Q2 2020 Mercantile Bank Corp Earnings Call
[music].
Morning.
Welcome to them working.
Corporation second quarter 2020 earnings results call and web cast.
Participants will be in listen only mode should you need assistance, placing no conference specialist by pressing the star <unk> followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you. My press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like to turn the conference over to tie loved the war.
From an Investor Relations. Please go ahead.
Thank you Kate good morning, everyone and thank you for joining Mercantile Bank Corporation conference call on what cap to discuss the Companys financial results for the second quarter 2020.
I'm tired or was Lambert IR Mercantiles Investor relations firm and joining me today are members of their management team, including Bob Kaminski, President and Chief Executive Officer, Chuck Christmas Executive Vice President and Chief Financial Officer, and Ray Reitsma, President of Mercantile Bank, Michigan, we'll begin the call with management's prepared remarks.
And presentation to review the quarter's results then open up the call to questions. However, before we begin today's call. It is my responsibility to inform you that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives of the company's business.
The company's actual results could differ materially from any forward looking statements made today.
To the factors described when they complete latest securities and Exchange Commission filings.
The company assumes no obligation to update any forward looking statements made during the call. If anyone does not already had a copy of the second quarter 2020 press release and presentation deck issued by mercantile today, you can access at the company's website I, our dot Merck Bang dotcom at this time I'd like to turn the call overcome mercantiles present.
<unk> and Chief Executive Officer, Bob Kaminski, Bob.
Thanks, Tyler and good morning, everyone.
On the call. This morning, we'll provide you with detailed information on a company is apartments in second quarter as well as an update on the activities specifically related to cope with 19.
First of all I want to recognize the efforts of mercantile TV for allowing us to continue maneuvering through the many challenges brought about by the pandemic since the start of the crisis earlier this year.
Our employees have risen to the occasion quite often working remotely well all mercantile to successfully serve our customers and fulfill their banking needs.
I can tell demonstrated solid performance in the second quarter <unk> per share arrays of 54 cents, which included the strong provision building before shadow that ended the first quarter.
We also announced in our board has declared a regular cash dividend for the third quarter up 28 cents per share furthering our achievement no ongoing financial strain amongst the challenging environment as one might expect there are many moving parts in our financial statements during the quarter and Chuck will provide much more detail on her.
Garments momentarily.
As we discussed during our call on April the safety of our employees and customers is our top priority.
The vast majority of our staff was working front haul until early June after saying physical and social doesn't see modifications could be made to our facilities and it was deemed a safe for them to return to their offices and workstations.
Mercantile Bank lobbies remain close to walk in customer traffic until June 26.
During the time, our facilities were closed our team and clients adapted extremely well to alternative banking alternative methods of engagement to perform their banking activities.
Full time line over to related activities can be viewed on slide four.
The paycheck protection program dominated much of the attention to the lending team during the second quarter as our bank was extremely successful originated a significant volume of SPD loans businesses in our markets.
Focus regarding PPP has now shifted to the forgiveness phase of the program as we work to assist loan recipients in the gathering and submitting the required information to allow the rendering of a forgiveness determination.
Really efficient work of our lending groups on the TPP program, we have engaged numerous potential new relationship opportunities from businesses that approach or were referred to mercantile. Let me comment at the incumbent banks were slow with their PPP applications.
We will provide you with an update later on this call on the portfolio performance and information regarding customers receiving assistance through our payment deferral programs.
The metrics of our banks asset quality remained very strong well, we have worked with those clients impacted by coven 19 to provide relief via via payment deferments within the framework of appropriate accounting guidelines.
Our customers are working diligently position their businesses. So they can withstand the impact of revenue and expense challenges with the various closures mandated to how spread so I'll stop the spread of the virus.
The performance of our retail mortgage team in the second quarter was extremely strong customers were able to take advantage of low interest rates and refinancing their existing mortgages, but also what the reopening of Michigan to accommodate the economy do purchase activity was also very good.
The combination of those trends when added to the tireless work of our lending not an operation teams allowed our company to achieve record mortgage production during the second quarter.
Ran Chuck will have more detail on this in their comments.
Operationally in late June mercantile now the closure of three branch locations.
These decisions were made in part as part of our ongoing efficiency efforts to ensure the best allocation of our resources.
We anticipate nominal attrition as the customers of these branches will be serviced by other mercantile branches.
At the beginning of 2016, but the online deployment of technology as an alternative delivery channel mercantile has been able to reduce this number of locations from 53 to what will be 37. Once these locations our call with later this year.
