Q2 2020 Allegiance Bancshares Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020, Allegion Bancshares Inc. earnings Conference call.
Jabil participant lines on a listen only mode. After the speakers presentation. There will be a question and answer session topped the question. During the session. You want me to press Star one on your telephone please be advised that today's conference is being recorded.
Your party further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today Courtney Terrile. Thank you. Please go ahead ma'am.
Thank you operator, and thank you to also joined our call today. This morning's earnings calls will be led by Steve Fritz off the company raise it usually president of the company and CEO of allegiance Bank.
<unk> executive Vice President and CFO, Okay on H., and executive Vice President and Chief Risk Officer, The company and President of allegiance Bank and Shana capsule Executive Vice President and General Counsel.
Well, we begin I need to remind everyone that some of the remarks made today may constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 at the Mended, we intend to all such statements to be covered by the safe Harbor provisions for forward looking statements contained in the <unk>.
Also note that if we give guidance about future results that guidance is only a reflection of management's belief at the time that statement. Its main management's beliefs relating to predictions are subject to change and we do not publicly update guidance.
Please see the last page of the tech in this morning's earnings release for additional information about the risks factors associated with forward looking statements if needed a copy of the earnings release is available on our website at <unk> Dot com about calling Heather Robert at 2.15176, 42, and she will email you may copy.
We also have provided an investor presentation on our website, although it is not being used as a guy for today's common it is available for review at this time.
At the conclusion of my remarks, we will open the line and allow time for questions.
I now turn the call ever to our CEO, Steve Russell.
Thank you Gordon and we will already to our second quarter earnings call.
Not to go ahead or call stated my aspiration that for all of our listeners your personal and business interest, we're doing well and that we would say against that pandemic related shut down behind it.
Unfortunately, I have to reiterate that comment even doubling down on the sentiment is our community in the country continue to grapple with the challenges.
Notably private bankers, but the entire community banking industry is so many other community banks like leaders have stepped up in a big and bowl way right when they were needed.
It is the United the collective effort from all of US that was needed it has been delivered.
Israeli reportedly just bank has been more the top performers as it relates to delivering on PPP workday roll. The first leaves to produce an outsized level of service.
I don't want to our existing customers, but to the community at large we also stepped up in a big way to support the Houston region to the Houston feedback.
Due to our significant donation and matching challenge over 1 million meals will be provided to doesn't need.
We're supplementing this with volunteer opportunities for our staff at their distribution center, which not only helps the food banks builds upon our already strong culture and sense of tea.
We recently had been recognized by both the better business Bureau for their Excellence Award and also were named one of the top 100 companies to work for in Texas. So when I say allegiances, leading it a big way I have a lot of evidence to prove.
Mission to our PPP effort, our bankers have been frequent contact with customers over the past month, providing any need assistance and gaining insight into their real time operational status, obviously, there's uncertainty as to the timing of reopening of certain businesses, but even schools, but the real adult of our outreach has been has favorable.
Yes, it could be hoped under the circumstances.
I will speak to some of the particulars into the status of deferrals overall, though we feel we continue to feel very good about the granularity the loan to value and personal guarantees that are central to our portfolio of small commercial borrowers.
Sure to believe that our management of concentrations as it relates to elevate covert risk categories, such as hospitality bar restaurant and oil and gas was the right position for us to be and going into endemic and will be proved beneficial going forward.
Paul will provide color on our record pre provision earnings.
Hi, lied our excellent.
NIM performance, our strong capital, particularly our risk based capital ratio and our liquidity position.
We also had solid deposit growth success during the quarter with Ray will describe.
Well, it's our balance sheet mix and recent margin changes over the past several quarters positioned us to better face the uncertainties of the pandemic and our reserve build during the past quarter and year to date has been meaningful.
We began paying dividends and 2020 and are able to continue that based on our strong position.
We just opened a new office ease of downtown Houston, where we previous did not have a physical presence.
We're very pleased with the opportunity to introduced our best in class service level and that surrounding area to the quality of that team they've been incubating within the bank for over a year that said we understand it we have experienced an increase in noncontact banking, it's silly to a highly successful work from home status during the pandemic.
Well, we know is that well our assets for branches significantly on the high end of the scale and why we do have additional geography for fill in opportunities. There is an active discussion in the industry that suggest fewer branches will be needed to support future growth and asset.
We also recognized the increase central space and staffing requirements to support growth will likely be diminishing.
Our planning and evaluation will consider greater use of technology improve workflows and the option for Highbridge such as continued work from home work in office approach.
Good so much talk of uncertainty our commitment to the safety of our employees and customers has been a constant determinant guiding our operation.
