Q2 2020 First Merchants Corp Earnings Call
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[music]. This presentation contains forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.
Such forward looking statements can often be identified by the use of words like believes expects ordinary.
And includes statements relating to first merchants goals. This is glenn growth strategies loan and investment portfolio.
Asset quality risks and feature costs and benefits.
These statements are subject to significant uncertainty is that may cause results to differ materially from those set forth in such statements, including changes in economic and business conditions.
The ability of first merchants to integrate recent acquisitions and attract new customers changes in laws regulations their requirements of the company's regulators the cost another affects of legal and administrative cases.
He is in the credit worthiness, Oh customers and the impairment Oh collectibility of loans fluctuations in market rates of interest and other risks and factors identified in first merchants filings with the Securities and Exchange Commission.
[noise] first merchants undertakes no obligation to update any forward looking statement, whether written or oral relating to the matters discussed in this presentation where press release.
In addition, the company's past results of operations do not necessarily indicate its anticipated future results.
After today's presentation, there will be an opportunity to ask questions.
To answer your question you May Press Star then one to withdraw your question you May press star into.
We also know cities or that is being recorded.
And at this time I'd like to turn the conference call over to Mr., Mike Reckon, President and CEO. Sir. Please go ahead.
Thank you Jamie and good afternoon, everyone.
Welcome to earnings conference call and webcast for the second quarter ending June Thirtyth 2020.
Joining me today for presentation, our Mark Hardwick, our Chief financial officers, Chief Operating Officer, John Martin, Our Chief Credit Officer, Michele can be asking our senior Vice President and director of Finance.
We were released earnings in a press release. This morning at approximately eight am eastern time, and our presentations speaks to material from that release.
The directions that point to the webcast were also contained at the back of the release and my comments begin on page four aside titled second quarter 2020 highlights.
So on that page up top first merchants reported net income of $33 million for the quarter earnings per share of 62 cents.
The earnings compared to 41.1 million during the same period in 2019.
Whereas the 62 cents in second quarter earnings compared to 83 cents earned in the second quarter 2019.
Produced a return on assets of 97 basis points.
Considered interrelated context, the earnings provide pre tax provision our away at 1.73% or pre tax provision return on equity of 13.18%.
Balance sheet grew total assets grew 13 grew to 13.8 billion 3.1 billion or 28.7% over the second quarter 2019, and as Mark will highlight later it was a combination of our September Onest 2019 closing them in a row bank and try.
Just organic growth through the period and then as the some important point says total loans were helped by approximately $900 million of PPP volume in a program that set up very well for our client base.
John will be on obviously talk about asset quality, but in consideration of our second quarter provision our allowance in fair value marks totaled 1.62% alone.
Michelle is going to provide additional comments as well in her remarks.
I'm down in the deposit section on meaningful part of the margin equation I feel like we made great progress in the quarter deposit volume's up as Mark's going to detail steady progress in cost reductions in fact, our 47 basis point cost for the second quarter down 50 basis.
Points from year end, there's number of 97 basis points.
As you look at the detail in our deposit mix.
You will see opposed to review will show that our deposit structure has management anticipating additional interest rate and dollars an expense savings linked to our remaining and laddered CD volumes and maturities.
Capital levels stay very high Tc he have to assets, 9.31% and as the press release notes that without PPP loans are Tc he that was actually 9.93%.
A $23 enforce and tangible book value per share grows 9.7% increase over the second quarter last year and a similar compounded growth rate overtime.
Moving to page five very busy second quarter as a provider of all elements of the cares Act, most notably PPP I alluded to in a moment ago, a more than 5000 applications really readily received both by our bankers and by the marketplace. I think I saw an article this week that said we produce.
News the third most.
PPP bonds in the entire state of Indiana, a of all banks.
John Martin and our bank or team recently negotiated with an outside partner that will be helping us through the forgiveness process. The forgiveness phase using our own folks along with a partner as we continue to understand what will be the preparedness by the S. P eighta take that forgiveness applications.
[music].
We're also are registered main street lender and we're assessing the fits of that program as the as it evolves. The listeners might know that there is new features announced weekly for that.
And we look forward to seen if that's a good fit for any of that clients in our marketplace.
On a big impacts coming up out of the resolution of the loan modifications and so John remarks go deep into that $1.25 billion in modifications approximately 12% of the portfolio when when I use the term robust process and the middle bullet point I'm, what I'm really talking about is direct client dialogue.
Working with interim financials CFO for Cas business owner abuse of their need for additional help.
And as the last bullet points as really a modest amount if none none by the end of the second quarter and I think a trickle them that John I'll speak to about second request on the back of the help that we provided up through the second quarter.
The balance sheet voted with a liquidity with a loan to deposit ratio just under 85% and deposit growth from all sources liquidity of our consumer and commercial clients held at first merchants to include some of the PPP balances and then as Mark will highlight some really strong cash balances that we're looking for.
