Q2 2020 Glacier Bancorp Inc Earnings Call
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Now I'd like to hand to conference over to your speaker for today.
Randy Chesler, CEO and President you may begin.
Thank you Twanda.
Hi, good morning, and thank you for joining us today.
With me here in Kalispell. This morning, as Ron Copher, our Chief Financial Officer, Don Chery, Our Chief administrative officer, Angela dose see our Chief Accounting Officer, Byron, Paul in our Treasurer, and Tom Nolan, our chief credit administrator.
Yesterday, we released our second quarter 2020 earnings and today, we're ready to review the state of the company in the financial results.
The second quarter was very solid and highlights the strong core of the company and the strength of our team and our business model. Despite the stiff headwinds caused by the global Cobot 19 pandemic.
We continue to navigate through the pandemic extremely well and I'm exceptionally proud of the glacier team their commitment and leadership and their service to their communities.
As I noted in our last earnings call. The Glacier franchise covers almost 1500 miles from Montana, the Arizona and the impact of the pandemic is different across that franchise, our unique business model with 16 different divisions, serving over 140 communities provides us with a unique capability.
He to respond to our employees customers and communities in a way that best suits that local market.
We continue to take advantage of our model today to respond to the quickly changing conditions.
At this time most of our locations have moved back to drive through service with in lobby meetings by appointment.
This is in response to resurgence of the virus in many of our markets. Most of our eight states have active cases in mortality rates well below the national average, but are still seeing increasing cases with more testing.
Despite the pandemic were amazed at how well customers up adjusted to the circumstances and our carry on with business.
Our mortgage volume is at record levels, where the refinancing a new home purchases our commercial lending business is beginning to pick up.
And many of our business customers reports solid increased activity.
As expected tourism on our western markets has generally rebounded very well do a lot of pent up desire to get out of the house and travel.
Our markets were strong before the pandemic driven by high quality of life business friendly environment and low cost of living.
And we're seeing some signs that the natural social distancing that comes with a more rural markets will add to the attractiveness of all markets.
And now onto our results for the second quarter.
Once again, the second quarter results really highlighted the consistent strength of our core business.
Reported earnings per share of 66 cents, an 8% or five cents increase from the prior year second quarter.
Net income was 63.4 million, which is an increase of 11.
1 million or 21% from the prior year second quarter.
And highlighting the company's core earnings strength pretax pre provision net revenue for the quarter was 91.3 million, which was up 41% from the prior year second quarter.
Core deposits increased 1.8 billion were 16% over the prior corner.
With noninterest bearing deposit growth of 1.2 billion Werent, 30%.
Non interest bearing deposits were 38% of total core deposits at the end of this quarter compared to 34%.
At the ended the quarter a year ago.
Deposits continue to flow into the balance sheet. So we significantly reduced our federal home loan bank borrowings by 475 million during the quarter to about $40 million and put in additional focus on reducing the cost of deposits given the drop in interest rates, we were pleased to see our.
Cost of core deposits declined to 14 basis points from 20 in the prior quarter and the total cost of funding drop 21 to 21 basis points from 29 in the prior quarter.
The loan portfolio organically increased 1.4 billion or 14% in the quarter and increased 1.5 billion or 17% from the prior year quarter.
All the loan growth in the current quarter and most of the deposit growth was due to our paycheck protection program or PPP loans.
We have approved in closed over 15000 Triple P. loans for about 1.4 billion with most of these funds deposited in accounts with us.
We expect to earn about 50 $55 million in fee income from these loans.
So as part of this effort.
We also acquired over 3000, new customers, who received triple P. loans from us totaling close to 298 million in loans. This was due to a number of our competitors that we're struggling with offering the triple B program.
Total debt Securities of 3.7 billion increased 104 million or 3% during the quarter and increased 1 billion or 37% from the prior year second quarter.
Net interest margin was tough to hold as we saw drop from for 36 last quarter. So for 12 today dragged down by the 150 basis point reduction of short term rates by the Federal reserve in late March.
Pricing on new production during the quarter was around 440 versus our portfolio rate of about 485.
Last quarter's new production yields averaged 480.
The core margin look better ending the quarter at for 21 versus 430 in the prior quarter and for 27 a year ago.