No sounding muffled as we emphasize the adroit usage of masks our message of appreciation to our staff is both sincere and exceedingly well deserved.
Next Ray will describe our loan to deposit production results as well as an outlook on credit followed by Paul who will cover our financial results. We'll then open the call for questions right.
Thanks, Steve.
$5 million, a core loans originated $697 million, a pvp loans opened over 2000, new deposit accounts, including setting a record with the Onboarding of new Treasury management customers process loan deferrals kept our bank officers open to serve our customers and designed are Pvp loan forgiveness process in the midst of ongoing.
Legislative changes.
The answer to how we did it is teamwork dedication and the genuine desire to serve others.
So similar to last quarter I will provide details on our business continuity effort Bank office operations and PPP stats, followed by our normal reporting a second quarter results.
We continue to be pleased with all aspects of the execution of our business continuity plan.
Whether working remotely are working and shifts or teams we have handled the business of the bank as if we were working entirely on premise.
While we observed customers via our drive throughs and buy appointment since cobin was declared a pandemic.
We have slowly reopen a number of bank offices to full lobby service and continue to do so when appropriate following state and county guidelines.
As Steve mentioned, we're very excited to announce the opening of our 28th Bank office located in the historic East end of Houston.
This dinovo known as the East and office serves an area of Houston that is both rich in history and experiencing a resurgence of business in residential growth.
For example, the city of Houston recently approved $24 million in funding to develop a new high Tech maker hub located near our New Bank office to support manufacturing and fabrication job training for companies located in the eastern community.
Our bankers already has strong relationships in the east and area and will attract him anymore now that we have a permanent presence in the community.
In conjunction with the opening of the new we stand office. We are closing the loan production office located in the Palm Center of Houston.
Several members of the East and office lending team incubated at the pumps Center LBO.
Where we will continue to have a presence via our deposit taking ATM.
We are also extremely pleased with our Pvp loan results and the impact of our effort efforts on the eastern region.
As of June 30, we funded more than 5800 loans totaling 695 million affecting more than 60000 jobs.
Since quarter and we are funded an additional 181 pvp loans of approximately $8 million.
Our approach to provide pvp loans to both existing customers and new customers has further strengthened our market presence.
For some perspective on the PPP loans, the $695 million, an aggregate fundings represents 169% market share of all approvals in Texas compared to our deposit market share of 0.49% in Texas.
Meaning are <unk> results were nearly three five times, what would be expected for our bank of our size.
And we're continuing the process additional applications as a result of the program extension to August date.
I will now go over our second quarter results can provide some additional information on several segments of our loan portfolio, including the volume in nature of payment deferrals that have been granted as a result of the pandemic.
Total core loans, which excludes PPP loans and mortgage warehouse lines ended the quarter at 389 billion a decrease of 66 $6 million during the quarter.
In addition, early in the quarter, we successfully completed the full exit of the mortgage warehouse business.
During the second quarter, our staff and lending team, but $234 million of Nucor loans that funded to a level of $148 million by June 30 <unk>.
Compared to the first quarter when $294 million of new loans were generated which funded to a level of $202 million by March 31.
Paid off loans or $171 million in the second quarter compared to $204 million on the first order and $182 million in the fourth quarter 2019.
The average size of the new organic core loans generated during the second quarter was 320000 with an average funded balance of 202000, which once again reflects our continued focus on building a diverse and granular loan portfolio.
The average size of all core funded loans ended the quarter at 344.
Regarding interest rates on loans based on total loan amount the weighted average interest rate charged on our new second quarter core loans was 487%.
Which is below the first quarter 2020 weighted average right, a 508% and the fourth quarter of 2019 weighted average rate of 539%.
The $171 million paid off core loans during the quarter had a weighted average rate of 516%.
Carried core loans experienced advances of $101 million at a weighted average rate of 531% and paydowns of $124 million, which are weighted average rate of 514%.
All in the overall period and weighted average right charged on our funded core loans decreased five basis points.
Ending the quarter at 524% compared to 529% as of March 31 2020.
The mix of new loan production based on second quarter funded levels was represented by the following for commercial categories.
Owner occupied CRE non owner occupied CRE commercial term loans commercial working capital loans.
These for commercial categories represented 56% of the new funded production for the second quarter compared to 58% for the first quarter 2020, indicating are ongoing commercial concentration.
I would now I'd like to provide some additional information on three loan categories that could have heightened risks due to energy prices <unk> Covid pandemic.
Those being our oil and gas portfolio or hotel portfolio, and our restaurant and bar portfolio.
Despite being a Houston region bank are overall exposure to oil and gas is largely indirect as we do not have any reserve base loans, but we have defined this category to be any borrower that operates in our directly supports the upstream midstream are downstream segments of the industry.
