable portfolio.
But in general we do expect will go outside of our our band that we like dock operate in.
But we don't think it will be dramatic I would file was to put a number on it'd probably be in the three tend to 315 range the balance of year.
Right I'd also say that you know going forward at least for the rest of this year, new loan growth will be dramatically less than expected in and that ought to allow us to.
Focus more on some of our deposit costs and not put the traditional pressure on trying to keep keep that deposit growth going the same line.
Okay.
And Mike does actually my final question on growth.
As we went to the IPO is very much.
Driven story.
And then kind of the backdrop change here.
And then if so how do you.
What are you doing differently.
Now.
We ended the when we went through the IPO process now I'm guessing you're going to loan growth, obviously slow but.
Yes, it will probably slows somewhere.
Expense plans as far as new hires.
The new locations.
Yes, Thats a great question.
Yes, the pandemic and the economic conditions have changed so dramatically sense, you know, we talked a year ago when when we did the IPO and.
We are definitely slowing new loan growth I will say that we're very focused on making sure we're taking care of our great existing customers.
And helping them, where there is opportunities too and there is some industries that are still doing really well and people who can take advantage of what's going on but but we are focused on all areas of noninterest expense.
We have slowed hiring.
We're looking at every area, we can to try to become and work on our efficiency everything we're looking at all of our vendor contracts.
Renegotiating some of those just an example, as we have it we're going to enter into a new contract for cellphone providers that are cut that expense on half. So we're aggressively looking at everything.
To work on our efficiency and.
I really believe that we need to really drive our efficiency down.
To 50 or better.
Okay.
Great. Thanks, guys.
Thank you for our next question from your line is Michael grows from Raymond James Your line is now.
Hey, guys doing well.
That's all my questions.
You mentioned in the slides and in the release that the majority the increase in the substandard.
Doubtful loans was was from energy.
I would love to hear about about that little bit more specifically, but also what are the other pieces and can we get an update on kind of the enterprise value.
Some of the snacks that you had been if you've seen any negative migration there. Thanks.
Hey, Michael this Randy.
How about that in first question was on the energy.
Portfolio as we said we did see.
The majority of the increase in our sub standard in the quarter in in the energy book.
Obviously that was a unique quarter and energy that started at the end of Q1 with.
But it is the demand.
Excuse me a supply issue became a demand issue with some of it.
When commodity prices dropped precipitously in oil in particular, which is extremely volatile as you know going from.
Negative two it's nice to see it back in the in the forties and so we went through our spring Redetermination. We it was an interesting time to set the price deck and what we were going to run the those those borrowers at.
We don't focus as much on the short into the curve because as we've said before I mean, we've got a PDP only portfolio. We've got long lived assets and so we tend to look a little bit further out on the curve. When we look to set our price deck, but we did the center price deck, we ran our borrowers through that and when we look at grade in the energy space I mean, we're going to look.
What happens to the advance rate.
What's the base case repayment scenario looks like that liquidity the customer what other credit enhancements may be there and so we factor that all into our model. When we look at what the proper grade should be and again with the lower prices you to think that have lot of these were one.
Hi stacks in May when we were in the Twentys.
40.
Feels better certainly on on the oil side.
But we continue to obviously watching evaluate that portfolio closely and we have touched.
The portfolio.
So we could see some additional migration in that portfolio, but we feel like weve put eyes input metrics on.
The the dollars in that portfolio.
And feel like we have.
Okay.
Separately graded.
Portfolio.
I think another part of your question was outside of energy what was in some of the substandard.
We saw some migration in our our see an eye book at a much lower level within that.
A couple of manufacturing companies that had been negatively impacted by Covance.
And we saw one that was in the youth sports area that was absolutely shut down because of Covance and so it was really diversified.
No one really other segment that drove that migration.
I think the third part of your question was about the leverage lending easy portfolio.