The pace of Triple B loan forgiveness could help the margin in the next few quarters as fee income will be accelerated upon forgiveness and last night DSP a issued some direction on how and when to submit the forgiveness applications and we look forward to getting started with the process, which according.
To the as BA will most likely started in mid August longer term, though we still expect lower rates will continue to put downward pressure on our margin.
The return on our debt securities held up well ending the quarter at 3.16% up six basis points from prior quarter.
Debt security income was 26 million, which was an increase of 5 million or 23% over the prior quarter, an 18% over the prior year quarter.
This shows the effectiveness effectiveness of the actions we have taken to maintain our investment portfolio returns.
Noninterest income was driven by record mortgage production.
Book gain on sale of loans of 26 million, which was 14 million over the prior quarter or an increase of 118%.
18 million or 233% over the quarter a year ago.
Mortgage purchase and refinance business continues to be very strong.
And we've seen an uptick in a number of our out of state buyers. In addition to strong local demand.
Credit performance was better than expected with net charge offs at 1.2 million or two basis points of total loans about the same as the prior quarter.
Delinquent loans were 22 basis points of loans versus 41 last quarter and 43 a year ago.
Nonperforming assets increased 7 million, what were 27 basis points of assets, which was up one basis points from the prior quarter and was 14 basis points less than the level a year ago.
For the quarter, excluding PPP loans, our NPS would've been 30 basis points of assets.
We've also made over 3000 loan modifications on loans totaling over 1.5 billion, representing about 15% of the portfolio, excluding triple B loans.
We have received regulatory flexibility to make these modifications and they are a good way to help customers get through severe but hopefully short term business disrupt disruption like we're now see.
Both the triple B loans, and the modification help customers maintain and build their balance sheets, while they get back to business.
We've also made in excess of 200 million in triple P. loans to the modification customers that will provide additional support.
We finalize closing many of the many of these modified loans a bit later in the second quarter as we were very busy with handling a record number of loan request for triple P. loans.
Well most of the modifications are for three months, we'll begin to see the majority of them come up for renewal in a few more weeks, we expect to see a good number of these customers go back to paying as agreed.
It's important to note that all of these loans that received a modification we're performing as agreed before we gave them a modification.
In addition to relying on the subset substantial inherent strength of the loan portfolio. We've implemented enhance monitoring of industries that we think posed higher risk due to the pandemic.
Total amount of loans under enhanced monitoring is $630 million were 6.29% of our portfolio.
This include loans in the following industries hotel motel restaurants travel tourism gaming and oil and gas.
The largest industry with increased risk in our portfolios, our hotel motel loans totaling 422 million or 4.2% of the portfolio.
Most of these hotel loans are small are smaller loans less than 1.5 million and have an LTV under 60%.
Most of you know that we have not materially increased our position in hotels for over three years. So many of these loans of good amount of equity, which generally translates into a lower debt burden.
The next largest exposure in the higher risk group is restaurants, totaling 151 million or 1.5% of loan portfolio.
Similar to our hotel portfolio. These are smaller loans with an average loan size of 175000.
And comprised of a solid group of operators. Many of these owners have already started to adapt to a new operating model by shifting to take out while they wait for the ability to reopen fully.
We plan to can continue with our enhanced monitoring process of these industries for the foreseeable future.
Credit loss expense of 13.6 million for the quarter brings us up to $36.3 million for the year and 1.42% of loans.
1.62% of loans, not including the Triple P. loans, which are 100% guarantee.
This is a 13 basis point increase over the last quarter.
This increase is primarily driven by the impact of cobot 19 on the economic forecast.
And not deterioration in the underlying credit portfolio.
Our allowance for credit loss stands at 162.5 million, which we believe is a very adequate and prudent amount given the uncertain circumstances.
Total noninterest expense was 98.1 million, which increased 6.2 million or 7% over the prior quarter.
And increased 12 million or 13% over the quarter a year ago.
For the quarter the efficiency ratio was 49.29% an improvement compared to the prior quarter efficiency ratio of 52.55.
On a year to date basis, the company's efficiency ratio was 50.81, improving from the 54.93 efficiency ratio for the first half of last year.