At June 30, this categories approximately one 6% of our funded loans are 74 $8 million of which $27 million was commercial real estate and 47 $8 million was C&I.
Of the 27 million CRE the weighted average LTV for the portfolio was 53, 7%.
A 20% stress testing of the most recent appraised value plus 6% marketing expenses resulted in an overall collateral deficiency of approximately 128.
And the 30% stress testing plus 6% marketing expenses resulted in an overall collateral deficiency of approximately 712.
Regarding our hotel portfolio at June 30, we had $134 million a hotel loans of which 125 $1 million was commercial real estate.
Six $1 million with Sandy and two 9 million wasn't C&I.
Of the 125 $1 million in CRE.
Weighted average LTV for the portfolio was 62%.
A 20% stress testing of the most recent appraised value plus 6% in marketing resulted in an overall collateral deficiency of approximately 392000.
And a 30% stress testing plus 6% in marketing resulted in an overall collateral deficiency of approximately three $1 million.
And regarding our restaurant and bar portfolio at June 30, we had 111 3 million of restaurant and bar loans of which $86 million was commercial real estate.
Two $7 million with Sandy and $28 million was C&I.
For the $86 million in CRE, the weighted average LTV for the portfolio was 69, 4%.
A 20% stress testing of the most recent appraised value plus 6% marketing resulted in an overall collateral deficiency of approximately four $8 million.
And the 30% stress testing plus 6% marketing resulted in an overall collateral deficiency of approximately seven $7 million.
In terms of our overall loan portfolio the loan type mix was little changed on a linked quarter basis.
Slide deck posted on our website.
<unk> added color regarding our overall mix of loans.
Asset quality at quarter and remain in a manageable position.
The level of net charge offs experienced during the quarter was 538.
Or an annualized rate of five basis points.
Nonperforming assets, including both nonaccrual loans and Owari into the second quarter up from the first quarter, increasing from 68 to 77 basis points a total assets.
Nonaccrual loans increased Ah net of 11 $6 million during the quarter from 20, 162, 33 $2 million, primarily due to 15 $2 million in new nonaccrual alone.
Including a seven 1 million.
[noise] hotel relationship.
That had been on nonaccrual and prior periods, which is now experiencing occupy occupancy issues due to the current economic environment.
The additional eight $1 million increase and non accruals was from 19 relationships three of which totaled for $1 million and the remaining $4 million was from 16 smaller relationships.
These downgrades, where partially offset by two $8 million and pay offs and payments.
633000 charge offs and 225000 foreclosures.
R. O R. E consists of six properties totaling 11 $8 million.
The largest is a five $5 million commercial real estate property with the second largest meaning of five $2 million industrial commercial real estate property and the third largest 576000.
Residential property.
The remainder are three smaller properties, one northwest of Houston, Onewest of Houston, and one in Beaumont These properties or being actively marketed in several are currently in contract negotiations for a potential sale.
Generally we believe our nonperforming assets are well collateralized.
In terms of our broader watch list are classified loans as a percentage of total loans increased slightly to 206% of total loans as of June 30th compared to two O 4% as of March 31.
Criticize loans increased to three 200% at June 30 from 285% at March 31.
The specific reserves for the impaired loans ended the quarter at 12, 1% compared to 9% at March 31.
On the deposit front, we saw an increase in totaled deposits and the second quarter by $747 $1 million from the first quarter and up $841 million over the year ago quarter.
The increase was primarily and the non interest bearing deposit category.
As a result of new accounts associated with Pvp customers as well as higher balances and are carried accounts.
Non interest bearing deposits increased 536 $6 million during the second quarter, and we're up $587 million.
Over the year ago quarter.
With that are non interest bearing deposits to total deposit ratio was 37, 3% for June 30th 2020, compared to 38% for March 31, 2020, and 33% at June 30th 2019.
We seek to continue our track record keeping this ratio at or above 30%.
Back to some other items related to the effects of the pandemic on our borrowing customers.
In March we started to offer 90 day payment deferrals two eligible borrowers.
As of June 31st time deferrals were granted on 2111 loans with an aggregate loan balance of 119 billion or 30% of core loans.
As of July 24.
Second deferrals were granted on 129 loans with an aggregate loan balance of $100 $1 million or 8% of first time deferrals.
While approximately $564 million in loans or 48% of the first time deferrals had made a regularly scheduled payment.
Leaving approximately $494 million or 44% still on the first deferral.
Not included in the 119 billion of loans that received a first time deferral are approximately $20 million in loans that I've paid off in full.
