Q2 2020 Altabancorp Earnings Call
Good day and welcome to the older Bancorp second quarter earnings Conference call. All participants are in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'd be an opportunity to ask questions to ask a question you might press Star then one or your Touchtone phone Swift.
Your question. Please press Star then to those listening to the webcast me.
Excuse me. Please note that this event is being recorded I would now like to turn the conference over to Mark Olson Executive Vice President and Chief Financial Officer. Please go ahead Sir.
Thank you and good morning, Thank you for joining us today to review, our second quarter 2020 financial performance.
Joining me this morning, I'm, a college, Glenn Williams, President and Chief Executive Officer for all the Bancorp.
Our comments today, we'll refer to the financial results included in our earnings announcement and Investor presentation released last night.
Okay, and a copy of our earnings release or presentation. Please visit our website at www Dot <unk> Bancorp Dot com.
Our earnings release contains forward looking statements all statements other than statements of historical facts are forward looking statements.
Such statements involve inherent risks and uncertainties many of which are difficult to predict beyond the control of the company, we caution readers and listeners better that a number of important factors could cause actual results to differ materially from those expressed or implied or projected by such forward looking statements.
These forward looking statements are intended to be covered by the safe Harbor for forward looking statements provided by the private Securities Litigation Reform Act of 1995.
Looking statements speak only as of the day. They are made and we assume no duty to update such statements except as required by law.
Called now over till then.
Thanks, Mark Good morning, and thank you for joining our call. This morning.
About five months after that economic downturn, resulting from a coping 19 pandemic.
The situation continues to be rather fluid for clients and for us.
As you best began to unfold with the health risk on Cobot 19.
Immediate concern was a health and welfare dedicated associates.
We immediately executed our pandemic response incorporate it into our business continuity plan.
Response effort has been the largest coordinated project under undertaken by the bank and I'm incredibly proud of how our associates responded and continuing to respond to the challenge and so quickly and dramatically altered how and where we work.
We've seen strength and leadership emerged from this unprecedented business twist.
Well all of our branch locations are open to fully staffed approximately 65% to 70% of our workforce remains working from home.
Protection measures are in place for our associates working in our branches at administrative offices masks and a hand sanitizers are available for our clients clients as they enter was building.
Our technology team was able to respond quickly to the needs of our associates working from home and purchase a necessary equipment to ensure our continued operations.
Our salesforce continues to connect with our clients to ensure that we provide whatever relief we can.
We can offer through either government programs or throw up.
Department programs.
Well, we rapidly deployed or back office support areas. We did so in a safe and secure environment. We continue to ensure appropriate data security as our operations shifted to new delivery methods.
At the outset as a public health crisis, we responded swiftly to our clients need including actively participation have a small business administration paycheck protection program.
Since the end since inception of the program, we have funded over $85 million at PPP loans, hoping over 300, thirtys local small and medium sized businesses.
Another 700 up our clients were referred to in funded by cabbage Fintech aggregator.
We also offer payment deferrals of up to six months to our commercial clients up to 90 days for our consumer class.
We are for Tempur temporary loan payment relief to 435 businesses.
The 108 individuals totaling approximately $327 million or 20% of total loans, excluding S.P.A.P.P. logs.
To address cash flow challenges.
Is impacted by to cope with 19 pandemic.
Oh, the 327 million in loans.
Where the payments were deferred approximately 90% we're on loans secured by real estate with a weighted average loan to value ratio of approximately 50%.
And 89 million what to higher risk business sectors that we have identified including hotels retail restaurants and assisted living centers.
You expect the realities each loan at the end of the payment deferral period to extend the maturity rather than retain the original maturity date with a balloon payment upon maturity.
We believe this approach provides our clients with a short term payment really they need to address the negative cash flow effects, resulting from the bad debt.
And this approach mitigates large cash outlays after the department.
It's important to note that average deposit balances for clients, who either applied for payment really well with us or have loan payments made by the S. P eight increased $32 million or 118% to $58 million from the first quarter 2020 to the second quarter 2020.
In particular, we have seen that many of our borrowers who requested payment departments have held onto their cash than would otherwise been used to make the monthly payments.
Passionately, 15% of our borrowers who requested loan deferrals have continued to make their monthly payments has agreed.
We anticipate that these additional funds held by these clients provides cash flow. So there will be able to resume making payments on their loans after the deferral period.
We continue to work together with our clients to ensure that we can provide financial solutions to assist them on their path to economic recovery as we or couple of endemic.
I'd like to direct your attention to pages nine through 13 of our investor presentation.
And evaluating our loan portfolio, we have but then identified approximately 20% of our portfolio is in business sectors that could potentially potentially be impacted by the cold mid 90 bad debt pandemic.
These business sectors include retail assisted living or nursing home facilities Hotelzon motels restaurants.
And arch entertainment.
Tourism and recreation.
The vast majority of these laws are secured by real estate and our commercial and industrial loan exposure is small.
