Q2 2020 WesBanco Inc Earnings Call
Good day.
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Second quarter 2020 earnings conference call.
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After today's presentation, there will be an opportunity to ask questions to ask a question.
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I would now let's turn the conference over to John I know senior Vice President Investor Relations. Please.
Thank you Sean Good morning, welcome to Wesbanco Inc.'s second quarter 2020, <unk> earnings Conference call.
Leaving the call today, our Todd Clossin, President Chief Executive Officer, and Bob Young Senior Executive Vice President and Chief Financial Officer.
Today's call an archive of which will be available on our website for one year contains forward looking information.
Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings related materials issued yesterday afternoon.
As well as our other FCC filings in Investor materials.
These materials are available on the Investor Relations section of our website whats Banco Dot com.
All statements speak only as of July 23rd 2020, and Whats Bank undertakes no obligation to update them.
I would now call over to Todd Todd.
Thanks, John and good morning, everyone. Appreciate your join us on todays call.
Well, we're going to briefly resumed review the results of our second quarter 2020.
And provide an update on our ongoing efforts during the covert 19 pandemic.
He take waste Nicole today are.
We remain well capitalized financial institution with solid liquidity and a strong balance sheet.
We continue to focus on the health and safety of our customers in our employees.
The integration of old one bank continues to go well and we have achieved the post conversion expense saves as planned.
We believe we are well positioned for the current operating environment with sound credit quality diligent expense management efforts.
Comprehensive range of digital offerings.
Our underlying performance during the second quarter was evidenced by strong year over year growth of 15.7% to $66.8 million in pretax pre provision income excluding merger related expenses.
This strong performance was highlighted by tightly controlled discretionary costs.
Record originations in fee income in our residential mortgage program.
And year over year organic growth about half a percent when excluding loans funded through the small business administrations payroll protection program.
Our credit quality trends remained strong due to our legacy a prudent lending standards. This inherent strength of our company is evident when compared to all U.S. banks with total assets between 10, and 25 billion as we have better credit ratios across a number of key measurements, which can be seen on slide 13 of our earnings press.
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Furthermore, we continue to maintain strong regulatory capital ratios, which remain well above well capitalized standards.
As I mentioned during last quarter's call.
We successfully converted all wind bank into our new mid Atlantic market on February 21st of this year and achieve the anticipated cost savings related to that integration by early April.
Encouragingly the integration has gone very well as we continue to experience good customer in employee retention and remain positive about the long term opportunities in our newest market.
We are monitoring the virus trends across our footprint and remain focused on the health and safety of the entire west Banco family, our customers and employees.
We routinely review our policies and procedures to ensure they meet the highest level of safety standards. As we have since March we continue to stay safe serve our customers through both our drive up facilities and be appointment and our branch lobbies.
I'm proud of the entire organization as it has worked tirelessly to help our customers and communities and our efforts have not gone on appreciated by our customers as we have received quite a few positive comments across our organization.
I'm also pleased dimension that West Bank a bank was recently named for the second year in a row, a world's best Bank by Forbes magazine.
The second annual ranking is based upon customer satisfaction and consumer feedback and he received very high scores for customer service financial advice general satisfaction and digital services.
I'd like to personally thank our employees for their hard work and dedication and congratulate them on the job well done.
In mid March West Bank. It was one of the first banks to launch a number of initiatives to help mitigate the impact of the unprecedented covert 19 virus outbreak, including offering mainly 90 day payment relief options to affected borrowers and participating in the SP A's payroll protection program.
We have received hundreds of letters and messages from grateful customers and community based organizations. Since most of these deferrals were made from mid March through early May we're beginning to enter a timeline when customers are coming off of deferral status. In fact, we've seen a reduction in the amount of loans receiving payment deferral as a significant majority.
Of those customers are not requesting a second deferral.
As of July Twentyth loans, receiving relief represent 15.9% of loans were 17.2% of loans when excluding PPP loan balances.
We have long had a robust platform of digital banking service, including digital Bill pay P to P payments mobile deposit and online residential mortgage applications.
Posit account opening small business own application capabilities again, just to name a few of our capabilities on the digital side.
Reflecting the realities of the current environment, we have seen increased utilization of our digital channel products by our customers.
This combined with the other mitigated success of our employees working remotely we anticipate accelerating our branch optimization strategy during the second half of this year.
I look forward to providing more details on that on next quarter's call.
Before I turn the call over to Bob I'd like to make a few comments on our diversity and inclusion efforts for many years West Banco has been a leader in its communities and we want to continue to take a leadership role by noting our stance.
Quality.
As CEO I'm looking internally and constantly reaching out to my team members in hopes of having constructive dialogue within our own company on the subject of inclusion.
In addition to our existing women's symposium events, we are adding a diversity and inclusion council as an added resorts and a positive catalyst for how we conduct business.
This program focuses on employee development education and community outreach.
Our hope is that not only helps us evolve and grow as a company, but that also spreads to all of our other community based efforts.
In fact during the past year alone Whats Banco has made approximately $1 million philanthropic donations in support of our communities and this is an addition to the approximately 600000 of pandemic related grants, we distributed organizations across our footprint.
To effect change we missed all lead by example, as a company we are focused on being leaders in our markets personally I'm, reaching out to all the mayors cities across our footprint and asking them to include Wes Banco in Communitywide discussions on how corporate America can help move the country forward.
We will strive to be transparent in our efforts and our activities around diversity and inclusion and that includes being the example first.
I would now like to turn the call over to Bob Young our CFO for an update on the second quarter's financial results Bob.
Thanks, Todd and good morning, everyone.