The deferrals as of June 30, and some key categories by loan type are as follows.
I'll provide two numbers in each category. The first number will be the percentage with respect to total deferrals and the second will be the percentage with respect to total loans within a given loan type category.
Retail 17% of total deferrals.
With 53% of all retail differed.
See store, 11%, a total deferrals with 41% of all c-store differed.
Hotel.
10% of total deferrals with 85% evolve hotel differed.
Office, 7% of total deferrals with 8% of all office differed.
Restaurant and bar, 7% of total deferrals with 72% of all restaurant and bar differed.
Rental an investment property, 6%, a total deferrals with 28% of all rental an investment property differed.
Wonderful family, 6% of total deferrals with 18% of all 1% to for family differed.
And oil and gas, 2% of all deferrals with 25% of all oil and gas differed.
As previously mentioned, we funded $695 million in PPP loans, a breakdown of Pvp loans made to our high risk loan categories as a percentage of our total Pvp loans is as follows.
Restaurants and bars, 7%.
Oil and gas, 4% hotels, 1%.
Since we provided pvp loans to both existing and new customers. We can say that in general nearly all of our existing restaurant and bar and hotel customers received a PPP lamp.
And approximately 30% of our oil and gas customers received a pvp lamp.
Houston and Texas continued to me in the news as Covid hotspots.
As of July 27.
Harris County reported 66195 total confirm cases and 654 total deaths.
Over the past 10 days, we have seen improvement in several key measures, including the seven day Rolling average a new cases, and the number of ICU beds occupied by filbert patients.
While these trends are headed in the right direction, we remain highly focused on health and safety.
Business is being conducted in the eastern region traffic is returned to our roads and restaurants can operate at 50% capacity.
Putting on a mask when near others is becoming his routine is butlin your seatbelt when getting in the car.
Generally are borrowing customers are coping with economic situation with a we will arrive this out approach by finding new ways to deliver products and services, while keeping an eye on expenses.
R borrower profile of small to medium sized businesses and the resulting granular loan portfolio does provide strength. During these times as these companies can be nimble and pivot quickly to address the challenges during this pandemic.
I know turn it over to our CFO Paul.
Thanks, right as previously referenced in much like in the first quarter are Bottomline results were significantly significantly impacted by 10 7 million and provision expense due to covid related risks and economic uncertainty.
So net income came to nine 9 million or 48 per diluted sharing the second quarter, which is up from three 5 million or 17th polluted sharing the first quarter and down relative to the 14th $2 million or 66 per diluted sure posted in the second quarter of 2019.
While we are disappointed with the bottom line results were very pleased with many of our underlying operating tracks.
On the back of record net interest income we posted record pretax pre version results in the second quarter.
Tax pre provision income for the second quarter was 22 6 million.
Compared to $15 3 million and the first quarter and $19 $4 million in a year ago quarter.
Recall that the first quarter featured nonrecurring items that decreases pretax pre provision earnings by two $1 million.
Adjusting for nonrecurring items, such as gains and losses in Oreo write downs pretax provision income for the second quarter would've been 22 8 million.
First and adjusted 17 4 million for the first quarter and $18 $7 million in the year ago quarter.
Record net interest income with a key driver to our increase in pretax pre provision earnings power in the second quarter.
Net interest income increased five 8 million.
Or 12, 9% to $58 million from 45 million and the first quarter.
Key drivers on the asset side with the impact of interest on nearly 500 million.
An average loan balances due to SBA PPP loans and additional income from our largest securities portfolio and the quarter.
Which is partially offset by lowered purchased accounting accretions.
Similarly impressive was the liability side, where we improved our cost of funds significantly.
So a total interesting come increased by 3 million.
While total interest expense decreased by two 8 million.
All while acquisition accounting accretion decreased by $585000 compared to the first quarter.
The impact of acquisition accounting accretion continued to decrease in the second quarter.
Accretion increased loan income by 566000 and reduced CD expense by 103000 for a total positive effect on net interest income of $669000 during the second quarter.
As compared to a total positive effect.
One $3 million in the first quarter, and two 8 million and the year ago quarter.
This quarters accretion leaves three $5 million in the low mark and $363000 in the CD Mark.
You don't loans and the second quarter was 513% impacted by both PPP balances and lower.
Accounting accretion as compared to 559% in the first quarter and 588% for the year ago quarter.
Adjusting for the acquisition accretion yield on loans would've been 508% and the second quarter, 547% and the first quarter.
And 562% and the year ago quarter.
Now if you too if you were to exclude the pvp loans yield on loans would've been 544% and the second quarter.