The Companys capital levels remain very strong with C.G., one ending the quarter at 12.35% up compared to 12.14 at the end at the prior quarter and up from 12.19 from Macquarie.
Year ago.
Tangible book value per share was 17, Oh eight at the end of the second quarter and increased from 16 35 at the end of the prior quarter and increased from 15 OTO three from the prior years second quarter.
Our access to liquidity remains robust with growth due to an increase in core deposits and borrowing capacity.
At the ended the second quarter the company had access to over 11 billion in liquidity.
This includes 5.6 billion of unused borrowing capacity with 2.6 billion at the Federal home loan Bank 2.6 billion in borrowing capacity at the federal reserve discount window, and Triple Pete liquidity facility and 400 million of capacity our correspondent banks.
In addition to 1.6 billion Unpledged and marketable securities in cash.
Four to 547 million.
An additional $3.5 billion and liquidity is available from other sources, including brokered deposits over fledged securities and loans eligible for pledging at the federal home loan Bank.
So in March we declared our 140 onest consecutive dividend.
With our robust capital and liquidity position, we don't see any change in our dividend strategy at this time.
Dividends have been and remain one of our preferred access capital management strategies.
In a few important items before in my comments.
We completed the operational conversion of Heritage Bank in Reno, and I'm pleased to report that the conversion went very smoothly and it will be good that heritage bank on the company's core platform.
My thanks to the Glacier and heritage teams for an excellent conversion.
S&P selected glacier to become part of the mid cap 400, moving up from the small cap 600.
And finally bank director just this week published the 2020 Bank director Scorecard, and we moved up in the rankings quite a bit.
For banks with assets between five and $50 billion nationally we are on the top five number four that's up from number 16 last year.
So overall and outstanding performance from the team.
And that ends my formal remarks.
Now as Twanda to open the line for any questions that you may have.
Thank you.
Ladies and gentlemen, as a reminder to ask the question you would need to press Star then one on your telephone.
To withdraw your question press the pound cake.
Again, I want to ask the question.
Please stand by while we compile the Q.
First question comes from Milan of Michael Young with Suntrust. Your line is open.
Hey, good morning morning, Michael.
Maybe just starting on PPP you guys, obviously had.
Recognize the expenses.
For the expenses, rather and so it's just kind of trying to figure out the cadence of how you expect to the both the fees and the expenses to kind of flow back into.
The income statement as we move forward.
So we've been amortizing the total fees that we expect to earn over two year period.
So that started in the second quarter, you can see that financials.
You know how that's going to change we do expect it to get accelerated we just are a little uncertain about the pace of that as I noted Jamie just last night.
SBA they gave us direction on how to submit the paperwork for those.
Forgiveness loan applications and so.
We believe that's going to start in mid August.
They have 90 days, then that turn that around and so probably going to see most a fair amount of activity in the fourth quarter, probably spilling over into the first quarter. So some.
Acceleration to those loans will happen in those two quarters.
And thats still subject to the SP.
Sticking to the process that they outlined last night.
Okay, Thanks, and maybe kind of a broader question just on overall maybe.
Klein then loan demand.
As having very broad footprint, obviously with a lot of different.
Subsidiary banks. So just just trying to think about kind of what may be driving strength or weakness in various areas and wet what areas. You may see some some credit issues pop up if any.
Yeah well.
I'd say I'm very very surprised that the strong level activity across the total footprint starting in Arizona, where you see a lot of press about.
The virus in issues, but talk in a business owners in the market.
There is.
Surprising consistency in and back to business that's going on there.
And for example, one of our customer builds roads, there are backlog there do more business than they ever have with all the infrastructure investment another one in the car business.
Pace of can't get enough cars to sell.
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So.
Homebuilders, you know reporting a lot of activity on on new homes and so.
We still see we see a surprising amount of activity no real areas of weakness popping up maybe go kind of move further north into Utah similar story.
Nevada.
Well the way up into Montana so.
We're hearing from our customers that businesses resuming and nothing has really starting to bubble to the surface at this point as and it is an area that other than the enhanced risk areas that we weren't that already mentioned that areas that were concerned about.
Okay.
