Q2 2020 Columbia Banking System Inc Earnings Call
Columbia banking systems second quarter tiny tiny earnings update.
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Yeah, I'm French is being recorded I would now like turn to call a richer cold.
They sign President and Chief Executive Officer curious Columbia banking system. Please go ahead.
Thank you Barbara good morning, everyone and thank you for joining us on today's call as we review our second quarter results, which we released before the market opened this morning.
Our earnings release, and Investor presentation are available Columbia Bank Dot com.
I'm extremely proud of our talented bankers, who demonstrated their unwavering commitment to each other.
Clients and communities through one of the toughest quarters in the history of banking.
Because Columbia Bank had a well developed and tested pandemic plan at the ready.
We've been able to focus on growing our business stand up new lending programs as part of the Carers Act and touch $1 million to support communities through our pass it on and Cobot 19 community really campaigns.
Kobin driven changes to our operating model have resulted in minimal disruption.
I'd like to recognize that this is in large part due to the expertise.
And tenacity business continuity and crisis management teams.
The individual that leads this team is military train and has over 15 years from corporate business continuity experience.
Her guidance and leadership and executing on our pandemic plan has allowed the entire exactly team to remain outwardly focused on managing and growing the bank.
The pandemic, resulting the economic turmoil has magnified the focus on credit within our industry.
Cambia, we've always taken an active approach in assisting clients for full economic cycles.
Well the pandemic, it's beyond typical we've experienced bankers thorough knowledge of our clients businesses.
We believe this gives a competitive advantage over most community banks.
The strength of our capital position provides us the flexibility to help our client and communities recover from the economic effects of the pandemic.
Like most banks, we're managing a surplus liquidity and while this has negatively affected our net interest margin.
Net interest income is relatively stable even in light of the Feds March rate cuts.
On the call with me today are Aaron Deer, our Chief Financial Officer, Chris Mary well, our Chief operating Officer, and Andrew Mcdonald, Our Chief Credit Officer.
Following our prepared remarks, we'll be happy to answer your questions.
Let me remind you that we may make forward looking statements during the call.
For further information on forward looking comments, please refer to our earnings release or website or FCC filing.
At this point I'll turn the call over to error.
I think what.
Second quarter earnings of 36 point Sixmillion EPS of 52 cents for an increase of 22 million and 32 cents, respectively on a linked quarter basis. After factoring out the significant provision expense of 33.5 million quarterly pretax pre provision earnings of 78 point, Threemillion, where our best quarter on record.
Which was 14.2 million higher than the prior record set in the second quarter 2019, and up 18.9 million on a linked quarter basis.
The increase was primarily due to the gain on the show a portion of our visa be I'm, sorry, visa class B restricted stock and subsequent write up of the remaining shares which together contributed 16.4 million to pretax income.
Also recognized and 875000 gain on the shuffled alone that hasn't been previously charged off net interest income for the second quarter was 121.9 million a decrease of 571000 on a linked quarter basis. The drop was due to the early pick out the three investment securities in the first quarter, which added 1.9 million of.
Nonrecurring income to that earlier periods.
Meanwhile, second quarter interest income was negatively affected by the full quarter impacted the March federal reserve rate cuts, which were largely offset by interest earned on T. He loves interest expense declined significantly during the period of short term borrowings were replaced with lower cost deposit funding.
The net interest margin of 364 represents a bit dropped 38 basis points on a linked quarter basis excess liquidity from record deposit inflows as well as lower yields on loans and investments securities caused by the rate environment contributed 13 basis points and 11 basis points with the decrease respectively.
The addition of lower yielding PTP loans dropped by four basis points and the margin dropped by eight basis points due to a onetime prepayment fees in the first quarter combined with increased premium amortization in the second quarter and investment securities.
The remaining two basis point decline was due to balance sheet mix.
Our cost of deposits continued to be industry, leading up to seven basis points, which was down 70 basis points on a linked quarter basis, and 13 basis points compared to the second quarter of 2019.
Total deposits ended the quarter at 13.1 billion up 2.3 billion during the quarter approximately 60% of this increase was concentrated in noninterest bearing demand deposits, which rose by 1.4 billion for 26%.
At June Thirtyth or loans totaled 9.8 fill in with P.P.P. loans accounted for about 10% of that our loan to deposit ratio was 74% at quarter end personal give more color on the drivers behind those balance sheet trends in a moment [noise].
Given the very strong deposit inflows in excess liquidity were starting to deploy more of the funds that we expect much of the T 15 money could be depleted over the coming months and couldn't see other outflows as well. So we're taking a very cautious an incremental approach for new investments.
Noninterest income of 37.3 million was an increase of 16.1 million from the prior quarter due to foreign banks and 16.4 million gain on visa stock and 875000 gain on the loan sale. This was offset by a reduction in overdraft fees of 1.1 million. The decrease in overdraft fees is driven.
Good to higher deposit balances as well as lower transaction volumes due to the shelter in place orders.
Noninterest expense was 80.8 million in the second quarter, which was a decrease of three point fourmillion on a linked quarter basis. The change was principally due to an 8.8 million reduction in compensation and employee benefit costs stemming mostly from the capitalization of loan origination costs from the PTT loan program.
This was partly offset by 3.6 million of systems legal and professional and various other costs much of which were incurred to respond to the pandemic and set up the PCP program. In addition, the provision for unfunded loan commitments included in other noninterest expense increased by 1.8 million.
Our non interest expense ratio fell to 2.13% for the quarter well, our operating efficiency ratio dropped to 64.9%. We expect our quarterly non interest expense run rate return to the mid eightys for the balance of the year.
Our effective tax rate for the quarter was 18.3%, which compares to 18.1% on a linked quarter basis and 19% for the second quarter of 2019 with that I'll turn the call over to Chris.
Thank you Aaron and good morning, everyone.
