Q2 2020 Independent Bank Corp (Massachusetts) Earnings Call

Before proceeding let me mention that this call may contain forward looking statements with respect to the financial condition results of operations and business.

Actual results may be different factors that may cause actual results to differ include include those identified in our annual report on form 10-K, I never really earnings press release.

Independent bank or cautions you against unduly relying upon any forward looking statements and disclaims any intent to update publicly any forward looking statements whether in response to new information future events or otherwise.

Please note that during this call. We will also discuss certain non-GAAP financial measures as we review Independent Bank Corp.

These non-GAAP financial measure measure should not be considered replacement sport and should not be read together with GAAP results.

Please refer to the Investor Relations section of our web site to obtain a copy of our earnings press release, which contains reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and additional information regarding our non-GAAP.

Also please note that this then is being recorded I would now like to turn the conference over to Chris I'll leave some president and Chief Executive Officer. Please go ahead.

Good morning, Oh, Thank you for joining us today.

Well with me as usual the rock, which all our chief operating officer.

Mark <unk>, our Chief Financial Officer.

We will again be joined by Jerry NATO, President of Rockland Trust, and our Chief commercial banking officer.

Well, let's think audience, we continue to extend their best wishes to you and your families for good health during these very extraordinary times.

It certainly has been very.

Interesting three months since your last spoke in many ways to the degree of I certainly published by this bad debt crisis remains as great as ever.

The other half.

A lot as a company about how to cold adapt to persevere and ways that a reassuring.

All that elevated provision levels and intense pressure on a net interest margin continue to lead our financial performance.

Strong fee income and expense restrain helped to service counterweight to produce pretty decent results.

Net income in the second quarter came in at $24.9 billion or 76 cents per share mark I'll be covering the quarter in more detail shortly.

Important takeaway here is that our core profitability gives us a lot of straight to get through this period.

Definitely emerge our fundamentals.

Very much attack.

We've been maintaining a laser like focus on our commercial customer consumer customers throughout serving their needs are providing for parents were warranted and enable them to manage to this crisis.

An active participants of the P.P.P. program originating about 5600 language totaling nearly $800 million.

This is involved about 250 of our colleagues throughout the bank working virtually around the clock.

More recently, we've been working very closely with a P.P.P. recipients and helping them navigate the ball forget this process with its speedway.

As you can imagine we're intensely focused on the credit environment with extensive reporting and monitoring firework conditions.

<unk> daily the loan balances exposures for commercial customers within the interest rates, we consider to be most at risk.

The penalties at the end of the earnings release, we've expanded our reporting at these exposures along with updates rather pertinent covert related information and a few minutes chairman Robert provided added color as well.

Locally one of the really encouraging developments that as has been the astute manner in which the stated, Massachusetts isn't managing the called the type of pets.

Our governor has instituted a gradual reopening of he kind of activity over a four phase process space. The number of weeks apart, depending how progress across a series of health metrics. We're currently phase three three openings since peaking in April for a number of cold winter related cases has slowed considerably.

Hopefully this measured approach a broad inherits set a record that guidelines to prevent a spike that is unfortunately the experience in other parts of the country.

With all its been taking good notes on our experiences and observations over these past few launch.

Hi towards anticipating the operational applications for what many referred to as the new normal.

Quite obvious take away is that that customer preference for digital access that service will certainly accelerate particularly as many clients across more comfortable if this medians during the crisis.

I, probably reference to steadily expand our capabilities and offerings that digital spaces positions us well, we will continue to invest intelligently robust technology to keep pace with this trend.

Likewise, our ongoing review of our French type work. They include more dry box and outside walk ups as well as actually expansion of our visit video Teller service.

Also our future infrastructure needs will be reassessed as many of our employees have been able to successfully work from home since March.

The net result of all these combined effort should result in further improvement in operating efficiency overtime.

Times like these banks like our service critical providers and relief to the enormous financial emotional stress induced by this crisis on somebody.

Situates.

As such were fully engaged to providing much needed support guidance across the full later on employees customers and communities.

Our reputation here is intrinsically connected to our brand image, which has never been stronger. This is borne out by the continued high ratings received from reputable third parties in areas such as customer service employee satisfaction diversity CRM charitable giving.

Our focus and commitment to build a healthy called chiller that engender is high quality relationships that a lot of discretionary effort has also paid another huge defensive at that meeting the challenges at the bad stuff to cope with crisis.

As I've said before a crystal ball is no better than any of your as I said, he kind of make path from here, our best guess instead economic activity will be viewed it 8-K will be I slog, Intel vaccine or protocol to mitigate the symptoms is developed.

Well, we do though is that we have the capital.

City core profitability.

Persevere through this crisis, we will adhere to our playbook of focus is to support that has proven very successful prior crises.

And fully expect <unk>, our growth path has before whenever this crisis abates.

Finally, I always like they had with this flew to my Rockland Trust colleagues.

They prove themselves to be resourceful.

Resilient.

Tireless at their passion to serve our customers and journey through this crisis I'm very proud each and every one of them.

With that I'll turn it over to Mark Mark.

Thank you, Chris I will now probably the second quarter results in more detail.

GAAP net income of 24.9 million in diluted EPS of 76 cents in the second quarter 2020 reflect decreases of 6.9% and 2.6% respectively from the prior quarter's results while pre tax income was actually up by 13%. This quarter the returned to a more normalized.

Tax rate accounted for the decline in the bottom line.

Pretax pre provision return on average assets was 1.66% for the second quarter compared to 1.89% last quarter with a decrease being driven primarily by the temporary balance sheet increase associated with the P.P. program.

