Q2 2020 Howard Bancorp Inc Earnings Call
Good morning, and welcome to the Howard Bancorp Inc. second quarter 2020 financial results Conference call.
My name is dog and I'll be your operator for today.
Please note this call is being recorded.
There will be a question answer session after the presentation.
If anyone should require operator assistance started conference. Please press star zero on your telephone keypad.
I will now turn it over to Robert L., Corporate <unk> Executive Vice President and Chief Financial Officer of Howard Bancorp Inc. Mr. Carpenter you may begin.
Thank you good morning, I would once again, but I think everyone for joining the call. This morning again my name is Bob Carpenter and I am a chief financial Officer here, what Howard Bancorp.
Before we begin this presentation I'd like to something remind everyone that some of the comments made during this call might be considered forward looking statements.
Our form 10-K for fiscal year 2019, a quarterly reports on form 10-Q.
Our current reports on form 8-K, right all identifies certain factors that could cause the companys actual results could differ materially.
I was projected in any forward looking statements made this morning.
The company does not undertake the process to update any forward looking statements are the result of new information for future events or recent development.
Our periodic reports are available from the company either online or on the company's website or be the fccs website.
I'd like to remind everyone that why we think our prospects for continued growth in performance are good and we and we have to keep in mind, the cobot 19 related challenges.
It is our policy not what's that was what the markets any earnings margin or balance sheet Guy.
With that said.
I now would like to introduce Marriott Scully, the chairman and CEO powered Bancorp.
Hi, Good morning, everybody focused for joining up we're looking forward to during her basket waiver presentation. Let me begin Oh, often do except those short lead statement of what we believe this summer investment value basis. We are a commercial was focused bank.
Almost exclusively focused on small and medium sized businesses from a lending standpoint operating them demographically attractive reinsurance we touched on in both the press release in later in the earnings presentation. The fact that this has been an economy relatively more resilient in downturns and one that even in this public health crisis is.
Proving to be more resilient our goal is to leverage our steel and our market position not only the largest locally owned gotten greater Baltimore, but as the result of the consolidation in the industry now the third largest state headquarters Guy.
Core P.P. on the or increased 29% year over year.
Core net income also increase.
We had an outsized participation in a payroll protection plan program with a greater share peacekeeping loans versus deposit market share and we will also touch on that several times throughout the presentation. Both in terms of what it does for us in market share opportunities, but it also has provided us.
With in Palm <unk>, Yeah in this quarter.
Funding costs continue to drop faster than portfolio loan.
Although earning asset yields have been impacted both by the lower interest rate on the PPP loans and by the level of liquidity maintained and this crisis still positive yeah, but that outsized participation provides us with further opportunities to leverage that market.
Position to take loan to deposit share going forward and the funding Clos allow us to fund out more efficiently as does our fixed versus floating jobs there.
We've got significant economic uncertainty and headwinds however, both from a health perspective, the impact that helps on possible revenues as well as big impact that Dot hills on the net interest margin and therefore, it's prudent for us to continue to increase our allowance and.
Did so 79% year over you know providing us with a one point worth we could get covered your portfolio loans, which is like work ponds our coverage of classified assets.
As Randy Jones, our Chief Credit Officer will talk about our general underwriting standards as well as how we are monitoring.
Portfolio with the personally stressful time, when you do not maintains significant concentrations in individual customer exposure is candour individual highly impacted industries.
Capital levels remained strong and 11.66% well in excess of well capitalized as noted earlier in the discussion of earning asset returns, we have exceptionally strong liquidity and again significant participation in the P to P program, which we believe we'll have significantly.
Be upside in late 2020, well only 2021.
It's also driven customers all of those war two out of state banks to open relationships I would note that our participation level in Maryland loans in the P.P.P. program was almost twice our deposit market share in Maryland.
We have new relationships already tangibly being built in small business business banking in middle market for what else, we maintain a very long proactive approach to managing how.
On an important when a customer.
And we have all modestly our community support in excess of $100000 and I noticed this time of great success, because it has to be stored <unk> equities, but the majority of our community philanthropic support has always been focused on underserved population images.
Already minority jurisdictions.
When we got bought all ongoing commitment to the health and safety of our employees and our customers in the context of what's happened in the state of Maryland on July 15 times Governor held his most recent credit costs I can share the following Piazza.
Relating to this resilience of the economy.
We were able in Maryland to keep 70% of the economy opened during the pandemic.
And I would not recoveries 52 days ago to stay at home water was lifted and we entered stage two of the recovery plan, 98% of the economy is present, we open and able to operate safety safely and Bob will talk about this and the allowance discussion, but all unemployment rate was higher than historic.
Well level is much lower than the national way better than most states in the U.S. and the best amongst they fit all region.
During the Lincoln Spice, we've certainly seen a cessation of any additional opening.
Well, we had a 9.9 with but may unemployment in Maryland, pinpoint reports just for the lungs and interesting was 11.2%.
No reserve just right and again, that's how I guess it.