We're all AIDC loans.
We use the loan to cost ratio as well as the loan to value ratio in our underwriting.
<unk>, we do this to ensure real money is into the deals.
The loan to cost on our acquisition development construction loan is approximately 51%.
The average loan to value on our owner occupied commercial real estate portfolio is approximately 58% and the average loan to value on our investor commercial real estate portfolio is approximately 54%.
Well, the total loans potentially impacted by the pandemic approximately 14%.
Acquisition development construction loans.
We've not seen a slowdown in construction activities through the pandemic.
Another 30% of the potentially impacted loans, our owner occupied commercial real estate, primarily in the retail space.
Another 30% as in the Investor Real estate again, primarily in retail assisted living ordinary sinkhole facilities, coupled with some hotels of motels.
Lastly, approximately 12% of these loans potentially impacted or in the commercial and industrial well.
The ultimate extended the impact to our overall loan portfolio, it's difficult to predict at this point as it is contingent upon the length of time that the individuals are required to shelter at home and the like the time it takes for businesses to resumed normal operations.
I'd like to discuss the credit quality of our loan portfolio and our balance sheet position.
For the past 24 months, we've communicated each quarter, our efforts to fortify our balance sheet.
Based on our perspective that we were at the end of an economic cycle and wanting to ensure we were prepared for an economic downturn.
Well, we certainly did not anticipate that the economic downturn would be the result of a pandemic our strong balance sheet provide safety and security to our stakeholders as we work through the negative effects of the of the economic slowdown.
We believe our balance sheet strength as reflected in the level of allowance for credit losses held by us and our strong regulatory capital position.
In addition, our focus to reduce loan concentrations in our ADCC in commercial real estate portfolios and the tightening of our overall underwriting standards over the past couple of years will help to mitigate the negative effects of the past the pandemic may have on our loan portfolio.
Lastly, our strong liquidity position provides us the flexibility to grow aggressively as the economy recovers.
We have experience.
Positive credit quality trends, including lower delinquency rates, lower nonperforming assets lower loan concentrations and lower classified assets, we experienced slightly higher loan charge offs with our annualized loan charge off rates, increasing nine basis points, 2.16% in the second quarter 2000.
Or 2020.
While we are pleased with the positive credit quality trends that we've experienced year to date, we do not expect these trends to continue short term as released program start to wind down beginning in the third quarter.
Severity the impact to our credit quality trends will depend on the length of time that businesses and individuals are negatively impacted by the Kobin 19, pandemic and the timing and level of recovery that occurs post pandemics.
We are closely monitoring the portfolio to determine if any additional allowance for credit losses are required at this time. However, we believe our allowance is adequate and a regular regulatory capital position is strong.
I'd like to now direct your attention to pages 16 to 21 of the Investor presentation.
We're fortunate to operate one of the strongest states in the nation from an economic perspective.
Utah's economy is consistently performed better than most states and the nation as a whole.
The unemployment rate from a nation was 3.5% at February 28, 2020, it rose to 14.7% April Thirtyth and it recovered to 11.1% at June Thirtyth 2020.
The unemployment for the steady rate for the state of Utah was 2.5%.
For a 28.
Rose to 10.8, 0.4% at April Thirtyth.
Recovered the 5.1% at June Thirtyth, 2020, which is a second lowest unemployment rate of any stayed in that nature.
Nationally total jobs increased by 1.6% year over year at February 28, 2020.
Fell to a negative 13.4% April thirtyth.
And has recovered to a negative 8.6% at June Thirtyth 2020.
Total jobs increase year over year for the state of Utah.
Were 2.4% at February 28, 2020 bell to negative 7.2%.
In April and has recovered to a negative 2.7% at June Thirtyth 2020. This is the lowest year over year negative change for jobs of any state United States.
Despite the negative effects.
The pending pandemic has had on the overall year over year change in jobs in Utah at the end of the second quarter construction jobs about actually increased 8.7%, which we believe is a leading indicator of the beginning of an economic recovery in Utah.
Believe that Utah will continue to outperform other states and the nation's a whole as we continue to recover from the negative economic beck's effects of the pandemic.
Despite the onset of a pandemic we earned a net income of $10.3 million for the second quarter achieved a return on average assets of 1.5% and earned.
Return on average equity of 12%.
The board of directors declared a quarterly dividend payment of 13 cents per common share.
The dividend will be payable on August 17, 2020 to shareholders of record as of August 10 2020.
The dividend payout ratio for earnings for the second quarter 2020 was 24%. This continues the over 50 year trend of paying dividends by the company.
We announced last quarter, we discontinued the repurchase of Ulta shares until further notice at this time, we anticipate continued anticipate continuing to paid a quarterly dividend. We will continue to actively manage and monitor monitor our capital adequacy to determine future Sherry.