It is understood that the economic challenges faced this quarter has been extraordinary our bankers have responded with hundreds from all divisions and regions rallying to ensure our clients obtained PPP funding. Both the same time the trend into loan deferral requests and the growing up non PPP long.
And our deposit portfolio.
Our bankers are dedicated to their client success and their efforts have resulted in the balance sheet growth that you let's see.
As Clint mentioned the work of her crisis management team provided us a layered approach to coconut and allowed us to keep all of our branches and facilities opened during the quarter to service, our clients' needs with minimal disruption.
Additionally, in the second quarter, we saw unprecedented loan and deposit growth as an outcome of the federal economic stimulus response to the pandemic.
As Aaron mentioned deposits grew by 2.3 billion the growth is largely due to the lower spending resulting from softer in place orders as well as proceeds from the PPP loan program.
The deposit mix shifted slightly from 58% business and 42% consumer.
March 31st% to 59% business and 41% consumer at quarter's end.
Exceptional build and deposit balances flow to the assets out of the balance sheet as well loans rose by 839 million during the quarter to 9.8 billion as was mentioned and absent PTP loans, our portfolio declined 403 million.
See Eni loans declined by 252 million, but were offset by increases in agriculture and series E loans of 91 million at 63 million respectively.
Our utilization rate has declined from 51.6 at the end of the first quarter to 47.5 at the end of June.
This contributed to a 126 million of line Paydowns during the quarter.
As we saw clients use other available excess funds to pay down debt and our utilization rates declines were seen across all loan categories.
Total production was 1.3 billion for the quarter with PPP loans contributing 962 million.
Setting aside the PPP portfolio loan production was lower than normal, but given the environment during the second quarter, our bankers still find opportunities take care of our clients' needs and produce an additional $295 million.
Construction and wonderful her family real estate was up compared to first quarter, whereas modest production declines were seen in CRT cnine and our agricultural portfolios.
As Aaron previously mentioned, our cost deposits declined to just seven basis points in the second quarter.
Compared to 14 basis points in the first quarter, reflecting the full quarter impact of a response to the fed interest rate a drop in March we continue to believe that our relationship based approach is a key differentiator at our clients rely on this as much as on any deposit interest rates available on the market.
Excluding the PPP loans, the quarter production mix was 45%, 642% floating and 13% variable.
The overall portfolio mix is now 10% PPP loans, 45% non fixed non PPP fixed, 31% floating which is prime and LIBOR and 14% variable.
Excluding the PPP program, new loan production throughout the quarter with slipped at an average exit just coupon rate of 3.79.
Which is lower than the overall portfolio rate of 4.19 as of quarter and.
Also excluding the PPP loans, the overall portfolio rate declined 25 basis points during the quarter construction down 78 basis points and Cnine down 32 basis points.
The lower rate environment has increased demand in the mortgage space. We're very pleased with the progress of our residential lending business and its impact on non interest income will continue to look for opportunities to expand our mortgage solutions, both purchase and refinance markets in the future and now I will turn the call over it.
Andy to review our credit performance.
Thank you.
Division under Cecil of 33.5 billion reflects our economic forecasts, which continues to be negatively impacted from the cold at 19 pandemic.
As a reminder, we use I H CAPHS market for our economic forecasts.
In general our forecast anticipate anticipates, an annualized gross domestic product in the third quarter of 0.4%.
Followed by 4.9% performance in the fourth quarter with the economy continuing to recover next year.
Unemployment will remain elevated ending the year around 12.7%.
And ending 2021 at about 9.5%.
Thus the economic forecast accounted for about 24 million of our provision for the quarter that negative migration accounted for the rest.
We ended the quarter, where the provision relative to period end loans of 1.55%.
Adjusting for the PPP loans, the allowance to period end loans increases to 1.72%.
In contrast, during the first quarter provision relative to the second quarter provision the second quarter scenario is much deeper.
Of an economic impact than anticipated in the first quarter with a solid recover recovery the latter half of this year.
Certainly the economy has improved.
Statistics recently bear that out.
However, the momentum and passively recovery, there's a lot more questionable given recent corona virus paces and states halting or rolling back opening.
Adding to this uncertainty is the consumer reaction to the recent spike of Corrado virus cases.
And what will future government stimulus look like.
Therefore, our modeling now reflects a more protracted recovery with slower GDP growth and unemployment rate that remains elevated.
Mph for the quarter were relatively unchanged at 34 basis point.
However, I feel adjusting for P.P. loans provides a more consistent comparison.
As we move forward into 2021.
With this adjustment is do increase but only by two basis points, so again relatively unchanged.
I would like to remind folks mpsvs are still comprised of credits.
Who is issues predates the pandemic.
[noise] past due loans for the quarter were 21 basis point that net charge offs annualize were 16 basis points for the quarter.
Our impaired capital ratio rose modestly from 22.3% to 23.5%.
Therefore, your standard credit metrics for the quarter were very acceptable.
Overall, when compared to the first quarter it was a relatively stable quarter.
Our the risk rating fraud.
Owns rated watch or below increased approximately $153 million during the quarter.
We saw walks loans increased 75 million going from 310 million to 385 million.
Special mentioned loans increased 70 million to 387 billion.
Substandard loans saw an increase of eight.
And are now around 313 million in total.
These changes increased our watch and below risk rating from 10.4% to 11% of total loan.
The sector, which saw the greatest migration was hospitality as it accounted for about 45% of the negative migration.
The balance was centered and other commercial real estate, however over a broad range of category.
While the deferral Fry I watch remind folks that most of our deferral programs were four month.
So the vast majority will be getting making payments in August.
We granted over 3000 requests for payment deferrals amounting to about 1.6 billion in total loans through June Thirtyth.
As I noted last quarter. We believe these deferrals are in the best interest of all of our stakeholders as we try to work our way through this pandemic.
Most of the deferrals little over 1500 or roughly 690 million.
In dollars were granted to clients at our dental portfolio.