Total yield on interest, earning assets is 483% for the second quarter, which was down from down from 5% to 8% for the first quarter and 558% for the year ago quarter, reflecting the aforementioned effective PPP balances and lower accretion income as well as higher average security.
Balances and the earning asset mix.
If you if you were to exclude the PPP loans, the total yield on earning assets would've been 507% for the second quarter.
Our cost of interest bearing liabilities decreased dramatically in the second quarter to two 119 basis points versions of 168 basis points and the first quarter and 186 basis points for the year ago quarter.
The overall cost of funds for the second quarter with 79 basis points versus 130 basis points and the first quarter. Thanks in part to significantly higher balances of non interest bearing deposits.
A second quarters improvement in cost of funds reflects the first full quarter impact of non maturity deposit repricing. After fed actions in March and a significant decrease in the cost of borrowed funds.
We expect continue to improve continued improvements in our cost a fund going forward, but it won't be as dramatic and it will be driven more by the gradual repricing of our CD portfolio over time.
Notwithstanding such a significant average balanced mixed shift towards lower yielding.
PPP loans and securities. We're really proud to have maintained a very strong taxable equivalent net interest margin of for 100% and second quarter.
As compared to 415% in the first quarter, and 433% and the year ago quarter.
On what we define is core or adjusted NIM.
Excluding the impact of perched accounting accretion, we saw our taxable equivalent net interest margin gain a basis points to 485% and the second quarter from 404% in the first quarter and remained relatively stable relative to the 4.07% we saw in a year ago quarter.
Excluding pvp loans and related revenue net interest margin would've actually increased to 428% for the second quarter.
Going forward, we feel well positioned to maintain a strong net interest margin as we manage our funding mix and maintained discipline on non pricing.
Non interest income decreased one.
$216 million from the second quarter from two $7 million for the first quarter, primarily due to the laws on the sale of Orey of $306000 during the second quarter and lower correspondent bank rebates deposit fees and lowered gains on the sale of securities in the corner.
Total non interest expense and the second quarter was 29 $7 million compared to 32 $4 million in the first quarter.
Recall that the first quarter feature to $2 million of write downs on other real estate owned recognizing that quarter.
Notable and the second quarter expenses with deferred costs related to PPP loans recorded and the quarter, which lowered the salary employee benefits line by one $6 million.
These decreases were partially offset by an increase in overtime expenses related to the PPP loan booking process.
While on the topic of PPP loans and income statement impacts we should note that we expect to recognize approximately $25 million an aggregate origination fee income and the approximately one 6 million.
In aggregate deferred origination cause we just mentioned into yield over the life of the individual Pvp lounge.
Upon SBA forgiveness or early pay off on individual loans. The recognition of remaining origination fee income and cost will be accelerated.
Are improved revenue an expense profiles drove efficiency improvement in the second quarter decreasing are efficiency ratio to 50, 690% compared to the 60, 813% we posted for the first quarter and the $61, 93% for the prior year quarter.
Note that if you were to adjust the first quarters efficiency ratio for the Oreo write down it would've been 60, 348%.
The provision for loan losses was 10 $7 million from the second quarter, which is slightly lower than the provision we took in the first quarter of 11 million.
This brings are allowance for loan losses to 47 6 million.
Representing 104 basis points of total loan.
If you were to include the three $5 million in the loan Mark remaining an acquired land and exclude the PTP loan balances the ending allowance plus loan mark to core loans would be 132 basis points.
As we mentioned in the first quarter call, we elected to take relief that relief that came with the cares Act and we deferred the implementation of teasel to the reported allowances under the current incurred standard.
Since the Covid 19 situation is fluid with significant economic uncertainty, we look forward to being able to further refine are allowance loan losses with the benefit of additional time and information.
Are covered related provisioning during the second quarter significantly impacted are bottomline RIAA, an hour ATCA metrics for the quarter, which came to 071 percent an 832% respectively.
Quarter, and tangible book value per share with $24 and nine.
An increase of approximately 6% from the first quarter, partially driven by unrealized gains in our security security spot.
Notwithstanding current economic uncertainties, we are buoyed by a strong margins, which drive a solid recurring pretax pre prevision, earning street.
And that's before the significant beneficial revenue impact, we expect from PPP loan forgiveness.
We are also fortunate to be at or near all time high levels of capital on a consolidated basis and at our Allegiant Bank subsidiary.
All in all we feel well positioned as we navigate the current economic environment, and we feel confident about our ability to maintain a strong capital position and are modest dividend.
To that and are board of directors declared a 10 dividend on July 23rd.
I will now turn the call back over to Steve.
Thank you Paul and thank you Ray.
With that I'll know turn to call over to the operator to open the line for questions.