During the second quarter of 2020, we experienced a continued declining rate environment due to the 150 basis points of cuts in the Federal reserve short term interest rates during March and continuation of the limitation on interchange fees for large banks about 10 billion total assets.
And the deterioration in the macroeconomic forecast, which as required by the new car unexpected credit losses accounting standard otherwise known as Cecil negatively impacted the provision for credit losses.
Merrily, reflecting cecil's embarked on the provision for credit losses in the current pandemic driven environment, We reported GAAP net income of four and a half million and earnings per diluted share of seven cents for the three months ended June 32020.
And GAAP net income of 27.9 million.
At earnings per diluted share of 41 cents for the six month period.
In order to provide better comparability to prior year periods and to demonstrate the strength of our underlying second quarter results. It is important to evaluate pretax pre provision income excluding merger related costs.
For the second quarter 2020, we reported 66.8 million in pretax pre provision income excluding merger related costs, which increased 15.7% and 7.8% compare to the second quarter of 2019 and first quarter of 2020 respect.
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In addition, we reported strong second quarter pretax pre provision returns on average assets and average tangible equity of 1.61% and 19.47% respectively.
We believe our strong balance sheet is well positioned for the near term operating environment as we proactively addressed our various lending portfolios in order to more properly balanced risks and rewards during the last few years.
When excluding the old line Bank acquisition, which primarily drove the year over year increase in total assets and total loans total organic loan growth for the second quarter was 11.3%, reflecting both loans funded through the SBH payroll protection program and organic growth in commercial unresolved residents.
<unk> real estate loans of 3.9% and 1.6% respectively.
As of June Thirtyth, we have added thousands of current and new business customers by funding more than 6800, TPP loans totaling $837 million.
Furthermore, reflecting strong demand deposit growth, we continued to strengthen our balance sheet by reducing higher cost certificates of deposit and federal home loan bank borrowings, which declined 6.7% and 28.8% quarter over quarter respectively.
Total organic deposit growth excluding certificates of deposit.
It was a strong 20.3% year over year, reflecting the cares act and PPP loan deposits delay tax payments and stronger personal savings rates.
As Todd mentioned, we were one of the first bags to proactively assist our customers with various loan deferral initiatives. The majority of which were for 90 days during the early stages the pandemic.
Over the past 30 days as we have moved past that initial deferral period for many of our customers. We have seen the overall level of deferrals decreased by more than $300 million and we're not yet, saying a significant number of requests for a second round of deferrals.
Our long term lending strategy is built upon balanced and diversified loan growth across both our six state footprint and various loan categories, while adhering to our prudent credit standards.
On slide five of the supplemental presentation. We filed last evening, we provided an update on certain commercial loan categories disrupted by the pandemic.
Including hotels restaurants, retail and energy, which combined represent 16.7% of total period end loans, including PPP lots.
As you can see across each of the categories, which are detailed on slide six and seven there is good diversification and granularity but.
The loans in our hotel portfolio, our two well known seasoned hotel flags and operators across our footprint.
With an average loan to value of 56% and debt service coverage of one.
0.6 times.
There are no outsized loans in these portfolios in fact, the vast majority of loans across retail restaurants, and direct energy average less than 1 million.
Furthermore, within our retail portfolio, the largest subcategories as a percentage of total loans, our commercial real estate loans for strip shopping centers with anchor tenants like grocery or other central stores or standalone buildings like pharmacies.
Turning now to our credit quality measures, which are highlighted on slide 13 key metrics such as nonperforming assets past due loans criticized and classified loans and net loan charge offs as percentages of total portfolio loans remained at low levels and favorable to peer.
Bank averages in this case peer banks are those with total assets between 10 and $25 billion.
For the prior four quarters and consistent with prior years.
Reflecting the adoption of the Cecil accounting standard earlier this year the allowance for credit losses specific to total portfolio loans at June Thirtyth was 168.5 million or 1.52% of total loans or when excluding the ASP PPP loans 1.65.
5% of total portfolio loans.
The increase in the allowance and related $62 million provision for credit losses was related to the continued deterioration in the macroeconomic forecast during the second quarter of 2020.
Primarily driven by the negative forced forecasted economic impacts.
Hope at 19.
This forecast, but based upon a blend of two nationally recognized economic forecast published in June is primarily driven by national unemployment and interest rate spreads as well as.
Other various qualitative factors.
Key information and measures effecting this quarter's provision can be viewed on slide 14 of the earnings presentation. I would also like dimension that there's an additional $11 million accounted for in the unfunded commitments liability.
Moving now to net interest income in the margin as we're seeing across our industry net interest margins are being negatively impacted by the cumulative 225 basis points of cuts to the federal reserve boards target federal funds rate since July 2019, as well as the relatively flat yield curve, reflecting this.
Significantly lower interest rate environment, we have aggressively reduced aggressively reduced our deposit rates in particular higher price Cds and shortened to maturities and lowered rates in our borrowings.
Partially offsetting lower earning asset yields which reflect materially lower yields on new or reprice commercial loans as well as the negative two basis points impact from PPP loans this quarter.
Excluding the purchase accounting accretion benefit of 19 basis points. Our net interest margin declined 36 basis points from last year, and 22 basis points from last quarter to 3.13%, which was consistent with last quarter's outlook statement.
On the subject of the fee revenues noninterest income for the quarter ended June Thirtyth 2020 was 32.9 million, an increase of 5.5% year over year and 17.3% quarter over quarter.
The primary drivers of fee income growth, where mortgage banking fees and commercial loan swap income, partially offset by lower electronic banking fees due to the Durbin amendment to the Dodd Frank Act mandatory limitation on interchange fees as well as lower service charges on deposits due to higher concern.