Our typical approaches to provide details over quarterly results and trends, which we will certainly be covering but we will first focus on the unique dynamics of our operating environment, which is of intense interest to you all as the cold in 19 pandemic related loss provisioning and PPP activity all contributed heavily towards Q2 results.

Focusing first on the colder 19 pandemic similar to most other financial institutions, we are seeing indirect impact on a number of areas within our financial results.

From a credit perspective, the environment is challenging and still playing out.

As referenced in appendix half of our earnings release as of June Thirtyth 2020, total loan subject to future deferrals was 1.17 billion or 12.5% of all long portfolio.

This balance reflects a reduction from an actual June deferral amount of over 1.4 billion a certain 90 day loan deferrals have reached their maturity Andy prior to June Thirtyth.

With another 490 million of loans set to reach deferral end dates through July we are actively in the middle of understanding in assessing the current and projected future situation for a lot of these borrowers upon maturity a portion of which we would certainly be expected to request another round of deferral.

Along those lines I'd like to turn it over to Jerry and Rob to provide a brief update on the respective commercial and consumer portfolios.

[noise] varied.

Thank you Mark good morning.

We are facing now what we called second request for Colgate deferrals. They are either for the from some cases for the first time, but in any of those for the second time, It's a second 90 days, which the majority of our first round of deferrals work and that might be other for interest only off a complete deferral and why.

Well, it's probably too early in the quarter to be completely certain it appears that the volume with these requests will be much less than that route one.

When there was so much more uncertainty for our clients.

The early round to request it not surprisingly been primarily from hotel retail real estate owners, which have a large number of restaurants and service type businesses. We've only been recently been allowed to reopen in many cases with reduced capacity.

Some Massachusetts business would close for all of Q2 due to the government is phase reopening plans and.

Small know about where actually we have to remain closed until phase four which may not be too. Much later this fall early in 2021.

I requirements for around two deferrals of much more demanding centered around one.

Where requiring the receipt review 2019 fiscal yearend financials 2020 projections, we're looking for a detailed summaries of current circumstances and justifications for the request, including rent rolls with tenet payment updates on hotels looking for current occupancy in 80 I report.

And then for other businesses like restaurants are gyms, we're looking for sales trends.

We also asking for sources of liquidity.

Status of government loans, whether they be P.P.P.E.D. I know that standards seven day.

We're looking for our loan offices to assess collateral strike and the sustainability of the current risk rating.

And from an approval process all of these require a one off from a normal credit approvals. So many of these are going to our highest level of loan committee approval.

Oh, the findings for the quarter that somewhat mixed some very positive and others less. So for example, I've known as Ive been largely experiencing minimal negative impacts except for a few that a very dependent on students in either the city of Boston are in Providence.

Retail property owners with small retail the personal service tenants are experiencing challenges as many of those tenants have been asking for deferrals of their own rent.

Hotels, it's very interesting for us approximately half of our portfolio hotels, Irene vacation like areas, whether that be Cape Cod, Martha's Vineyard, Nantucket, New Hampshire and Columbus.

Those with those tourist aspects to them I've actually been experiencing some fairly strong to bad as people want to get out.

And so they have seen occupancy rates in some cases up almost up to 75 or more on an average weekly basis percent.

Fortunately those at a more business travel oriented.

Are experiencing occupancy rates more akin to 25% to 50%.

And again, we're about equally split between those two groups.

Our retail automobile boat RV motorcycle deals are reporting strong sales, but a facing inventory shortages, but also they facing solid demand for surface work. So overall they've been fairly optimistic.

Suburban home and condo developers are reporting strong demand for the newly built homes in condominiums, but not facing some construction material shortages in price increases, particularly lumber which has risen.

20% in the last month, the so do the unprecedented bad not only by homebuilders and contractors, but also by homeowner is going to look you know the local home depot and most.

And those contract is that focused on renovations to homes are booked out for months people have been home more discovering things they want to change in the home, adding home offices et cetera. So that's also helping our contract supply houses who surface those contracts.

And then last not surprisingly I portfolio, what could stores are all reporting robust sales I guess, that's not very surprising.

We realize that some of my bars are likely going to need their loans to be restructured to accommodate extended repayment terms in the future and that will be seeking to require them to pledge additional collateral and other guarantees to help them.

Well through those periods of time.

We also have certain borrowers who are going to require additional working capital as they have depleted that surviving the last few months for this purpose. We have added additional resources to our SB eight group to help with the processing of stand it SB seven eight guaranteed loans.

It's Mark commented earlier on utilization rates has made a big impact in our commercial loan outstandings during the quarter.

They have dropped from 48% between Q1 to 38% in Q2, representing nearly 200 million dollar decline in average balances. So the cost it was about left the bank. They just borrowing less on their working capital lines of credit.

Now some of this is certainly attributable to the receipt of P.P.P. money.

Approximately $600 million.

Has been received by our commercial see an eye balls.

And that money is really become at least it a temporary increase in working capital for many of them, though it will be permanent if those loans that together so that excess liquidity has improved their financial position such that they don't need to borrow as much from the bank on the working capital lines of credit.

As the P. P forgiveness process ways, all that may change as some of those may need to be repaid if not given.

And then maybe just a touch upon our loan pipeline a competition continues to be very keen from a smaller competitors, but less so from larger bags, which has really helped us improve terms and pricing a new opportunities and it's also enabled us to expand the requirement the interest rate flaws in minimum minimum all in yields.

Now just to give you a couple.

Facts and our pipeline at the end.