For the highest.
Yield that we can possibly a attained in this period of of really significant liquidity.
Let me go to page six.
Not efforts over the last five months I'm really the.
Throughout the bullet points here, making sure that anyone that's doing business with us or doing business on our behalf our employees feel safe and so while all of the banking centers were opened by July the first we're doing it away through modifications in protective barriers that are welcoming to our clients and put our a banker.
As in a position to be the best banker that they can be that environment would.
Include required mask and this is even ahead of some of the governors that have done that but just to a feeling on our part that it makes for a better environment to continue to be the advisor that our clients expect.
I think we touched on at our last call. Some of the enhancements we made two capacity levels and so that bankers that were more accustomed to using face to face banking and lobbies to the extent that they couldn't they still had mobile and online.
Limits materially higher as well as a lot of one on one coaching for those folks that hadn't been digital bank users in the past to take advantage of our investments over the last several years.
Towards the bottom a bullet points to calls return to office, it's an HR driven framework that we use that flexes.
To the environment, you know all parts of the country of kind of had fits and starts and it allows us to react to our company experienced specifically and government pronouncements as they come about.
We have a fully armed pandemic team that digests information and then commuted communicates it out to the rest of the company.
Bottom of the page the community support the efforts listed here have really served as a rallying point for our colleagues through this difficult period of time top bullet point, we had a commitment of a million dollars in donations distributed the non for profits I think Mike Stewart, our Chief banking Officer core.
Her back that effort. It included our regional Presidents, obviously, I think we were able to get funds to over 200 frontline organizations and so that.
Investment I'll call it call. It an expense reflects itself in our second quarter marketing expense, which you might have noticed.
We caption it internally is the right thing to do.
Bottom bullet point it talks about an announcement we made the we're excited about we've named our first ever director of corporate social responsibility and it links to the middle point, but the director of corporate social responsibility.
Is it really combining a lot of efforts that had existed heretofore with a little bit more muscle on them as an internal leader within our company previously the market President of our monthly market, which is a headquarters market Scott Mickey It is by name you're going to lead several prior efforts as one one larger.
More impactful effort.
With the region President Scott is going to lead the community benefit agreement execution, among all of his responsibilities and that's the middle point on the page.
The five year 1.4 billion dollar agreement that we announced in conjunction with the NCRC, but really with a community groups throughout the larger markets within the markets that first merchants serves and what references credit on here. It really is going to be directed towards low and moderate income needs.
In mortgages small business affordable housing.
And then on top of those credit related answers and solutions to the needs of our community is philanthropy and banking center access. So we're excited about it.
Page seven just a snapshot that might give you some context for some of the answered or material provided by either mark Michelle or John throughout the balance of our call today. It's a map of our franchise again page seven tried to just.
Show you some of the progress has been made and.
Prior to hearing from our just a summarizing look at our marketplace is the Midwest.
In our view is on the early end the reopening and so you see some of the improvement in unemployment. There are no guarantees for me as to where we go from here yet there are no notable cobot hot spots on a full country basis that exist in the Midwest or in our franchise and so we're just working our way at at week at a time trying to take advantage.
Duration and as you can see by the unemployment numbers the workers are finding opportunities, which ought to give rise to a healthy first merchants and a healthy Midwest.
Paying close attention to what the governors of those state have to say so as we try and move forward. We're doing it in a really balanced way and at this point I'm going to turn it over to marks we can get a little bit deeper into the results themselves.
Thanks, Mike.
However, a real sense of prior to run the communities those community support comments you just made.
And I'm excited about.
Our ability to just enhanced the financial wellness silver diverse communities. We serve so those initiatives are exciting an important.
If you turn to slide nine.
Total assets on line seven.
Increased by 1.4 billion or 21.9% annualize since year end 2019.
Our investments on line, one increased by 193 million corn annualize, 15%.
Following up a strong 2019, where investments increased by 59% over 2018, providing really strong liquidity for the company.
Oh loans online to have increased.
By 831 million since year end of that increase the PPP loans accounted for 883 million net of deferred fees and costs.
Additionally on line three the allowance for loan losses increased by 41 million or 51% year to date, primarily due to co bid.
Related economic challenges.
The composition of our 9.3 billion dollar loan portfolio shown on the upper right side of slide 10 produce a second quarter 2020 yield of 4.10%.
Down from the first quarter of 2020 yield of 4.85%.
And 83 basis point decline in LIBOR during the quarter quarter.
Was the primary driver of the decrease in loan yields and PPP loans accounted for.
About six basis points of the decline.
On slide 11, our investment portfolio has a longer duration than our peer group.
Which is a nice offset to the variable rate loan portfolio that we have and as of June thirtyth of 2020, our unrealized gain totaled 139.1 million.
$66.6 million increase since year end.
Our yields are stable totaling 3.02% with remaining maturities in 2020 totaling $253 million with an average yield of 2.56%.