Consumer deposits from.
Personal savings as well as overall fewer transactions and and limited consumer spending experience during the quarter.
Reflecting the current low interest rate environment, and and organic growth mortgage banking income was seven and a half million during the second quarter due to record one to four family residential mortgage origination volumes up 368 million half of which were sold into the secondary market and also of which approximately 55.
With that.
Were related to mortgage refinancing.
We continue to balance disciplined growth and important technology investments with a fundamental focus on expense management in order to deliver positive operating leverage and enhance shareholder value.
Total operating expenses, excluding merger related cost for the second quarter of 2020.
Of 85 million continued to be well controlled and lower than expected.
With resulting lower efficiency ratio of 55.57%.
As well as a decrease in these expenses were 1.3% from the first quarter.
This reflects the anticipated cost savings from the old buying bank merger and effective discretionary expense controls enacted early in the pandemic.
Salaries and benefits were somewhat reduced this quarter by lower incentive compensation accruals and deferred costs on the PPP loan program originations as well as lower health care costs.
For 150 years, the banks management is focused on being a strong and sound financial institution for our shareholders.
While our regulatory capital levels remained strong during the great financial recession, a decade plus ago, there even stronger now as we have regularly reported capital ratios significantly above both regulatory requirements and well capitalized levels and we have grown tangible equity to 9.09%.
We remain focused on appropriate capital allocation to provide financial flexibility for the foreseeable future.
Well I'll now turn to our current outlook.
With an operating environment that continues to be unprecedented it remains difficult to provide meaningful earnings expectations for the rest of the year.
That said I would now like to provide some limited thoughts on our on our outlook.
As a somewhat asset sensitive bank, we are subject to factors expected to affect industry wide net interest margins in the near term, including a relatively flat spread between the three month and 10 year Treasury yields.
The up 150 basis points of federal funds rate cuts.
Experienced in March and a continued overall longer term rate environment for at least the next one to two years.
Our GAAP net interest margin for 2020 may decrease by a few basis points per quarter due to lower purchase accounting accretion from the 19 basis points that we recorded during the second quarter.
Declining asset yields should be partially offset by the aggressive pricing actions, we've taken and are continuing to take on our deposit costs along with continued borrowings reductions.
We anticipate our second half of 2020 core net interest margin.
Excluding accretion from both purchase accounting and PPP loans to be down a few additional basis points from 3.13% during the second quarter.
However, we also anticipate margin accretion over the next few quarters as PPP loans are for given by the SBK.
And as net deferred fees on such loans are accreted into income.
We will maintain our focus on diligent expense management and delivering positive operating leverage.
While second quarter salaries and wages reflect the plan to personnel cost savings from the old buying bank acquisition typical mid year Merit increases our effective late second quarter through mid third quarter of 2020 across an employee base that now includes our mid Atlantic region.
We have delayed the implementation of up to $2 million and plan to 2020 brand awareness and other marketing expenses into 2021 and expect marketing expenses during the second half of 2020.
To be similar to the first half the year.
Furthermore, FDIC insurance expense will increase from 2019 due to a higher assessment rate associated with our larger asset size as well as last years 3.1 million dollar assessment credit from the FDIC, which was realized during the last two quarters of 2019.
We are comfortable with the current consensus for expenses in the back half the year of some $87 million to $88 million per quarter.
As a reminder of the anniversary of the impact of the Durbin Amendment on our electronic banking fees will occur during the third quarter of 2020.
Relative to our provision for credit losses under Cecil.
That provision will depend upon changes the macroeconomic forecast as well as various other credit quality metrics, including loan growth potential charge offs delinquencies criticized and classified loan increases and other portfolio changes.
Lastly, we currently anticipate our effective full year tax rate to be approximately 13% to 14% subject to changes in certain taxable income strategies and now inclusive of the state of Maryland, and our total state income tax provision.
We're now ready to take your questions. Operator would you. Please review the instructions.
Thank you we will now begin question and answer session to ask a question Press Star then one on your Touchtone phone if people are using a speakerphone. Please pick up your handset before passing the key is that anytime to question has been addressed you would like to withdraw your question. Please press Star then to first.
Questions, Dave will come from Casey Whitman Hyper Sandler. Please go ahead.
Hey, good morning, good morning Casey.
Hi, just maybe start with some the NIM Gabi just scale Bob.
What does that assume for I guess of levels look where do you guys have does that assume some of the deposit growth. You had this quarter is going to come off and so how quickly just to get thank you said couple basis points law compression. Thanks.
Yeah, One thing I would note is that with the July 15th tax payment due date and.
Both April 15 from June 15th of and move forward.
I think most banks and we as well our R&D and would continue to experience some run off in.
Deposits related to those large tax payments for companies and individuals that are due and we also expect that while the personal savings rate has been high over the last quarter that some of that particularly if.
Another round of stimulus isn't adopted.
Some of that personal savings would be used for expenses, if if unemployment and.
Another round of up cares act like payments are made two individuals a plus to PPP.
Loans and those deposits then put back into bank should be spent by those businesses.
Casey we did calculate.
That.
The higher base of cash and do from banks, basically, earning 10 basis points on on the the portion invested at the Federal reserve.
Cost us a anywhere between three and five basis points for call. It the extra $500 million are so that we were carrying here in the second quarter on average.
And so I do expect asked maturities of federal home loan bank borrowings come up and you can see that were down from the first quarter. The second quarter in terms of the federal home loan bank, we've taken some extra money down at the end of the first quarter just to have a reserve and so we pay down over 300 million of those in the second quarter and that.
Hey should continue here in the second half the year.