As of June pipeline was up 2 billion won 43, which was up from bad.

And the proof portion of it was a 200 million and again improved from bad.

We were able to close 100 million in new credit in June which is the best month since February.

Yeah, we're able to add 259 million of new opportunities during the month of June and again, that's the best since February a year today closings or just a bit over 600 million, which interestingly enough is only a billion dollars less than it was for 90 at this point India.

And then just to close out of this the majority of a new loan opportunities from Cree bar was mostly looking at refinances have from existing seeing eye customers looking to increase the term bogs I'll, let me turn it over to Rob for some consumer updates.

Thank you Gerry.

In regards to I consumer portfolio federal stimulus programs fairly generous unemployment benefits.

Significantly reduce spending due to coal that delayed tax bills and readily available payment relief.

Have all led to improved consumer balance sheets for the time being.

One need only turn to second quarter deposit growth widespread evidence of the enhanced consumer liquidity picture.

And it just Jim as suggested by robust mortgage banking activity.

Residential real estate values have also held up well today.

And with limited inventory and historically low rates there was no sign up short term weakness.

With the combination of healthy comes from a balance sheets and strong residential real estate values, the underlying quality about consumer portfolios remains quite good.

Average credit scores and ltvs have been stable to improving.

And as reflected in the schedule to our financial statements.

West for payment relief on our consumer portfolios continues to be manageable.

As of June Thirtyth, 8.2% about mortgage portfolio and only 2.6% of our home equity portfolio was in forbearance.

New request for deferral slowed significantly engine.

However, about 70% of the balances of expiring consume a deferral arrangements chose to extend during the second quarter.

We hadn't anticipated that the duration of the shutdown would lead to follow on requests and we are providing the additional 90 days ago leave with little incremental scrutiny.

However, should really be needed. After a combined 180 days of forbearance, we will follow our more structured legacy modification process.

In addition to payment relief just this week the governor of mass extended the state mandated moratorium until closures and evictions to October 17th.

Our states cautious approach to reopening has certainly contributed to the nation's highest unemployment rate.

Fortunately It has also helped keep covert rates comparatively low.

Of course, there was much uncertainty in regards to the cost of the virus its impact on the NPL employment picture should we suffer a level a wave and the availability of additional stimulus within election approaching.

In the meantime, most consumers seem to be on solid footing for now.

Our.

Thank you Jerry Thank you Rob.

Leveraging the information that Jerry and Rob just shared economic forecast assumptions based on the Moody's S. Four scenario and other qualitative factors of our own consideration our provision for loan loss was $20 million in the second quarter compared to 25 million in Q1.

But the deferral programs, providing temporary relief for the majority of customers directly impacted by the pandemic actual net charge offs and asset quality information remain benign through the second quarter.

It's an expectation that the ongoing effects on the pandemic well more directly impact those metrics through the remainder of this year and potentially into 2021.

Similar to last quarter. In addition to the appendix in the earnings release, providing details over alone deferral information Appendix E reflects loan amounts within industries that we view as heavily impacted by the stay in place orders in government shutdown.

All level of exposure to these loan segments, all contemplating the potential release from deferral assistance and the GBP program continues to be the primary factor behind the determination of provision levels for the first two for the last two quarters.

Regarding the PPP program. The company has closed on over 5600 loans totaling 793 million of PPP volume through June Thirtyth 2020.

As a reminder, these loans accrue interest at 1% in a subject to origination fees paid by the yesterday, which vary in percentage amount depending on the loan size.

Approximately 22, approximately 26.2 million of origination fees and total are expected to be earned on the PPP loans closed through June thirtyth with the amounts to be amortized into interest income over the term of the loan or accelerated into income upon full payment and or SPD forgiveness.

Such normal amortization resulted in 2.2 million of the fees being recognized in interest income during the second quarter.

Although we anticipate some level of see acceleration in the second half of 2020, the amount and timing will be driven primarily by the ability of customers to use their loan proceeds in accordance with the program rules to maximize forgiveness as such our best estimate at this point would be to see some level of accelerate.

And amortization in the fourth quarter 2020.

As part of our PPP program. The loan proceeds were required to be deposited into accounts held at Rockland Trust.

With the loan balances still outstanding in the majority of the proceeds still on the deposit accounts the impact of the PPP program on balance sheet metrics and the net interest margin is noteworthy.

Although impossible to identify with precision the amount of loan proceeds still on account, we estimate that at least 80% of P.P.P. funds were still on deposit as of June Thirtyth, and we would expect to see some level about balance attrite as customers utilize the proceeds.

Well P.P.P. driven deposit growth was substantial additional factors combined with PPP activity led to a 1.3 billion dollar increase in total deposits for the second quarter.

The increase in deposit balances as seeing widely across the banking industry as a whole is being fueled by a combination of both business and consumer government stimulus programs loan deferral programs, allowing customers to preserve additional cash and an overall mindset of businesses to prioritize liquidity in the current environment.

With that being said the level of P.P.P. volume and resulting excess liquidity in the form of cash held at the Federal reserve has significantly impacted our reported net interest margin for the quarter.

Within the earnings release, we are provided a basis point path to the notable decline in the margin this quarter with the pressure on loan yields being the biggest factor.

We have also included appendix see in the earnings release to provide insight on the quarter over quarter trend and adjusted in core margins and we plan to continue to provide the small you view over the course of the PPP program.

As noted in the appendix with P.P.P. and excess cash on hand, diluting the margin by four in 19 basis points, respectively. We pegged the quarterly adjusted margin inclusive of purchase accounting adjustments to be a 3.48%.