Repurchases and dividend payments I'll now turn the call back over to Mark to discuss more specifically our financial performance for the three and six months ended June Thirtyth 2020, Mark.
In.
Total assets grew $754 million or 33% year over year to $3.1 billion that jumped 30 of 2020, which is primarily the result of a significant increase in total deposits.
Oh deposits increased $631 million or 32% to $2.61 billion at June Thirtyth, 2020, compared with $1.98 billion jumped 30.
2019, noninterest bearing deposits increased $278 million or 39% to $985 million at June Thirtyth 2020, compared with the same period, a year earlier, an interest bearing deposits increased $353 million or 28% to $1.63 billion at June 30.
2020, compared with the same period a year ago.
Noninterest bearing deposits to total deposits increased to 38% at June thirtyth compared to 36% a year ago.
The increase in total deposits is primarily the result of both governmental and bank relief programs and business doesn't consumers actively conservative conserving cash to try to counter the negative effects the shutdown and the economy.
Cobot 19 pandemic.
We anticipate a total deposits will decline through the remainder of the year as businesses and individuals hey, federal and state taxes that were postponed by the government agencies to address the pandemics.
As borrows begin to make payments again on loans were payments were deferred and as cash reserves are used by both businesses and consumers to address any shortfalls in income resulting from the pandemic.
Our loan portfolio declined $14 million or 0.8% year over year to $1.7 billion as we further tightened underwriting standards and reduced loan concentrations, which was offset by the funding up $85 million an S. Sta PPP loans.
Orders, they average loans increased $6.7 million or 0.4% to $1.69 billion for both the three months ended June thirtyth.
The year prior.
We have focused on reduced our loan concentrations and maybe seeing in our agency portfolio as well as our overall commercial real estate concentrations and you see loans to total capital declined from 140% at June 32018, 71% at June Thirtyth 2020.
Just a real estate loans to total capital declined from 285% to 287% for the same respective periods.
Lowering our low loan concentrations and limiting our portfolio for certain clouds Heights has made a more difficult to generate net loan growth, but we believe this course is appropriate given the current economic conditions.
The allowance for credit losses increased $15 million or 52% to $43 million at June 32020, compared with $28 million for the same period a year ago. The allows for credit losses to loans held for investment was 2.6% at June 32020, compared to 1.7% at June Thirtyth 2019.
Remaining accretable discounts on non purchased credit deteriorated loans was $2.9 million at June 32020, which provides additional credit protection.
If we remove hundred $36 million in government guarantees from the SP and other government agencies from our loans loan totals of which $85 million as SBH PPP loans that are 100% guaranteed and we add the remaining $2.9 million and accretable discounts to our allowance for credit losses, our total loss coverage for outstanding.
Non guaranteed loan amounts is 3%.
Nonperforming loans decreased to $6.4 million at the end of the quarter compared with $8.8 million at the end of year nonperforming loans to total loans were 0.39% of the ended the quarter compared with 0.53% at the end of year.
But for many assets decreased to $6.4 million at the end of the quarter compared with $8.8 million at the end of the year and total nonperforming assets to total assets was zero point to 1% at the end of the second quarter compared with 0.37% at the end of last year.
Cash and investment securities grew $770 million or 146% to $1.3 billion that the ended the second quarter compared with your earlier.
Yes.
Liquid investment Securities represented 42% total assets at the end of the second quarter.
Shareholders' equity increased by $37 million at 12% to $350 million at the end of the second quarter compared to $313 million at the end of the June 32019.
Tangible book value per share increased 13.5% year over year $17.12 at the end of the second quarter.
Leveraged capital ratio was 1.7% at the end of second quarter, compared with 12.8% a year ago.
Our risk based capital ratio was 19.2% at the end of the second quarter compared with 17.2% a year earlier.
Our leverage capital ratio was impacted by the significant increase in total assets, resulting from increased total deposits. Our total risk based capital was not similarly affected as the funds received from the increase in deposits were held at a low risk weighted cash and investments securities.
Tangible equity plus allowance for credit losses totaled $364 billion or 22%.
Total loans held for investment at the end of the second quarter.
Which provides overall credit protection for both expected an unexpected credit losses in our loan portfolio.
Turning to the income statement net income was $10.3 million or 55 cents per diluted common share for the second quarter compared with $11 million or 58 cents per diluted common share for the same period a year ago.
For the six months ended June Thirtyth net income was $21 million or dollar and 11 cents per diluted common share compared with $22 million or $1.13 cents per diluted common share for the same period a year earlier.
Our return on average assets and return on average equity was 1.5% and 12.1% respectively for the second quarter, compared with 2% and 14.3% respectively for the same period a year ago.
For the six months ended June Thirtyth, our return on average assets and return on average equity is 1.7% and 12.6%, respectively compared to 2% and 14.4% respectively for the same period a year ago.
Pretax pre provision and couple of $14 million for the second quarter compared with $17 million from the same period a year earlier for the six months ended June 32020 pretax pre provision income was $29 million compared with $32 million for the same period a year ago.