In 2021 maturities totaled 429 million whether yield of 2.25%.
On slide 12, total deposits increased by 1.1 billion or 22.9% annualized over year end 2019, obviously some portion of the increases due to PPP loans that have remained on deposit, which we estimate to be about one half of the of the 2020.
The growth that we've experienced.
We believe that our loan to deposit ratio of 85% our loan to asset ratio of 67 in prison percent again provides the bank with strong liquidity levels.
The mix of our deposits on slide 13 is the key to both liquidity and strength and low cost or liquidity strength and low cost funding second quarter interest expense on deposits totaled 47 basis points down from the first quarter of of 2020 of 88 basis points. This 41.
Our this reduction of 41 basis points helped all helped us offset what was an unusually unusually challenging decline in loan yields during the quarter.
As we move through the remainder of 2020 and into 2021, we have time deposits.
Time deposit maturities.
That should bring down interest expense even further in the remainder of just 2020, we have nearly $900 million of Cds that will mature with an average rate of 1.77% and we're anticipating about 140 basis points of savings as those Cds mature throughout the rest of this year.
All regulatory capital ratios on slide 14.
Our well above the regulatory definition of well capitalized in our internal targets, which ensures the bank maintained strong levels of capital.
When adjusted for PPP loans, which are 100% government guaranteed our tangible common equity ratio.
Would recalculate to be 9.93% as you can see on the slide and as Mike previously mentioned.
Now, let's turn to slide 15, the corporations net interest margin net of fair value declined by an additional 27 basis points from the first quarter of 2020 to the second quarter of 2020.
The decline PPP loans accounted for six basis points.
As mentioned during the discussion about loans and deposits our loan yields declined more than expected.
As a result of LIBOR rate reductions our guidance only called for 10 basis point decline as this rapidly changing environment impacted the quarter at the at the highest end of our modeling during last quarter, we were anticipating the lower end of the range.
Much of our confidence was due to the aggressive deposit rate reductions deployed by our team. However, it simply wasn't enough to outrun the rapid repricing and earning assets that we experienced.
From this point forward PPP fee amortization should be the primary point of discussion, although we don't know how quickly the SPJ will process the forgiveness of PPP loans.
We.
We have clients that are eager to move forward we're modeling.
For 80% of the PPP loans to be forgiven evenly over the next 12 months, although thats just an estimate.
This acceleration of fee income should allow net interest income and margins to increase on a reported basis.
But the core net interest margin, excluding fair value and PPP should remain stable.
Non interest income on slide 16 totaled 26.5 million for the second quarter 2020.
The decline in fee income from the first quarter.
Totaled 3.3 million and fees from customers accounted for two and a half million dollars of the decline.
Service charges on deposits on line one was the primary driver accounting for 1.7 million of the decrease as customer average balances increase resulting in just half of our normal NSF and OTI fees for the quarter.
May was low point for service charge income.
But we did see nice recovery in June.
Wealth management fee income is down $384000.
And more than half of the decline is related tax prep prep work that has directly offset and other expense.
Card payment fees increased 109 by 190000 during the quarter.
Gains on the sale of mortgage loans continues to be a bright spot in our performance as they increased by 311000 for the quarter.
And hedge income was down for the for the second quarter compared to the first quarter as loan closings, excluding PPP loans is less than than our normal run rate.
Non interest expense on slide 17 totaled just $60 million in the second quarter of 2020 compared to 66.1 million in the first quarter.
The decline was driven by 2.3 million of deferred salary expense related to PPP.
A 1.1 million dollar reduction and bonus accruals and a $1.6 million decrease in debit card payment processing expense due to the termination ever rewards program.
We also expense nearly $1 million.
In the quarter based on our contribution levels that we committed to.
For Cobot relief.
We anticipate noninterest expense in the third quarter of 2020 to be closer to $64 million.
Now on Slide 18, we were pleased that our bottom line totaled $33 million and net income and earnings per share totaled 62 cents.
We also like the strength of our pretax pre provision return on assets of 1.73% and an efficiency ratio of less than 48% for the quarter.
On slide 19, you can see trends vps dividends and tangible book value per share and we chose to add a dividend payout ratio line as well, we believe that our dividend, which is still less than a 50% payout is reasonable in this environment.
And on slide 20, you'll notice our total compound annual growth rate of tangible common equity is still 10.13% and.
And our dividend yield is nearly 4%.
Now Michel kept asking our senior Vice President Finance will cover a couple of key items related to loan loss coverage and capital strength.
Thanks, Mark My comments will begin on slide 22.
Looking at the top rated the slide you'll see the allowance for loan loss recorded for the quarter. We had a beginning allowance balance at the end of Q1 sub 99.5 million less net charge offs of just 230000, plus the Q2 provision expense of 21.9 million that brings to the June 30 allowance for loan loss balance too.