Thank you as a reminder to ask a question you would need to put a style one of your telephone to withdraw your question Pester Pankey.
Please don't bottle in Kampala Q&A rosters.
Our first question pension needed feaster with Raymond James Shine is open.
Oh, good morning, and everybody.
Good morning.
I just wanted to start out on the core margin I mean, once you guys have been able to do is tremendous.
And <unk> I appreciate your commentary so if I'm doing the math right it sounds like a cord ma'am.
PPP and ask.
<unk> was like 421.
I guess, just how do you think about the core nin going forward I guess as you.
Have some opportunity to further reduced deposit costume.
Leveraged.
Proved earning asset mix.
Just any thoughts on the core named going forward very present.
Certainly well, we're going to be working our hardest to to protect that and the bookcase for our name is clearly the.
Ability for us to continue to decrease our concept funds and as I mentioned in the in the prepared remarks, it's likely to be a little bit more gradual and the third quarter than it was going from the first quarter to the second quarter.
But we do see a.
Meaningful ability to continue that momentum so to speak into the third quarter from the standpoint of our caused funds on the asset Todd.
Certainly will be some some headwind, particularly as it relates to excess liquidity on the balance sheet and the relative unknown as it relates to.
Our ability to continue to book.
Loans and try to push for some level of stability and our growth on the loan side of the balance sheet.
To the extent, we have access levels of liquidity and are earning asset mixed shifts to a degree that's going to have an impact on our overall asset yield, but we still feel pretty good about our ability to maintain.
Or to at least maintain really strong levels of margin.
Into the back half of the year.
So.
Between the lines at least flattish if not some potential for additional margin expansion.
I think.
Flattish as a way to.
Two probably set expectations and we'll be trying our hardest.
Two two.
To ensure that we deliver that and then.
Who knows maybe a little more.
And then gray I appreciate all the commentary on the <unk> rates and.
I guess just.
House, how I mean, if I'm doing the math right, it's like 15% to 20% re deferral right.
Through the data that you've got through the 24th of July I guess, how do you think is that sustainable as well.
The.
The remaining deferrals.
I guess, just how do you think about reader for all right is going forward and how your conversation develop.
Sure I think that the.
It's probably pretty good benchmark I think if you look at our.
Higher risk scattered higher risk categories, they're a little bit higher than that on the total portfolio.
But overall it's.
The philosophy that we're seeing is that was from.
July 24th is the basement, we're giving that just a few days ago. So.
Thank the velocity the first deferral.
Velocity, obviously was.
It was tempered after that what we reported as of April in April with the Big bulk of those deferrals that were granted and at the end of March and.
So that has slowed down and second deferrals, it's probably still early but I think feel pretty pretty good about that level book almost the chairman.
Other aspects of the second the federal as is.
We have more stringent requirements as to what it tastes for the second departments to be granted.
Much more robust documentation from the customer base is the first departments.
Okay.
We're done in an effort to accommodate in the short term the needs of our customers. While we were working on the <unk> at the same time second deferrals really are granted as we get comfortable that there is a plan behind.
What the customer is working on to get to better.
To get to a better place in terms of their revenue and the ability to make their payments so that impacts the velocity of the of the second beeferman significantly.
Okay.
Okay. That's helpful color and then I'd just last one for me just thoughts on are gaining Crow, obviously, the Pvp program and the deferral activity was a huge distraction.
And then just as I look at the loan balances it looks like C&I utilization may have come down just curious your thoughts on origination activity and organic growth.
Going forward and maybe you bring some of the new.
The new accounts over from the Pvp program in your lenders can get back to.
Original <unk> and.
Just thoughts on organic growth and.
X X PPP going forward.
Yeah, so the originations and the second corner.
Definitely took a dip from what we normally experience.
There may be a little bit of pin the pipeline.
We may see in the third quarter I think it's still too early.
To say what may happen as far as net growth.
We do have some pipeline that will turn into originations and the third quarter and the fourth quarter and.
We are still experiencing.
What we.
Look to be no longer elevated levels to pay off that just as it has become the kind of run ready to pay off so.
What the net growth is David.
Really not sure, but I do expect originations to pick up a little bit from what you saw on the first quarter.
Second word.
Okay. That's helpful. Thanks, guys.
Thank you. Our next question comes from Brad No sex with Piper Sandler and is open.
Hey, good morning.
I'm going to add morning.
Alright, Thanks for taking my question.
Wanted to follow up on the deferral discussion.
500, or so that you guys are still.
Waiting to hear from their own first deferral right would you say that.
Since may be hard to calculate but that remains piece do you think it's more than your high risk categories. In other words have you have some of his deferrals cured and sort of the areas that would be less viewed as less risky and you've still got more about a high risk bucket of deferrals out there if that makes sense.