Is that responsive.
Yes, thanks for that Bob I.
I guess the other question a large number who can you let us know on the X amount of GBP income that this quarter.
Interest from up to 13 fees.
I believe it was 3.7% the.
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If you look at the average and I think that would be a question, you've got 840 million and and.
We figured the average it was kind of front loaded so the average for the quarter about 680 million. We think the monthly run rate. When there is no forgiveness is about 2.5%, but we do expect margin accretion.
I think if you heard that one sentence I add on ppb loaning income being accretive to the margin in the back half the year that is a quarterly comment so as forgiveness occurs we would expect to see.
Against our other comments on the margin you know three to five basis points per quarter.
Specific that quarter margin pickup as forgiveness occurs.
But we really don't know yet the pace at which forgiveness occurs there arent constructions yet posted by the SBK. So no. One has submitted their first forgiveness application. We do have a queue of them from some customers that were anticipating forgiveness to occur after that initial eight week period, but with a change in the program.
Ram and now, allowing up to 24 weeks.
For people to spend the money and then the 60% versus 75%.
Against the portion related to salaries.
We think it's just going to be longer.
Before we see the call it the tsunami of forgiveness applications to submit and and you don't get that.
The additional fee income fits deferred until that forgiveness occurs.
But it was not dilutive significant late to the second quarter, even without the forgiveness and even though I just quoted a and overall yield.
Including regular accretion of deferred fees net deferred fees and a 1% so.
Yeah again I hope.
That's helpful.
No Darfur footwear.
Second largest simulation.
No margins in the back half, they're still going through that.
I guess I was asked one another.
Hi.
Think about capital here just.
Broader thoughts it says what has happened today. So we think the current government along.
Yes, I'll be glad jump and answer that if when you look at.
What we anticipate.
This point looking at our internal forecast and we see the economy doing and everything else. We don't see any any reason to have any kind of impact on our dividends. So.
We do not forecasted any kind of changes in that we think we got a good capital position I think our pretax pre provision earnings are very strong.
We think we took a really significant step with reserve build this quarter that puts us right in line with peers, if not a little bit a little bit ahead of peers.
And we still look at this as a earnings event not a capital event with regard to this a pandemic I think we'll take a lot of other banks do so.
We really don't have any in anticipation of of that.
You'd have to get into a really dire scenario where banks are.
Posting.
Consecutive quarter losses, and things like that and we don't we don't anticipate that.
Okay. Thanks for taking my questions sure Thanks, and welcome back by the way.
Thank you.
The next question will come from William Wallace with Raymond James. Please go ahead.
Thanks, Good morning, guys.
Real quick follow up on the PTP.
Numbers that you gave Bob on her two different numbers was what was the yield on the.
Loans net with a net deferred fees was 3.7% or 2.5% exclusive of forget.
I think I said 3.7, if I didn't I meant to say 3.7 million was earned in the second quarter related.
Program.
The.
By the time, we got them on the system.
Out of the Unprocessed Scott was about 2.5% in the month of June.
On a run rate basis, but again that will increase in the back half the year.
More in the fourth quarter into first quarter of next year when.
In particular quarter could see.
You know as much as a high single digits low double digits of margin accretion to that quarter, but we don't currently anticipate any significant margin accretion for the year up 2020, taking on a full year basis.
Got a particular quarter, yes because of those.
Those those higher.
Fee deferrals, we have about.
I think on net basis net of cost we have right around $25 million to accrete into income over the next couple of years.
Yep.
Based on the way the rules are now understanding that there's a proposal to forgive maybe some of the small salons without just just for your magically, but exclusivity I just the way. They wells are now what what percentage of the loans that you originated what do you think would qualify for forgiveness.
Well, we've re done our forecast and we're figuring we originally assumed that there would be 30% to 35% left by the end of this year and.
85% would be forgiven, we've now increase those assumptions to around 90 little bit higher than 90% would be assumed to be forgiven, but the pace in terms of what happens. This year versus early next year has has been moved more into that that first and second quarter time frames next year.
Just think about all the time as you have or the number of months you have.
Within the new process.
Understood.
Switching gears to the deferrals.
I believe you have a slide it says the bulk of your deferrals work 90 day. If you look at the loans that have come off their 90 days and had hit eight a payment due date what percentage of those have actually paid or said another way what percentage have have needed a second deferral.
Of the one has had a payment due.
Given given the timing, we're getting were just coming off of that first deferral, but what I can take that I just talked this question with our credit.
Executive yesterday.
What we're seeing with regard to.
Requests for another deferral period as its very low it's like 3% of those that are coming due or asking for a second deferral.
We are putting them through credit underwriting and everything else, we're being a little more generous obviously with the hotel portfolio, because we would just expect data.
B B.
In the second second 90 day time period.
But but it's very very little I mean, just up just a few weeks at this point, but we're still early.
I haven't gotten point, yet where those coming off the deferral.
You coming up on a payment or anything like that at this point.
But thats been relatively quiet, which has been good day.
And compare that to maybe into the highest two weeks a couple of months ago, it's down 95%.
And then with only 3% asking for new deferrals.
Thats encouraging at this point, but.
I'll have more color on that maybe in a monthly again when that when the next payment.
Comes up for those companies and individuals that did not request the second deferral to see what.
What they're looking like but again, if we if we see stress and if they're asking us we're providing that deferral.
Understood. Thank you so I have two big picture questions for you.
Todd one I mean.
You built your reserves not even including the marks that are also balance sheets.
1.65% over 2% you include the marks do you scratch your head at all when you when you look at the economic forecast in your and your reserve models of high single digit unemployment and and.
Pretty significant GDP contraction.