121.1 million I would remind you that we elected to defer this did adoption of Cecil So we calculated the provision using the incurred loss methods that continues to run our c. So most parallel we believe the provision expense this quarter materially approximates the what provision expense would have been under the C. So method.
Moving down to line nine the remaining fair value marks on purchase loans totaled 29.3 million, adding those marks to the allowance balance totals 150.4 million, which is a healthy is 1.62% of total loans, which Mike mentioned earlier in his remarks.
Next on Slide 23, aside is intended to show you that when considering our robust capital and allowance for loan loss levels that we have nearly 500 million am reserves Krishna city economic downturn. So let me start by walking you through the allowance at the top at the page the table at the top shows the roll forward of our allowance for loan losses.
Number 31 2019.
The first highlighted line shows our current allowance balance of 121 million with an allowance to loans total ratio of 1.3%.
When excluding the PPP loans from total loans the allowance to loans is 1.44%.
As I said earlier, we did not dedup Cecil but in our 12 31 19 form 10-K, we disclosed to the estimated Cecil day, one adoption impact. If we had adopted on January 1st was estimated to increase the allowance by 55% to 65%.
Applying 65% to the 12 31 19 allowance for loan loss balance of 80.3 million creates the Cecil day, one adoption increase the 52.2 million.
So a pro forma of the allowance with Cecil adoption using these assumptions would have yielded an allowance of 173.3 million, which has a robust coverage ratio of 1.86% and 2.06% without ERP.
The increase in the allowance for Cecil adoption would lower capital on an after tax basis. So in the bottom left corner I have provided a pro forma of the total risk based capital ratio.
Current total risk based capital ratio is currently 14 point, 18%.
When reduced for the impact of the Cecil adoption the ratio would be reduced to 13.68% Thats still leaves 360 million of excess capital above the well capitalized level.
This excess capital added to the 173 million of allowance both shown post Cecil gives you nearly 500 million him reserves.
Enough to cover a 6% to 7% non PPP loan charge off ratio, depending on whether you're looking at a four after tax it's important to keep in mind that this does not consider our strong pretax pre provision earnings levels that would continue to contribute to capital over the quarters to calm as well as the 29 million.
In fair value marks that I, just mentioned on the previous slide I hope. It gives you a clearer picture of our balance sheet strength now I will turn it over to our Chief Credit Officer, John Martin.
Alright, Thanks, Michelle and good afternoon.
I'll begin my comments on slide 25, with a detailed look at changes in the portfolio provide an update on modifications discuss the PPP loan program further discuss some of the specific cobot sensitive loan portfolios cover some mortgage lending highlights and then review.
After asset quality.
So turning to slide 25.
And I loans grew online one by $718 million during the quarter.
Resulting from the origination of roughly $908 million and PPP loans offset somewhat by decline in line of credit utilization.
Dropping down to align 10 mortgage loans grew by $19 million a home equity loans online 11 declined by $38 million.
The active refinance market help to maintain and grow the mortgage portfolio. While second mortgages were likely included in refinances, which caused our.
Second mortgage balances to decline.
Slide 26.
The shows a diversified loan portfolio grouped by bank call report reporting.
Which is tied to collateral and yet as one would expect concentrated in the states.
We are located.
There have been 2548 cumulative payment deferral modifications granted to roughly $1.1 billion to $4 billion with roughly.
1800, and 69 commercial modifications.
At quarter end, there were no commercial second deferrals or modifications granted.
Checked yesterday, and we had less than $5 million of second commercial deferrals.
To date.
It is difficult if not impossible to determine the number or the amount of second payment deferral modifications that will be credit requested.
But I've been us pleasantly surprised by the low number of requests and grants thus far.
We have established processes for our second modification request to analyze and work with borrowers depending on individual circumstances.
These include reviewing need and expected repayment in a co good environment.
With financial analysis and financial information.
Determining the borrower's ability to repay.
Drilling into modifications further on slide 28.
Next or industry segments. The slide is intended to help provide a clearer picture of the modification data.
Here you can see the modifications concentrated around hotels.
Restaurants, and Foodservices dental and lessors of real estate.
Hotels were not as fast to request modifications in the first quarter, but grew to be the portfolio at the highest percentage modification, while lessors of real estate became the portfolio with the largest dollar modifications.
Ill, but 28 loans, representing roughly $80 million were granted.
90 day deferrals, while the remainder were extended for a full six months.
The these longer term modifications were granted primarily to hotels.
The 1863 modifications mentioned earlier, roughly 1250 or roughly 67% have returned or are in the process of returning to the regular payment schedule.
Moving onto slide 28.
As I mentioned on the loan portfolio trends slide we originate $908 million of PPP loans to roughly 5100 borrowers the effort utilized existing resources and systems and generated almost $27 million in deferred PPP loan fees.
Because of the high demand in the first round that streamline process that the initial streamline process that we implemented the initial focus for fulfillment and delivery was to our existing customers.