The decline in pretax pre provision income was primarily the result of lower net interest income and higher noninterest expense.
Net interest income decreased $2 million or 7% $26 billion or the second quarter compared with $28 billion for the same period a year ago.
The decrease is primarily the result of net interest margins narrowing 128 basis points to 3.96% for the same comparable periods offset by average interest, earning assets, increasing $494 million or 23% to $2.6 billion for the same comparable periods there.
Interest margins is primarily the result of the federal reserve, reducing benchmark rates to almost zero and an increase the average amount of low lower yielding cash in investments securities held by us stemming from average core deposits, increasing $232 million or 18% for the same respective periods.
Percentage of average loans to total average interest, earning assets declined to 65% for the second quarter compared with 80% for the same period a year earlier.
Yields on interest, earning assets declined to 147 basis points to 4.21% for the second quarter compared with 5.68% for the same period a year earlier.
The declining yields on interest, earning assets is primarily the result.
The average amount of cash and investment securities held by us increasing $487 million were 113% to $909 million for the same comparable periods with the yield on cash and securities decreasing 59 basis points to 1.63% for the same comparable periods.
In addition, the yield on loans declined 96 basis points for the same comparable periods and average loans outstanding increased $7 million or 0.4% to 1.69 billings for the same comparable periods.
Yields on loans were negatively impacted by the lower yield on SP APTP laws.
The yield on SPP loans was 2.8% for the second quarter, including the amortization of deferred fees and costs recognized over the contractual term loans.
We expect that the yield on ESB allowance will increase as we begin the process of loan forgiveness, what's the SP and the remaining debt deferred fees are earned income.
Total cost of interest bearing liabilities decreased 31 basis points to 0.43% for the second quarter compared with 0.74% for the same period, a year earlier and and is the result of the cost of interest bearing deposits decreasing 31 basis 0.0, 0.3% compared with.
4.74% for the same period a year ago.
The total cost of funds decreased 22 basis points for the second quarter to 0.27% compared to 0.49% for the same period a year earlier.
Acquisition accounting adjustments added five basis points to net interest margins in the second quarter.
For the six months ended June 32020, net interest income decreased $2 million, a 3% to $53 million compared with $55 million for the same period a year earlier.
Decrease is primarily the result of the narrowing of interest margins, resulting from the reduction the benchmark rates and an increased the average amount of lower yielding cash and investments securities held by us stemming from average core deposits, increasing a $178 billion or 14% for the same respective periods the percentage of average loans.
Total average interest, earning assets decreased 69% for the six months ended June Thirtyth 2020, compared with 80% for the same period a year earlier.
This decrease was offset by average interest, earning assets, increasing $358 million or 17% to $2.5 billion the same comparable periods.
Guilty interest, earning assets declined to 105 basis points, a 4.66% for six months ended June thirtyth compared with 5.71% the same for your earlier.
The declining yields on interest, earning assets is primarily the result of the average amount of cash investment story is held by us increasing $353 million are 87% to $761 million. The same comparable periods will be yield on cash investment securities decreasing 35 basis points in 1009% for the same comparable periods.
In addition, the yield on loans declined 64 basis points for the same comparable periods, an average loans outstanding increased $5.2 million, 0.31% to 1.69 billion for the same comparable periods.
We expect our net interest income and net interest margins to continue to be adversely impacted in future periods because of the federal reserve lowering benchmark rates to.
And there's zero.
Provision for credit losses was $2 million for both the second quarter 2020 end of 2019, we incurred net charge offs. The zero point $7 million on second quarter compared with less than zero point $1 billion. The same period a year ago.
For the six months ended June Thirtyth provision for credit losses was $2.8 million compared with $3.7 million for the same period a year earlier.
For the six months ended June 32020, we incurred net charge also have a million dollars compared with net charge offs 0.9 million for the same period a year earlier the decrease in provision for credit losses in the six months ended June 30, 2020 is primarily due to a decrease of reserves on individually evaluated loans and no loan growth during the same period.
Noninterest income increased $2.5 million or 70% the $6.1 million, the second compare quarter compared with $3.6 billion for the same period a year ago.
This increase was primarily due to 1.4 billion dollar increase in mortgage banking income, resulting from higher loan volume of refinance mortgages, which was driven by a lower interest rate environment for the same comparable periods total loans sold increased $28 million or 58% $76 million for the second quarter compared with $48 million the same period.
A year earlier.
In addition, we report one we recorded a $1.4 billion gain on selling of investment securities in the second quarter as we sold $48 million of securities to rebalance our investment security portfolio.
Six months ended June 30, 2020, noninterest income increased $2.9 million or 42% to $9.9 million compared with $6.9 million for the same period a year ago.
The increase was primarily due to a $1.7 million increase in mortgage banking income, resulting from higher loan volume.