Another 178 million in loan referrals were granted and hospitality.
Followed by office at 116 billion.
Health care non dental 107 million.
Retail 93 million.
And restaurants at around 66 million.
In total the categories I just reviewed account for approximately 76% of our deferral.
With that I would now like to give you some color on the portfolios, we believe to be some of the first impacted by the pandemic.
For Columbia that includes hotel retail restaurant aviation and of course, our dental and health care portfolio.
In aggregate these industries accounted for about 2.4 billion in loans or roughly 25% of our loan portfolio.
The largest portfolio impacted by the cold and 19 pandemic is our dental portfolio.
I'm sure. Most of you are aware most states had directed dental practices. The cease operation with the exception of emergency types of procedures last March and April.
So effectively most dental offices were closed until the end of May.
When we last spoke about 86% of our portfolio was in states that had yet allowed dental practices to be open.
Today, 100% of the states, where we have exposure have allowed dental offices to open with appropriate cobot 19 protocols in place.
As of June Thirtyth, we had 879 million in dental related loans, representing approximately 2745 notes for an average note size of 328000.
Therefore, it is a very granular portfolio.
Within this number is approximately 635 P.P.P. loans for a gross balances 67 million.
So the growth in this portfolio with isolated to PPP low.
Again, we believe the impact on this portfolio is truly transitory.
Today most of these practices are generating revenue at around 82%.
Three pandemic level.
At this level of revenue generation, we believe most of these practices are operating above breakeven.
The combination of deferrals and PPP loans are allowing these practices to move forward with little impact on the bank's balance sheet.
Today, we've had very little request for additional relief within the dental portfolio and continue to report 95% as pass rated.
Excluding the dental portfolio, we have another 1.6 billion or 16% of our portfolio to discuss.
The next largest segment, which we have identified as having high risk relative to the economic disruption caused by cobot 19 is our retail portfolio.
We have approximately 568 million at retail related exposure.
Flip between commercial real estate and commercial business loan.
This represents about 6.3% of our loan portfolio.
Again growth in this portfolio was driven by PPP low.
We granted 394 PPP loans for a cumulative total 75 million to our retail customers.
The largest part of our retail exposure is comprised of commercial real estate loan with approximately 442 million imbalances.
It is evenly split between Washington, and Oregon, and as you would expect centered within the Portland, and Seattle and I'd say.
The average loan size is 370000.
Again, we provide retail loans, primarily the standalone retail centers like auto parts or building materials and garden stores, along with food and beverage and gas station.
In addition, the portfolio contains grocery anchored centers and mixed use properties, mostly strip centers.
We're not in large downtown core metropolitan areas, nor do we financed regional malls.
Using at origination value the average loan to value for the portfolio is 52% with 97% of the portfolio.
Having a loan to value less than 75%.
We have stress tested this portfolio for an equivalent declined in value that's seen in the great recession.
The average loan to value rises the 64% with about 72% other properties, having a loan to value less than 75%.
For the entire retail portfolio, 86% as pass rated.
7% as watch.
5%, its special mention and 2% substandard.
The breakdown is essentially unchanged from the first quarter.
We did see an uptick in deferral requests in this portfolio during the second quarter and Fred about $93 million in loan deferrals or roughly 16% of retail portfolio.
Most of this activity most of this activity occurred early in the quarter and the pace of new deferrals has declined greatly.
Which is consistent across the entire portfolio.
Let me give you a little more color around deferrals for the entire portfolio.
During the month of April we committed 1.2 billion in deferral.
Therefore, we are averaging about 298 million a week.
During the month of June we granted 58 million in deferral for an average weekly volume of 12 million.
So far through the first two weeks of July the weekly volume has declined to 5.4 billion.
So the demand for deferrals has declined.
Okay, let's discuss hotels next.
We have 336 million in hotel loans, representing about 3.4% of our loan portfolio.
About 35% is in major markets, which would include the Portland, and Seattle and I say.
However, we also have about 16% of hotel portfolio or $55 million up exposure out all the Oregon codes.
To give you an idea the types of hotels, we fit and most have one of the following flag.
Holiday and best Western choice Marriott and window.
In total flag properties comprised 70% of the portfolio.
The average loan size is 1.5 million.
Today, we have granted deferral requests for about 178 million or half of the portfolio.
We anticipate the recovery in the hotel sector to be prologue.
I would expect many of these clients will seek additional support throughout 2020 head into 2021.
With this in mind, we were working on a number of options for our clients, which include you Sta program. The main street lending program, along with more conventional solutions as well.
Similar to the retail commercial real estate loans, we continue to do stress testing on this portfolio as well.
The average loan to value for the portfolio based on originated appraised value is 54%.
With 99% of the portfolio, having a loan to value less than 75%.
On a stressed basis about 71% of the portfolio has a loan to value less than 75%.
Not dental health care is about 297 million in total.
This was another area, where we saw a fair number of PPP application.
We extended 322 PPP loans for around 48 million in this segment.
PPP loan activity was that's responsible for growth in this portfolio.
Approximately 93 million of the portfolio is veterinary.
Other 152 million our physician practices are very encouraging.
And 52 million as other types of health care providers, such as Chiropractor's physical therapist in counseling services.
The average loan size is 311000.
As of June Thirtyth, 98% of the portfolio is pass rated with 1% on watch and 1% rated substandard.
We have granted deferral requests for about $107 million in total in this segment or roughly 36% of the portfolio.
Similar to the dental space, we see this sector rebounding as folks are once again able to see their orthopedists dermatologist or optometrists.
In addition, elective surgeries such as hip replacements knee replacements Korea's cataract and cosmetic surgeries are now being performed.
Okay.
Restaurants in foodservice.
We have approximately 214 billion to this portfolio. This two thirds being commercial real estate loan.
The average loan size is 265000.
Today, 87% is pass rated 6% lot.
3% special mention and the balance is substandard.
We have granted 157 deferrals for about 66 million in this portfolio.