Looking forward the PPP forgiveness planning process is well underway as Mike had mentioned and we intend to use a third party system with a blend of internal and external resources on a flex basis as necessary.
Turning to slide 29.
The shows the industry concentrations for our Cnine portfolio.
Our largest concentration is manufacturing manufacturing, which aligns closely with the concentration of manufacturing in our geography.
Line utilization drop for the quarter from 47.5% to 40.8%, which reduced loans by $138 million as I referenced on the first slide partially offsetting the growth in PPP loans.
Receipt of ERP funds combined with reductions in working capital assets and the repayment of isolated.
Defensive draws are potential crosses for their.
Reduction of line borrowings.
Turning to slide 30.
Hi, broken out and expanded on prior discussions of our sponsor finance business and clarified how it fits into the definition of leverage Glenn leveraged lending on the right.
Our sponsor business lends to the portfolio companies.
Managed by private equity firms, while most all of the businesses, we lend to in the sponsor finance space rely on enterprise value as a secondary source of repayment, we generally structured loans with lower leverage of senior funded debt.
This means that not all of the sponsor finance business is definitionally leveraged.
We also have relationships outside of the sponsor finance business, which may be leveraged, including regional or middle market businesses or leverage shared national credits in our geographies, where we are a participant.
The table at the bottom of the page provides a breakout of our leverage loans by business lines.
Which includes modifications.
Moving to slide 31.
I've included a breakout of the investment real estate program portfolio.
By multifamily and commercial real estate.
Commercial real estate includes some of the more cobot sensitive categories, including hotel and some are some hotel and some retail which are shown on slide 32 and 33.
I've included on slide 34 mortgage and consumer for reference as well.
These slides are intended to provide a deeper view into the areas, where modifications have been higher or where we've seen issues I'm happy to answer questions, but suffice to say we continue to monitor these portfolios closely.
Then moving to slide 36.
Nonperforming assets increased $34.5 million due to two names in the senior living space and one in the University logo apparel industry.
All three have been experiencing some level of issue prior to the pandemic and now need to either a restructure or some other form of workout.
Dropping down to lying for 90 plus days delinquent increased mostly as a result about 3.5 million dollar relationship which is in the process of a refinance but decided to let the payments at the end of the quarter go past due we believe that we are well secured and in the process.
Collection and this relationship should be resolved by quarters end.
Third quarter's end.
Then moving to slide 37, we reconcile nonperforming assets, we added the $35.6 million of Nonaccruals online one reduced non accruals by $1.1 million through $600000 payoffs and returned to accrual or restructure online too.
You.
With.
Gross charge offs of $500000 online five.
We had a 600000 dollar reduction in Oreo through sales and write downs online eight and nine with up $4.7 million as I just mentioned in 90 days past due.
That leaves us with a 39 million dollar increase in NPS and loans 90, plus days delinquent at the end of the quarter at $63.6 million.
So to close out my remarks.
We are paying close attention to the modifications in the second deferral requests.
I believe we have a long way to go before we will know or understand the impact.
Of the economy being the economy being shutdown.
The economy is.
Presently being buoyed by stimulus that will eventually and but for now we are proactively engaging our cobot impacted customers.
And balancing between the best short term and long term solutions, such as deferrals and non concessionary restructures.
We continue domain maintain our underwriting standards and look for opportunistic portfolio growth in non coveted sensitive industries to borrowers who are well positioned to grow in the current environment and beyond.
We are beginning to cycle with a stronger credit and capital profile and this should give us strength to bridge through.
All right I'll turn the call back over to you now Mike.
Thank you John.
In a move to page 40 have some offer a couple of comments and then we'll take questions. So.
We aspire to demonstrate.
Many of the needed ingredients to be a true high performance banking company and often do.
I would submit theres some of that in our second quarter on their highlighted specific bullet points on 40, whether it's a.
Earnings stream pre tax provision of nearly $60 million it will help to continue to build cattle.
Capital and cushion.
TC that already stands just under 10% absent the effect of the pp loans.
Liquidity for all purposes.
The diversified loan portfolio that John just covered and the slides I thought were insightful, but maybe most of all.
Experience and talent and working through a recession and so in John Martin and Mike Stewart, Our Chief banking officer in in dozens and dozens of other bankers charged with monitoring their portfolio and the health of their borrowers I feel like that as what comes whether its next quarter's modifications or.
The entirety of the portfolio to include new request and less certain times I'm very confident that our commercial backbone will be up to the test.
Corporate social responsibility, which is two thirds the way down the bullet points.
Really gives us a chance to invest in the staying power of our marketplace and it'll do so we got nearly 2000 teammates on board with that set of opportunities.
Under Scott Mckee's leadership.
Take a deep look at our channel of deliveries, we've always been looking towards platform work in the consumer Bank I think we're going to widen that out and see if customer experience has had them changed the way they like to use our company and there's a lot of technology that we're.