And then maybe just last one for me you noted kind of the decline in in loan yields I would imagine there's been some maybe loan spread widening and we may not expect the staff the turn of kind of refinances and what not within the book. So just on a core basis do you feel like Theres, an ability to kind of hold loan yields around that.
New loan yields around that for 40 level or do you think theres going to be incremental pressure from there.
Youre right about the spread growing a little bit, but we're still fighting the markets in the fed.
And the softening in the flat curve. So you know we think on that if that holds where it is today are probably looking more at kind of for 25 to 450 range in this quarter on new production.
And weather.
I think that holds or gets a little better is really a function of what's going on and on the interest rate curve.
Okay. Thanks, I'll step back for now.
Thank you.
Our next question comes from the line of Jeff Rulis Da Davidson. Your line is open.
Thanks, Good morning.
I mean.
And maybe taken that maybe the full margin question.
Further.
I think maybe.
Remind us the moves you made in late Q1 in the Securities book Certainly hope.
Boost yields in the second quarter I guess.
Trying to recall.
How does that support strength into the third quarter if at all.
And maybe just stops overall now on the margin.
Noted that maybe the loan yield pressure, but.
You've got a lot of liquidity and.
Just want to see how that shakes out like moving pieces.
Yep.
So on the securities the debt Securities we've been doing a lot of work there and I think that strength showed through in this quarter and.
Ron and has spent a lot of time looking at so Ron do you want to give a little more color around the debt security, yes. So we.
We bought those.
Late March and the great yields we got.
Put on the Muni, 70% of 725 million rounding.
Were high quality Muni and tax equivalent yield there with for 12. We also bought of that 725 million, 30% were corporate for the GCIB bank the large running through it.
JP Morgan et cetera, so those for 35 to the blend at all we have a 420 yield and Thats what showed up in the second quarter and that will continue really tell those things are.
Call with the Muni they've done a very long call dates. So we think this will continue to be an underpinning.
Certainly through next year.
And feel very good about about that we initially funded those that FHLB, but.
Randy talked about in for in March and we've been able to.
Pay down the borrowings and so now we're really financing that with.
Deposit costs that came down nicely. So both tied to that have really help.
And then just on that.
We have been doing with the excess liquidity.
With really showed up.
Towards the latter half of Jim.
We.
Purchase.
We could go just about $170 million of security.
80%, where residential mortgage backed securities Fannie Freddie 20% were structured corporate MBS.
And the combined yield.
84 basis point.
So thats, where the market has come so thats why I want to know that because thats why opportunistically.
That three days and late March when we were able to buy what I described we really pulled forward things that we would've bought otherwise.
Okay.
Okay. Thanks.
Any detail on the on the increase in the non accruals, where these sort of pre covitz stressed or kind of what was was in that grouping that the uptick.
Yes the.
Very slight slight uptick, but Tom I'm going ask Tom to give you a little more color around those yes slight uptick a little about half of what was.
Area. The other part was that all of these were pre pandemic weaker credits.
On the theory side, you know the pandemic mayor.
Kind of put the issues into hyperdrive, but certainly these were all pretty pandemic issues that likely would have ended up here anyway.
Okay and.
Then just last one on them.
Deferral breakdown Randy I think you mentioned predominantly three month, what's the timeline is I don't know if you've got an on a percent of deferrals were.
70% GRI month, but just trying to get a sense for what.
What would the mix of of timelines on the deferral.
About 63 month 46.
Okay and as those three months of come in.
Got a billion five on deferral at quarter end.
And your comment on.
Open those come in or a vast majority.
I guess could to date those that have expired.
A vast majority not seek extension.
Hello early to tell because as I pointed out we.
We.
Finalize these months later in the second quarter and so the three month, we've just seen very few start to come forward. So I hate to draw conclusions I think what we've seen is encouraging.
But just.
Little bit early because we were so busy with our triple P. production, we put them odds on the back burner and got to them later in the quarter.
I see okay, well thank you.
You're welcome.
Thank you.
Our next question comes from the line of David faster the framing James Your line is open.
Hey, good morning, everybody good morning.
Just wanted to kind of follow up on the on the re deferral topic and implications for reserve I mean, just from your commentary it sounds like most of the heavy lifting the gone.