The portfolio did see negative migration during the quarter, primarily out of the path and watch categories to special mention and substandard.
Similar to the hotel in retail segments, we see this area, taking some time to heal.
We do stress testing on the CRT portion of this portfolio and on a pre pandemic basis. The average loan to value was 58% with 93%, having a loan to value less than 75.
Again on a pre pandemic basis.
Under a stress test scenario loan to value rises to 72% with only 54% having had loan to value less than 75%.
The last portfolio I'm going to discusses our aviation portfolio.
It is comprised of both direct exposure to domestic airline carriers as well as entities at least airplanes at engines to airline carrier.
In total the portfolio is about 148 million.
What about 100 million being direct exposure to us domestic airlines.
And the remaining 48 million and exposure to less stores airplane.
Today most of the portfolio is rated special mention.
With the exception of one credit rated walk in one rated substandard.
Of the domestic airlines, we have exposure to.
They have raised over 33 billion in additional capital to assist them through this pandemic.
Including carriers, we do not have exposure to the amount of capital raise today exceeds 63 billion.
As such this additional capital combined with the expense reduction efforts results in all of our borrowers having over 12 months of burden raised.
In addition, these domestic airline carriers are continuing to negotiated agreement.
Amounting to billions of additional funding with the US Treasury via the cares Act.
Within our portfolio our customers have executed a little over 11.7 billion in signed letters of intent.
And industry wide approximately 20 billion in letters of intent have been executed.
While no final agreements have been executed and no timeline for funding has been provided we know if needed additional capital is available.
We believe this government funding will help them recover from the coated 19 impacts along with the billions of dollars of capital already rate.
Most of our domestic airline exposure is secured by aircraft with a pre stressed loan to value of 69%.
Got a current loan to value, we believe closer to 72%.
As for the leasing portfolio, 45% of the exposure is in Asia.
27% Europe.
And 8% North America.
The rest is in South America, and the Middle East.
The majority of the portfolio consists of narrow body aircraft with an average age of 8.2 years.
For the entire portfolio. The average age is 6.7 years with wide body the lowest at 3.4.
We view the younger more fuel efficient aircraft as being the most in demand post pandemic.
Based on origination values, our average loan to value for the portfolio is 73%.
However, based on what we believe as today's value the loan to value is closer to 82%.
Okay, I'll now turn the call over to clip.
Thank you Andy.
As I stated on our first quarter earnings call Columbia Bank is actively meeting the challenges of the disruptions caused by codes at 19.
The strength of our balance sheet credit profile that Andy just reviewed.
Acquity and capital position are serving us well and we continue to expand our reach.
Right recent examples of the ongoing reinvestment in our business are the deployment of Xcel earlier, this month and the construction of our fully see neighbor hub, which is scheduled to open later this quarter, sending a clear message on our long term commitment to the treasure Valley.
We continue to receive recognition for the work we do on your behalf and are honored to recently has been selected by Forbes has the best Bank in both Washington and Oregon.
These awards are a direct result of the tremendous work done each day by our bankers.
Recent external events have underscored the importance of accompanies values and culture.
Diversity and open discussion is core to Columbia banks culture and during this turbulent time, we continue to engage with our employees in communities through active dialogue and outreach.
This morning, we announced a quarterly dividend of 28 cents.
This quarter's dividend payout of 54% of earnings will be paid on August 19th to shareholders of record as of the close of business on August fit.
This concludes our prepared comments and Elmira, we will open the call for questions.
Thank you at this time, we would like to take any questions. John We have first today and is there. A reminder, you may ask your question, where this fall nine most pressing star London and your telephone keypad and two of your request to me press the pound cash.
Neal ascended chats questions over the acuity panel on the web platform.
Click on QB option.
Yes type of question and you'll see area and you make mix.
We have a first question over to follow nine from this.
Your line is open. Please go ahead.
Hey, good morning, guys.
Morning.
I was wondering any do you mind rattling off to the.
The special mentioned in sub standard portfolios again for the quarter.
Mr. just I think the those two numbers.
Yes, that's no problem I can do that.
[music].
So our special mentioned loans are now 387 billion at our substandard loans or 313.
Perfect. Thanks.
Then I wanted to talk a little bit about the geography of the reserve build last quarter. We saw that the majority of the increase was related to commercial portfolio was it similar this quarter and do you have their commercial and consumer reserve to loans ratio, excluding PPP on hand.
Well, our reserve isn't as complicated as some of the larger banks. So it's.
I know we allocated.
But I don't have those numbers.
With the arena.
Okay.
So that's like a yet.
Okay, then just kind of talking about the if you looked at I think it's on slide 19 that shows that the macro factors again kind of weighing on the reserve the majority of the reserve build.
Looking forward I mean.
Given the kind of visibility that we have now versus kind of at quarter end.
You see that with the majority of the reserve build should kind of continue be impacted by that or should it be probably.
More geared towards portfolio migration going going forward.
Well.
First of all our consumer book is really small it.
Performing fine so it's really not drawing much in reserves in terms of looking forward.
So with Cecil it's it's all about your economic forecasts.
If you look at our.
First quarter.
We had over 400 million in loans downgraded.
Over 75% of the reserve build was due to the economic forecasts. So.
Even in a quarter, where you doubled the size of your.
If you will problem loans.
It hasn't muted impact from a reserve build standpoint.
So the real I think wildcard.
Continues to be the economic forecasts.
And.
Of course, I said in my speech.
While the recent economic data was pretty good although today unemployment came out at 1.4 million.
Unemployment claims.
So I think the real question as you know.
What's going to happen to the consumer as we enter into the latter half of the third quarter with rising cases.
If you look at California, and Texas.
Some of those states.
They've rolled back much more significantly than others.
States like Idaho, which we are in historically has not been impacted and now you have the governor try and get people to wear masks.
So if that puts the.