Yes, that's a good question.
I would think what's left on deferral looks like the rest of the portfolio.
This earliest function of when the deferrals were granted and.
Again, a bulk 800, something $50 million or the one point.
$2 million was granted Pryor as of.
April 26.
So.
It's a function of the timing I believe and not necessarily the industry.
Got it so it will look kind of like the rest of the book it it's not it's not like you've heard from the customer is already in Utah.
Right I think.
Hotels left or whatever sure I think the second deferral right.
Wood.
Based on what we've seen the second deferral right should look similar as those come do.
It does come out at first of all.
Got it.
Just maybe for my own clarity.
I know you guys benefit a lot from SBA lending.
How much did that program, where the government will make payments on behalf of customers.
Do you expect to have that.
A big impact can you guys at my understanding is that will pick up once a deferral periods over.
Just kind of curious how you think about that sort of secondary and tertiary.
Source of payment over the next six months.
Sure. So yes, we have been receiving those those payments on the six month of payments, that's really not a deferral.
The customer.
Experiences a deferral, but the money is actually coming on those SBA loans and are are SBA portfolio. Non PPP is around under 75 $180 million. So those we have been receiving those every month and.
We keep a close close eye on those SBA loans to see how they're doing.
A number of those are in the risk area of.
Hotel restaurant and.
Take care of that kind of thing in there.
It's a huge the underlying customer.
Sure.
Now what I was getting.
And then Paul just to kind of follow up just to make sure I have all my number is correct on the Ppp's.
I think you said right around $500 million on average can you can you give us how much an interest income you recognize.
And the quarter and dollars and then how much and fees you have left to be recognized as you kind of move through the program.
Sure I don't I don't have a detail here, but ultimately we had.
Just under $2 million in both PM interest income recognized.
In the quarter and of course since due to the timing the booking the average as the average putting so to speak with only $500 million. So when you look forward to the.
Second quarter pardon me to the third quarter.
You're going to really have that that fully loaded average.
Level of.
Footings.
To drive the interest income story interesting fee income story I should say.
Going forward and we don't expect really meaningful levels of forgiveness and the third quarter when push comes Chung.
We're still on the front end of that process.
Feeling.
The fourth quarter and going into.
Maybe the first part of her first quarter of 2021 is where you're really going to be seeing the bulk of hopefully high level.
Forgiveness.
Thank you. Our next question comes from that only with Stephen zinc is open.
Great. Thank you and good morning, I wanted to ask about the operating expenses. It sounds like some of the increased overtime costs and <unk> were offset by some of the.
Cause from the Pvp is this $30 million level is this a good run right to assume for the third quarter or the other considerations for us to think about.
I'd say, it's it's a solid.
Line of demarcation for us to to shoot too.
To be better then, but that's kind of.
What I look at as to run right.
Okay, great. Thanks, Paul and then.
On the credit side, your higher risk categories that you've mentioned.
At the hotel the restaurant bar oil and gas can you talk about what your greatest concern is here within these portfolios and then.
Some of your peers are also including retail theory.
[noise] categories are focused on I think for you guys. It's around seven or 8% of total loans can you talk more about your retail portfolio and why you decided.
Not to include that in terms of the categories, you're both concerned about.
Sure. Let me talk about retail then I'll turn it over to economy, Steve on the other items. So.
Retail.
That.
That loan type shows about something about around half is what we would call.
Loans that are dependent upon third party rent so the other half is.
Single tenant.
Type properties, where we haven't seen a whole lot deterioration in those so.
I think we we probably didn't included.
As far as one of the categories to give additional color on most of his how we underwrite those.
Going in on the front end with our LTV are that coverage ratio person guarantees.
These are not.
Big dogs anchored centers and.
Those.
Deferral right look similar to the rest of the portfolio and that.
And that grouping.
And the other part of that bucket is also there's owner occupied in there as well so.
So as of as abroad retail really got to look at it and what is that kind of dependent upon third party rent and it's not that entire amount. So.
I'll turn it over to.
Oh Counterstatement about the other category I'm happy so kind of happy to speak about hotels restaurants bars, and oil and gas a little bit and how we think of the risking those portfolios. So all three of those buckets.
Naturally benefited from.
The deferments that we talked about earlier as well as the PPP loans that have supported those customers. When you look at the nature of the portfolio for hotel and restaurant and bar.
Vast majority of it is going to be in CRE secured by commercial real estate.
Weighted average.
<unk> theory alone 60% restaurant.
70% Ray discuss the.