I guess, how do you think about reserve builds going forward as we might get some.
Summary, deferrals and potential risk rating downgrades.
Any thoughts on that.
Yes the.
What I'm going to have to ask Tom to give you a little insight into that but you're specifically David asking for the what you think are.
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<unk> expense will be or did you maybe you could just tune your question a little so make sure we we get your answer.
Yes, just just interested in your thought I mean, whether most itself isn't it sounds like most of the reserve build is already completed based on your commentary about incorporating economic scenarios versus credit deterioration I guess just thoughts on.
What's the.
How you plan to or just thoughts on additional reserve build going forward in the back half a year and.
No implication is it primarily going to be driven by potential credit migration from risk rating downgrade that wont get re deferred or just any thoughts on.
Reserve build going forward.
Yes.
This is Tom I think with the World. We know today, we're pretty comfortable with where rat, but barring any deterioration in our forecast or.
Material deterioration in the credit portfolio.
I would agree with you that probably the heavy lifting side, but we're it's still early.
Specialty given that in a lot of our footprint isn't higher tourism areas early signs are all pointing positive but at the lower early.
Okay.
And then I appreciate the commentary on the 3000.
New customers, if you're able to acquire from the Triple B program. Just curious how much of this has translated into non triple B growth.
Maybe similarly have there been increased opportunities from.
Lenders, who might be price after that.
How does the bank of the larger banks that might be interested in making a change in creating the hiring opportunity for you all.
Yes, So let me start with the 3000 customers.
I would tell you that a fair amount of these where people that.
We wanted to do business with that we had been calling on for a number of years and the triple P.. If you turn the clock back to when this first started.
There was a lot of anxiety around this in a number of the money center banks were very.
Slow in their response to the customers and that was the in some of them. The straw that broke the camels back and they came over.
To one of our divisions and that's a that's a fair portion of those 3000 of people that we've been looking to get into the bank and fair amount of Omar.
With the money center banks and so.
Step one is we now have a deeper relationship with them with the Triple B.
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They all all the.
Did require accounts to be open. So we do have that established now and I think.
No that is a project for the next year for US is to deepen those relationships. So we just had.
Last month, and all hands on Dec meeting was all our divisions talking specifically about how do we spent a day and a half talking about how to how to deepen those relationships now that we haven't been the bank and if you think about it it's like a small acquisition for US is 3000, new customers into the bank all with the lender.
In relationships that are an opportunity. So we'll see how we do we are very focused on it and that's one of the things we have on our to do list for the next year is further.
Deepening those relationships and pull over the good business, that's sitting on another bank right now.
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In terms of.
New commercial lenders were pretty well staffed I mean, I think we always maintain a list of people who want to come on over the glacier.
But.
And as really good opportunities.
Present themselves, we take advantage of it.
But I think there's generally.
We have.
A good shortlisted in most of our markets of people we know.
We'd like to have joined us when the time is right, but right now our focus is on those 3000, new customers and how to deepen that relationship over the next 12 months or so.
Okay Thats, great and then just one more.
Welcome to other commitments for dividends with as much excess capital is you have strong credit performance.
Thank you can return to dividend growth what are you hearing from the regulators.
Thank you get pushed back if you tried to raise your dividend now and just maybe your thoughts.
Overall thoughts on capital deployment capital return.
Yeah.
Well, we're very thankful that we're in a position to pay dividends, we continue to pay dividend.
There hasn't been a lot of industry discussion you know around this.
Other than initially there was some some of the bigger banks got some direction to.
Slow it down I think you just.
Need to be smart about it I guess from our point of view, which is to have a very maintained very solid capital and very solid liquidity and keep your payout ratio in a reasonable range because I think it's a it's a legitimate regulatory concern at this point to make sure that banks retain capital.
Alan and.
Push it all out through dividends. So I think it's sensitive maybe more of an issue for companies that are paying out a higher percentage of earnings with less capital.
But I.
From an industry regulatory standpoint, I don't think it's on the front burner, but from our standpoint, we don't really want it to become an issue. So we're going to be proactive to make sure. We take steps to ensure that we're all is able to pay pay a dividend.
That's great. Thank you.