The consumer back on the sideline than the economic forecasts for the third quarter, we'll continue to be poor.
And we will that continue to drive more provisioning.
If the consumer doesn't get frightened by that and the case counts improve.
And we don't end up going backwards, then I say migration will have a larger percentage than what it has today, but it will still the majority will still be driven by the economic forecasts.
That help you at all yeah, no that those okay helpful. Thanks, and then just lastly.
And maybe this is for Clint just kind of on the PPP loans do you mind, just giving us the kind of schedule you guys are modeling for for forgiveness, and then what percentage of the overall portfolio you expect to be forgive him.
Well I think that.
That's still a bit of a moving target.
Relative to what the entire process like and.
Well if congress passes.
Expedited relief for the smaller ones I know Theres, a bill circulating in the Senate right now that.
Further.
Modifies the forgiveness process, but I'm going to defer to Christmas season.
Very close to.
Most of our internal focus on on mall that forgiveness process and what that might look like.
Thanks Clynt.
The other process continues to evolve.
We're obviously very hopeful im sure with others have an expedited process.
If you use a certain amount of about 150000 that'd be somewhere in excess of 3000 of our request would have an expedited forgiveness process.
The rest kind of remains to be seen as the timing you now were crossing our fingers and hopeful our clients are anxious to start that process and be able to move forward as well.
But we're really waiting for the guidance to come out of when we can actually something that we're ready to go and Axeight. We're anxious our clients are anxious but tends to be determined.
As far as the amount of overall forgiveness, I think thats going to be.
Anybody's best guess.
I think when we first started having an eight week timeframe in which to deploy the funds and some of the other restrictions that were on it.
I think it was a lot lower number extending through the ended the year.
Allowing the numbers to change from payroll to other types of items as well, which in a position when there.
You know a majority and I'd say a high majority is likely to be fair given I think the program to set itself up too.
If a.
Recipient spends the money correctly, then you'll have a an extremely high forgiveness rate.
But there's also the opportunities where some folks may indeed go out of business or something so I can't really give you a clear number but.
I'm looking at as Theres, a very high percentage that will be actually for given.
When they come out and it will trickle through the ended the year.
Okay. That's helpful I'll step back thank you.
Sure.
Your next question comes from the line of John Hochschild. Your line is open. Please go ahead.
Thanks.
Everyone.
John.
Sure.
Maybe start with a margin.
Yeah.
Okay.
[music].
You broke up there John but I think I think you want to talk about the margin neutral that definitely gap.
John we're not picking up.
I'm not sure if you.
Get a little closer to a cell signaling, that's what's going on or try and other line.
Okay, I can dial back im although bucket.
We have another question comes the line of Steve I suppose in your line is open. Please go ahead.
Hi, Good morning. This is lee by Posen on for Jeff Rulis.
Morning.
Morning.
No I saw it related TPP yields per pound the benefit to interest income.
And you mentioned that the majority of the decline in comp.
Was related to.
Deferred expense there I was wondering if there is there a number for the deferred expense that was recognized this quarter.
I guess it to maybe give some more color generally within the expense categories.
Mix, a breakout kind of five different items that I think I'll help you arrive at what might be considered a core rate.
Within the comp and benefits line.
Theres, but 9.3 million and that was.
The vast majority of which were those TPP, which nation cost of Fas 91 impact.
In the.
We also had a credit with our regulatory premiums that was about 300000 in the quarter.
We had some outsized data processing costs of about 1.1 million that legal and professional costs that were outsized by about one point threemillion.
And and then in the other line.
We had expenses there that were about 3.3 million outsized.
And that was largely the provision for unfunded commitments. So if you add up each of those items you come up with about 3.9 million in total kind of what I would consider to be outsized or abnormal items, and which is pretty close to the 85 million that we've talked about being a being a run rate.
Okay.
Keep in the color there.
Moving over to the credit side I appreciate the.
And the detailed live is broken out there, but then the credit to NPK, particularly that theory in a non credit any more color on those relationships.
You mean the movement in the CR in PA.
Yes.
No not really.
They just represents commercial real estate projects that were struggling pre pandemic.
It is there's a couple of them that are in there we've been working with these folks for awhile.
There are just kind of running out of steam and so replace them on non accrual.
We'll have to see where that goes.
One.
We'll probably take a longer term workout the other one I anticipate.
One of the sponsors will probably dilute the other guys out there [laughter] so.
And that would be just fine with us.
Okay.
Thank you Thats it for me I'll step back.
Once again I would like to remind everyone. If you wish to ask a question. Please press star one and your telephone keypad. You May also Sandy Chad's question over the web platform basin. Thank typing it into the open area then connection.
You have my next question comes from the line.
Jon Arfstrom. Your line is open things go.
All right some better.
I'll, let you better job.
All right I'm standing on the room for my House.
[laughter] works.
So here in a quick question for you I'm sure you had an interesting quarter first want to mature but.
Just let's get right to the margin in terms of you talked about liquidity.
The loan pricing prepayments fees.
All those are headwinds and I guess, we understand that but how do you want us to think about.
The margin from here and do those categories, all kind of maybe prepayment fees don't but the other categories kind of persist.
And constant pressure in Q3.
Yes, that's exactly right and when I gave in a kind of a breakdown of those different drivers.
And we also have that at the within the the.
Investor presentation, we posted to the website at the bottom of page 11, and so it's kind of shows that this shift from first quarter second quarter, and what drove that 38 basis point decline.
Excess liquidity was clearly a big part of that and as I mentioned, where we're going to try to get more of that deployed but we're going to do so.
No it's pretty conservatively as we try to ascertain what kind of you know what the deposit or behavior is with all the new inflows that came onto the balance sheet. So hopefully as we get some of that deployed that will help.
Recover some of the of the pressure but.
But fundamentally the low rate environment is.
The real challenge here and.
As an asset sensitive institutions.
Theres theirs.
There's not a great deal that we can do given where our funding costs already are.