Which was driven by a lower interest rate environments and the gain on sale that I mentioned earlier total loans sold increased $35 million or 38% to $126 million for the six months ended June Thirtyth 2020, compared with $91 million for the same period a year earlier.
Non interest expense was $16 million compared with $15 million at your earlier, our efficiency ratio was 51% to the second quarter compared with 47% the same period year ago.
Six months ended June Thirtyth, noninterest expense was $32 million compared to $30 million and the efficiency ratio was 52% versus 48%.
The increase in noninterest expense for both the three and six months ended June Thirtyth was primarily the result of higher salaries and employee benefits, resulting primarily from higher incentive payments made to mortgage loan officers higher data processing costs and higher marketing and advertising expenses.
These were these amounts are part of partially offset by lower occupancy equipment and depreciation.
As we look forward, we anticipate the net interest margins will remain narrow given that better federal reserves outlook that interest rates will remain near zero through at least 2020.
Too as a result, we are reviewing our overall cost to determine how we can operate our platform more efficiently and effectively while retaining our high touch client experience, we anticipate making changes over the next several quarters to improve our operating leverage income tax expense was $3.2 million, the second quarter compared with $3.5 billion for the.
Same pretty your earlier effective tax rate was 23.6% compared to 24.1% a year ago for the six months ended June Thirtyth income tax expense was $6.6 billion compared with $6.8 million for the same pretty your earlier in the effective tax rate was 22.7% compared with 23.9% I'll turn the call back of Glenn. Thanks.
Thank you Mark Petrobras Huh.
We find ourselves in challenging and uncertain times as we navigate effects shutting down the economy to mitigate the impact of the pandemic.
Throughout this crisis, our primary concern has been the safety and security of our associates I'm very proud of our team and how they've handled this crisis.
Our next priority has been the safety and soundness of the bank. We believe that we've built a fortified balance sheet that will withstand the negative effects of this pandemic.
Lastly, we focused on providing relief to our impacted clients. It's our goal to provide as much assistance as we can to our clients and committed used to support them through this crisis.
Thank you for joining us today at this point alternate the call back to Chuck the moderator to open the lines for.
Those questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one all your Touchtone phone if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble Ross.
And our first question will come from Jeff Rulis with D.A. Davidson. Please go ahead.
Thanks, Good morning, Joe.
Hi, Jeff.
Just wanted to say.
Maybe getting a little deeper on the margin Mark you mentioned about expectations remain narrow seems like you've got quite a bit as.
Yes.
Balance sheet.
Goings on that that would it somewhat artificially impacted by PPP.
Could you either have that what you think the core margin is and ads you kind of look forward and maybe those.
Those loans come off and or Didnt get forgiveness and yield bumps as you mentioned.
Got it ranged down where where this settles in.
Even even to the point zero that you have a core margin for the quarter. If you were to exclude.
We would be helpful.
Yes, Jeff Great question Boy I heart hard to answer I mean, you look at what happened in the second quarter the and the.
The fundamental change in our balance sheet was pretty dramatic can and with that.
We're holding onto a ton of cash and securities, which we would prefer not to do.
And as as we look into the third and fourth quarter, we anticipate those those deposits at least some of the coming out.
As our clients by tax payments et cetera. So.
What that looks like is frankly difficult to look at.
We anticipate certainly that would say forgiveness of the us.
Escape PPP loans that we'll get a positive effect given the the fees that we earned.
By making those loans and our expectation is as soon as we get to August 10th we we will begin making applications that to get loan forgiveness and then as those loans are given will earn that additional fee and that will certainly help the margin in the third quarter.
What does that look like going forward.
I think it's difficult frankly for us to predict and.
Our goal is certainly is wanting to grow the portfolio our loan portfolio in an appropriate way given the economic conditions that were in and we will look at that and try to grow the portfolio accordingly to the both economic conditions, but what I would say is as we see the economy approach.
Roof improve our goal is to aggressively grow our loan book, we think as Glenn mentioned, we Utah has got a strong economy and we're not seeing the same negative effects that other states or are seeing and frankly, we're back to business in Utah, and we think the best positive for us overall so.
As we get out of the forgiveness period, what's the PPP loans, we're done with the deferments, we'll have a better understanding of really what the credit quality looks like and that will give us an opportunity to look at.
How aggressive we are on loan growth going forward. So I know thats, a long winded answer and that Doesnt.
It does it really respond specifically the core NIM, but I in my 30 year career I've never seen a balance sheet change as much as it did in a single quarter and frankly, a third and fourth quarter are going to change pretty dramatically as well. So it's it's hard for me to give you a specific number.
Okay, Yes, I guess Im just go ahead.
I'll just add another comment or two to that.
As we look at these times I mean, it's a little bit of a fluke and it's going to drive down new of as deposits committed at the rate they come in when you can't safely deployment to loans.
I think we all understand that.
The PPP those drag it down a little bit.
But we've talked a lot over the last couple of years about positioning the balance sheet and.