Thank you.
Our next question comes from Milan, Matthew Clark with Piper Sandler Your line is open.
Hi, good morning, guys.
One.
No.
On the comp expense you benefited from the.
Deferred origination cost if anyone stuff on the PPP about 8.4 million or so you also had strong production on the mortgage side, so that probably best some of that relief.
How should we think about the run rate of comp expense.
58 million this quarter.
Yes, so you're right about.
Kind of the dynamics in play there.
With a deferral and then underneath that is increased mortgage comp expense due to the record level of production we're having.
So Ron maybe you can give math you a little view of kind of the run rate that we think we're going to see there, yes, Matt you're right.
That $8.4 million.
So the certainly a benefit but that that ended that that's not going to continue.
So and we did have a higher compensation expense that you alluded to so.
Roughly $66 million would be where I would think the run rate would be for the compensation expense.
For the third quarter and you notice that we.
Added some people so included in that higher compensation, if we had a great mortgage banking income. So we paid on that production and then we had.
The higher body count, so that but thats all baked in that.
That's great Okay. Thank you.
And then just on the the PPP that 1.4 billion.
Looks from the release that you only had 166 million of that.
And toward.
The higher risk industries that year.
Focused on.
Is there some other portion of your PPP.
Portfolio at least from an industry industry perspective that.
May be of more concerned just given.
To support that they needed.
Not that I'm aware of.
No Tom a view of any I mean, we certainly look at where the triple B.
Has gone.
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And.
It did there was a bit of a match up with the months.
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But the triple Pete was pretty widespread so I don't know Tom do you have any thoughts on that no. I mean, I think the industries are pretty widespread the did receive a triple b outside of what we have any enhance risk portfolio. There's nothing that gives me any immediate concern.
So for example in our when you look at some of the industries that did receive triple B, we had some healthcare. Some construction construction has remained very strong through the pandemic in healthcare warrants.
Elective procedures were open back up the pent up demand that.
You know existed through the shutdown really really is keeping a lot of medical provider very busy in a lot of the conversations I have with our providers and also our contractors state that.
Summer vacation plans are over we're very very busy right now and and things are looking good outside of that.
Matthew it's pretty it's pretty widespread and.
Nothing of the over concern.
Okay. Thank you and then just on credit migration I mean.
It sounds like you're kind of just going through the deferrals now but.
I guess, how are you going to current risk rate.
As we move to this process have you seen any migration, yet or do you feel like there might be some as you.
These deferrals come up for renewal.
We haven't we haven't seen any migration, yet Matthew but I certainly would expect some as we roll some of these modifications, especially in this higher risk portfolio. So as we continue to dig through.
So each of those credits.
At a very detailed.
Credit perspective, I would expect some some deterioration but I.
I don't expect anything significant are serious.
As of yet.
Okay, great. Thank you guys.
Welcome.
Thank you.
Our next question comes from the line of quoting Maguire with Stephens. Your line is open.
Morning.
Morning.
Ron I was hoping we could round out the expenses.
I just mentioned.
State regulatory assessment credit or an adjustment I guess the past couple of quarters. The FDIC credit has helped can can you help us think about.
The run rate for that line I'm line item.
Yes, the state.
Vince will go back up to about the.
600000 dollar so that that's not a big number but it was nice to have.
The rebate for the first half its not by the way they have not ruled out a second rebate.
For the remainder of the year, but we'll wait to see what the what that is.
But the.
What with the other part.
And then what are they I think that was it I was trying to.
Get a gauge for what the run rate for the regulatory assessment expense was I think you said 600 a quarter.
In addition to 1.6 million.
I mean look here one second I would.
One point.
Yes, 1.5 men per quarter pardon me.
I think in obtained.
Thank you.
Then I was hoping you could provide a little bit more color into origination volumes in mortgage.
Margins this quarter and what's the outlook there heading into the third quarter.
On the origination of the loans then.
But.
Yes, the mortgage mortgage the more volume, yes, obviously was.
Substantial.
And we are.
And just way above where we were in the prior year.
In terms of.
The level of activity.
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Your question is on the.
On the spread that we're seeing there those are holding really nicely the pricing on those is obviously going to be dependent on the.