Outperformance, albeit they resilience imbalance.
Our headquarters in regional commercial staffs is still working successfully from home, we've taken again cautious and pursue position to returning to the office and our branches continue to be open.
12, or 15 branches of operated throughout this can damage that operate continuously and drive thru and call we had.
Customers have taken advantage of digital bank offering and of course, we seem to increases in traditional branch transaction.
The year over year reduction in card transaction volumes that many in our industry is seeing starting to reverse in June and continued to reverse in July.
And we have continued to invest in the future in digital investment.
<unk> online business account opening module that we implemented earlier this year that we use in a different crashing in customer offices.
Our.
Initial entre onto the Delta platform, which is a consumer P to P best practice.
Ongoing investment in the architect online business banking upgrade in a recent business line dashboard industry.
So with that as a prelude I'll turn it back to Bob and he'll begin to discuss the strong capital position that when they can be keen focus [noise].
Thank you Marianne.
Yes, so we might as well just mentioned briefly but when you look at our our total.
It did in fact declined in the second quarters resolved the goodwill impairment charge.
I have seen dollars again, we have to emphasize.
Non cash items that had absolutely no impact on our tangible.
Regulatory capital.
When you look at our regulatory capital ratios were enough. We're in a very good place all in show improved over their March 31, 20, Twond levels. So for example, our leverage ratio.
Even including PTP loan was was.
Still fall slightly at 9.5 per cent for March our common equity tier one tier one capital ratios 11.66%.
She was up from 10 95 and in March and finally, our total capital ratio was 19.09%. So guys. You can see all those ratios well are well in excess of regulatory well capitalized.
As we talked about was whether it be yeah words, we looked at Q1, we certainly had expectations of a major liquidity challenges or not.
But for the entire banking industry.
The good news somebody some of those some of those.
Pessimistic assumptions around liquidity didnt come to fruition.
Oh, we're going to we're in an excellent position from a liquidity perspective.
Our available liquidity, both on and off balance sheet.
Over $750 million.
While the challenges we've had a in the current environment is reducing our excess on balance sheet liquidity.
We continue to look at opportunities to increase our pension funds you funding capacity.
And then we talked about PTCL Paycheck protection program lending facility established by the Federal Reserve.
Well, we talk to you back a quarter ago, our expectation was that he would fund all of our PD Lone student facility as it turns out when you use the facility on a very limited basis.
And given the strength of our deposit base, which we'll talk about later were they were at this point in time, we continue to evaluate using the p. pls versus other less expensive sources of funds.
And so with that I won't I'll turn it over.
To.
Chief operating officer Bob.
Thanks, Good morning to <unk>, Firstly I want to highlight here is is our PPP initiative, which which marianne it on earlier, if you have access to our investor deck, you'll see that aren't stratification across loan size.
The majority of our loans in PPP program came below $350000. So we achieved the maximum fee on each of those loans of 5%.
Like to note that we received.
Hundred percent of our customers that applied for a P.P.P. you qualified we obtain funding for them.
And it was very well received both in the market so you're going to continue to leverage that.
I also want to note that.
As we underwrote each of these loans, we did underwrite forgiveness at 100% within the original eight week guideline provided by the Sta. So now that that's been extended we expect that we will have successfully obtained forgiveness for the majority of these loans. So.
Also note that we did and the majority of the underwriting due diligence on the front in terms of Oh.
Obtaining.
Good standing certificates in all compliance requirements. So that'll help efficiently obtained the forgiveness for these loans.
Not surprisingly for us the majority of the dollars to the total dollars went to the construction industry.
As I see as a large cnine lender, we do have a lot of <unk>.
Customers into construction trade and based on their employment. The total number of employees at a lot of this company is higher.
They obtain though the large snam dollars.
As we look at our loan portfolio at 630, it continues to be well diversified we saw a slight growth in RCR report folio, which was offset by a rundown in our residential portfolio as a result of lower interest rates in refinance pressure on that portfolio.
We also saw a decrease in our line utilization bar scene, I borrowers I was down $31 million quarter over quarter, but despite being down $31 million. Our total loans in the Cnine segment were only down about $5 million on average.
Offset is due to expanded relationships expanding existing relationships in new customers coming into the bank.
If we look at our credit line utilization as I just mentioned it was down about $31 million for the quarter. Ami is a result, we can we can you can make the assumption that some some of that is driven by the TPP success that we had but we would also state that we receive still seeing.
Strong operating results for a number of our see NIE clients, which are driving their line utilization down at this time.
So with that I'll turn it over to Randy Jones, and ask him to comment on our credit culture and underwriting standards.
Good morning last quarter and again this quarter. We showed you several the pillars of our credit culture, we feel here tower bag.
I believe these continue to serve us well, especially in this challenging environment.
Some of the additional things we've taken on this past two quarters or in the pandemic had been a fairly rigorous a series of portfolio reviews very targeted specific to first our highly impacted businesses and then.