Moving the organization from really a real estate asset based lender to more of a cash flow raging ratio analysis lender, we've got 80.
Individuals throughout the company undergoing some pretty intense training right now.
With.
Moodys commercial banking training to to bring along our ability to recognize and move forward on some of the growth in the market that's safe growth.
We're looking for overtime quality sustainable profitable growth not not growth that just supplies with the economy.
I wanted to be moves in the real estate sector, Although real estate will always be an important part of what we do we're continuing to diversify around it. So yes, I Didnt answer your question either because we don't know what what's in store. The next couple of quarters from a from a lending side, we will be cautious.
I think I mentioned last quarter that our pipelines were at high levels. They continue to be at high levels. They have have not transformed into new business, yet because we're seeing a lot of businesses on hold.
So we continue to work it continued to build pipeline and.
The backlog, but when things break loose we want to make sure. We're positioned to move we have the balance sheet liquidity to do it yeah and then just responding.
A little more what led said we.
This morning, what the federal government announced 33% decline at GDP for the second quarter to us the worst in recorded history.
We have a fortress balance sheet.
Believe can withstand that negative effect.
Despite that that negative.
Decline there we were we heard that Ninetyth percentile for front with our pairs from a capital perspective, we were in the 97th percentile with respect to reserves and even with those strong positions. We are in the 93% off for Anoro eight and a 90 792nd for preset percentile for net interest margins last quarter. So.
When you look at that in totality, having the balance sheet strength that we have and still being able to get best in class earnings we think.
In the right things for the organization given the uncertainty that all of us have right now.
Got it yes, I think on a just to the margin remaining narrow I guess the question I just that sounds like the pace of forgiveness and the amount of liquidity you could put to work.
Yes, it's temporarily should be but but.
I would be expected to lifted that crusher, relieves and mark or excuse me length to your comment I think you were alluding to a longer term year you change to.
The risk profile of the high fives kind of margins are thing in the past and we're settling in but.
I have a sub four here seems temporarily.
Low is that that's that's fair as this kind of goes forward and maybe some of those pressures abate.
Yes.
You've known us long enough Jeff to know we tend to estimate relatively conservatively on these things as it is our objective to move that as quickly as we can transform the balance sheet safely and the PPP loans, while I've seen some reports already where the accounting methodology is different than ours.
Cars.
The PPP loans on our books are two clients, we know and we have engaged with another organization to audit use automated resources to get these things forgiving forgiven, we're already already gathering data the sooner we can get those off the books and get those margins back into the income stay.
But the better off so.
We've got them listed over the time, but we have an effort going on internally to get those things pay down out as fast as we possibly can so your comment I guess, it's a long way around the 4% plus is still in our radar.
Okay or term I think I think support I think so for us right short term.
Okay. Thank you.
Just on the you mentioned the fortress balance sheet wanted to kind of and it's small but I just wanted a note the kind of if you could touch on the board rationale of the kind of a penny reduction in the dividend rate for that for the next coming quarter with data.
Thing have you bumped it by a penny.
Crisis, and then it was.
Effective had we known that let's just keep it flat.
Just trying to.
No no your high reserves are high capital and just to see what that reduction is.
If you could comment.
Yes, it's really tied to our commitment to the 20% to 25%.
Dividend amount that kept it in their opinion wouldn't have made a ton of difference.
But we don't know what the future holes and so we came up with that number the board supported that number as just a statement that weren't going to stay conservative we're going to make sure that the organization is strong through this it was it was a good debate and good discussion.
But our objective is to hold it at a high reasonable level.
Best we can it was it was a pretty minor move but okay, yes, sorry, the companys.
Companies been paying dividends for over 50 years were we want to continuing to pay.
Good dividend back to our shareholders.
Going forward and we think having the strong balance sheet affords and continue to have best of class earnings that gives us the opportunities continue to get dividends going forward.
Right now John sounds somewhat formal formulaic them.
I agree, but appreciate I'll step back thanks.
Yes, good talking to you.
Our next question will come from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody.
More than David David how are things in Florida.
Oh man, where we're hanging in there were hanging in there.
The Barbree high for what not to do.
But.
I just wanted to follow up on the commentary I mean, I'm looking at loan growth going forward. I mean, you thought you gave a lot of economic data, which is extremely helpful. Just.
Taking a better picture.
In the in the second quarter, obviously, the TPP program was a huge distracts modifications were a big distraction.
I guess.
You talked continues to outperform I mean, do you think growth can accelerate from here.
Seems like Kenai utilization kind of weighed on that but just curious your appetite for for growth Youre. The pulse of the market in terms of growth and.
Just any commentary X TPP obviously.
I guess the first comment David is the appetite for growth this intense but the appetite for safety is more intense.
As.
As you just mentioned is going on down there the growth numbers in illnesses here.
Has his spiking a bit again, so there's a big unknown, we are poised to position and ready to move matter of fact, we've started.