As a side note we assumed the two previous quarters average cast that cash balance of approximately 1 million 100 million as the baseline and this analysis.

Also excluding all purchase accounting impact the adjusted core margin would be 3.41% for the second quarter, representing a 28 basis point drop from the similarly calculated Q1 adjusted core margin.

With average one month, LIBOR or decreasing 94 basis points from Q1 to Q2, along with the full impact of the drop in prime rate from March the immediate repricing of loans, specifically tied to those indices and overall repricing of loans into this low rate environment have led to a core loan yield compression.

A 43 basis points for the quarter.

That is offset by 20 basis points of relief on deposit costs as total cost of deposits fell to 28 basis points for the quarter versus 48 basis points in Q1.

To help address the rate environment headwinds, we are looking for more opportunities to place interest rate index floors on new variable rate commercial loan volume and with additional cost a deposit release anticipated to also help offset these house it yield challenges, we expect our core margin to compress only slightly over the second.

In half of the year.

To wrap up the discussion over cobot Nineteens direct impact on our results and financial position. In addition to the call that Robyn Jerry provided a custom regarding customer behavior for loan demand. We continue to see reductions in deposit service fees as government stimulus programs and reduced levels of spending.

Have driven reductions and overdraft fees and ATM fees.

Regarding capital management during the second quarter, we completed the stock repurchase plan, which had been approved by our board in October of 2019.

With approximately 1.2 million shares purchased during the first quarter and the remaining 300000. She has purchased in April.

With the stock buyback complete and balance sheet growth driven primarily by PPP activity tangible capital as a percentage of assets was 9.12% as of June Thirtyth 2020.

We believe this level of capital to be appropriate for operating through this environment as we expect future earnings should continue to bright provide support for a sustained dividend and prospective capital growth.

I'll now provide a bit more color over so many other second quarter results.

Second quarter decrease of 300, and Threem 330 million in loan balances when excluding PPP activity is driven primarily by reductions in the commercial and industrial and residential portfolios.

As Gerry alluded to see an eye balances were impacted significantly in the second quarter as line utilization within the portfolio dropped from 48.5% in Q1 to 38.4% in Q2 with decreases across the board and asset based lending floor plan in general see an eye revolver.

Product categories.

In addition, with the challenges associated with the current yield curve in longer term mortgage pricing. The majority of mortgage production continues to be sold in the secondary market, which reduced the level of new retain portfolio loans available to offset the continued paydown activity within that category.

Although the consumer pipelines at the end of Q2 was strong in the approved commercial pipeline sits out approximately 198 million as of June Thirtyth. We anticipate the continued uncertain uncertainty over the business activity with isn't within this environment is likely to challenge loan growth for the second half of 2020.

As noted earlier a number of factors contributed to strong core deposit growth during the second quarter with time deposits continue into run off as anticipated.

Second half of the year deposit balances will certainly be impacted by the timing of P.P.P. funds utilization as well as overall business dynamics as the pandemic I'll look progresses.

As such we expect to see some level of decline from the outsized balances at the end of the second quarter.

And with current cost of deposits already down into the low 20 basis point range. In June we should experience continued relief from deposit costs were should partially mitigate expected for the loan yield compression in the second half of the year when compared to Q2 results.

On the borrowing side with on balance sheet liquidity at historic highs the company pre paid $200 million a federal home loan bank borrowings, resulting in a 389000 prepayment penalty included in other expenses in Q2.

In addition, we made at 37.5 million prepayment on our outstanding 75 million term debt that was obtained as part of the 29 team Blue Hills acquisition financing.

These June pay offs will further decrease interest expense going forward when compared to Q1 in Q2 levels.

Turning to noninterest items, a few highlights to note in the second quarter.

For noninterest income as noted previously deposit service charges and ATM fees were negatively impacted by the covert 19 pandemic while interchange revenue showed signs of rebounding in June.

As a reminder, the Durbin amendment impact from our crossing the 10 billion asset threshold will come into effect in Q3 and is anticipated to decrease interchange revenue by four and a half to $5 million over the remaining second half of the year.

With a sharp rebound in the market in the periodic annual bumps due to tax return preparation fees investment management income increased 6.8% quarter over quarter as assets under administration increased by 10% to 4.4 billion at quarter end as compared to Q1 quarter.

Mortgage banking income also rebounded nicely in the second quarter stabilization of the secondary market combined with a strong demand led to a significant increase in income quarter over quarter.

And with the June Thirtyth pipeline of 268 million origination activity is expected to remain strong through at least a third quarter.

Also continuing to serve as a natural hedge against the low rate environment loan level derivative income remained elevated at 2.9 million for the quarter, though down slightly from the prior quarter.

And regarding other noninterest income games on equity Securities were up 1.4 million compared to the prior quarter offset by 460000, a flow through losses from small business investment company funds decreases in cash collateral interest and other miscellaneous items, reflecting quarter over quarter decreases run.

Regarding noninterest expense, while there were some minor quarter over quarter variations in certain expense items overall noninterest expense was essentially flat with the prior quarter and as we looked out into the future as Chris mentioned, we certainly will look to leverage learnings from this pandemic to identify potential opportunities to drive.

Operational efficiency, while not losing sight of the importance of continuing to invest in initiatives to promote long term sustainability.

Lastly, the tax rate of 23.8% for the second quarter returned to a more normal level was slightly lower than anticipated primarily as a result of updated assumptions over the timing of P.P. fitting fee amortization.

That concludes my comments and we will now open it up two questions.