We continue to engage our customers. So we can fully understand their needs and how patterns and preferences I've interaction with UBS are evolving, especially in view of the challenges brought about by call with 19.
As we discussed at the end of first quarter, Michigan experienced a higher level of infections in many states and therefore, the governor has taken an aggressive approach for containment, including stay at home order and appeared a widespread closure all by the central businesses and industries.
As the incidence of new infections drop during may and most of June.
State implemented a phased reopening of consumer and business activity, which has a lot of the economy to slowly be re energized and recent increase in cases toward the end of June and continuing into July has pause at cost a pause in the further progression of the phases as we try to understand the.
Solution transmission and ramifications of the virus.
The state and local government governments and business leaders alike, and our state are continually working keep citizens healthy all along then to return to work and businesses to safely reopened.
Just a number of infections continue to increase.
The Governor has indicated that the current phase of the state's plan may need to be downgraded with more restrictions reinstituted on the activities of businesses and consumers as mentioned earlier, the safety of our employees and customers will continually be our top priority.
I will add my comments by touching on additional events that occurred around this nation, capturing the attention and focus of its citizens.
The effects of systemic racism manifest themselves in many ways and most recently in the form of violence against people color.
The management staff and board and mercantile bank or Paul by these tragedies and are committed to working together with our community partners to address and correct the underlying causes.
Internally mercantile team is having ongoing conversations about racism to help the institution of real change in our communities.
We are committed to lessen listening learning and making a difference.
So from our enter those are my introductory remarks, I'll now turn it over to right.
Thanks.
Loan portfolio increased $432 billion second quarter 2020.
There are over 2000 paycheck protection program loans totaling $550 billion noted on slide eight.
So by $109 million and reduced outstanding under commercial credit.
Professional manner in which are team administered the origination of these loans has resulted in a significant opportunities to grow our base of commercial relationships. Additionally, our construction pipeline remains solid $70 million of commitments and commercial construction and development loans, which we expect to fund over the next 12 to 18.
The months.
Details on payment relief assistance for commercial retail borrowers can be found on slide six so.
Our asset quality remains strong as nonperforming assets totaled just $3.4 million or less than 110th of a percent total assets. At June 32020. This breakdown can be found in the financial portion of our presentation on slide 23.
Commercial pass through loans at quarter end, our nominal in dollar terms totaling $464000, representing 12 borrowers overall pass through information can be found on slide 12 and 13.
However, given the uncertainty of the economic environment, we elected to record of provision for loan losses of $7.6 million. This amount was generated entirely through qualitative factors supporting the analysis as opposed to reserves against specific credits.
These actions Remy allowance for loans to or I'm, sorry, the allowance for losses to total loans grew 1.16%, but excluding the impact of CPP loans.
David Deferrals number to 705 for the quarter and represents $719 million, an exposure $23 million of deferred payment.
As of July 17 extensions in place beyond June 30, number 33 represented $130 million or exposure and $4 million.
Yes.
We expect more requests in the near future. However, these relatively modest numbers.
Expectations for future requests and our pass through performance are positive indicator.
The risk rating process depicts a portfolio a strong characteristics bucking the strength of the pre crisis ICANN.
Maintained accurate risk ratings won't be will remain a key focus in the upcoming orders as our hours report results impacted by the crisis.
Can you to monitor the financial condition.
And performance of credits, particularly in following segments automotive dealerships hotels in lodging assisted living restaurants construction movie theaters in retail.
These individual segments that account for more than 5% of commercial loans acquisition of these segments can be seen on slide 10.
[noise] recognize noninterest income during the second quarter of nearly $11 million, but $5.9 million or nearly 180% prior years second quarter, excluding $1.3 million nonrecurring items related to that.
As can be seen on slide 16. This improved level noninterest income was largely driven by increased mortgage banking from watching the success of ongoing strategic initiatives designed to increase market share a higher level of refinance activities stemming from historically low rates increased share and the purchase money.
Good and an increased percentage of loans sold.
The second quarter of 2020 purchase mortgage loans originated were up 30% or comparable ordered in the prior year or refinance activity increased 469%.
June applications in backlog suggests that refinance opportunities will.
Persists into the near future.
And purchase applications are at record levels.
Continuing to enhance mortgage banking income recent market share.
Increased share the purchase market remains a priority to new to higher proven mortgage loan origination originators as we were able.
Noninterest income from payroll services grew 4.2% despite high levels of unemployment during the quarter relative to the prior year quarter.
As charters on accounts and credit debit card income each fell by approximately 9% as activity within the accounts was diminished overall during the period. However, recent activity has shown a rebound although still less than the previous quarter.