Moving out broadly throughout the portfolio as he's a proven very valuable and kind of gaining intelligence from our customers in our loan officers and what they're hearing on the street. We've also continue to track or migration of risk and are keeping a very close eye on.
Changes in the trends.
Our asset quality picture for the last a percent of our key metrics for some of the last few quarters has remained fairly stable, but we're not seeing a tremendous.
Increases in our non performers charge offs.
Delinquency as following our normal historical patterns and the classified loans have remained stable.
As we will talk through a couple points in the presentation today, we continue to build our allowance.
This is not.
Related to identified losses at this point, but more out of prudence, So what we're saying and the outside environment with some of the economic factors that are that are going up [noise].
We've had a lot of success with our loan modifications.
Believe we were very proactive and our loan modifications we offered for clients.
We've seen a decline.
Thanks to all kind of reporting periods as of April 24, or last reporting period. We had 314 learns from 14.7 million aligns modified.
Mostly deferrals of three to six month deferrals. Those total portfolio. It goes total modification to decline by June Thirtyth to 291 million and have continued to decline through this month with the resumption of payments in July down to 227.9 million.
So we're seeing lots of success with our customers that we helped out through short term deferrals, we still have several months of remaining.
Step downs as will be tracking this and only a handful of a very highly impacted businesses are asked if asked for.
An extended period of deferral most of those event and the restaurant and hospitality lines of business, which we anticipated to be impacted heavily from the start.
[noise] are impacted loans sectors have remained.
Through all of our intelligence gathering of remained consistent our take on these has remained consistent quarter over quarter, we outlined our exposure last quarter as largely remained stable.
We have seen.
57% of our modifications were in these highly impacted segments.
And about 20% of our toll PPP dollars went to businesses and these highly impacted sectors. So some of the marketing relief.
I will note some of the sectors are not large employers don't have a large employee base such as the hotels and some of our commercial real estate. So they weren't able to get I'm going to PPP program as large as well.
But I believe.
I'll, let Bob go into further detail on our allowance build and the provision.
Thank you Randy.
Yeah, certainly one of the love our stories for further to prepare for 2020 is there our growth in our allowance for loan losses are we.
In my opinion, we've reacted appropriately to the current today evolving economic environment.
And and if you look step back and look at and what we're seeing.
Our historical losses in fact, using a are rolling average loss rate over over a period of time has continued to decline or we were 29 basis point average historical losses in.
Before or at 12, 31 that dropped to 25 basis points.
In Q1 down to 20 basis points into Q.
Randy said, we haven't you kind of currently seen significant downward stress in terms of downgrades et cetera.
But what we've done as we've looked at our qualitative factors.
And we focused our methodology has focused a on the state of the economy as Marianne Jen.
The good news is American economy.
The Federal Reserve district economies in terms of of unemployment have held up better than nationally, but still it's been a dramatic.
It's been a dramatic change adverse change in terms of the economic conditions here locally.
We but we've used the combination of not only an economic qualitative factor, but we've also looked at those potentially highly impacted one sectors that Randy described earlier.
And we've done some analytics around does.
Adjusted some of our qualitative factors to reflect the potential stresses from those particular portfolios.
So so again that's on on average and you can see here are our wallets has increased from 60 basis points of loans at year end to 76 basis points of loans.
March 31, and now 96 basis.
Of loans.
As a 30 Twond 2000, I should emphasize that number excludes the P.T. lines that 96 basis points.
The a lot of a build has been in our commercial portfolios over our personal portfolios.
And and a.
A couple of takeaways here and we certainly feel that loan modification for TPP long assistance will reduce some of the short term risks in the portfolio.
But again, our our sense is that we will as we move through time see.
The risk of downgrades in the central charge offs will will exist in its future periods.
Let's talk about our net interest income and our net interest margin.
A couple of things that stand out is our net interest income increased this quarter.
I wanted to big factors that was our PPP loan program, which was accretive to net net interest income although it is less dilutive to our net interest margin.
Our net interest margin for the quarter.
It was down 12 basis points.
And and basically what we saw is is a drop in our earning asset yields largely driven by the loan portfolio.
We also saw pretty significant reduction in our cost of our interest bearing liabilities.
And while things that helps US is the fact that approximately a billion dollars of our loan portfolio was a fixed rates and then throw in another quarter billion dollars talk at the main dollars are so adjustable rate mortgages with with only a small portion of those resetting the remainder of this year.
And then within the variable the tree variable element for portfolio, we have about 400 million set of already reprice.
In reaction to the change in prime why more and other in other variable rate indices.
Oh the.
Ppt impact on our on our some of our T. numbers.
13 basis point.
Adverse impact.
Nine basis points, or earning asset yield seven basis points.
One of things we saw in Q1 is we built substantial on balance sheet liquidity or some of that was in the form of.
Wholesale Cds institutional.
That's fairly high rates.
We're estimating that will drag on our net interest margin for Q2 from that build of liquidity is roughly five basis points.
We look at our loan yields in deposit rate trends again, I think this right.