Where the market.
Prices so.
Future as.
It's going to looks like it's going to be another strong quarter.
We've been very surprised.
At the level of activity.
But its maintain.
A lot of.
Almost the concerned about shortage of inventory because the builders weren't able to build houses for the first quarter and now theres a lot of demand that coupled with as I noted the out of the increase in the out of state.
Purchasers is now almost 20% of our purchase volume is from people outside of the market Thats almost double what it was in the first quarter. So.
Lot of activity there.
Good.
And then Ron you brought down the customer repo costs this quarter.
But still yielding around 1%, it's like gets to small smaller balance relative to total the total balance sheet, but is there still opportunity to bring those costs lower.
There is.
Definitely.
One thing to point out all of the when you looked at our funding liabilities interest bearing.
Deposit certainly than wholesale all categories drop.
And so we still got some room you know the Cds that book Rolls off that will come down and then.
Definitely in the repo tier to your point.
There is room.
Good thank you.
Thank you.
Our next question comes from Milan of Jackie Bohlen with KBW. Your line is open.
Hi, good morning, everyone wanting Jackie.
Thank you could provide a little bit of color on the unfunded commitment expense that within that other line item.
Thanks, and just what the driver was in the quarter and then what your expectations are going forward.
Yeah, I'm going ask Tom to talk about that Thats been that's been a little frustrating with a new accounting rules, how that has kind of entered our landscape now and.
We've talked to our accounts about a way to reduce volatility in the answer is there is none and so.
Maybe Tom you can give a little more color on kind of what has occurred and maybe what your expectations are so yeah. Jack you are two primary reasons, we had an increase in the quarter first we've seen a reduction in the utilization rates of our revolving lines of credit.
It's actually been fairly significant over the quarter customers are using other lines of credit less and less which from my chair speaks to the strength of their their balance sheets and the lack of need for for borrowed funds, but as the negative side of that is it increases the unfunded balances in the unfunded liability to the goes along with it.
And then secondly, you know similar to the funded the allowance for credit loss. The unfunded is sensitive to changes in economic forecast as well and you know on the unfunded side. There's it's made up of the combination of revolvers also construction loans and construction loans or our newer they have longer weighted average lease.
Okay and can be.
Can have a.
As Randy mentioned, a little bit more volatile change so expectations in the future, we're starting to get into the.
The grilling season on the AG portfolio I think we'll see some utilization there will also see some seasoning of the construction portfolio as those draws continue so.
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Well, a little difficult to projected out but.
Certainly I think we'd.
Expect maybe not quite the volatility we saw this quarter.
Okay. So.
Correct me, if I'm not thinking about this properly, but when there is offsetting maybe a lower amount of provision expense related to the 6.9 million in unfunded commitments. Because you had those balances go down so meeting that because your commercial balances declined as utilization decline you had.
Lower Perkovic reserve requirement, but then that increase your unfunded commitment requirement I think about that properly.
I think you're thinking about properly I mean, I can't I don't have a number to nail down what the difference was between the two but you know well you know that that follows the logic behind it as balances.
Decrease let's shift from the funded to the unfunded side.
Okay.
And if I.
Just for that weighing an unfunded commitments, which was roughly around 10, and a half million quarter to quarter. It looks like other expenses were low outside of that.
I pulled merger charges that others, so maybe that the variance there but was there anything else unusual in the quarter that caused that items to be lower.
No.
Okay. So outside of.
Unfunded commitment is pretty good runway is today.
Jack.
Dealt with the $8.4 million of the.
For comp coming from the PPP origination.
Yes, I am speaking specifically to just the other expense line item in looking at the quarterly variances there.
Yes, that's correct.
Okay. Thank you.
One last one sorry is once again, a little bit technical when I look at the fees that were just close on the PPP loans and thank you for providing that level of detail.
Does that include the loan origination costs offset in there.
The lead those are the gross fees.
So what table are you looking out there for the triple fee is that in the release.
In the release, sorry, right now I just got it.
Model, so I'm not sure where I'd hold it for on the 7.3 million.
Also the quarter 7.3 million.
Yeah I'm just wondering if that's the gross number or if that's already met.
Deferred loan origination costs.