You scratch your head a little bit when you see the 3% of your your loans on deferral or are.
Asking for return hurdles, while 97% are coming off I mean.
Does that split with you or or does it seem perfectly rational yeah. This is 3% asking for re deferral I think I think is pretty low again, we're early in that process. So I want to see how that how that.
Those out over the next the next couple of weeks or a month or so but that is a very low re deferral rate, which would indicate that they're doing a lot of companies businesses aren't feeling a tremendous degree of of stress I think you've got some really unique things going on here right I mean last quarter, we had the.
Biggest drop in GDP and country had seen since the great depression, but at the same time household income was up over 10%, which I think was like a record and those are both occurring at the same time. So it makes it very very challenging to try to predict outs.
A year or two years things like that for the reserve and what's the appropriate level. So we follow the rules, we got very specific rules around Cecil and we take that process very seriously and we found it very closely spending a lot of time on that to make sure that we're reserving based upon what.
Expectations are when unemployment forecast and things like that.
Based upon what we see today, we're comfortable with the reserve steps that that we've taken but.
May turn out that.
There will be reserve releases.
With the industry and in a year or if the industry takes us another step downward in unemployment goes up and then there could be reserve increases.
But right now we've we've gone out to pick up a big data at the Apple here and put us in a position where were we think appropriately reserved you look at our criticized classified numbers are charge off numbers, our history of performance everything else and and then look at our reserve level relative to peers as well.
I think we're right in there with everybody else if not maybe a little a little farther ahead, but we're conservative company and I think thats good place to be that's why we carry a little higher capital level.
Going into the into the pandemic, even though we didnt know, it's going to be up endemic.
We're just a little more conservative oriented company and I think that flows through everything that we do.
So it's hard to know whether there's a disconnect between the reserves that are being built and future stimulus and the timing of vaccines and all that kind of stuff. It's just it's so uncertain.
But you got to you got to you've got to quantify the best Ken and.
And put in place and move forward with it but.
It'll get evaluated each each quarter.
And I'm, hoping if the vaccines.
Continue to to get some traction.
Here.
And.
The country gets spikes under under control, a little bit better and.
Businesses start to respond strongly that may turn out that.
That maybe that the downturn will be as severe as expected, but we don't know that and it could be just the opposite.
Okay. Thank you for that and then the other question is just around the branch network. You may have addressed this in your prepared remarks, I apologize I have not called run late but.
One Bob you you said you're comfortable with the 80 788 million dollar run rate in the back half of the year per quarter does that include the anticipated saves around the consolidation that you're referencing the release.
If not could you quantify that and then Todd.
What what is your expectation of how the branch network might change given how this pandemic has changed the behavior around the acceptance of the digital channel for delivery, how stepped out and listen to your response. Thanks, Yeah, I'll start off with the than but can can jump in.
We've been evaluating bottom, 20% performance of our branches historically even level for.
I arrived on the scene seven years ago. So it's something we've always done and Weve closed 15 branches since 2017 out of 236 branch network. So it's nothing new to us but.
We do have been looking at.
The the use of digital services, which has been significantly on the rise.
We're also looking to see that how well business has been able to be conducted.
In a.
Ointment typesetting and drive up typesetting and more customers using using digital so we had plans to continue to optimize our branch network.
We're really looking seriously at accelerating that that's something we're going to be discussing very seriously here in the in the second quarter.
As a company.
And I think you can look at probably what would have been done over the next 345 years and probably accelerating that into.
The near term next several quarters kind of our looking our plan on that so could be a combination of things.
It would be in some cases closures in some cases consolidations in some cases.
Closing to building, a new one into better location.
It could be.
Restricting some too.
You know ATM type services things like that and all the above so we're really taking a very strong look it at all of that and then one of our peers have already done that and announced it and I recognize that so.
Our our thoughts are very much inline with what others have done and we recognize it is something that we need to do as well too.
It's it's not reflected in any Bob speak to this but it's not reflected in any of the any the expense numbers or run rate numbers or anything like that that we just mentioned to you.
We we would have to evaluate that and if we decided to do something on that then that would change.
Run rates and things like that Bob.
No I think you said it well Todd I think any discussions decisions.
Announcements would would at this stage of the year.
Primarily just given the timeframe it takes to get regulatory approval and to close offices would be more of a 2021 savings event.
Just a little bit of additional color I just want imagine that we go.
Market by market with our nine or 10 markets and we have each one of the market heads evaluate with their teams the re sightings.
That Todd mentioned and those offices that don't.
Our aren't getting enough traffic in enough transaction counts.
And and they make their own recommendations that we evaluate at at the top of the house from a committee perspective before we make recommendations to the board, but each one of our regional presidents comes in it makes those.
Those those presentations and is led by our.
Head of commercial and retail Jay data so.
More to come but at this stage of the game or this part of the year.
Anything that we would do other than the ordinary course of events a couple of here in a couple there.
Would be a 2021.
Savings events.
Thank you.
Next question will come from Catherine Mealor lift KBW. Please go ahead.
Thanks, Good morning, and.
Good morning.
I will ask about the increased and the reserve this quarter it sounds a little bit in your remarks that.
Keith can talk about soon as a qualitative assumptions that you made.
This quarter versus last quarter that may have given the higher build.
And just to clarify that there wasn't anything kind of specifically within your portfolio within your markets.
Hey, you're seeing that makes you more nervous that that had you pushed differs or hires more just kind of big picture macro qualitative reasoning for how much. Thanks, Yeah. It's clearly big picture macro things. If you look at the end of the first quarter when Cecil was adopted.
They did not take into consideration.
Consideration.