If you have our deck on page 21 is we see that are over that period, our loan portfolio yield has dropped about 69 basis point, but during that same period of time price down to our 25 basis points, one month LIBOR down 208 basis points. So that's demonstrates this the good news isn't.
In a in a declining rate environment.
Fairly high percentage of fixed rate loans has certainly helped help mitigate some of the damage to loan yields and managers and interest margin.
On the deposit side.
We've been very aggressive.
Over the last.
Three four months in terms of lowering those rates, we pay when a customer deposit.
Oh, that's the.
The CD portfolio of course, it's going to take some time as some of the hiring Cds mature our reinvested at lower rates are moved to other deposit products.
And with that I'll turn it over to Rob sure. Thanks, Bob If you look at page 21, and our Investor deck. You you will see a very strong deposit growth strategy or story, particularly as it relates to our transaction accounts, which now account for 47% of our total deposits.
Really the growth in the transaction accounts is result of multiple factors, one obviously being the PPP program.
The second being that we really began focusing on transaction accounts in early 2019, we hired a number of business development officers focused exclusively on new deposit relationships and we're starting to see the fruits of their labor.
Weve Threec opened up a number of accounts for new clients, who were upset at their current Bang on the way there PPP application was handled.
We're seeing increases in existing customers accounts across the board as their maintaining higher liquidity levels.
And all the growth in these transaction accounts, who will lead to higher Treasury management fees going forward in interchange income from additional card usage.
As we look at a 2021 and we focus on what the opportunities are for us.
We as a bank will continue to leverage side and brand awareness achieved through a successful PPP initiative.
And although we are not seeing a lot of growth out of our existing customers in them in the market in terms of loan demand, we're very focused on moving existing relationships to the bank, we're continuing to higher season commercial bankers with deep relationships.
Their business banking commercial clients and.
Real estate clients were very focused on the business banking segment here as we look to get more granular within our loan portfolio.
For those who usually followed us for through a couple of years now as you recall that it quarter over quarter, we do have a large variances due to payoffs or drawdowns on lines of credit or withdrawals from large depositors. So we're going to try to smooth that out going forward.
We're going to continue to expand down into the greater Washington, DC area. We hired one individual in the first quarter to cover this market force for commercial real estate.
We are starting to see the benefits of adding that individual.
Focused on increasing our noninterest income.
As a previous slide show John to deposit side that we are confident that we will see increases in each of these noninterest income categories.
I continue to focus our on the consumer loan growth.
Continue to look at he luck utilization programs in marine lending and we're going to continue to capitalize on the successful deposit gathering initiatives to further reduce our cost of funds.
With that said, we're always focused on reducing.
Cost and expenses at the bank.
We've implemented a very prudent hiring practices right now back when the two banks merged in March of 2018, we had 532 employees today, we have 238 at the same time to banks merge we had 28 branches and we're down to 15 branches today, we continue to monitor the staffing.
Levels that each of these brands and adjust for changing consumer behavior.
We completed the renegotiation of our core processing system in the fourth quarter 2019 expect to see the full benefits from this negotiation in 2020.
And we're continuing to review all of our variable expenses, including incentive plans traditional business development vendor management and looking to achieve efficiencies through leveraging.
Digitalization.
I'll talk now about some of our core <unk> quarterly results.
Again favorite the reported number has that parts with little charge, we take that out of a numbers are recorded loss excluding goodwill charge.
As was approximately $9.8 million, so nice growth up from 6.3 million in the first quarter and we had some security gains I'll talk about embedded in those numbers.
Focusing on our core earnings where we take out the.
Certain certain items.
I picked up the goodwill charge of course, among among those items the former performance of our mortgage banking operations and in previous periods.
Our core PPNR $7.9 million ice growth almost a million dollars from from apart quarter up almost about M&A from same quarter a year ago.
Net income core net income 3.7 billion built a million dollars up from last quarter. So it's pretty much in line same quarter year ago.
And the 27 core diluted EPS of six cents from first quarter of this year flat versus the same quarter last year.
Couple of comments I'd make as we look at those Pipas would earnings number.
The we certainly have seen and.
And that the core and a key Asus corporate PPNR format. We do have an increase on net interest income.
Any much largely because of the of the PPP program than that.
Interest spread on that program, we've got some weakness that we talked about earlier in terms of noninterest income.
On the operating expense side, we're running I mean lower than than in Q1.
And and so that's the story on that.
Finally, just talking about some some some key ratios and I view for those who have a deck I do apologize we have a.
Our efficiency ratio.
20 cents a.
All of that numbers really Korea available.
Under the other sort of because of a goodwill charge.
But on our core numbers were 60%.
For Q2, that's down from 63.8% in Q1 and down from 68% same quarter a year ago. So that demonstrates that we're making some good progress in terms of of improving our efficiency.
If we look at our.
Tangible return on average tangible assets.
Again as a non-GAAP measure as has all of our references to core non-GAAP.