The impact of distress testing that we did the 26% or ended 30% plus 6% expenses for both categories.
And you can see.
That's essential losses in the worst case scenarios flooring those scenarios.
Suitable losses to the bank.
You have to keep in mind that are underwriting standards are very concerned we've been going into these loans.
Typically.
That service coverage no less than 125 personally guarantee.
A number of instances we have.
Spa's guarantees as well and and we will look at the past few his G hotel and restaurant.
Very very minimal in fact, no past two at the end of the quarter for the hotels.
Very small amounts for restaurants, so so as it stands at the end of June for hotels, and restaurants, I'd say that.
Potentially impact of cool bid in those industries have not yet.
Very powerfully felt in our portfolio, that's not to say that we may not see some deterioration in the future month.
And we keep a close eye on these too.
These two areas.
In fact that we had a.
Significant customer outreach effort.
The second quarter, where all these industries were cover then we touch base with.
All of the these borrowers to understand where they are.
Appropriately risk right.
Based on the information available.
Each one of the.
Loans.
At this time, we remain cautious with these areas.
Optimistic to the fact that we're not seeing significant weakness yet.
But.
He is going to be for us to stay in front of these customers and we see deterioration to quickly.
To quickly act on it.
In regards to the oil and gas.
About 665% of that portfolio CNI, 35% CRE weighted average LTV owned Cru's, 54%.
Stress on the Cru's.
Is again, very manageable 127, 426% and 712, 30% 36%.
Again personal guarantees on every single one of them.
No past fused into the quarter no charge offs at the end of the quarter in the in that category.
So it's another area that we're we're closely watching and again, we have been in touch with our.
Customer base the typical anecdotal.
Information, we get is that they are experiencing relatively slower pay from.
The big outfits.
And that business for the most part is still slow in the industry.
Working towards income diversification opportunities expense control.
And that <unk>.
Really help them a lot during the second quarter and that's that's what we here in the industry.
Oil and gas and again name of the games to stay very close to these customers and figure out what's going on in appropriately appropriately risk rate is is being developed.
And that I would just add the Steve.
Obviously, you know we're on the incurred loss model and so we look at those things we reached out.
What kind of exercise are.
Outreach muscle.
And the burn from the last quarter, we're going to continue to exercise that muscle as we go forward, we really say closer to these customers.
The hotel is probably the most.
Waited those categories and it's really all about duration how long is this.
Going to continue and.
When will the economy start to kind of come out of this a lot of uncertainty out. There. Obviously was that occurred loss model. You you really kind of look at where things are and we will we will stay very close in touch with those customers. We feel good about our hotel operators.
They're experienced these people are topnotch that was good branded hotels.
And so there.
Some are doing better than others, obviously, but duration is probably going to be the case.
Okay. That's helpful commentary I appreciate that and just finally.
I know you are still on the incur Los method.
And you're delaying the seasonal implementation can you remind us what the estimated day one impact would be under seasonal once that is implemented.
We covered it.
I think in our first quarter call, but.
Hi single digits and millions of dollars.
Was what.
Jan around the range you could think about for what are.
Jan one 2020, Cecil adjustment would have been.
Okay, great. Thank you guys.
Hey, Granta.
Thank you once you mentioned I'm going if you wish to ask a question at this time. Please crestar then one or any test on telephone.
Question comes from Brady Gaming came UW your line is open.
Okay. Thanks, guys one ready.
Any additional growth in the bond books expected from here.
No.
Not really.
Nothing as meaningful is what we've done year to date so.
We will and we are likely to.
Reinvest cash flows into the bond market and potentially make some incremental.
Purchases, but really.
It's not going to be as as meaningful it's pretty significant pivot we made.
Year to date and most of that was actually in the first quarter.
When they're still was value of the by Margaret.
It's a little tougher now, but but to the extent we have meaningful liquidity we will.
Look to get incrementally invested it's just I don't think it's going to be.
Quite as meaningful.
Okay, and lastly for me just the tax rates seem a little low 17% was there anything.
One time in nature of there and I think we talked about going forward. The taxpayer it'd be around 21% is that still the right way to think about a P. S.
That's alright, we're going to think about it.
Okay, and nothing abnormal in to accuse tax rate of 17%.
Those are timing differentials that ultimately are driven there so.
I would expect more than that high team, 20% overall effective tax rate on quarterly basis.
Great Thanks to us.
Alright.
Thank you then on furnishing no further questions at this time I turn the call back over to Steve Wrecks Ross for closing remarks.
Well, thank you operator and once again, we appreciate all of your time in interest in Laziness Bank. We look forward to speaking to you again in the future and we have no. Other promise. So thank you all very much and have great third quarter.
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