The exercise discipline related overhead costs as we focus on efficient delivery systems and all of our lines.
Remains a priority as evidenced by the decision to close three branches, where mercantile locations are available on close proximity. Thanks.
No slowdown of the covert 19 virus and its ongoing impact just provide an opportunity to demonstrate the value of community bank.
Buying high service levels with strong capabilities.
Our electronic banking capabilities.
Salability of drive facilities allowed us to close our branch lobbies on March 25 contributed to the ability to have 75% of our employees work.
So resumption normal activity by too.
That concludes my comments I will turn call over.
Thanks, Ryan good morning, everyone.
Noted on slide 14. This morning, we announced net income of $8.7 million or 54 cents per diluted share for the second quarter of 2020 compared with net income of $11.7 million are 71 cents per diluted share for the second quarter 2019 net income during the first six months.
2020 totaled $19.4 million or $1.19 cents per diluted share compared to 23.5 million or one dollar and 43 cents per diluted share during the first six months of 2019.
[noise] proceeds from a bank owned life insurance claim increased net income in the previous second quarter by $1.3 million are eight cents per diluted share. Excluding the impact of this transaction diluted earnings per share decreased nine cents are about 14% during the current year second quarter compared to the respective prior.
Your period.
Proceeds from bank owned life insurance claims and a gain on the sale of a former branch facility increased net income in the first six months of 2019 by $3.1 million or 19 cents per diluted share.
Excluding the impacts of these transactions.
Diluted earnings per share decreased five cents or 4%.
During the first six months of 2020 compared to the respective prior year period.
Turning to slide 15 interest income on loans declined in 2020 periods compared to the 2019 period, primarily due to FOMC rate cuts aggregating 225 basis points since the beginning of the third quarter of 2019 with 150 basis points of those cuts occurring in margins.
This year.
Interest income unsecured entering the 2020 period benefited from accelerated discount accretion from caused us government agency bonds.
Totaling zero point $9 million during the second quarter and $2.7 million during the first six months of 2020.
In total interest income declined $2.7 million during the second quarter of 2020 compare to the second quarter 2019.
And was down $3.4 million during the first six months of 2020 compared to the first six months of 2019.
Interest expense declined in all categories. During the 2020 periods compared to 2019 periods, we've talked in the declining interest rate environment and total interest expense declined $2.1 million during the second quarter of 2020 compared to the second quarter 2019 and was down 2.5.
$1 during the first six months of 2020 compared to the first six months of 2018.
Net interest income declined zero point $5 million during the second quarter of 2020 compared to the second quarter of 2019 and was down zero point $9 million. During the first six months of 2020 compared to the first six months of 2019.
Provision expense increased significantly in the 2020 periods compared to the 2019 periods, primarily reflecting the krona buyers pandemic and its impact on economic environment.
Provision expense totaled $7.6 million during the second quarter of 2020 and $8.4 million. During the first six months of 2020 compared to 0.9 million and $1.8 million turned respect in 2019 periods.
The large provision expense recorded during the second quarter 2020, plus primarily comprised of an allocation associated with the newly created covered 19 pandemic environmental factor and an increased allocation related to the existing economic conditions environmental factor.
The Cobot 19 factor was added to address the unique challenges and economic uncertainties, resulting from the pandemic and its potential impact on the Collectability a loan portfolio.
We elected to postpone the adoption of seasonal as permitted by the carriers that however, we are running our CFO model concurrently with our incurred loss model.
Based on preliminary results, we do not believe the loan loss reserve balance determined by the seasonal model this materially different than a loan loss reserve balance as determined by our incurred loss model as of June 32020.
Turning to page 16.
Fee income increased in the 2020 periods compared to 2019 periods, primarily reflecting significantly higher mortgage banking income, which more than offset reductions in certain other fee income categories.
Excluding a bank owned life insurance claims during the second quarter of 2019 fee income during the second quarter increased $5.9 million or 118% compared to the second quarter of 2019.
Excluding bank owned life insurance claims and the gain on the sale of former branch facility. During the first six months in 2019.
Fee income during the first six months, a 2020 increased $7.7 million or 79% when compared to the first six months of 2019.
Reflecting an increase refinance activity and the successful implementation of several strategic initiatives.
Mortgage banking income was substantially higher during the 2020 periods compared to the 2019 periods second quarter 2020 mortgage banking income was $6.3 million higher in the second quarter.
Of 2020 and income during the first six months of 2020 was $7.9 million higher than the during the first six months of 2019.