And our tangible return on average tangible assets Oh on reported basis 91 basis points up from 67 basis points in Q1.
I should add of course that had security gains in that recorded number for Q2. So if we focus now on the core number.
Core tangible return on average tangible assets at 69 basis points a in in Q2, and so again keep in mind that reflects in that core number the entire provision for loan losses is deemed core.
Results 69 basis points in Q2.
Oh from 55 basis points in Q1, 81 basis points. It all kind of lower provision environment back in second quarter 20 team.
I was just a few final comments.
We did end market in fact on that's our strategy to monetize certain of our unrealized gains on securities portfolios that late late second quarter.
The bottom line effect was we generated roughly $3 million of security gains.
And we look at the security gains and the that the pre tax income benefit of the PPD program provides a nice source of earnings to offset the impact of our our efforts to build the allowance.
I talked about liquidity earlier, and I challenge of trying to and then environment with strong deposit strong core deposit growth, reducing any excess liquidity on the balance sheet, that's a continual process.
And.
We also did have a small prepayment going out on our FHLB advances, we look to optimize our cost of funds.
I think I know as we noted our first quarter Investor presentation, we did substantially complete the exit of our mortgage banking activities in Q1 that that that business is totally behind us.
Here in Q2.
And from this point forward our focus is on.
Going.
Our traditional from a commercial.
The banking business.
I'll turn it back over to Marianne at the site. So I'll briefly conclude just by reiterating that we do believe that we've had and market position, which is uncommon and.
[noise] pillar industry.
It has been strengthened by the marketplace accident PPC program, we are too as it wouldn't building on growth from earlier in the year under funding strategy exhibited early in the quarter.
Core operating on PPNR growth numbers are tracking up we do have the short term headwinds of liquidity and keeping impact on assets.
Mitigated by the fixed and floating portfolio and offset by the longer term tailwinds of transaction deposit growth under cost of funds trends, especially as those Cds mature, we're well prepared and positioned we believe for this one's from a century exhausted it's Sean.
At this time customer safety employee safety diversification of portfolios expanding the allowance how we have funded that expansion of the yellow.
Food city and at all times, both protecting preserved.
Well as positioning our capital.
The Securities goes in PPP and slot noted has helped us to build the all.
And that allowed us to devote the piano our two unallocated capital. We are at the same time continuing to invest in the future, especially with a number of digital technology investment.
I have noted repeatedly the breadth of our team to support.
The bars the depth of our team.
Providing us with unparalleled resilience in this market and we're not only retaining and rewarding a deep bench of experienced bankers, but we are attracting talent, including talent into contiguous greater Washington market, So with that I'm going to turn it over to you for your question.
Thank you.
Got a minute disarming will be conducted a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad.
Confirmation tunnel indicate your line is another question Joe.
You May press star to feel would like to remove your question from the Q.
For participants you think speaker equipment, and maybe necessary to pick up your handset before pressing the star Keys. Our first question comes from line of Stewart lots with KBW. Please proceed with your question.
Hey, guys good morning.
Oh I'm sorry.
No there on is doing well.
Marianne I guess quick quick start on kind of revenue opportunity.
I know you guys are focusing more on.
Thank you know improving fee income business is now that the mortgage sales behind you.
Can you talk about how you what your revenue outlook is indeed.
With your excess capital position are there any opportunities you're looking at on the fee side to kind of supplement.
The run rate right now or.
Well I think to clarify what we're looking out on a revenue side continues to be whole relationships that are under flux is that not only our existing team, but some of these hires. We obviously are focused on ensuring that as we build loan volume at a more modest level.
The remainder of the year given the economic conditions that we will be able to supplement the normal interest income with a focus on getting scenes in those loans as we booked 7 million existing loans were also very focused from a deposit standpoint on building rich operating.
Relationships, so not just deposits that sit here and our active the true operating relationships, which leads us to be able to project higher Treasury management fee incomes for the remainder ended the year the consumer side, we've stuck to continue to be relatively soft as behavior will bounce up.
And down depending on the opening of the economy, but we think our short term greatest opportunity or on the Treasury management side and the loan side.
Thanks for the color.
And Bob maybe if you turn to the provision and kind of the reserve build this quarter.
As we look in the back half the year.
If growth is slowing and you've got really from PPP. How can we think about further reserve build from here, if we don't really see any material credit deterioration.
[noise] like how much more room do you have from a qualitative standpoint to.
I just your reserve power.
You know from my perspective from a qualitative perspective is where we're starting to run out of a ups of opportunity I think we still have one more quarter, where we can assuming that some of this some of the key metrics like unemployment don't turn positively significantly and I'm in a good direction, we'll look at our entire.
And with somebody other economic metrics.
I think there still is the potential we can increase based on those factors will continue to look, but our central highly impacted portfolios.
Again the story there as we haven't seen they've got were well monitoring carefully, but we haven't seen by major degradation now what I would say, though we have keep in mind that theres, a little bit an artificial reality in the economy, we're dealing with right now.