That's the net number.
Okay perfect that you have a number I quoted in my 53, Thats the gross number not netted out by anything.
Okay. Okay, great. Thank you sorry for being so technical no that's good you're welcome.
Thank you.
Our next question comes from the line of Tim Coffey.
Jamie Your line is open.
Okay. Thanks morning, everybody.
Good.
Ready as we look at kind of the portfolio with enhanced monitoring on it looks like it's come down.
Quarter over quarter, what's your approach to that portfolio is that kind of actively managed in a down or content with what you have or would it be something like your open to the right opportunity in these categories.
Yes, I'm going to ask Tom to make a comment on that Thats, we carved that out early as the area that we thought due to the.
Cobot.
19 would have the most risk I think it's it's proven to be an area that.
We think does have the risk in terms of how we're managing and Tom you want to give some insight on Tim That's a great question, Yes, I would say, we're managing it very closely.
The reduction you a combination of normal amortization and then as I mentioned earlier, we had some pay downs on an evolving side, which a portion of for from the enhanced risk portfolio and just like anything there stronger credits and there is weaker credits so in terms of new originations.
I wouldn't say that were actively looking to increase the hotel or restaurant portfolio, but.
There's there may be the exception here in there just really depends on the individual credit in of itself.
Okay. That's helpful.
And then also comparative to the prior quarter.
There was a fair amount of modifications in that portfolio at the I think when you reported on M&A, how many of those are coming up on their 90 day exploration.
You know as Randy mentioned, we have about 60 40 split between 90 days and.
Six month, we're just now starting to see those hit expiration. So you know the 90 days is probably going to be within the next four to six weeks and then of course, the six months we'll be longer.
The and answering the modifications on the enhance risk is kind of disbursed throughout the timeframe, we're writing them altogether.
Sure Okay I understand.
And then on the PPP loans do you have an idea of what percentage of those are are under 150000.
Well I. Our average is below 100000, we have one of the more granular ones.
In terms of what percentage of our total loans that we did our under.
Under 150000.
Yes.
Ron has got that number.
Ron whether its a.
When we add there with.
Well the other total it roughly.
600000 600 million isn't it.
In that range of below the $150000. So 600 with a one one.
Okay, Yes is below 150.
All right.
And then on mortgage banking congratulations on a record year.
Thank you if yes volume stay elevated like they have would you consider putting more of these into the more into the portfolio.
Organic loan growth starts to slow down our stall in the second half.
No, we like our portfolio rate where it is.
The portfolio is there to help.
Customers that just don't quite fit the box.
We don't look it as a way as a growth engine, but it's a way to maintain relationships with realtors and.
With our branch.
Customers.
So we don't look at that as a way to significantly grow and its percentage of our portfolio is actually stayed about flat shrunk a little we're very happy with that keeping a right where it is.
Okay.
And then on deposit costs.
Well, we're we're what were deposit cost at June 30.
So total deposit costs.
Okay.
You're looking at total funding cost or core deposit costs.
Core deposit costs.
So Ron if you want to go back to the end of this quarter. So yes, just for the you're talking right. It.
At the end of June so we've heard clients, but 13 basis point.
So what that is that includes the Cds at 88 again.
Finally grown over time those are timed deposit the fourth but 13 basis points in a drop.
Steadily from April to make to Jim.
Okay.
Right. Those are all my questions I appreciate it. Thank you welcome.
Thank you.
We have a follow up from Gordon Maguire with Stephens. Your line is open.
Thanks for the follow up.
I apologize for bringing expenses backup.
Ron did you say that the compensation run rate for the third quarter is 66 or 50 666.
Thanks.
And does that assume strong mortgage and commissions are at a similar level to Twoq you picked up okay. So.
Fourth quarter would be the expectation that probably moved lower from that number yes to the extent the gain on sale with.
Decline, yes, the variable expense for the commissions would similarly decline.
Okay.
Thank you yes.
Thank you.
I'm showing no further questions I would like to Tim.
Management for closing remarks.
Right. Thank you Linda.
And I want to thank everybody on the call today for dialing in and spending started part of your summer with US. We appreciate it we want to wish everyone have a great day in a fantastic weekend. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.
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