Looking at some.
Some bigger safe real estate deals to put on the books that historically, we may have passed on are sent to an insurance company. We're starting to compete on price a little bit more on some of those as well, but the asset quality issues.
Remain the standards remain high right now and they will.
Through this pandemic, we've seen across the country.
Loans back off.
Due to credit quality standards changing.
We did that a little bit early.
We.
Remember also we acquired a couple of banks couple of years ago, one of them had extreme credit issues and that.
That has reduced our pole portfolio dramatically. We think we've worked through that in our last quarter.
Probably $25 million our portfolio.
We could have hung on to we actually moved out.
Based on asset quality trends of issues. So.
I think we're at we're at a a baseline now that we're pretty comfortable with and our objective is to start seeing seeing some growth, but again with the pandemic going on in the uncertainty of business, our when do at best.
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We keep our eyes, we could aggressively marketed but.
Like I said the pipelines up.
One was up last quarter, but they didn't get to the finish line because businesses aren't pulling the trigger as quickly.
Okay. That's helpful. And then just kind of thing on that asset quality topic I mean, what's what's the early read on re deferral shrink I mean, what are you hearing from your clients and then I guess as you move you are there any wonderful wireless to get a re deferral are you looking for additional costs.
Lateral are you.
Maybe more personal guarantees in.
Just just curious on the on the re deferral rates.
Yes, that's a really good question because I think our whole industry is going to deal with that very quickly.
On the deferrals initially we required a one page.
Had a history.
Of course.
Cash flow and liquidity and the approval process was relatively easily prove how you are impacted by co bid and show that prior to co bid you had the ability to support repayment that was done on round one for around two which has not begun yet, but we'll be shortly the.
Understanding we have in our credit administration group is they will be fully underwritten.
So we've got to have updated financials, we've got to have data that supports that these are survivable.
And so the underwriting.
Read deferrals, we will do it but the key to doing it is we've got to be able to validate validate that they are legitimate.
They have a legitimate opportunity succeed and move forward, we don't want to just continue to kick the can down the road forever.
Okay.
Yeah that makes it kind of sense and then just following up on the commentary in your prepared remarks about.
<unk> expense savings and just I know.
Updating the strategy to adapt to the changing customer behaviors I mean, just curious as to what you've identified.
As opportunities between branch rationalization or just other savings then maybe Conversely, anything that you need to invest in further in order to keep up with evolving client behaviors.
Yes, David Great question as always yes, yes, good ones there.
As we look at important we're going to look at everything and we have been looking at everything and you mentioned some of those but.
We're going to look at how we can be more efficient as an organization.
We're not going to.
Make it where we havent negative client experience with our high touch.
Client experience is very very important to us and we will make sure that that remains but with that we have to make sure. We operate from a from a back office perspective, as a fashion effectively and efficiently as we can so we can afford that front office cost.
So with that we spent a lot of money over the last couple of years.
And new technology, we mentioned Encino, the implementation of that which we continue to do or look we've got a couple other low assistance we're implementing.
For our consumer side.
Our mortgage operation that you saw.
With great growth.
There was there was some good growth from lower rates, but we also.
Implemented a best in class.
Hello, West there and.
The customer experience there has significantly improved so we will continue to actually invest in technology.
But we've got to be more efficient overall and so we're going to look at every area that we can begin to look at we flattened the organization can we.
Working we make it where we can be faster better cheaper but.
We we will continue to have those discussions as we move board every quarter and and as things become more definitive and we're ready to talk about those but.
As in the prepared remarks, the federal reserve a same.
Rates are going to be low for long time, and we have to respond to that.
Thats, what we'll do.
I just will add a caveat on their though but good reason for the increase.
In the and I have for the quarter was the.
The payroll in the mortgage group and with that that higher on a commission based at higher productivity out of the mortgage group resulted in some higher.
Salary costs as well and we'll pay that every day.
That's extremely helpful. Thanks, guys.
Thank you.
Our next question will come from Andrew Lice with Piper Sandler. Please go ahead.
Hi, good morning.
Hi, Andrew Guide it just kind of just following up on your last comment on the mortgage group pretty strong quarter, there, but how do you do that going forward, what's the pipeline in the mortgage business look like.
Going into the third quarter.
Yes, the pipeline looks pretty good rates continue to hold.
Hello.
Down to where the refinance business has picked up again in a pretty big way.
But we also actually have a pretty robust.
New homebuilding market share.
We've had a change in leadership over the last year in that mortgage group that has sparked it to new heights.
They continue to higher best in class people build processes that are much more advanced than we had in the past we've improved the turnaround time on a new deal by 14 days from what it was in the past so we're pretty bullish on what's happening in that organization and think regardless of.
Rates or the refinance world, we think theres more opportunity to grow that business. So we've gone all in with us.
Right.
And then just the negative wind the other operating or the other fee income section.