So.
If you look at the.
Okay, where our yields when quarter to quarter, you can see that came down quite a bit.
On the on on the loan book as well as the investment Securities our new purchases on investment securities. During the quarter. We're right around 150. So that book is going to continue to be under pressure.
Someone on the on the on the loan side as a as Chris mentioned, the new loans in the quarter came on a 379 again well below what the averages for the book.
Now that arguably might be little low just because of the mix of the types of credits we put on during the quarter. So hopefully that.
You know will will come up but.
But if that's where new asset yields are coming on the balance sheet. Obviously, we're we're facing up a pretty strong headwind on that so.
You know, we will try to make up some of that in terms of how we're pricing products and getting things getting more of this liquidity deployed but.
I think the margin is going to be core margin I should say is going to be real challenge, obviously on the TTP loans that too is you.
No I did a little bit of pressure on a on a.
It will.
Excluding the rate of of forgiveness on that.
That could continue to cause a little pressure to given the low yields on that category.
I would expect that if the 50 forgiveness comes in.
I think there's a lot of people expect over the next couple of quarters. The acceleration of the fees related to that will well at least give us a non core bounce to the margin. So we'll.
It's kind of wait and see how that how that plays out.
Okay.
I know, it's a hard hard to project with that helps.
Andy question for you.
The.
It was great detail in all would you consider maybe stressed or at risk categories.
But is it safe to assume that those that are not deferral.
Would be credits you consider healthy where they have the resources to stick around and.
And.
Okay their loans.
Is that fair assessment.
Yes, I don't think that that's a.
All of that characterization.
And there are a lot of businesses.
You know like even within our hotel segment, you know not every hotel is doing poorly.
We have some properties that have really benefited.
In the strange way.
Because of co bid.
And that.
Other types of facilities have closed down and so for construction workers for example, the extended stay folks.
[noise] are doing quite well.
And a lot of the rural markets.
To achieve social distancing.
And then also to provide.
A place in case, a co worker at a processing plant or manufacturing plant gets tested.
A lot of businesses are renting hotel rooms to have those places where those individuals can go for 14 days and get quarantine before they go back to work.
So there are lot things like that and so yes, I would I would agree with your characterization.
Okay.
And then last one kind of a random question, but maybe it's true.
Chris or Clint.
But.
Curious.
There's a way to characterize how your people are spending their time today.
Versus probably we're spending their time see back in January February I'm, assuming it was all hands on duck TPP and I'm just curious to kinda give just sense of normalcy what are your people doing today versus what we were doing.
And does that make sense.
Yeah. It somehow all I'll start and then and then I'll, let Chris finish.
No. It is says we.
Got past.
The fee.
Grind of the PPP origination process.
And into the month of May.
We really started focusing on what's the new normal at least for this interim period, and and I think that that debt.
Work that we did then has actually set us up for what how things have played out since the end as as we look at.
Even things like schools across the country going virtual the impact that has on on families. The capabilities that we have for folks who can work remotely.
Also the need for continuing to stay connected to the organization and rotate them in.
To the offices in a safe socially distance manner.
What.
We've seen I'd say over the last two months.
And this is even true for the executive team as we've started resuming some of what we would consider normal types of activities.
Traveling.
Rob footprint spending time in market with our bankers.
Doing some some client calls.
It's very different some of those client calls now by our bankers are being done.
The.
Thanks like Microsoft teams have resumed but some are are are also occurring in person and and I think thats something that our bankers have have embraced is getting back to what feels normal to them and.
The ability to not only take care of their existing client base, but also continued to develop.
For the prospects and and win new business and we've had some examples.
In the last.
45, or 60 days of significant wins on the new business from and so so I it.
It's not it's not business as usual because you know I think as a society right now nothing is normal, but but it certainly is a sustainable way.
For us to continue to grow our franchise and that's what I was getting at in my prepared remarks.
I believe the term I use was we continue to expand or reach and.
Reference the rollout of of itself. So we're still focused on.
Digital is more important than ever and the work we've done the last several years is certainly paying big dividends now.
But also we're looking at markets that.
We're very.
Bullish on and expanded our physical presence like what we're doing in downtown Boise.
So I think that at all.
All of those types of activities give our bankers a sense of normalcy and I'll turn it over to Chris to fill in any gaps and I might've missed.
Thanks.
John I think the parts. So they can fill in iron is.
With a return to a little bit of normalcy in our as I mentioned our facilities. Our branches are lobbies will open a majority of the time during the last quarter and what we've seen as you know people moving more to UTI utilizing drive throughs utilizing.
Mobile deposit options and so we spent some time working on scripting and outreach to our clients since or not I mean like this in the same amount to proactively start talking to them about things like to sell.
Extensive project went into that promoting that so that.
Well, we can we can see that adoption rate.
Moving increase in say also folks have looked at the opportunities of while they may not be able to travel where they wanted to may not be able to do on European vacation.
We've encouraged our folks to find time to get away from the office and just try and decompress because it really has and all hands on DECT and all hands on deck in quite a sprint.
For.
For the six months of the.
First half of the year, so incursion to do that knowing that the second half we're going to be faced with some.
Employees will the school closures on what that means so again trying to get people. Some relaxation on some rests in the meantime, it's focused on the business going forward.
You've heard us talk about the things that we've invested in and we do.
We'll continue to do that we'll continue to look at our distribution network.
We're also remaining opportunistic and there are.
There is a business that is out there there were opportunities coming up as Clint mentioned people are working there their prospects. It is different there's not as much now entertainment pain men or anything of that nature don't expect that probably change throughout the end of the year.
But our teams being very effective with our approach and their experiences.
As Wayne out in that and then in certain certain business lines.
We've seen a real uptick back to more of a normal.
Pre flagging new deals.
No it wouldn't be surprising if I told you that in the second quarter, our health care group did about 10% of their normal volume you know as Andy described the dental offices for close so that makes perfect sense.