Ben evaluating for quarters, now and look to make an investment on when the time is right sooner rather than later so we're excited about that.
I'm going to it finished by referring to a page that we looked at not that long ago page seven the unemployment rate decline and how it feels while our loan demand might be less than it was or historically prior to the kobin period.
It's very much out there and it's a function of our dialogue with our clients.
So while the overall loan demand might be beneath where we'd like to have that eight 9% organic growth.
Theres industry pockets that are really running hard and there are pockets that we participate in so we know we'll get our share there I'm encouraged by the.
Stick to it of newness of our entrepreneurial middle market client base and look forward to watching their recovery is I watched the strength of our company. So at this point, Jamie if theres folks that have questions, we're ready to address them.
Once again, if you would like to ask a question. Please press star one so with all your questions you May press star and too.
If you are using a speaker phone we do ask you. Please pick up your hands up before pressing the numbers to ensure the best on quality.
And our first question today comes from Scott Siefers from Piper Sandler. Please go ahead with your question.
Afternoon, guys. Thanks for taking the question.
Sure Scott.
Hey, I was hoping Johnny might be able to provide a little more detail on those three credits that you mentioned that drove the increase in nonperformers, the two senior living ones and they.
Logo company.
Guessing given that there are virtually.
No net charge offs, you probably haven't necessarily charged those down but just im curious for what kind of.
Loss potential you might you might see if you have charge them down kind of where they are charged down to et cetera.
Yes, they hey, Scott.
We havent charged those names down a little bit of background essentially what we had were.
Two.
Two specific nursing homes that were in the process of lease up and both of them hit were hit with the Corona virus. They were a little slow to lease up initially anyway.
With the Corona virus, they experienced issues and as a result really fell backwards in terms of their their occupancy.
There hasn't been any charge at this point and we're in the process of getting updated appraisals and we have laid or put in place a specific reserve.
Okay, perfect and did any of those.
We had they received any forbearance or given that that they were.
Experiencing some trouble or slowdown before kogut, where they just sort of not eligible.
Well they have they they probably could have been eligible for co bid, but given the issues that they were experience experiencing we thought it best to recognize the.
Nonaccrual status rather than try to mask, if you will for someone who is potentially not going to be able to pay.
Even without the deferral so it was transparency more than anything Scott.
Okay.
Perfect Alright, Thank you and then.
Mark maybe one one for you just on the cost base really good cost control quarter sounds like things might.
A little in the Threeq I was hoping you could maybe just provide a little color on what would cause the upward pressure on costs in the third quarter.
Yes, Scott the.
The couple of items that I highlighted just the 2.3 million of deferred salary expense that was all related to the people to our PPP originations. So we won't have that deferral into the future.
So that is where 2.1 or $2.3 million of the increase comes from.
The.
The the reversal of an accrual that we had from the termination of a.
Rewards program that was in place was 1.6 million.
And.
And then the contribution level and kind of the bonus accruals kind of offset one another and that's how I kind of move from 60 million up to 64 million for the third quarter.
Okay got it. Thank you very much appreciate you guys taking the questions.
Sure.
You're welcome.
And our next question comes out of Terry Mcevoy from Stephens. Please go with your question.
Hi, good afternoon.
And Terry I'm I'm, just curious on the accounting for the the salary expenses that were deferred well that flow through expenses future expenses or what is that netted against the.
The yield or the fee that will come through net interest income.
Purity. This is michel that actually will come through the salaries line and so we just for the total of 2.5 million that will be amortized over 24 months. So you should expect to see an impact of about 300 220000, each quarter coming through salaries expense.
Okay.
And then.
Thank you for that a question for Mark Thanks for pointing out that this six basis points impact to the margin from PPP.
And running through some of the repricing opportunities on the the CD side, what are your thoughts on the core margin call. It in the third quarter.
Well there continue to be some incremental asset yield pressure and do you see that coming down.
Oh, we think we'll have some incremental asset yield pressure, so wed expect to see a modest reduction in loan yields, but we do feel.
The.
The ability to reprice, the CD book and continuing to.
Tighten our pricing on the deposit side can offset whatever reduction we might see in the third or fourth quarter. So we kind of we feel like we've hit.
A level that we can maintain going forward.
But.
The way this quarter played out there was a lot of volatility and.
And.
We're monitoring it watching it closely and managing it as well as we can.
Thanks, and then maybe a question a tactic.
This is Mike a tactic that should offer some help relative to asset yields.
Particularly with the lie bore decline that mark covered earlier in his comments.
The implementation of LIBOR floor that we've put in place probably 90 days ago, but we didnt have the ability nor the appetite to just unilaterally deployed against all of our LIBOR based loans, but are deploying it in every new loans situation or rewrite situation to include.