When you start thinking about all the stimulus money PPP and alike, which we think is masking is potentially masking some of some some downside.
But so what I would say again as.
If you ask if we don't see significant deterioration in trying to downgrades losses et cetera, we will run out of growth and trying to Q factors, probably after Q3 in my opinion.
Got it.
As you know includes inclusive of Morris I figure now around like 125.
Yes.
Kind of expects you to maybe one more quarter reserve build and then kind of.
Three to be in the high watermark, unless there's no significant deterioration in the back after the year.
[laughter] that that would be my initial that'd be my initial reaction again, our with what the marks were right now at June 31.43%.
But yeah I think.
Again, I think that would be my cost right now is one more quarter.
Absent any.
Noticeable.
Deterioration that manifests itself in significant downgrades were actual credit losses.
For specific allocations.
Okay.
Thanks.
Maybe one more for me I'm looking at your hotel booking.
Good an update on kind of what you're seeing from occupancy standpoints.
Then in Baltimore and your surrounding markets are unrelated to the hotel book.
Well, it's all book is kind of all this first it's not a lot of loans, it's about a.
Got it doesn't.
Properties, they're located in.
Of Baltimore City.
A couple in Delaware Cup on the eastern shore.
And.
It's hard to summarize these generically because we're actually hearing different things from from each of these segments. None of them are particularly business travel focused a lot of them are leisure the ones on the eastern shore are holding up fairly well and we're getting good reports out of those.
A lot of this hit very early before their season started is of not terribly impactful and it's been a decent summer at the beach, so far for our customers.
Delaware had some different rules and business resumption. So a couple of those are little laggard in terms of their.
Getting back to the capacity.
And Baltimore City.
We only have a couple of properties here in both of them are kind of different dynamics and experiencing a different factors. So I can't throw blanket all over all of them. We're hearing different things from from different operators, but we do have a good set of operators very very.
Skilled and I think are making this landing a soft as I can.
Stuart the everything that I've mentioned is that clearly you know rather than just focusing on occupancy we're focusing on revenues because a lot of these operators are naturally doing is lowering their rate in order to increase their occupancy, but the good thing about the portfolio that we have as Randy node. It is its does not have.
Exposure to business travel. It also doesn't have exposure to conference revenues nor to western lock revenues. So these are generally drive up not fly through drive up plain Vanilla hotel and not provides them with some flexibility.
Great appreciate all the color guys and thanks for taking my questions.
Thanks Terry.
Our next question comes from the line of Brody Preston from Stephens. Please proceed with your question.
Good morning, everyone.
Yes, I just.
I'm, sorry, I missed that I hopped down about five minutes late I just wanted to get a sense for what the interest income.
Interest expense on noninterest expense was related to PPP this quarter.
Ah yes.
Yes, yes, the breakdown of the numbers in Q2.
We're oh, yeah first the interest income at the 1% interest rate was $385000 for the quarter.
The lead is if the deferred processing fees net of our origination costs or the the net accretion of those those numbers are added $530000. So we had our total interest income was $896000, but purposes, our internal analysis.
We are applying a 35 basis point cost of funds as if we were funding needs through the TPPL out.
So that results in her $24000 of interest expense or something like $72000 of net interest income.
And then we ended up our net cost deferral during the first quarter was $242000 now I should add this is an important point.
We actually deferred roughly $770000, a cost and as long as but weve, but for the for analytical purposes. We're looking at the incremental costs other than salary costs. So for instance, we had some outside cost related some initial processing by third party. Some some paralegal help to work through the backlog of documentation.
And.
We had a we had a small bonus program for the for the extraordinary effort by our team that were that lived in brief this program for large part of a month of April so while we look at that that's why we got to a net number $242000. That's how we get to a pre tax pre tax income a sector them.
Okay in dollars.
Okay and so.
You know expenses I thought were well manage this quarter just thinking about that.
I guess some of the deferred TPP cost.
How would you characterize the core run rate on on expenses moving forward with 12.1 to 12 point to be a good run rate.
Yeah, I, certainly think that that's a that's.
You know I I think that's.
Hi, Mike My sense is that we're going to be a little below that but I think that's using as a high end. That's that's that's a fair high end of a range.
Okay.
Okay, and then you guys gave great detail on slide 16, with regard to deferrals in sort of the roll on roll off.
And so.
You know between the three months from April to do to lie added 16, and a half 103.2 rolled off so all in we ended 228 still modified should I interpret that as sort of 212 million of the 228 is on a second modification period or how should I be thinking about.
[music].
No. We've only had a handful kind of go into a second modification for although some of our really impacted businesses, we did longer deferrals from the start so.
No. We if you envision kind of a step down or over the next several quarters are deferral terms will be ending and and I was trying to step down fashion. We already saw that in July with a pretty significant reduction just from the end of June.
Okay. Okay. Thank you for that.
On the line utilization rate I noticed you know you mentioned in your prepared remarks, and then in the slide deck. It was way down in June just wanted to get a sensor at that level. The operates its still decreasing incrementally from here.