Credit and debit card income was lower during 2020 periods when compared to the 2019 periods, reflecting lower transaction volumes during the second quarter, especially during the first half of the quarter.
Activity volumes have been increasing over the past six to eight weeks.
Service charge income was also lower during the second quarter of 2020 compared to second quarter 2019, and it's almost the same when comparing the first six months of 2020, but the first six months at 2019, the lower level, primarily reflects less transactions from business customers and high average deposit balances for.
Individual customers that alleviate is certain monthly service charges.
Continuing on page on slide 17 overhead cost increase into 2020 period compared to 2019 periods, primarily reflecting higher compensation costs, especially related to residential mortgage lending activities.
Salary and benefit costs were up zero point $8 million or 6% during the second quarter 2020, when compared to the second quarter of 2019 and up $1.4 million are about 5%. During the first six months of 2020, well compared to the first six months of 2019.
Occupancy furniture and equipment costs were up a combined zero point $5 million or in the second quarter of 2020, when compared to the second quarter of 2019 and up a combined zero point $9 million. During the first six months of 2020, when compared to the first six months of 2019 in large part reflecting the follow up 2019 complete.
One of our main office expansion.
Continuing on page 18, our net interest margin was 3.17% during the second quarter of 2020 down 46 basis points from the first quarter of 2020, and down 62 basis points when compared to the second quarter of 2019.
The yield on earning assets declined 69 basis points during the second quarter of 2020.
When compared to the first quarter of this year, while the cost of funds declined 23 basis points. During the same time period.
In comparing the second quarter of 2020, what the second quarter last year, the yield on earning assets declined 100 basis points, while the cost of funds declined 38 basis points.
The yield on loans was down 51 basis points during the second quarter compared to the first quarter and down 100 basis points when compared to a year ago in large part, reflecting the feds aggregate 225 basis point reduction in the targeted federal funds rate mentioned earlier.
We are recording the origination fees and direct origination costs of PPP loans equating to a $14.7 million net increase to interest income im commercial loans using the level yield method.
Second quarter 2020, net accretion totaled $2.8 million.
Assuming no forgiveness transactions, we expect to record net accretion of 2.9 million.
And 2.5 million during the third and fourth quarters of 2020, respectively.
And 2.1 million.
1.6 million.
1.2 million.
And zero point $8 million during the first second third and fourth quarters of next year, respectively for the remainder during the first half of 2022.
The yield on securities during the second quarter 2020, and the first six months of 2020 benefited from accelerated discount accretion that caused us government agency bonds.
Accelerated discount accretion totaled zero point $9 million during the second quarter of 2020.
Positively impact in the quarters net interest margin by 10 basis points.
Accelerated discount accretion totaled $2.7 million during the first six months of 2020 positively impacting the periods net interest margin by 15 basis points.
Negatively impacted our net interest margin there to 2020 period, and especially the second quarter of this year and a significant volume of excess on balance sheet liquidity depicted by low yielding deposits with the federal Reserve Bank, Chicago and a correspondent bank.
The excess funds are primarily a product of federal government stimulus programs as well as lower business and consumer investing in it and spending.
Overnight deposits averaged $247 million or in the second quarter of 2020, and just shy of $200 million during the first six months of the year.
Compared to our typical average balance of 50 million to $75 million.
We expect the level of overnight deposits to stay at elevated levels for at least remainder of 2020.
The cost of funds has also but on a declining trend primarily reflecting the falling interest rate environment, but in terms of magnitude of scale not has a very experienced on the our yield on loans.
For our net interest margin for the remainder of 2020, assuming no forgiveness activity on PPP loans, and a steady level of excess funds as depicted as of June thirtyth.
We expect our net interest margin to being a range of 2.85% to 2.90%.
Under normal excess funds, which again, we do not expect but if we did have normal excess funds. Our core margin. If you will would be 3.10% to 3.15%.
On the next few slides, we talk about mortgage banking.
Mortgage loan originations increased substantially during 2020 periods and especially during the second quarter of 2020 in large part reflecting significant refinance activity stemming from the decreased interest rate environment, coupled with ongoing as the ongoing success of strategic initiatives that were designed to expand market penetration in here.
Since the gain activities and operate more efficiently.
Mortgage loan originations nations totaled $275 million during the second quarter of 2020 compared to $80 million during the second quarter of last year, an increase of almost 250%.
Mortgage loans originations totaled $408 million during the first six months of 2020 compared to $125 million. During the first six months of last year, an increase of about 225%.
Almost 80% of the mortgage volume during the second quarter of this year consisted of refinance applications compared to about 48% last year's second quarter.