An MSR impairment I'm, sorry, if you said earlier that I missed that.
So the other the decline in any other income item, yes, the negative 41000.
Yes, So we went through a general ledger conversion.
In the second quarter and in doing that.
We significantly expanded and.
GL and became more defined in our fee income et cetera, and with that we did have some re classes and what you see on the other side actually just simply moved to the mortgage banking income, that's where really should have been reported historically and so it's just a reclassed between mortgage banking another.
Okay.
Thanks, George on other questions, let's step back.
Thank you.
Our next question will come from John Broadus with Janney. Please go ahead.
Good morning, guys.
Good morning.
Just to follow up on that last question, how much was the request to mortgage.
And I guess said another way what should that other line item sort of be more normal.
Going forward, yes.
Look here real quick I can tell you.
And I'm just curious just while we're on fee income.
Card processing was also up linked quarter and that's sort of went against what most other banks were doing so was there any reclass there or what drove the Chris there. Yeah. There was that was a re classed as well yes.
Okay.
Yes, so that you feel you look at the totals the totals are still up but we did have some reclasses between us.
And just give me one second here.
And then while you're looking at it.
I realize all the excess liquidity on the balance sheet, maybe just your thoughts as far as where the securities portfolio goes going forward I assume the trend is down and assuming that.
How much down or.
Yes.
On the other of the other income line going forward should be about $200000.
Going forward.
On a quarterly basis with respect to the investment securities portfolio, Yeah, we would really like to have that decline and.
The extent that.
We start seeing the outflows will continue to let that amortized.
The thing that we did do as we all we bought were amortizing products. We wanted to to make sure that as we are investing that we are investing and we're going to get the cash flow back as quickly as we possibly can.
So we didnt and invest in any municipal bonds, where we have long term bullets et cetera, we want that cash flow come back. So we can reinvested in loans.
Because the market turns so yes, we would anticipate that that's going to go down.
Going forward.
And in can you say, what you expected cash flows are on the portfolio by quarter over the next couple of quarters.
Roughly again it depends on what happens from a from a depository perspective, but we were amortizing are getting cash flows of about $20 million per quarter.
From from the investment Securities portfolio, if we don't.
Just any additional.
Securities 20, 20 million Im sorry, my 20 million a quarter or a month.
Wait a quarter a quarter okay.
Okay, and then just to make sure I heard you on the other fee income line item, you said roughly 200000 a quarter.
That's right, Okay, and then just circling back to expenses. So you said elevated mortgage.
Assuming maybe some normal seasonality in mortgage would it be fair to assume that just directionally. The operating expense line item, maybe goes down a little bit all things equal from the second accordingly.
Yes, the mortgage business is set up to adjusted adapt to seasonality quickly.
Okay.
So another that's another where are you, saying, it's a lot of variable cost I suppose.
There is a lot of variable costs exactly okay.
Okay.
Okay.
And then you guys just one more question just.
I get the I get the.
I get the excess liquidity the margin pressure and so forth. If we're just looking at net interest income dollars in if you back out the impact of the PPP fees in net interest income.
Do you think.
Given all the pressure out there, even though margin goes down do you think net interest income dollars.
Excluding PPP our.
Close to a bottom or.
Is there.
Still meaningful room on the downside.
We would say currently monitoring we get those numbers weekly and.
They appear to have bottomed.
Okay.
Okay. So okay that makes sense. Thank you guys sticker.
Hey, so much.
Again, if you have a question. Please press Star then one our next question will come from Jeff Rulis with da Davidson. Please go ahead.
Hi.
Started beat up the income statement.
Line items, but I just.
Given that discussion of some of the Remapping.
Noticed that yes, Aki occupancy and equipment was down meaningfully and then your data processing was up was that tied to some of that movement.
Yes, yes. It was we did have some reclassified between the two.
Mostly.
In closing.
Appreciation that was really.
He related we also had some telephony that was in occupancy that it's really managed and part of the overall data processing cost. So again as we significantly expanded the general ledger and got more refined in each of our line items. We we have the opportunity to make some adjustments to.
To make them numbers more refined as we as we move forward.
Okay said, the DP and occupancy those those expenses from those levels are.
On a go forward basis going to be somewhat consistent around those.
Yes, I would expect data processing to.
I am looking I hear it hold on.
No.
Our occupancy will continue to be at a lower at a lower level and.
Data processing will be more elevated going forward yes.
Okay.
That's all out thanks.
Thanks, Jeff.
This concludes our question and answer session I would like to turn the conference back over to win Williams, President and Chief Executive Officer for any closing remarks. Please go ahead Sir.
Great. Thank you Chuck and thank you again, all for joining US. We appreciate the input the investor support and if you have individual questions or would like to follow up with its mark My so feel free to give us a call here again stay safe out there, we we care for all of our stakeholders and wish you the best and look for.
George This conversation again next quarter. Thank you.
The good bye now.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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