So to my guess is it's going to be leveled off the biggest driver that's probably the PPP program.
Yes, we are still seeing strong performance from a number of RC and I clients.
In their spend is down.
In there either collecting the receivables at a pretty quick rate because of the liquidity thats in the market. So.
My guess is it's flattened out for now.
And we should probably start to see tick back up the other way as the PPP phones are utilized.
Alright, and then just just two more from new you mentioned that you're expecting to start executing on some residential purchases in our third quarter just wanted to dig in a sense for what we could expect to there and what the yields our new zones right now in the marketplace.
You should show it really our strategy. There is just to keep the portfolio flat to where it is written that 500 million dollar range on deals that we're currently seeing there about 3.75.
Pre premium.
Okay, all in down closer to three to 3.35 roughly.
Okay.
And last one.
You mentioned sort of continuing to try to make inroads.
In DC and so I'm going to ask if there are any specific industries that you're having success within the DC area currently and.
Why the focus specifically on healthcare lending mentioned in the in the deck.
Is it should I wouldn't confuse the too I mean, so in the DC market. We're currently.
Expanding our C C Ari.
Efforts there we hired somebody in the first quarter who's already hit the ground running been pretty successful will continue to look at that.
In terms of the healthcare lending in 19, we started to have a bigger push in that area, obviously with coded we slowed it down.
But we don't want to exit our efforts there we want it we want to make sure.
We're continuing to pursue it we're in a pretty good market here for it we have some pretty experienced credit underwriters that understand the industry pretty well. So we don't want to abandon that industry, but we want to be we want to be cautious with it right now to see what the outcomes going to be from code sobriety, what we've done there you've got a modest lease structure.
In a small health care team because we do believe that's kind of continue to be an important industry in greater Baltimore and greater Washington, as Rob said, we took a step back to see.
Exactly how it will shake out in there and then in the new world that have taken their opportunity internally to restructure that team a little bit in order to leverage a lot of those experiences and a strong network that one of our senior credit officers have to position us to go back into that market.
Either late in 2020 early in 2021, so it's really repositioning the platform as much as anything else.
Okay got it. Thank you very much you check my colleagues along.
Okay. Thanks Betty.
As a reminder, it has started one ask your question. Our next question comes from the line of will Wallace with Raymond James. Please proceed with your question.
Hi, good morning, Thanks for taking the call.
[noise] on net interest margin you guys. I believe mentioned there was a five basis point drag from excess liquidity as assuming that.
Liquidity levels don't change do you think that net interest margin has bottomed or do you think we saw some pressure from the asset side to work through.
Well, yes.
From my perspective, we'll out we should we should be able to whittle down that excess liquidity challenging and to some extent in Q3, we have a fairly sizable chunk of institutional Cds maturing during the quarter had.
You know one one of the quarter rate range. So that's a that's going to be a big positive, which will drive our cost of funds down yeah. I think there's still going to be I think one of the biggest challenges as a as we booked new business, what what are their market rates going to be an impact that will have on on on our low lower loan yields lower earning.
Asset yields are not net interest margin.
Hi, I'm reasonably confident from from some of the modeling we've done there that but I don't see I don't know they see a lot of downward pressure on our on net interest margin by the end of the here.
Some but not a lot.
Wally I think is as Bob said, some misunderstand on the mix of New business. You know for example, how much is CRT versus how much is floating rate C and I and how much did not see an idea is actually utilize.
The downward opportunities are clearly in that CD portfolio.
Additional CD portfolio and the CD portfolio that Bob highlighted where just because of the maturities in the CD. We're still looking at an average cost in Cds from 1.59% not all based on longer maturity that were put in place when rates will lie thing so.
I would say they Bob said, we've modeled it to show you know some potential for modest drops, but we don't see the kind of drop going forward, but we've seen in this last quarter.
If that helps to.
That does help and.
Speaking to that to the loan growth side of equation. If you if you back out the P.P.P. It looks like loans were down a little over 3% and if you look at date line utilization declined it looks like maybe half of that can be explained by the decline in line utilization looking at your pipeline.
And maybe get a little bounce back in line utilization what are your starts in the back half of the year on.
Your ability to to book <unk>, new good quality loans.
And offset any.
Potential continued paydowns.
Yes. So we think there's there's a number of opportunities out there to continue to book New business Weve feed relationships.
While we did the difficult part right now is to understand the timing right. So appraisals are taking much longer than ever before because in some instances they can't get inside of a building equipment appraisals are taking longer than normal. So it's just really understanding the timing of when a lot of these transactions will close we were also in our pipeline going.
Indicated we had a number of acquisitions that we were getting ready to financing and those have all been put on hold so how quickly they come back.
That will really drive with the loan growth is we are continuing to higher experienced lenders.
And when you do that they're able to new business pretty quickly because they've had long term relationships with a lot of their clients.
So that's that some cherry picking floors. So.