Okay, My 82% of the margin loan originations during the second quarter of this year have been or will be sold on the secondary market up from about 62% during the second quarter of 2019.
In recent weeks, we have seen an increasing the origination of purchase mortgage loans and as Ray mentioned earlier the pipeline of purchased mortgage applications is currently at a record level.
On the next couple of pages slides 20 to 23, we talk about asset quality.
The standard clout standard quality metrics that loan portfolio remained very strong with continued low levels of nonperforming loans and loan charge offs.
Non performing loans as a percent of average loans equaled only 10 basis points at second quarter. The balance of other real estate owned was less than $200000 at quarter end.
Gross loan charge offs totaled $300000 during the second quarter of 2024 recoveries of prior periods on charge offs totaled about 150000.
The resulting net loan charge offs of less than $200000 equated to just two basis point of average total loans annualized.
Additions to nonperforming assets totaled just over 200000 are starting to second quarter of 2020 with a net reduction of about $300000 recorded a non performing assets on an overall basis during the quarter.
As shown on slide 24th we remain in a strong and while capitalize regulatory capital position.
The banks tier one leverage capital ratio.
Was 10% and the total risk based capital ratio was 13.5% as of June Thirtyth 2020.
The total risk base capital ratio was over $113 million above the minimum threshold be categorized as well capitalized.
There was no share repurchase activity during the second quarter of 2020 as in late March we elected to temporarily ceased share repurchase activity to preserve capital for lending and other purposes due to the uncertainties surrounding the coke in 19 pandemic. We currently have about $10 million available in our current repurchase plan.
Okay.
Concluding on slide 25 point to make comments on our forecast considerations for 22, what for the remainder of 2020.
Due to the high degree of uncertainty that currently exist, we will not be providing earnings performance guidance as we've done on past conference calls. However, we are able to offer key considerations there should be factored into any earnings forecast of our company. These include on net interest income.
PPP loan and PPP al volume.
BP loan portfolio totaled $549 million agenda, the second quarter.
But still originating new PPP loans, maybe one to three a day aggregating lasted about 100000 each day.
We expect that trend to continue until the plan deadline slated right now for early August.
We did firewall about $44 million in late April under the PPP Lf program. However, due to a large and growing volume of on balance sheet liquidity. The PPP LS advance was fully paid off in early June.
Given current and expected ongoing excess on the balance sheet liquidity. It is likely the PPP program will not be as excess in future periods. However, we currently have over $450 million and borrowing capacity if need be.
In regards to PPP loan forgiveness, net deferred SP loan origination fees and direct loan origination cost will be accreted into interest income on loans over the life of loans at a level yield method as I detailed earlier.
The vast majority of PPP loans were underwritten or 24 month period, the degree to which PPP loans are forgiven and the loans are effectively paid off by the SPJ net deferred loan to be accretion may be impacted.
And of course, but anyway, so have done any increase in volume of non accrual loans the degree to which an increase in non accrual loans experience loan interest income may be negatively impact.
Provision expense may be impacted in future quarters by items, such as net loan growth the degree to which loans are downgraded in accordance with our long creating paradigm.
The degree to which loans become impaired due to being placed on non accrual or Cds TDR status and the qualitative environmental reserve allocation factors are formerly reviewed at the end of each quarter is certainly any changes may have an impact on required reserve calculation.
In regards to fee income mortgage loan originations for the purchase of homes has been steadily increasing over the past couple of months and the current pipeline of applications for the purchase of homes has had a record high however, the degree to which changes included 19 measures are made by Michigan's governor are different up difficult to predict on our mortgage banking.
In operations.
Michigan shelter at home declarations also had a substantial impact on credit and debit card interchange fees as card usage trap. However activity has recently increase that agreed to exchanges in cobot 19 measures are made by Michigan's governors are difficult to predict on these operations and finally overhead.
Cost any increase in problem loan relationships could result in an increase in collection costs.
In closing while there are many uncertainties that may impact reconciles financial condition and operating performance in future periods. We note that we entered this stressed environment was strong asset quality and a solid capital position. We're pleased with our second quarter operating results and financial condition of as of June 32020 and believe.
Turning to navigate through the unprecedented environment created by the kroner virus pandemic and other events. Those are my prepared remarks, I'll now turn it back to call back over to Bob.
Thank you Chuck that now concludes managements prepared comments, but one that we will now open the call for the Q1 day.
We will now begin.
Ken and answer session.
To ask a question you know press Star then one on your top down from.