As you know that portfolio for US is about is little bit less about 9% of our portfolio today and that portfolio is actually holding up really well through this.
We feel good about our sponsors there's there's been instances with the sponsors have stepped in to support the businesses, but we've not seen material grade migration in that portfolio.
Okay. That's helpful. And then just to follow to follow up questions.
If I exclude the PBP loans looks like your reserve the loans is about 1.76% if I'm doing my math right right.
Do you guys think that this is the peak in reserve building in that future.
Reserves will be more dependent on individual credit or are you not kind of want to make that statement yet.
Well, Michael I think we feel like we've done some heavy lifting on the reserve build in the first half of the year and we're still on the incurred loss model and individual performance in great migration will drive additional reserves, we certainly feel like the reserve build will be at a much lower rate in the next several quarters than it has.
Yes.
Yes, Michael I'd, just emphasize randy's right and and it's just.
We're really is so gray out there on what the next two quarters is going to look like it's just really hard to predict what's going to happen unless the economy, but we feel like as Randy said, we've done a lot of the heavy lifting in the first half.
Okay, and then just finally ill go back to the deferral.
Question.
So it's a little surprised to see the plus 90 day deferrals that 23% can you explain kind of what sectors. Those are in the rationale, but number just seems a little high relative to others. Thanks.
Yes, Michael that that was primarily in the lodging space I mean, we have.
As you're aware pay.
Hey, Adam.
It's less than $200 million lodging portfolio.
Space has been negatively impacted and we knew they would need more than 90 days to get.
Mr Footing and so that's the highest percentage in that over 90 isn't that lodging space.
Okay.
We had oncology.
Thank you for our next question from the line now Jennifer Demba from Suntrust. Your line is now open.
Thank you good evening.
Hi, Jennifer Jennifer.
Just a follow up on that question.
Yes.
Deferred longer or.
I would tell borrowers.
Do you think that there could be a third 90 day deferral period.
Some of your borrowers who are just inquiry.
At this point and specifically in the lodging sector was kind of occupancy levels are your borrowers staying right now.
Jennifer I think it's way too early to tell whether or not we will we will get to the point, where we'll have to do additional extensions.
We feel we feel good about our lodge and customers their strong there they are well capitalized.
Our loan to values overall are relatively low and and so so as far as that customer base goes we feel good that industry has just been hammered as you know and and so the borrowers I've talked to are starting to see occupancy rates up backup in the 40, 45% range.
Which gets pretty close on a lot of them to being able to at least breakeven.
And so.
We're hopeful that trend will continue to improve but but of all the industry is that one has probably been the most negatively impacted on our in our portfolio by coven.
Thanks, so much.
Thank you next question.
From the line is Andrew Lee from Piper selling your line is now open.
Good afternoon, everyone.
Good afternoon.
My follow up question here on.
Some of the energy.
Risk rating migration.
How are the borrower performing are they paying as agreed or is it just preemptively moving down the substandard preemptively moving on to nonperforming the propane and applying the payments principle.
Yes, just like it was there any like.
Is there any individual stress the relationship while what's driving the provision orders more broad strokes against the entire Buck.
Yes, so we we've looked at the credits individually and put them through.
The re spring Redetermination is that the current price deck. So the migration was really on a credit by credit basis.
You know at $20.
It was hard for them to breakeven at $40, they're really back at a really can break even they can they can make their interest payments.
And they need a little bit higher than that in some cases very diversified portfolio, but in some of the borrowers little higher than that de lever the balance sheet, but back at.
The 40 dollar level, they're more on on on on solid footing. We did we saw a small uptick in nonperformings as a bank and a majority that was in energy, but again. It was that was a fairly minor increase as a percentage of the portfolio to to nonperforming.
We have a couple that we're watching that could slip into.
Non performing in future quarters.
But.
One of the things that the industry has done as we've seen them much more proactive and expense.
Management and cutting and there was a feeling this was going to be lower for longer and so a lot of our borrowers reacted to try and right size there their cost structure.