Talk to say exactly where the loan growth is where it's going to come in at year end I would say our pipelines is pretty good I certainly would like though we see at higher but the timing is the hard thing to project right now.
Understood.
A couple of housekeeping questions. The a the legal accrual can you tell us a little bit about the what what is the issue being thought on the mortgages.
It is one let's say one Larsen again, it's it's one of the in our one of these mortgage litigations mortgage related litigation that goes back.
Over a decade. This is you know pre first Mariner recapitalization, not legacy Howard and not the legacy for smartphone or that we merged with in 2017. So it is it's just one of those lingering pieces of legislation.
And we decided that it was appropriate can make an accrual for us.
Okay and is this regarding Dan like mortgages.
Yeah were put into two trusts and and the G sees.
One and claw backs on the guaranteed portions sensors fighting over.
Mortgage has sold into the secondary market yeah, Yeah, that's right okay.
And then on the goodwill write down is there any piece and that that would trigger with your auditors I need to test the valuation on the DTA.
Hi.
No no not at all.
I think you can imagine while it would probably been working lock step with the auditors on this whole process of yeah.
Whether an impairment was necessary, what we should get one valuation side, but at this point in time, we don't see any rankings there.
Okay, and and and why I assume you're you're you're raising the question from the perspective of our inability to to carry a deferred tax asset.
Well, yeah, I mean, there used to be the looked back in so I just I'm I wasn't sure. If this would require.
Attached and then and then does the just the goodwill write down count I guess not taxable so does that count against the.
For word.
As it does the GAAP earnings count or or does it not matter they take out stuff. It's not taxable that's I guess, that's what I'm getting at is.
Yeah brought down into my perspective and from all the conversation. We've had this issue has never come up and I guess from my perspective again, it's a good well have a non issue. If you think about it from up from a cash perspective tangible equity regulatory capital and again is going to have no bearing on our ability to recognize deferred tax assets. Okay.
Yeah good great.
It's been well since I've had to even think about the DTA evaluation perspective. So thank you for that.
Okay and then.
Marianne or Rob just big picture, we've we've been hearing really on all of the earnings calls commentary about how the pandemic has changed customer behavior, both both consumer and commercial around utilization of technology to bank, how how has that changed.
And how were changed your thinking around the branch branch network and is there opportunity there to to restate the branches in perhaps find additional cost opportunity maybe over the next three to six quarters.
Yes to the first part of your question. While he is look at it changed customer utilization of our technology overnight. I mean, there was always a lot of people out there that resisted.
Positing checks through online and things of that nature in.
So it has forced.
A higher utilization of our technology without question.
Yeah, we did our branch utilization last year, we looked at every single one of our branches.
And you got to remember we have branches now that go from the northern part of the state only down to Annapolis Howard County, So when you when you look at how their dispersed.
We don't have a number of branches in any one area I mean, just kind of two per county tops.
In two even with dependent if we have actually we've looked at it we don't see the benefits of closing any branches at this time, we don't see the cost saves that could be achieved.
Because they were running them very efficiently today.
And be because based on where they're located.
We just believe that we need to have a physical presence need in each of those markets.
Okay. So.
So you're already you've already adjusted to staffing model to account for a meaningfully lower transaction count at at the branch is that what you're saying by offering them a fish, yes. That's correct, yes, well if you remember part of a story in the branch optimization.
Analysis expense reduction that we announced last year, we were very intent on positioning. It is this was not just merger related cost reduction. This was based on what we saw at the time as a very different picture of how customers utilized branches on that.
The utilization was primarily with the exception of a few other branches that might still have an older consumer base that the utilization is really the death staff then in the servicing capabilities along the ability of people into branches to get out. So the good news is I think we were we will read stuff.
They had anticipated unlike like customer behavior would be and it's certainly panned out in the Tam down there that the bad news is that a number of those things have already been implemented both from a physical facilities standpoint, I think weve got branches, where they could be from system share flip.
Services standpoint, and we've adjusted the staffing models accordingly.
Now that that doesn't mean that there aren't other opportunities that we're looking at and Rob referenced does in terms of cost savings, whether it's very careful hiring whether it's looking at some of our variable expenses them, how they're structured whether it's looking at how this is modified well, how we spend our our own travel Don.
All is how we spend our own business development dollars on how we utilized certain vendors. So there are opportunities, but probably not opportunities in terms of additional branch closures.
Okay. Thank you for that.
Yep.
There are no further questions any queue I'd like to hand, the call back to management for closing remarks.
Well, we just like the thank you again we.
Value enormously the engagement of our of our Investor is then others who are on their call encouraged that ongoing engagement I think that they're two way communication is the best way for us to understand your concerns in your questions for you and turned to understand.
What we believe is the best way to optimize long term shareholder value. So these calls are important and they can certainly be complemented by an supplemented by additional calls on just reach out to it but thank you for your time this morning and for all of the effort that you put into a in.
The reading a very against press release in a very complicated earnings presentation.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.