Pandemic and things like that because you had to go back to that day, one and all that so I think when you look at.
The second quarter the unemployment.
Forecasts so were worse.
Than they were when calculations were being done for the first quarter reserve, So and that's that's a big big very significant driver of it is what's the unemployment forecasts. So when you unemployment forecast goes up that that drives the great majority of the numbers that that you've got and we saw that and I think another whether banks of saw that as well too so.
You'd have to put some really significant overlays on top of things to.
Address.
With the unemployment numbers are showing in some banks did that and and we chose not not to do a lot of that because I really want to the reserve level.
To be to be strong.
But it's very qualitative very quantitative process, even the qualitative processes are a quantitative so you got to have a lot a lot of supporting documentation for what you're doing so it's a very.
Very detailed specific process.
But we didn't see any any significant deterioration in any kind of areas, where we thought there was a dramatic change that needs to be looked we continue to look at individual portfolios hotel portfolio. As an example in things like that and continue to watch watch those very very closely.
But what really drove the increase was just the economic factors and the great.
Patent impact of that was.
Was the unemployment number I mean that really drove the great great majority of the of the change.
We do anything else to that.
Well I could drone on for a long time, Todd and probably not be a good thing, but I absolutely agree with Todd that is primarily a quantitative model.
It's driven through a third party purchase software tool that most banks are using these days.
I won't mention the vendor name, but.
It is infused with a lot of different factors from our our data warehouse from our portfolio specific to the bank.
And then there are qualitative overlays applied to that so things like a increases and classified criticized and classified loans.
On a calculation around risk grade in precision.
There is a a qualitative tool that we use that has nine or 10 different factors in it.
That get evaluated mathematically each period.
And then we also added we did add this particular period.
On the hotel book, a little bit extra as well so that was part of it.
Finally, individual or PCD loans comprise about 7 million.
The total of 168 million.
And then as I mentioned during my prepared remarks, there is an additional $10 million to $11 million in the allowance for loan commitments, which is reflected in.
Other liabilities.
Great.
That's helpful. It makes sense.
And then my second question just on fees and service charges came down as we've seen across the industry and then your mortgage had a really great quarters to can you talk about is catching meeting pieces, maybe first on service charges. When do you think that normalizes.
Are you still waiving fees and.
Would you tax that's good that's happy and then a mortgage maybe how much of this quarter was just from the last pipeline, increasing and how should we think about that normalizing in the back half of the year as well. Thanks.
Yes, I'll start off on that as the mortgage business has been incredibly incredibly strong and it continues to be and I think with 30 year dropping below 3% here in the last week or two that got a lot of people's attention as well. So we continue to see a lot of volume being driven there and really haven't seen any slowdown in that so that's good it's good to see.
Because that does support.
A reduction in.
Service fees based upon.
Really large deposit balances that people have been have been keeping as well too so.
I would anticipate Bob's comment earlier about.
Deposits from those that cares act coming down overtime as people would spend them.
That you would see service charges on a go back up a little bit higher as a result of that.
And we're anticipating the mortgage business to continue to stay strong we think we're going to be in a low rate environment for quite awhile.
And that hopefully will be be continued support for us. So I don't know when the two we're going to are going across but I would I would tend to think that the mortgage business would stay strong.
And then some at the service fees would would come back as as deposits or are spent down and people returned to work in its more a more normalized.
Balances that they're keeping in their accounts.
And Todd just to.
Add to that we saw a little bit of improvement in service charges on deposits during.
Or towards the back part of the.
Quarter Catherine.
The low watermark was was really in the in the April may timeframe, so a bit of recovery, there and as you might expect as well and electronic banking or debit card and ATM transactions.
As well as saw a little bit of improvement.
Actually some nice improvement as we move towards the ended the quarter I would also point out that wealth management, which would have been lower as we we priced accounts at the end of the first quarter.
Given the market recovery, we saw a nice recovery in that.
Specifically trust fees in the second quarter.
Above our earlier forecast expectations and.
Depending upon where the market is for the rest of year that should be helpful to the cause as well one final comment.
We had pretty significant growth in residential mortgage in the first part of the year as well.
Not as much refinance business until the second quarter for sure, but because the volatility in interest rates in March most companies experienced a negative mark if they were hedging their book.
And we had a negative mark in March on our GBA hedges.
That that reduced the pull through of the fee income on that line.
Did not have that tend to any substantive amount in the second quarter and so you're saying a good run rate estimate at least for that for the next couple of months until we get.
Later in the fall and winter.
Great very helpful. Thank you.
The next question will come from vessel done there that EA Davidson. Please go ahead.
Hey, good morning, guys.
Good morning Russ.
Just a follow up on the deferral conversation I appreciate the color on the migration there and understanding that were in the earlier innings of of second deferral requests such as as those come through just Holistically, maybe do you consider these loans to be of higher risk given that they are in a forward.
Parents program and.
If that's the case is that captured in your current reserve.
Even in a qualitative overlay kind of way.
Yes, I would say we were very very aggressive came on early with with deferrals in.
And I think as a result, then we were pretty generous very generous with them actually.
And as a result of that we came out of the first quarter.
First quarter earnings call, we were up around 21%, which I think it was was higher than a higher than the averages and I think that got people's attention and what I mentioned on their call was that.
It all has to do with the timing of when you. When you provide though is if you went out early.
And you are using your earnings call date, you're going to have a bigger number. If you went out late and use the end of the quarter. Your number you never could dropped from 21% to 4%.
But it's all going even out by the time you get to the second quarter and I think we're seeing that so you're seeing some banks like us.
That are that are dropping from 21.