The majority of the modifications that Johns team evaluates so with the floor that we haven't plays over the book of business Thats LIBOR base I think it's going to provide a nice.
Net if you will beneath erosion on loan yield.
And maybe to.
Good explanation I think the key is that those floors warrants in places rates declined.
Now that we're at a lower rate environment every chance, we have to renew a loan we're putting new floors.
On the books.
Thanks, Thanks for that and then just a quick last one for John any of the for nonperforming loans are non accrual loans and then the 90 days past due any of them connected to the sponsor finance portfolio.
The fashion.
The logo where.
Name.
As connected to the sponsor book, yes.
Okay. Thanks, everyone.
Thanks, Eric.
And our next question comes from Damon Delmonte from KBW. Please go ahead with your question.
Hey, good afternoon, guys has done today.
Good well Dan.
Great.
Just to kind of circle back on the margin outlook, Mark what would you put the core margin at this quarter.
Take out the the fair value accretion that that was out recorded.
Yes. So if you if you go to slide 15.
No. The the reported margin was threenineteen.
You back out 12 basis points for fair value. It should have Threeo seven and then you can add back six related to PPP to get to a core. So you are 313 on a core basis ex BPP and fair value.
Got it Okay, and then the fair value. The first two quarters of this year were around 3.5 million or so.
We expect that to start to trail off in the back half of the year.
Oh that feels like a pretty stable number based on how much we still have outstanding and is so as we're building our models through the rest of 2020 and even into 2021, that's a pretty stable number.
Okay and can you just repeat again, how how much in a way of Cds you have about repricing again throughout the second half of the year, Yeah, we have 900 million.
[music].
We should pick up about 140 basis points.
Of savings as those were price through the remainder of the year.
The re currently on the books at an average rate of 1.77.
Got it Okay and then the last question you know.
As you guys clearly pointed out pretty healthy provisioning and reserve building the first half of the.
How do we kind of think about that as we go through the second half you think you kind of retreat, a little bit from that $20 million quarterly level or do you think that no.
Given what you're seeing across your footprint, it's going to be prudent to keep that level up there.
John I know is looking at as materials getting ready to answer I know that the current quarters 21.9. It was really an 80 day assessment of where we are under the incurred loss model that obviously plays into it and then we do a really deep environmental scan. So it's kind of pulled together as you might guess.
Towards the back ended the quarter and it.
I'm I'm not going to predict anything we're going to do the exact same thing we're going to look at our incurred losses through the first 70 75 days of the quarter and kind of assess where we are and look at johns team for them.
For what else we might see John you have any addition to that and now as long as you know the asset quality holds up and continues it should be consistent with what we've seen in the past end on any individual name that those will be.
Added a specific as necessary, we think that work that Michelle covered earlier and there's a lot on moving parts you know it.
Pp in size, but when you get to a number as she.
Called out that can be pro forma.
End of the future Whos see sold to a number that starts with the too.
That we think that thats, a healthy level and yet the economy is not done surprised us we're going keep close eye on.
Okay very good color. Thank you very much guys have a great thats the day.
Thanks payment.
Our next question comes from Daniel Tomato from Raymond James. Please go with your question.
Hi, good afternoon.
So just at the end of your comments, Mike you mentioned that.
The some industries are running hard and you might see growth or on the balance sheet. I'm wondering if you could go and do a little more detail on which industries, you're referring to.
Sure.
So a little bit anecdotal and John might have some answers, but it's kind of an inside outside thing anything that participates outside as we're watching.
Commercial companies that are serving outside activities.
They have more backlog and more need for employees than they can find to meet the demands I'm talking about.
Trailers RMBS.
Camps campers tractor suppliers.
People are spending money on their homes, so pool installers home contractors painters roper's.
Construction construction, maybe not so much new construction certainly not office construction, but yes building out here to four announced construction projects are swamp to.
Drive to the office in the morning, as we've been doing I hate eyeball my way through.
Parked on the side of the road and then in direct contact with our clients the ones that are really just.
Turning to draw older workers back into the workforce. So there's some real points of strength.
And they've been even kind of growing as the months of turn from May into June into July. So there's reason for optimism and yet at the same time, we've still got on balance 12% unemployment. So theres people that haven't seen fit to call everybody back yet but.
Reasons to be optimistic.
Yeah, that's a.
That's good color. Thank you.
And from a similar similar side looking at the I guess.
Breaking out the portfolios, but but from a geographic standpoint, you gave some some good information on.
Some economic metrics by state, but wondering what you're seeing.
In your different markets, if you're seeing any kind of divergence in between the Andy market and others or or how you're thinking about the that that start to play out as we see states can operate differently in markets operate differently as we come out of this.
Hopefully come out of this.
Recession.
Yes, I think it somewhat even Mike Stewart lives that on a daily basis, but I know that there is a parallel I think I heard it in your question with the.
You want to call it.