Using a speakerphone please pick up your handset before pressing the key to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble Ralph there.
Our first question is from Brendan Nosal from Piper Sandler go ahead.
Hey, good morning, guys how are you.
Good morning.
Just want to start off on deferral trends here.
Help me think about how we should kind of interpret the two buckets that 740 that.
Three months or less versus the 130 that three to six months.
The expectation here that that 740 million number will decline as we move forward with some moving into the three to six month bucket, but hopefully more of that.
No longer being a deferral at all.
Hello.
Again, the the biggest perspective around this is that.
We were fairly liberal in providing deferrals early on in the crisis.
And.
The guidance was consistent with that from those who regulators and the experience around the industry under the second go around we were much more concerned with.
The.
Credit dynamics that surrounded that we had the opportunity to review more information financial information those borrowers and as a result, we saw the trend decrease rather significantly if you look at some of the buckets that we're paying particular attention to the number of.
Deferrals for instance, automotive dealers were 17 to seven restaurants with 55 to one hotels when from 19 to three so.
Those categories were seeing the ability at least through July 17 to function well go further deferrals now I would be remiss if I didnt mention that it is July 17 of their our days ahead, which could include requests for more deferrals. However.
Sure.
The liquidity within.
System is such that total that provides some cause for optimism but.
No unprecedented is the right term for these times.
Future older rigs have you seen but as we evaluate deferrals as of.
Today.
They are down considerably less than 20% of what they were on the versus.
Okay understood.
And then just one more for me and then I'll step back.
We're just being curious to hear an update on how some of the larger let's call them at risk portfolio Theyre doing today versus three months ago.
I would like hotels rescue.
Payment.
Any color on things like occupancy rates are our capacity at restaurants today versus two months ago be quite helpful.
As it relates to restaurants.
Opened under the Governor's orders.
They should do most of them are.
Our operating at a percentage of.
Normalized occupancy, but the.
Hi, Takeout business is just absolutely driving as is the driver business. So we've seen results that range from.
Better than they were before the crisis, two simpler and slightly worse and.
So that's an area that I think we will see no more stressed that pops up in the future, but it hasn't happened yet and to be able to quantify that is absolutely possible.
As it relates to hotels.
Occupancy in many of those has made a term and started to come up a bit still well below.
Holes that you.
[music].
Serve prior to the crisis.
And so the.
Experience there is that the performance is still going to be diminish in the next few months that we'll see and work goes from there.
The pace of recovery.
Alright, great. Thanks for taking my questions.
Thank you.
Our next question from Damon Delmonte from KBW go ahead.
Good morning, guys have done today.
Our now to.
Great. Okay. So first question kind of on the margin here probably for Chuck So the Martin the reported margin was 317. This quarter. You noted that there was it can be point benefit from the the.
Accelerated accretion from the called agency Securities. So that would put the mark to core margin kind of like around call. It 307, or so and you are kind of guiding down to 285 to 90 is that right.
Yes, I think.
Part of that is the impact of the excess liquidity.
That we have on our books, which is going to be higher but the excess liquidity as as we have today that we've had over the last few weeks is quite a bit higher than the average access that we had during the second quarter.
So what you're seeing there is the impact of the.
The ongoing and increase access level by balance sheet liquidity.
Got it Okay, and you expect that to kind of stay on through the end of 2020, and then eventually move off once that PTP.
Proceeds or are deployed.
Correct, Yes, I mean that spend at the difficulty of.
The possibility of trying to predict I think all of us bankers thought they once the PDP money jets within eight weeks 10 weeks slide that money would be out of the bank and then what we see and I will talk and other bankers they've seen the same thing is that a large portion as remained in the bank. So when we made the loans. We went ahead and credited.
Deposit accounts like we typically would and we certainly have seen some money leave the bank.
But if you just very simply look at the going on with your balance sheet changes, we can definitely see that some of those proceeds.
Remain with the bank and it's it's impossible for us to predict when those monies.
Go out for operational use.
We have over 2100 loans that we did.
As you know money is very fungible, so trying to trace proceeds for one credit would be very difficult now at 2100 would be simply impossible. So.
My assumption is that a lot of that money is going to be safe stand at least for some time I think when we can get passed to cope with 19 environment I think we'll see businesses start to expand obviously bring all their employees back.
So I think we I would expect more movement.
But I would say that over the last few weeks the movement of our deposit balances have been has been pretty steady.
Hey, Good does point you also David is quite to the strength of much of our customer base that they were really good position as we headed into the pandemic that took advantage of the various offerings of the government program through SBH to help fund their payroll costs and as or businesses that can.