You're starting to see a lot of that come back and we're looking at those very closely and not to belabor. It but we do spend more time on each and every deal making sure we understand I'm not only where they've been but what are they doing too.
Evolve their business.
And in the total bid environment and whats coming because now it's more important than ever to understand the changes and how that could potentially impacted revenues. So in a new loan deal takes it takes longer but it's a very disciplined approach that we've always had and we're sticking to it so I'm hopeful that provide shed some color.
The put those thank you.
We have our next question comes from the line of Baby can you. Sir Your line is open. Please go ahead.
Hey, good afternoon everybody.
Hi, David.
I just wanted to get your thoughts and you just touched on it a bit but just thoughts on organic growth loans, that's PBT were down a bit more than expected. It seems like this is largely due to declining seen our utilization, but just curious the trends you're seeing how much of this was strategic like where you are tightening the credit box versus assets.
Deals or just simply less demand for new credit I guess.
It's on growth going forward, where you're interested in growing and even where you're seeing demand for new credit.
Right.
Sure.
Do they Andy Yes, I think that.
The second quarter was a tough quarter for everybody and so there just wasn't demand.
On this on the C.
For the CRT fried.
For you know.
Such activity.
So I think you've you look across the industry.
That's pretty consistent for most banks.
I think to the bankers were extremely distracted by the encompassing nature of.
PPP.
As we've kind of move beyond that.
With that PPP and the relatively modest activities you know the cash build also means to pay down on on the other revolvers and.
We believe our utilization revolvers out 43% so down significantly.
What we are seeing though is businesses are starting to get to get a little bit more active.
In.
The fried of looking at Okay, I still need to keep my business running I still need to invest.
In capital projects that ensure that I remain competitive.
I think there are more modest the projects and maybe what we've seen in the past.
Seeing people necessarily moving to new markets or launching new products, but rather investing in what they are already do can do well and so from that perspective.
The credit decisions through easier.
We also have seen an opening up in the construction area with the state's opening up and so construction activity again is moving forward as Chris noted earlier activity in the homebuilding segment is very strong there were also seeing commercial real estate projects now getting.
Back underway and so those are kind of areas, where we see growth in demand.
But I would characterize it as bought us at this point.
Yes, David I'd agree with Andy on that it is it's building machine some things come back is there still folks there.
Cautious, but we're also starting to hear more about businesses that are potentially.
Wanting to sell and so that that transition.
We will create opportunities and we're doing all we can be in front of though our centers of influence and things and be in the right place to participate in malls, but again, we'll have to look at each and every one of them on with all the higher level of due diligence and which makes perfect sense in this environment.
And I wouldn't say at any one specific area, we've always had a philosophy.
All being in markets will be cautious, but we'll look for opportunities that are available in any space and know that we're going after work a little harder to maybe find the best of the best and Thats part of what we do and the discipline so between production and Andy's credit team and we're very close.
To be instead allow time right now priest lighting things and looking at them. So that we ended up with a good client experience and also end up that's a good credit joins our books so.
Optimistic as the best way to look at it.
There's a lot of unknowns that are out there that could change that at any time.
Okay. That's helpful. And then just kind of following up on that production commentary has there been any I just curious to get your thoughts on hiring as all this disruption created additional opportunity for new hires in you know maybe expand into new markets and pick up a team.
It's kind of down the shortlisted, maybe be a bit more aggressive while a lot of others are kind of being more fearful.
Yes, the short answer is yes.
We continue to look at opportunities you never know when somebody from that organization might be ready. So we've always had a I too.
Good people get teams on we're always open for that coming on board as Clint mentioned, we're expanding our presence in Boise.
And he knows the neighbor hub, there and so disruption happens across the industry at all places and different organizations are going to attack problems and different manners and.
That creates opportunities for for the right individuals to.
Potentially look for something different and I think our values in our culture and the way we do business attracts a certain type of ended that individual.
We've been successful with that in the past and we expect to continue to be successful.
Okay. That's helpful and just one quick one and I apologize if I missed it but do you have an estimate for net PPP fees that are expected to come through net of deferred or net of origination it costs.
We looked at that I'm not sure that were disclosing that but I don't know.
[music].
We can follow up afterwards I guess.
Thanks, I think I think just we havent disclosed a number but I think of what I've read just from you know.
All the analyst reports and different thanks.
I think we're probably in that range of what you are you all are predicting for the industry as a whole.
Relevant to the amount it.
Okay. That's helpful. Thanks.
Your next question comes from the line of Matthew Hi, Carolinas, Ken. Please go ahead.
Hey, good morning.
I apologize if I.
She has already touched on the spin jochem between a couple of calls.
I guess, what the deferrals and knowing almost half of them came from the dental portfolio do you have a sense and.
As you talk to what's your.
Customers.
During the quarter, you know what percent of that deferral amount like care here in the third quarter.
Are you asking can you kind of broke up there and how many will want additional deferrals.
Know, how much will cure or how much Wilson I presume regular payments, what's your guesstimate for.
The percentage.
Almost all of it.
That's great Okay.
And then just.
You know Seattle, you had chaz shop, Portland looks like a disaster. These days I'm just how how is this.
Impacting kind of day to day.
You know not not really at the bank, but just among your customer base. So you've seen it kind of.
Disrupt.
Business within your portfolio or or not.
You know I I don't know that we're seeing.
A tremendous amount of business disruption.
From from our clients and in in even ourself with operations in.
In both those areas you know we've had.
Just a nuisance of some.
Broken windows and and.
Though vandalism with.
[music].
Tagging then you know other things that you can quickly address.
I think it's it's more the underlying.
Themes that I'm hearing from from.
From clients and and businesses and Christian I had had a meeting with.
One yesterday.
That's been located in downtown Seattle for.
During tire 20 year history their leases up next year and.
They're looking at Belvieu.
It.
So I think that's that's really the risk longer term is you had.