Thank you we will now begin the question and answer session.

To ask your question Mcgrath Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before passing the.

If at any time. Your question has been addressed you would like to withdraw your question. Please press Star then.

Our first question today will come from Mark Fitzgibbon with Piper, saying. Please go ahead.

Guys good morning.

Oh remark.

Couple of questions I'm in the press release in the table you have their appendix out I saw that it references 68 million of other deferral types, not principal or interest what what kinds of deferral types would those be.

I believe <unk> those are primarily just some some term a adjustments and not necessarily payment deferrals.

Okay.

And then I was curious Jerry in in your estimation, which industry segments. Do you think have the potential to have the most loss content for banks in general not specifically you guys, but you know which sectors you soda envision they're being potentially the most loss content.

But just to go back to one thing on that all the question are included in there was some floor plan. So what we did with dealers mostly used car dealers week, we basically allow them to curtail their normal curtailment payments on aged inventory and that deferment has now passed so going.

So your question, which is difficult to answer I would say in no particular ought to obviously the restaurant space is under a lot of pressure you know there's different stories in the country. The talking as many as a third of the restaurants in the country could close I think hotels will be especially those based on business travel.

Which there isn't much going on and depending when there is a vaccine or therapy or they'll be challenged until that time, and then it's probably to retail where there's such a bankruptcy rate, particularly for malls I would think will be the most challenged so I think those probably the three.

Well okay.

And then I guess I was curious you know how were the non for profits managing through the crisis, you know as their <unk> raising completely dried up and they're more challenged or curious what you're seeing there.

Well interestingly enough and I'll speak my personal experience I'm on a number of boards nonprofits and a couple of them actually you've been able to raise more money this year than ever in the history. It seems that you know a lot of people.

It looks like people that tend to be philanthropic I, realizing the pain that nonprofits facing and are willing to shift some of their personal wealth to help them BYD over now many of the nonprofits, where we're able to avail themselves of P.P.P. money, which is the first time dsps he's ever been able to provide support to not profits.

So I think it's not a combination of P.P.P.C.

<unk> Furloughs, and then some increased charitable giving.

Okay, and then lastly, I assume that the quality of the new loans that you're booking today is it probably on average after a bit better than the existing portfolio would you agree with that you are you being more stringent with your underwriting today than you you were saying the path.

Right I think I, probably didnt say enough about at my comments, but yet to it really two ways, we've been able to institute stronger floors on Weibo, a prime and we've been able to negotiate lower loan to values are fuller guarantees.

More covenants et cetera, so you're absolutely right, that's given us, particularly on the larger side as I meant in my comments still the smaller banks haven't changed their practices as much as the lodge bags, which has given us that opportunity.

Great. Thank you.

Welcome.

And the next question will come from David Bishop with D.A. Davidson. Please go ahead.

Yeah, good morning, gentlemen.

On a day Oh, Mark just circling back to the the initial commentary in terms of the deferrals that I just want to make sure I understood that's right.

As of June Thirtyth about 1.17 billion correct.

In deferrals and I think I thought I heard you mentioned another $400 million.

Potential right, that's why I I wasn't clear up it's like 1.5 billion under differ or or about 1.17 for billions and process.

Sure as it will provide a little bit of clarity there. So the 1.17 billion referenced in the earnings release.

Are we going to be that the active deferrals as of June thirtyth someone else since that as the volume that will result in a deferred payment in July.

The build up of deferrals over the course of the second quarter and in this references back to our disclosure in the first quarter 10-Q, we actually processed and had approximately.

Peak level over 1.4 billion of total deferrals and in the month of June and approximately give or take 250 million of that had their Alaskan deferral in the month of June which gets you to the 1.17 billion as of that point in time June thirtyth that would be subject to a future deferral.

Oh, the 480 million dollar number that I referenced in my comments is just insight into all of that 1.17 billion. How much of that book will have its last deferral payment in July and I think that it's just combined with some of the activity that we've already seen roll off in terms of first deferrals.

Request, you know a portion of those will certainly come to us looking for a second request. So I just wanted to give some of that color into the more immediate run off of what will be reaching their first their first deferral and date and what will be looking out over the next month or so in terms of potentially second request. So.

Does that help clarify Dave.

Sorry, Dave are you still there.

Yeah on their sorry, I had a mute a yet as you sort of go through that process and your relationship managers are reaching out to the to your clients in your bars any sense, where you think that that will not seek oh.

A second round the deferrals that I know, it's tough to hedge but we're seeing some of your peers and the 60, 70% range just just curious.

If you had a guesstimate.

I think Jerry I alluded to it a little bit in some of his comments, but as you point to it is a bit of a challenge at this stage of the process too.

See if this is truly a trend, but as we sit here today, where we're seeing in terms of.

Units, a a meaningful decrease and.

How much of that first deferral portfolio is now asking for a second deferrals. So we've actually only seen evidence of somewhere in the into 15% to 20% range in terms of number of units. The dollar amount is higher than that and to your point, we haven't quite reach that level that you referenced but we.

We're seeing in the 40% to 50% range in terms of the dollar amount and I think that goes back to Jerry's comments, where a lot of the second deferral requests that we've experienced so far but some of the larger relationships in our accommodation in foodservice industries, which typically have higher balances in terms of that overall portfolio.

Well said so.

Certainly something you know will be monitoring closely and as I mentioned, we anticipate a.

Meeting the needs of second deferral or <unk> request for for some of these borrowers, but it's been an interesting dynamic in terms of the unit versus dollar ratio on that I just mentioned.