Attracted due to.
Some of the stay at home orders and business shutdowns, they're sitting there pretty hefty cash position right now, but as we talked about in our comments as the economies.
Turning to open back up around the country and hopefully with a continued with the phase reopening.
We'll go back to more of a normal operating environment as much as we can at this point in time, but I think that the factor of the strength of our customer base is also one they don't want to escape mentioned then the conversation as well.
Got you okay.
Helpful.
And then with respect to.
This quarter's provision and kind of how you're looking at the reserve going forward.
If you exclude the impact and the PDP loans. The reserve is actually 1.16%, so pretty pretty sizable build this quarter you feel like year, you're at a an adequate level or do you think that you know additional reserve building is likely as we progressed through 2020.
I think thats. The that's a question there were all hinge on right now David is that we feel really good about our reserve at June Thirtyth, We we did the provision building through the qualitative factors that.
Thanks, Chuck outlined the rail lined in there and their comments and there was a prudent thing to do that lines up very nicely with what the seasonal model will continue to show throughout the rest of the year.
But really going forward.
Continue to monitor that and make adjustments the qualitative where we buy the necessary and also with us but specific quantitative.
Adjustment that we need to make based on deterioration up a specific loans in the portfolio, we haven't seen as of yet and we're very pleased with that but we know that up.
For the pandemic it to continue on the shutdown last a lot longer and deeper into 20.8, there is going to based on detrimental effect too to our client base and so out of the qualitative factors helped with that at the moment, but then if we get some specific deterioration with specific credits will address that appropriately to the right now we feel really.
Good about the reserve I was a prudent provision build at the end of the throughout the second quarter and where we stood at June Thirtyth was up where we felt we needed to be Adam will react appropriately as as this quarter continues on and certainly as the fourth quarter, but we feel good about it.
Okay, Great and then just one final question, let me try to reduce properly. So the the initial 90 day deferrals.
Sure portfolio as a total of 719 million then you have another 130 that.
46 months, so in total us around call 850 million, so basically 30% of commercial portfolio is deferred right now.
Yes, I would say when you're looking at the three months or less a lot of those have run off no Damon.
So what we see his support a six.
Those are mostly what we would call second round. So a vast vast majority if not all of the original payment relieve for three months and then those customers seek additional payment relief for generally giving them. Another three months and so the other three months is really what you're seeing on page seven.
So I don't think you really want to add those two slides together.
Because there's going to be allowed us to anybody that's on page. Seven was also included on page six and Thats, a better way of saying.
And while the wise and what are the ones on page six that there were three months or less both payments have resumed right.
Okay. So.
Is there a way based on this information I can look at your portfolio and say X percent of the commercial portfolio is.
Referred right now.
No.
Because they overlap.
I would say what I would say if you wanted to simply do that David I look at page seven yes.
I think it's Ray indicated we're definitely having ongoing conversations.
With was certain borrowers to talk about potential additional needs. So as we sit here today page seven would be the the number you'd want to use.
Okay. So paid sick gives you a snapshot of what your initial round of deferment requests were and then subsequent to that some of that has gone back to performing or yeah. Yeah, Yeah, performing and then others have migrated into the four to six months.
Right yes.
Thats majority have gone back to making payments and then what you see on page seven at this point in time to his are the ones that have said I'd even additional help.
Gotcha Gotcha Okay.
Thats all that I had put out thank you very much guys.
Thanks, David.
Again, if you have a question. Please press Star then one.
Next question is from John rode this from Jamie go ahead.
Good morning, everybody. So just back to the previous question. So page seven so the 100 and if you include retail that's 132 million, so thats roughly 5%.
Core loans, excluding PPP correct.
Thats correct that.
Okay. So that that's what some deferral right now.
As we speak today.
Slide eight indication.
Sure the 17.
Yes.
Chuck use your margin guidance to 85 to 290 for the second half does that include your.
Quote unquote normal amortization I guess of the PPP loans that you February Yep Yep that includes that schedule that I provided okay and then what I guess what is your assumption as far as forgiveness.
What I.
I I know, it's a guess, but what percent do you think is ultimately forgiven and you know as far as timing is it a third third quarter fourth quarter or mostly fourth quarter first quarter or what are you sort of thinking today.
I think John the assumption by our customers and and we believe it is that there assuming that their loans are going to be forgiven, but but thats. A fact that theres been some guidance, but not complete guidance by the by the FDA and the government on the outlook for gives US our will work, we're just lots with trial.