To be profitable at a lower breakeven.
Okay. Thanks, that's helpful and then.
Just on the non interest income side that came in pretty strong with the ATM interchange fees. There is there anything specific driving that.
A couple of things in the noninterest income line in our credit card fees were strong.
Most of that are a lot of that was concentrated in one customer had unique set of situation unique situation in a government contract had a lot of people add on credit cards. So that will probably come back just a little bit, but that's a good customer that will remain at a fairly high level, but it spiked a little bit in the SEC.
In quarter.
Because it was associated with the cobot situation.
The rest of the non interest income stuff was fairly normal we did take a few bond gains during the quarter. Our swap revenues were down and have been down this year.
Because we've not done a lot of swaps, but we have a pipeline of some stuff. We're looking at at this point in time, so maybe in the second half the year, we'll see swap revenues picked back up.
Great that's very helpful I'll step back thanks.
Thank you for our next question.
From the line of Matt Olney Stephens Your line is now.
Great can you guys Jeremy.
Hi.
Thanks, taking my question I want to go back to loan growth.
I believe was around 4% annualized.
Back out PPP and Mike I think you said the loan growth would be quite a bit lower than what we thought previously is that that 4% level that we saw in twoq.
A reasonable expectation at least some near term.
Yes, I mean, I think thats, probably as good a.
View as we can take right now as we go forward it's just.
Yes, very difficult to underwrite new credit, we're being very cautious and really trying to be careful and all of our lenders are very focused on their portfolios and portfolio management and make sure. We're working with our customers. So yes, I just think we're going to see real moderate very very moderate loan growth for the rest of year.
Yes, okay that makes sense.
And then the interest bearing deposit costs.
Nice improvement and it sounds like there's some more room to bring down deposit cost from here.
Especially when I compare to peer levels can you put some but the numbers behind this and how much lower do you think that can go over the next few quarters.
You know.
There's no question that there's overall another 20 to 30 basis points in our deposit costs that we probably can attack.
Some of our custom core customer deposits, we may choose not to bring down all the way just because we have traditionally paid just a little bit above market.
But I would say there is there is room for another 20 basis points of.
Cost of funds reduction.
Part of it is really focusing on the mix.
We continue to be very focused on growing our DTA and treasury business.
As we've talked loan growth is going to be moderated so.
We've got our folks out there really working on treasury accounts and deposit growth and continuing to.
To grow that non interest bearing bucket.
Okay. That's helpful.
And then going back to the Securities portfolio, you gave us some good detail.
In the prepared remarks can you give us more idea of what types of security that your that you're purchasing both kind of from yield on duration standpoint.
Does that compare to with prepaying are being called right now.
Our strategy at the moment is just to try to replace cash flows because there's just not a lot of value in the marketplace. There due to build the portfolio.
So our cash flows I think I mentioned were about 35 million for.
The third quarter second quarter that will run some were there are a little bit less than that.
The balance of the year.
It's really difficult to replace those cash flows with taxable securities at the current yields out there. We did find a few in the second quarter, we would probably replaces much of that as we can with munis you can at least get a little tax equivalent yield out of that that will.
Come close to replacing whats rolling off.
But our duration our portfolio duration is about.
No I'd say, it's about 40 months at this point in time, it's a little bit under four years.
We wouldn't go out much longer than that.
In any of our replacements.
But we'll put we'll put a higher average life muni on the books, where the call feature in it but.
We're not trying to drive or extend our bond portfolio at this point in time.
The yield on munis today on the tax equivalent basis, probably at best low twos, maybe two and a half if you want to dropdown.
In your ratings.
And you all know the taxable yields on the mortgage backs are not very interesting.
Okay Thats helpful. Thank you.
Thank you and there are no further questions over to sell missing NIM. Please continue.
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Ladies and gentlemen, this concludes todays conference call. Thank you for joining you may now disconnect.
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