Yeah, Mark that's always been consumer for the consumer portfolio it's been.

So far through the second quarter, 70% of the balances have chosen a second 90 day deferral, that's a combination of mortgage and home equity.

Yeah.

And Rob do you sort of attributed that I think you alluded to just that the high unemployment rate in the state or just the bar just trying to take advantage and more liquidity as much as possible just curious.

Yeah, I I think it's probably a combination of those two things David a little bit uncertainty, maybe still on the unemployment or maybe not failing completely secure they've just gone back to work.

And also the fact that on the consumer side, you know, we're putting up very little resistance to a second 90 day modification, we're making it pretty easy on them.

So it will be really though the third round that will be most telling a where we'll begin to institute our historical.

Quantification or restructure framework, which requires additional documentation will be tailored plans to the individual borrower that sort of thing. So I you know I don't read too much into that 70% number at this point.

It's still a lot to learn.

Got it and as we look at the the loan loss provision you know obviously remains elevated with the uncertainty out there just just curious in terms of the the model inputs. There what do we need to see to really start to see material decline to that as it is that a decline of the unemployment rate.

Increase in state GDP age I know, there's a ton of inputs there, but I'm just curious what what are sort of the book would be maybe one of the one or two of the material drivers to really a show a material decline and that that number.

Yeah, I think it's certainly an interesting question in terms of how we've had to approach.

The build up to date, you know a lot of the models or does that have been built in ours in particular.

This is heavily driven off of asset quality metrics and given the unique aspect of this environment and in some of the.

You know relief that we have from a regulatory perspective, a lot of that impact isn't necessarily reflected in the data inputs. So you're not seeing meaningful increases in NPL days or or even levels of net charge offs that would really influenced the model. So a lot of it has really had to a lot of what we've had to do is be very.

Much dependent on our insight into the at risk industries, taking a look at what some of our historical Mack loss given default rates have been we've done some stress testing over probability of default on where we consider there to be more at risk you know the industry's Jerry alluded to.

In the first question raised and where we've seen some of the deferral activity. So that's really been the backdrop of how we've built.

The model than in what I call. The qualitative aspect of the provision in that we put up so far.

So I think weve take we've taken a pretty conservative approach on that and we've anticipated.

Got you know some level of these.

Hi risk industry exposures in deferral requests you know certainly lead to nonperforming assets and potential loss, but I think where we stand today, we've tried to capture.

A pretty reasonable outlook on that expected transition to to lower quality assets and I think we'd have to see you know really a meaningful deterioration and asset quality or economic activity to suggest you know provision levels would continue to increase out these levels.

So I think.

All things being equal and knowing the approach we've taken through the second quarter I would anticipate you know we start to trend down on provision, but again I touched out with the caveat that certainly if we start to see levels of NPK user or movement to enhance criticized and classified levels outside of what weve out.

Do you expected in the model today that that could lead to elevated provisioning.

Okay got it appreciate the color and one final from me a Mark you noted a on a core basis or potentially a a few basis points here there in terms of NIM compression or what they used to using that offers that the 341 or 348 sort of a core net interest margin on the pending.

Yeah, we're just saying hey.

Yeah, I'd say, both I think the 340 aiding is just really inclusive of purchase accounting and that has been a bit volatile quarter over quarter. So I think if we had consistent levels of purchase accounting I think you'd still see a few basis point decrease off about level certainly.

Off of the core margin that we disclose in terms of the 341%.

I'd say, that's probably more of a pure our outlook that excludes some of the volatility of purchase accounting and it really just reflects.

It was probably stating the obvious but just due to continued.

Reinvestment into this lower rate environment, we do have relief on the deposit side that we've already made changes there and I mentioned the cost of deposits that we ended the quarter with being in the low 20 basis point range. So we should see relief on the deposit side into the third quarter two.

Offset the asset yield challenges, but I'd say you know all in all we still would expect Oh, some level of come of compression over there the second half a year.

Would you see some of that excess cash going to utilize that figure, but <unk> point 1 billion or so is that sort of.

I don't know how much that are expected to flow out with some of that's a district or you know certainly I think in terms of knowing a a significant portion of that is associated with P. P. P. I would expect to see that right now and to be honest, we were a bit surprised to see how much of that deposit was still.

On a constant through the end of June and I think that may just be a reflection of the changes in the government program and the extension of customers to utilize those funds going from eight weeks to 24 weeks.

But we were we were honest, we expecting to see a bit more of that money outflow. Shortly after the loan was issued so I do think.

All things being equal we should see a portion of that 650 million or so of deposits associated with <unk> start to run off in the third quarter and then in terms of other excess cash. It's just a challenging environment of where to put that money to work you know weve certainly seen some deep.

Creases, when our securities portfolio and there's been a.

Hesitation with with the rate environment to invest meaningfully there, but I'd say you know that that's likely in the area. We'll have to do some at a level of additional purchasing here in the third quarter and you know I think when you look at the loan book and understanding some of the dynamics that drove the decrease as we saw Saar in the second.

Quarter, such as you know meaningful drops and in line utilization.

We have a cautiously optimistic view over you know some of that business activity coming back in the third quarter, we hope to see some level of increase maybe in the line utilization and in loan volumes to use up some of that cash as well but.

It will.

Certainly be a challenge to deploy that cash in any meaningful way over the second half.

Got it thanks.

The next question will come from Laurie Hunsicker with Compass point. Please go ahead.

Hi, Thanks, good morning I'm.

Just staying with that that question a margin here I just want to.

Make sure that.

I'm thinking about the right way. So if you look at your accretion income.