17% range, you've seen others that are going up from the high single digits up into the into the teams and I think.
Maybe by the end of the next quarter, it will get even better indication of.
Deferrals and what does that mean with regard to credit quality. So it was so.
I guess I'd say, so judgmental in terms of how banks approach that if you took a really strict.
He ended at you could very easily kept that into the single digit numbers and it wouldn't necessarily be showing up in your delinquency.
Yet because of all the cures act in the PPP loans and everything else, but Conversely, if you have a really high number that that doesn't necessarily mean that you've got more risk in your portfolio that just means a lot of lot of people and businesses can it took pieces insurance policies.
Because nobody really knew what the future is going to hold and it's still still somewhat uncertain. So it's hard to really factor that into it I think with the second quarter and.
The re deferral.
Great that's going on it kind of that 3% rate, we'll see how that how that.
That holds up over the rest of the quarter.
But I.
I can't draw line from you're looking at a banks deferral rate to saying, what's the risk of that have that bank. It's hard it's hard to really be able to tell that but at the answer to your question based on what we see right now we feel that we've gone to the right process and setting reserves and adequately reserved we're taking all these factors into.
A consideration.
The ones that Bob mentioned and there's quite a few more that we look at any at all that together, we feel like we're in a we're in a pretty good position right now.
If you ended up with a much higher deferral rate lets say, let's see still got a deferral rate that significantly high and you're starting to see delinquencies at the end of the next quarter. I think then you can start picking between banks who's doing what but if you got to bank at a 9% deferral rate in the bank. It a 17% deferral rate I don't think you can draw line to future losses.
From that even though it might be tempting to do so.
'cause it lot of it just has to do with how the bank approach that deferral process and whether they're letting their customers build up a war chest to get through the fall in the winter or whether they're not doing that in which case and those banks with the lower deferral rates might have the higher delinquency rates come the end of the year, hopefully that doesn't happen, but that could be the case.
I appreciate your thoughts on the subject Todd. Thank you and then trying to tie it all together in a Cecil methodology, we're all seeing barring a significant macro deterioration.
Do you believe reserves have likely peaked and.
You commented.
Perhaps bigger picture you could see reserve release in a year so.
Trying to get a sense as to your thought of whether we're at peak reserves and then from a go forward perspective are we really matching charge offs in providing for any any future growth.
But that's unique aspect of Cecil is.
Predicting.
Addicting the future right.
Which is why you try to make it is.
Process, it's very very difficult to quantify and but you've got quantified.
And I think thats the process all that the organizations are are going through so based upon that that process and looking at it.
Yes, I think that.
We're adequately reserved for for what we see today in our portfolio and for what the expectations are for the economics.
Outcomes that are that are they are coming forward.
That could change up or down in the next couple of quarters, it's really hard to tell but as we sit here today.
We feel that Thats pretty good number and I think the fact, we really spend all the time looking at others.
Because you guys look at your own you're on your on balance sheet.
Having a 152.
With with.
We're 165, I guess I should say without the PBP loans copies, there's no risk in those so a 165 and then over to when you put in the acquired Mark.
That puts us in a really good position and much higher higher number than we were at that at any point during the great recession.
Up there among some of the.
Banks, our size with similar similar similar models.
So we feel we feel pretty good about it relative to everybody else, but we also feel pretty good about just based upon our own analysis and our own around looking at it but it isn't without an awful lot of work in an awful lot of focus.
By by a lot of really smart people that are that are train to to predict the future as accurately as we possibly can.
I appreciate your thoughts on that as well. So thank you and then just last one for me would be.
Any commentary or expectations around organic growth in the back half, let's see here.
The two really really good question.
We are seeing some some some pipeline activity there are deals that are coming through obviously, we're not we're not.
Looking to make loans or be aggressive in some of those.
Hi, good related industries like hotels, and things like that went out with more hotel money out the door or anything like that at this point, but.
I think when you look at.
Growth overall, so some of its being supported by the lack of payments right. So if you 10 $15 million a month or quarter would ever with regard to principal payments that don't need to be made that that supports loans I would call that loan growth for the for the reasons you want it to be but it is there.
We're not seeing a lot of things go to the secondary market, which we received before I think the secondary market. It seems to be opening up but it's been relatively relatively quiet I still think coming out of this I really like the way we're positioned coming out of it means probably more of a 21 type of event in the markets that were at and the strength of those markets.
That that low to mid single digit loan growth number would be something that longer term, we think we think could be appropriate but.
Right now I would say.
Things being equal I think most the banks are kind of treading water right now.
You want to you want to take care of the customer relationships, you have and protect those relationships.
It's clearly not at the time to be to be aggressive I don't I don't think this isn't the time to be taken.
Big Big swings it.
On the risk side, if there ever as a time to do that sure isn't now, but I think our credit quality meets our standards our underwriting everything has been pretty consistent throughout and we've always said, we don't get aggressive during the good times, but we're also going to make sure we support our customers during the Downtimes because I think as a community bank Thats that served US that's served us well so.
Long answer to your question, but I'd say near term I don't see a whole lot of growth, maybe a little bit economy recovers, but longer term low to mid single digits.
Would be the minimum we would expect.
Okay, Great I appreciate the color thanks, guys.
The next question will come from Steve Moss with B. Riley FBR. Please go ahead.
Good morning.
Let's circle back to seasonal here.
Just kind of in terms of looking for.
More of a raw unemployment number if you will kind of I heard the blended.
Use of models and just kind of curious as to what the actual.
Numbers just.
As we see unemployment progress or next couple months as a proxy for what May happen reserve.
Yeah, I'll, let Bob jump in this little bit too late into the our model to base off of using up using a fair number but at the end of the first quarter fed didn't produce a number.