Both Seattle and Portland are beautiful downtown cities.
That.
Our on on some sort of.
The third of at a turning point and.
For several years to the city Council for Seattle, It's been marginally.
Anti business and I think what we're seeing there is no longer even marginal and so that's concerning but I think it's also an opportunity for the greater.
Metro area I think it's an opportunity for.
The Tacoma and Pierce County community were were headquarters.
And have a lot bigger operations and I think it's.
A tremendous opportunity for Bellevue and can eastern King County.
And then also if you think about the Portland Metro area Theres opportunities across the river in Vancouver, and in some of the outlined communities that are outside of multiple in the county there.
I wouldn't say I'm, losing sleep over this but I wake up in the morning thinking about the possibility of some of the business climate that were seen in Seattle and Portland spreading.
To these other communities that I just mentioned.
And then I do think thing that case, it could be very disruptive to.
Our clients.
You know that's why I think I'm pretty bullish on on on the Boise, Idaho market as well is that a time we've spent.
There and meeting with the economic development.
Chamber and other folks.
And just seen the sheer volume of inquiries are getting from business relocations. So.
So.
It's time's going to tell I think it's we're a little over your way from elections for this city Council and I think Thats, where we'll see kind of if business both both.
What they're thinking and what we're hearing now but it is something that I think we're all closely.
Monitoring and and.
I don't know and your Chris have any additional insight.
Yeah, I think he most of it narrows, it's not really disrupting our key today operations, but it's more staying close to any and all clients that we have.
And what their thoughts are the best and to find a hammer home is full.
One pay attention to it and achieve summarized it well by same time hotel and it is it is an obvious.
Concerning for us.
Yeah I think.
Also the activities in downtown core areas.
Worth white collar people, they're mostly working from home anyway. So it's not really disrupting businesses from that perspective, I think what the bigger issue for businesses.
Mostly in the Seattle market is just.
How business friendly that community in the city is.
The taxing environment is what's really pushing people across.
Like Washington pit Bellevue.
Okay.
Great and then maybe just back to the P. P P.
How are you guys modeling kind of forgiveness process here, you kind of sense that most of that if not all of it will be forgiven and what's your expectation on timing is you think it'll be more.
More fourth quarter, and then maybe a little bit ended the first quarter and then be gone.
Matthew It is in terms of modeling that out it's there's a lot of uncertainty.
Obviously there the.
The notes or to your terms, but the expectation is that a lot of it is for given relatively quickly.
You know where.
I think expecting the majority of that to happen.
The vast majority of it really in the back half of this year and into early next year, but.
But it's really hard to say exactly with exact timing, if that's going to be.
There's also some unknowns and data of win.
We can submit so thats one on known and then when we do some that when we actually received.
So there's some things that we were still unknown in that sort of take drag a little bit.
Okay, I assume you cant even philly.
When you can't get participants today [laughter], even if you wanted to.
Which is the beauty of this program.
But.
I think that for a lot of businesses.
Because of the accounting impact, they're going to want to get us.
In 2020.
Okay, and I assume you have no appetite to sell TPP loan to a third party.
No.
We usually don't meet those emails may come in.
Got it thank you.
Your next question from Gordon why your line is open. Please go ahead.
Oh hi.
Aaron I wanted to the follow up on the margin discussion and particularly the the potential for dog deposit outflows other than those that are PPP related.
I guess I was wondering if you couldn't hazard a guess it it trying to size up with that could look like.
[laughter].
I will tell you. This it's something we've spent a lot of time thinking about because obviously the deposit flows were very strong.
And so we've gone back and looked at it past cycles to see what consumer.
And in business cost or behavior was like at the time.
Having gone through that exercise, we actually feel pretty good that this should be pretty sticky funding but.
But at the same time this is.
Unlike anything we've really finished before so.
His point I think were we're assuming that a lot of the TPP funds are utilized for business purposes as expected over the over the coming months and with the.
Remainder of inflows, we've seen for other reasons.
You know were.
We're we're hopeful that a lot of that sticks around but we're also going to.
Be prudent in terms of how we get that invest so it's you know there's just there's just a lot of uncertainty to it but hopefully that at least gives you some color on our and our thinking.
No, but does it if it were to stick around if you felt more confident with the.
Would you consider I know you typically targeted about 800 million in non core funding balances would you consider moving those lower it.
The lower cost deposits were stickier.
It's a question on again.
I think historically, you've tried to manage noncore funding to around 800 million.
And I was wondering if you do determined that these deposit inflows are a little bit more sticky whether you consider moving that 800 million.
Lower.
Right I played out they yeah, we haven't fact actually already let let a lot of higher cost one and go. So as you know is it makes sense can do so we will continue to do that so it's we.
You know we tie that in the past as part of a.
Balance sheet strategy, but given where rates are now.
We're very focused on keeping the funding cost as low as we possibly can obviously our.
Deposit costs. It it's seven basis points is it's hard to beat elsewhere. So.
And then just housekeeping and want to double check that does the DPP fees or do they show up in the the footnote the margin footnote with the 5.1 million of net deferred loan fee amortization.
Or is that layered on top.
Good.
So I repeat the question. Please in the margin footnote, where do you give us the the amortization levels than that.
Deferred loan fees this quarter.
I'm curious if PPP flows through the number and I think it was 5.1 this quarter.
And we'll follow up well okay.
Fall off with you offline on on on on that one.
The PPP would be small, though because those are four year note.
So.
They weren't outstanding for very long to amortize much of the C into income.
Thank you.
And you have no questions at this time please continue.
All right well, thanks, everyone for joining us and.
Well look forward to another interesting quarter here in the third quarter and chatting with you all.
Some point during the remainder of the quarter or on our third quarter earnings call.
Thank you.
Thanks to all the participants for joining US today can you help you find is sub debt, especially on T. should inform again.
This concludes our webcast and you may now disconnect have a great.
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