During the fourth quarter. It was 19 basis points and then it was four basis points in the first quarter now seven basis points. So to your guide.

Does that include more of that 78 basis points or does that include more of a three four basis points.

All right here Guy just solely on the core excluding accretion and then I guess the follow on question I'd be how do you think about accretion for the back half that this year.

Sure I'd say the guide is is based off of the core margin I guess would be the more simplistic more simplistic way to view it although I don't anticipate.

Yeah, any meaningful variations from the loan accretion we saw it in Q2 <unk>, that's certainly been a tough number to predict.

And to your point it was a little under $900000 in the first quarter up to $1.6 million in the second quarter.

So I'd say in that range, obviously acknowledging that that can be a pretty wide range, but.

I think if you assume purchase accounting accretion in a million to million and a half range I think that would keep the purchase accounting impact relatively stable quarter over quarter.

And the few basis points compression would be applicable to both that adjusted margin and core margin level.

Hi, Thanks, and then quickly here on tax rate, obviously, lower should we be using closer to 25% or how should we think about that.

Yeah, I I'd say, given the level of provisioning, but we've got we've pushed through the through the first couple of quarters. I think you can you can dropped out to two more on the 24.5% range.

Okay.

And then I guess my question Mark or Gary.

Looking at the at the hotel senior deferrals or 62%.

Much of those go out 180 day.

[noise] onto itself, if you haven't or how many have already done oh stuck into problem or class. So how many are you will uh huh.

Well Laurie.

Jerry I, just so we only granted.

PNR deferrals of up to 90 days.

In the first route.

Got it so and then <unk> and so in the second round it would only be an additional 90 days that answering your question.

Yes, sure as and then.

I mean, I guess, because well maybe most of them are coming on in the next week, but I guess I've you're on your 256 million uptick morale how much of that are acting that require.

Another 90 days flat.

Oh I would I would think on the hotel side, you know probably 80%, although what's interesting we've actually had some already tell us not with with that and as I mentioned earlier it was a little surprised by that because they're not even in vacation areas. So it's it's really.

Yeah. My suspicion is most wanted because they want to be cautious, which I understand but they're up some of them telling us that they think they use those are the vacation areas. They think that you will be okay. The once dependent on business travel are going to have a very difficult year and I'm sure. We're gonna have to restructure <unk> co.

Ross Collateralize get additional guarantees and have to do something to get them through even after the period of deferrals because business travel is not coming back.

By September.

Yep Great. You then you had mentioned roughly 50% of the airport and 15 million dollar back with Nike sense, what Cardioband ads like you called Sarah business capital.

Well the team.

That's the hot and number two really try to get out and we've we've struggled with it because what's interesting.

The remaining ballots I would simply not in vacation locations. So they're not in the once I shared earlier, but they some of them I've near Boston for example, in Iraq still tourist groups coming to Boston.

So they do have some of that but that the remaining as approx almost all flag Marriott's <unk>, you know hilton's hi, its stays in that type there.

I would say probably you know all of them probably business travel is at least half of what they normal revenue would be but the remainder would be people related to staying in the hospital in many of them have business. You know that's sourced from people having HOSMAX stands at hospital stays as I said tourist family gatherings, we've actually interestingly enough.

Had a few leave it on places like Brockton that have told us that backup to no 70% occupancy rates and they don't they the August seek deferrals. These again a family owned hotels, but they didn't need any further deferrals. So it's it's it's somewhat surprising the ones that are actually.

I'm doing baby, great, but doing okay.

Very interesting period.

Okay, and then just sort of one final question. How are you seeing any that again don't break into the vacate Gary that maybe there clicks University youve seen any universities, you any kind of that I pick up on that on the town or is it just too early to figure that out.

Yeah, I I've heard those stories as well I think it's still too early to determine if that doesn't materialize. It may because they're trying to look to spread people out so, but we have yet to see it materialize.

Okay. Thanks for taking my question.

Welcome.

The next question will come from Collyn Gilbert of KBW. Please go ahead.

Thanks, Good morning, everyone.

One I'm just stick to the credit conversation, which.

You know again to tell you got Ragnar precedence, it's great Super Super Good detail. Thank you for doing that but I'm sure I know what the tough question, but just given what you know now the level of sort of granularity in beginning the down into the portfolio and all the movement that you've seen.

Do you have a sense of kind of where you think near term net charge off could pool.

And I know what the I know what the hard question, but more just based on what you know now.

Just sort of curious in just a general range, where do you think losses could go.

Yeah that is a tough question I mean by my gut Instinct tells me that the peak is probably going to be.

You know beginning sometime in the fourth quarter 20 through Q2 in 21.

As my guess that's three over those three quad is somewhere in there is my suspicion is the peak.

Just a suspicion.

Okay.

And so I guess.

Follow that up I mean, given that you're sitting at zero right now I mean, the magnitude of change.

Yeah, I don't know I did say I know, it's a tough question, but I just would just trying to get to sort of figure out what.

Ultimately the losses will look like.

Yeah here I mean bid.

Some color, they're calling in and sorry, Jerry you don't need to interrupt, but I think you know the the challenge for us in it and not to bring this back to see some modeling, but we've been.

You know leveraging history in charge off activity and loss given default from historical crisis. It you know, that's where there's really a challenge because this environment certainly doesn't reflect the experience we had through the owe a crisis I'm so as much as were.

Trying to leverage that that information and understanding of where we saw sort of peak charge off levels in the past I think trying to correlate that to this environment in taking into account.