To make our best guess at this point in time, but but the assumption of our customers that their loans were were used for payroll as the program prescribed that Olivia forgetting, but until you have actual guidance you can't make that final determination. So it is a big question Mark.
It seems to me if I, if I could add it doesn't seem like it's going to be a lot of a third quarter activity.
We don't even have the guidance out yet as to how to you apply our help our borrowers apply for forgiveness. We've been hearing maybe early August that will be published but we've heard dates before.
And then I see that the Treasury has allowed up to 90 days to go ahead and approves the request or to act on the request certainly Congresses and other banking trade groups are trying to lease for the smaller loans.
Trying to get more about automatic forgiveness or at least a much simpler form.
That would obviously speed up the processes or something like that but if its loan by loan it's going to take quite a while and I would think it's going to be more of a fourth quarter first quarter activity without some way of stream streamlining the smaller loan forgiveness program.
I, what Chuck what percent of your loans are under 125000 balances.
You know I had that with me I did bring it was due to the room here.
I think what you would find is that if you look at the number of loans out of the majority fall under that dollar amount, but if you look at the dollars a majority of the dollars that we lent out our larger customers are larger borrowers yeah. Okay.
One other question just obviously mortgage is obviously did very well in the quarter.
As we go forward do you expect to see some normal seasonality.
Clearly I would think in the fourth quarter, maybe but third quarter do you think just directionally do you think mortgages down from the second quarter.
Or.
Just.
What are you thinking.
Yes. This is ray via the mortgage backlog has been rather steady for the last six weeks or so so that would portend a similar results into at least the beginning of the third quarter earnings you ended the third quarter in the fourth quarter seasonality will certainly.
Taking effect, but the.
Particularly as it relates the purchases, but the if rates continue as they are refinance activity will be a strong contributor and so in some magic to answer. Your question is the seasonal pattern will persist, but it will be at a higher level than it's been the pass.
Okay fair enough. Okay. Thank you guys.
Our next question is from Kevin Ronson from healthy Group go ahead.
Hi, guys.
Got it murder loan.
Hey, I appreciate the commentary around the men and the guidance here, but I'm sorry, if I Miss if it was there any guidance around what it actually means for spread income.
So I feel like this desire, but let you guys to those calculations, so I feel comfortable with assumptions that I gave.
To talk about the spread and margin.
Under my assumptions I don't think we're going to see huge change and average earning assets. So I think those two combined will probably get to where you wanted to be to go.
Okay fair enough the I appreciate that because that as much as the margin contracts at the NII doesn't really change all that much then I guess it's.
So there is some I guess, just moving points there, but I.
Just one more question.
I appreciate the increase in the balance sheet from.
In the liquid assets in the end and the TTP, but you guys kind of jumped pretty far ahead of though the $4 billion number.
Given how do you think that shakes out longer term that are you now considered yourself north of 4 billion for the longer term just kind of curious on your thoughts on how that all shakes out.
No I don't think we'll see that.
We certainly expect color a vast vast majority of our PPC loans to be forgiven I think maybe where you're going is that while other forgiven. So that means our loans now become overnight investments the federal reserve.
We'll have to work those off over time so.
I think it's going to be quite a while for that money to work its way out of our balance sheet.
But I don't think a majority of that permanent.
I would but having said that run rate kind of touched on that we're still talking to current customers about loan needs. We're certainly talk into prospects right touched on the PPP program prospects.
There's some opportunities there so we certainly would expect overtime.
At our commercial loan portfolio will continue to grow.
But when you have $550 million and PPP portfolio, that's a slug of money to the have to work through.
Got it okay. Thanks, guys.
Thank you.
Our next question is from Brendan also from Piper Sandler go ahead.
Hey, just one follow up for me on the margin appreciated the 280 by the Q 90 includes both.
Typical PPP as well as the excess liquidity.
Then the three tended to continue you gave does that exclude both excess liquidity as well as any impacted PPD in other words is that kind of the you expect the underlying run rate for the NIM going forward.
No I brought in the three Tenthree hundred 15 still includes the PPP accretion, but at a brings us our balance sheet back to normal on excess balance sheet liquidity.
So just Aladdin.
Got it okay. Thanks.
Certain.
Yes, and no more questions. This concludes our question and answer session I would now like to turn the caps the conference back over to Bob Kaminski for closing remarks.
Thank you Kate Thank you all very much for interest in our company will help you in your family stay healthy and say, we look forward to speaking with you next at the conclusion of the third quarter. This call is now concluded. Thank you.
The conference has now concluded. Thank you for attending to gross presentation. You may now disconnect.
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