So we quickly pivoted to Moody's and we used to we used moodys.
At quarter and decided to blend.
To blend the Moody's and the fed, which I think a lot of others have done as well too.
To kind of get a good good look at it both but.
Latest I've seen and again this this changes almost week to week in terms of what kind of the expectations are clearly changes month to month.
But.
It was the high high single digit.
You know numbers through the to the ended the year.
Getting pretty close to 10% through the end of the year.
So coming down from where we're at now, but staying in that nine or 10% range, but bobs much closer to the model than I am above in any comments on on on that.
There was there was an assumption made Steve.
Taught indicated we did pivot this quarter to include.
The Moody's baseline and the fed forecasted if it gives you.
Period end data points, you have to and AAA, but for next year year, and a half and so those were combined.
We take out a little bit of the volatility in the numbers by moving the forecast forward a quarter and then make a slight adjustment for the miss that occurred.
With the employment number on July 2nd versus what the expectation was from the fed and more specifically the Moody's of June I think it was June 10th.
Expectation for unemployment.
So that that was the.
How we made the soup so to speak Thats what went into to the.
To the model and it does phase down it starts with that we've had in mind. It gets starts and the 8% to 9% range move forward one quarter and then works its way down.
Towards the end of 2021 to the mid Sevens.
And then we have a one year reversion period. So it's one one year forecast one year reversion and back then to historical losses that were accumulated in average from 1991, all the way to the to the present, so a and then on top of that or are the Q factors so that.
Layers and some additional reserve.
That's that's helpful.
On the hotel portfolio, maybe going a little further into that just kind of curious as to what you guys maybe seen for occupancy rate.
Within that portfolio just underline activity.
Yes, we get the stars reports on all of our hotels.
We can we get them every month, so it will track that pretty closely.
And just recently here in the last couple of days, we started to get into the June numbers. They tend to come out in the third week or so of July's, we've got about a third of the.
Portfolios June numbers coming in.
In each month as shown improvement.
Maybe.
May was up over April June was up over over May and we've got some customers would tell customers that are over it.
Over 80% occupancy.
We got quite a few of them that are thinking that 40% to 50% range.
And have have shown improvement in in June over.
Over the months before so I'm really curious to see the July numbers when the July numbers come out because it was the first couple of weeks of.
July you had some increase in virus spreads things like that not necessarily in our footprint all that much but I think its shipped some people. So I don't know whether or not that is going to translate into maybe more of a flatter July.
On.
Hotel vacancy rate maybe not.
Because it Didnt Memorial day didn't slow it down so maybe maybe July 4th will slow it down either.
But we're seeing continued continued upward trend in that which is really an encouraging to see.
And I think as you get toward the end of the.
August into the September time period, I think thats, another kind of inflection point to look at as well too because you've got people that are traveling.
Doing kind of stay vacations and things like that but you know what's kids go back to school.
In the fall assuming they do go back to school and hotels that really relied on on business travel and and things like that so I don't know, what that's really going to look like and what people how they're going to feel about that I mean, I'm staying in a hotel tonight, because I'm because I'm traveling to one of our markets be there tomorrow.
So I think there will be some business activity there.
It may shift from stay vacations to more of more business travel.
I would expect over the next.
Couple of months to be very telling for that portfolio.
And hotels in general that I'm encouraged by obscene and we've had a number quite a few of our customers at a hotel customers that have said they do not need to second deferral period.
And there, okay and a lot of them are sitting on millions and millions cash.
Because we tend to deal with some of the bigger bigger operators, even though the average loan size isn't that big because we're careful what our exposures are.
Per loan and per customer.
There are some some individuals and businesses with.
Pretty deep pockets that it really could run.
Year year, and a half if they needed to.
Before they really got into into some difficulty so that's improving improving one month over the next.
But that's really helpful.
And then I guess just one last question for me in Turkey, and this was an up tick in the 90 days are still accruing category just kind of curious.
What was driving those numbers.
No. It's good question.
What we saw was about.
20 million or so of that have that increase.
Came related to just administrative.
Related aspects that we were focused on the PPP loans and focused on loan mods and things like that and.
We didnt didnt get to some of the administrative things that that we want it to particularly in relation to.
Yes, clearly portfolio it.
It old line, we Didnt, we just things got backlog.
So ticked into that pretty deeply because expectation get some some questions on it and the great majority of that is not critical holiday related.
Slide of its off already.
So we got some processes and procedures in place we're going to.
I have some additional support their through our credit risk management process to get these things through so they're not.
They're not backlog.
So that some of them or even PPP.
Core I'm sorry, some of them we the loan modifications that had been approved two months earlier that just didnt get done so administrative things. So you shouldn't see that next quarter I wouldn't expect related to administration.
We expect over time, I mean that we're going through the pandemic antibodies reserved monies I would expect.
That criticized classified would rise overtime I would imagine over 90 days going to rise overtime I would expect that in future quarters, but this quarter.
There was a little bit slow pay in there, but the great majority of that was really just administratively related and shouldn't have happened.
Great. Thank you very much for all the color sure.
This does conclude today's question answer session I would now let's turn the conference that she's on cost me any closing remarks.
Thank you again for everyone's time today, we believe we're well positioned in the current operating environment I think we've got very good strategies in place you all know about our strong legacy of credit and risk management, and we're very conservative on liquidity and capital position as well. So I think you'll see that that should stand up well through the to the pandemic I look forward to speaking with you. So.
In the upcoming virtual Investor event, and thank you again for your time have a good day.
The conference doesn't I think that thank you said attendances presentation you may now disconnect.
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