P.P.P. relief in differ release, you know it adds an element to it that certainly doesnt equate from to apples to apples comparison, but you know I think.

It is some comfort in knowing that we did try to leverage as much of that in the first quarter analysis of providing for loan loss and what I mean by that as we've we've really looks too.

Where we see risk in the portfolio and looked back to our history of where we had max loss given default rates.

And we've leveraged that data combined with stressing probability of default assumptions.

Sometimes you know upwards of 50% to 75% of what the model suggests PD is based on economic data. So.

No I think we've taken up a pretty conservative view over understanding historical net charge off peaks in loss given default rate and that's really been the backbone to how we determined our provisioning through the first couple of quarters. So.

I think that's as best as Weve been able to try and think about where charge offs could go in the next three or four quarters as Joe you alluded to but I think.

He did the nuance of this environment in some of the other external factors and just really how broad in widespread the risk could go it it makes it a unique in much different environment than than what we've gone through in the past.

Okay. Okay. One last question I'm kind of apartment that the balance sheet. So just curious it looks like you had about 4.5 million of encase start kit returned to payment. This quarter, just just curious what that dynamic like around those credits or what what drove that.

Yeah to be honest, calling it has to look at up to.

The relationships involved there.

The top of my head I believe.

These me if I may have just been pre relationships where.

Some of that.

Short term challenge what was able to be.

Matt and they've got back onto a good footings, but I don't have the the specific relationships in front of me. Unfortunately.

Okay, No way [laughter], Okay, I know mark just shifting to the balance sheet right. So.

Just curious.

Two things one is where are your new loan originated.

Loan origination yield coming.

Yeah, not not surprisingly has to do there the down meaningfully through the second quarter and if I take a look through.

The different portfolios I can give a little bit of insight there, but on the see an ice space.

Yeah as you can imagine what were down in a low 3% on average similarly with Cree, we have tried to.

Look to implement as Jerry talked about floors, and especially on our fixed rate volume on the Cree side.

We've looked at floors of three and a half to to 3.75, depending on five to 10 year maturity, but with some of the variable a especially our swap book as you know is based off of one month LIBOR pricing.

That Ah that results in many loans being executed sometimes you know and in a sub 3% or capacity. So on average our our new volume on the Cree side, I'd say was right around the three to low 3% in second quarter construction, we typically get to see better spread.

And better pricing there so we've been able to see new volume come in there or in the low 4% range and then on the consumer side or just a reminder.

We talked a lot about on the on the significant mortgage production most of that is being sold and those that we are retaining and portfolio are typically better quality and and certainly better priced volume in the mid 3% range in this environment to date, a similarly on the home equity side.

You know, we've been able to to keep raising the.

In the mid threes, there. So I think when you look at the entire portfolio as a whole we've probably trended down into the you know the 325 range kind of on a on a weighted average.

But again, not surprisingly given where the overall absolute levels of rates have gone.

Okay, Okay, and then just.

Lastly, you know again, obviously a lot of liquidity Delta here actually lastly, now there's two ways one.

Just look what did he and I know, it's an uncertainty as to how the PDP loans are going up or going to move for the PBT deposits are going to move back is there more to do on the borrowing side. If you sit in the fact that cash position for a while it isn't more to pay down the borrowings that I know you reference you.

Thank you didn't generate even beyond that.

Yeah, well, there's there's not too much left on the wholesale barring side, we do have a portion of brokered Cds that will set to run off over the second half of the year I believe that's about 60 million and brokered Cds those were some levels of activity that had come over with the.

Mission and have a pretty sizeable right on them up in the in the 2% range.

The the term debt at the parent company that I talked about we had paid off half of that which is 37 and a half million. A we do we will continue to look to see a if we can pay off more if not all of that here in the second half.

And then in terms of FHLB borrowings that it really doesn't leave a whole lot more and you know a 100 million plus.

Reminder, that that 100 million of that was swapped out and fixed.

So you know we could.

Look to exit some of those relationships, but I think you know what the determined that opinion being paid down potentially and some of their run off on the remaining brokered CD.

That should certainly help the cost of funds picture, even more than than what we did just on rack rates for deposit levels.

Okay. Okay, and then just lastly on on the TPP.

No it's hard to determine that just for for us for modeling purposes, any sense of what we should assume or what you guys are assuming on kind of a forgiveness schedule.

The next you know in over the third and fourth quarter.

After that.

It's the the magic question that we're trying to get our arms around as well I'd say no based on what we know now in the level of you know the split between some of the size relationships that we executed and if you've been following the program you know there's anticipation that loans under 150.

Thousand would be sort of a one page application and hopefully a much more smoother.

Avenue to get forgiveness. So you know if we would hope to see that that the bulk of those loans of which we did you know probably 80% of our volume over a much smaller loan sizes.

No. The goal in the hope here is that we see most of them be able to get to a level of forgiveness in the fourth quarter, maybe some of the the larger relationships I'm, Mike Mike Trail off into 2021, but you know I've been you know we've been talking well just doing some modeling here internally that.

I guess would assume it maybe 75% of the overall TPP production.

I would hopefully get to a forgiveness stage by the end of the year and I think the bulk of that would be in the fourth quarter.

But again, that's really just speculation based on that sort of reading, what we're hearing from that customer base.

Okay. Okay, that's great I leave it there thanks.

<unk>.

This will conclude today's question and answer session I would like to turn the conference back over to Mr., Amit Singh for any closing remarks.

Thank you Sean it. Thank you everybody for joining us today and all the fast too long and we look forward to lump.

Talking again three months.

Again, because I.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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