Aggression that any particular governor chose to deploy relative to their unique reopening I would say over the four states. We do business in Michigan has probably been.
The slowest to approach normalcy, if you want to call it that and so I think our backlog there might be a little bit light and in addition to which the Monroe franchises newest into our company and probably.
Has undertaken the most change and yet it's got off some upside, Ohio, and Indiana really kind of threw out doing relatively well and so thats, where I see the majority of the backlog at the beginning to replenish itself.
Thank you very much appreciate that.
Once again, if you would like to ask your question. Please press star and one.
And our next question comes from Brian Martin from Janney Montgomery. Please you have with your question.
Hey, guys. Thanks for taking my question.
Hey, just two for me Mark I appreciate the color on the expenses next quarter, just any thoughts on whether you guys have any initiatives in place expense initiatives looking out now that Weve had entered this period of the pandemic yeah. As you look at branches and whatnot going forward or anything like that on the horizon you're anticipating.
Yes, I think.
Every department of our company is looking closely at expense levels.
And trying to identify ways to in some cases take advantage of a new operating environment like in the case of retail.
Or.
Just looking for ways to be more effective and efficient. So you know as we are moving our way into planning for 2021.
Which.
Really starts in earnest here on about another month.
We have teams across the company that are already putting together their tactics and their recommendations.
Some based on how they.
View they could improve the.
Efficiency and performance of the company and some based on the direction that executive management of giving them. So.
We think we have opportunities to continue to create efficiency from end to end.
From the customer all the way through the back office and we're going to have to look really closely at them.
As we work our way through this 2020 budget season are of the rest of 2024 20 to 21 point, Brian It's Mike reckoned just going to add to Mark's thoughts.
As you've watched we have looked at our retail and banking center optimization over the years that will continue we think it's it a tiny bit early to draw transaction counts, which really.
Dove low in the March April time period, while giving full chance to see how thats getting used but it's clearly front and center for what we look out. We've also in 2019 made a technology investment.
That allows us to see Fintech companies that have really strong innovation around the back office of bank. So while consumer optimization is a tool weve used in the past and we'll continue to we think there's even more upside for some of the operational areas of the bank.
Got it and I appreciate the color and maybe just one other one which was just.
As it relates to the fee income the couple areas. It really took a little bit a turn for the next I guess the worse this quarter the service charges in the derivatives.
Just in general yes, some of those there's the timing of when when you might expect on the service chart five.
You'll pick back up Mark I thought you said that they might start to begin to pick up I guess, maybe I missed that if you.
Go back on your comments Mark Mark is looking for a note I think if we did see a nice lift in June relative to the earlier part of the quarter, but clearly.
Our consumer banking leadership wanting to make full offering to our consumer customers of the cares Act features about protecting folks through the times. So all of those numbers overdrafts than any other fees.
We're really held back or eliminated for a certain period of time, so that ought to have a natural lift to it the derivative the hedge that you talk about kind of speaks to my comment Brian about loan volume being a little bit down because those are origination fees around commercial borrowers locking in rates and so as you can see the number.
Nearly didnt go to zero it had been on a really steady a sense based on the interest rate environment I've already seen a little bit of volume pickup there. So that will be alive item for us I fully expect it based on the hunker down approach that many of our customers had trying to get through if you're using PPP, you're trying to keep employees not necessary.
Early.
Originate new loans, so, yes down and Mark made the comment about the other customer driven fee activity in the wealth business. The wealth business fee generation. You know is one month in arrears and so the figures.
Shared with you in the wealth business would capture the.
[noise] March April May 90 day time period, which really bore the biggest brand over the market declines in so I think we're probably four or 5% lower in fees out of that business than we other would've been in so.
Starting with June into July, we'll see where the market goes but it had a little bit more life to it.
Yes, okay.
I appreciate that color and maybe just one just modeling question I think do you have or I don't Miss seller Mark when it's the average balance that PPP in the quarter just in the dollars of contribution in the quarter.
Yeah, but you will be able to pick that up.
Quickly here I see some keyboarding, Brian Okay, if not I can follow up.
We'll send an email what the the the 83 as the period end and yes.
Yes, you actually Brian its 703 million with the average balance for the quarter, Okay, Okay, and I guess I'll just back in the yield you gave the other piece. So okay. Thank you so much.
Thanks, Brian.
And ladies and gentlemen at this time is showing no additional questions I'd like to turn the conference call back over to management for any closing remarks. Thanks, Jamie I have none I appreciate the questions I know as a longer call. The normally we were trying not only to make sure. We conveyed what we know about the business, but kind of.
Having some intuition for what allows folks to get the best feel for how first merchants is doing through this period of time.
We look forward to your continued interest we have any follow up question from material, we weren't able to get to ask you to give us a call. We'll see if we can provide that I. Appreciate your interest talk to you soon.
Ladies and gentlemen that does conclude today's conference call. Thank you for attending you may now disconnect your lines.
No.