Q2 2020 Hope Bancorp Inc Earnings Call
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Now, let's turn the conference over to Angie Yang Director of Investor Relations. Please go ahead.
Thank you Andrew Good morning, everyone and thank you for joining US hope Bancorp 2022nd quarter. If that's your conference call as usual we will begin.
We all be using a slide presentation to accompany our discussion this morning.
Not that sell already please visit the presentation page our Investor Relations website.
A copy of the presentation.
If you are listening it through the webcast you should be able to view the slight computer screen as we progress to the presentation.
Beginning on slide two I'd like to begin with a brief statement regarding forward looking for park. The call today may contain forward looking projections regarding the future financial performance of the company I Trust that.
These statements are based on current expectations.
That's for cash projections and managements assumptions about the future <unk> at the company, including any impact as a result, other cold Nike's pandemic, that's well listen businesses if markets in which the company does and is expected to operate.
These statements constitute forward looking statements within the meaning of the U.S. Private Securities Litigation Reform Act I 95.
These statements are all are not guarantees of future fourth.
Actual outcomes and results may differ materially from what is expressed or forecasted in such forward looking statements. We refer you to the documents the company files periodically with the FCC, that's well lets the safe Harbor statements in our press release issued yesterday.
Corp, I said no obligation to revise any forward looking projections that maybe made on today's call [noise].
Good he cautions that the complete financial Michelle to be sitting in a quarterly report for you for the quarter ended June 30 2020.
For materially from the financial results being reported today.
In addition, somewhat the information referenced on this call today or non-GAAP financial measures. Please refer to our 2022nd quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.
Now we have a lot of my eye for this call presenting sets management side today will be Kevin can hope Bancorp, Chairman, President and CEO and Alex coal, our executive Vice President and Chief Financial Officer.
Credit Officer, Peter Koh, It's also here with us today and will be available for the Q <unk> session with that let me turn call over to Kevin.
Kevin.
Thank you Andrew Good morning, everyone and thank you for joining us today.
Let's begin with slide three with a brief overview of our financial results.
We executed well despite the continuing challenges presented by the called it 19 pandemic and delivered a solid quarter of earnings driven by significant balance sheet growth and disciplined expense control.
We generated net income of $26.8 million for 22 cents per diluted share in the second quarter off from $26 million or 21 cents per diluted share in the preceding first quarter.
To some extent they involve the environment created by depend dynamic has accelerated our progress what a number off the longer term strategic initiative that we have in place to enhance our profitability and franchise value.
First we are more effectively leveraging our cost structure.
With the solid balance sheet growth, we were able to generate while maintaining disciplined expense control our non interest expense to average assets ratio improved to 1.60% and the second quarter for 1.87% in the preceding first quarter.
Next during the second quarter, we made significant progress with our deposit initiatives and had very strong inflows of core deposits, which has enabled us to continue improving or deposit mix.
Our total deposits increased 10% from the end of the prior quarter with the vast majority of that growth coming in non interest bearing deposits.
As a result, non interest bearing deposits increased to 28.6% to total deposits at June Thirtyth, Oh from 24.7% a year earlier.
Over the same time period, our time deposits have decreased from 46.7% to 35.1% of total deposits.
The improved deposit mix combined with our ability to pass through rate cuts to our deposit deposit customers helped to reduce our cost of deposits to 87 basis points into second quarter, a decline of 47 basis points from the preceding quarter.
Moving on to slide four we had a strong quarter or business development.
Total loans, increasing at an annualized rate of approximately 9%.
We originated $832 million in new loans in the second quarter, which was 33% higher than the preceding first quarter and 65% higher than the same quarter in 2019.
$480 million of our loan production was attributable to the PPP program. The remaining $352 million of loan production came from our traditional business development efforts.
Excluding the P.P.P. loans, we had $216 million in commercial real estate loan production nearly $62 million, Oh, cninety loan production and $74 million of consumer loan production, primarily consisting of residential mortgages.
With our concentrated effort process PPP loans during the quarter, we had just a small amount of traditional SPD originations this quarter approximately $6 million.
Moving on to slide five I would like to share some additional information about the P.P.P. loans that we originated in the second quarter.
Excluding approximately $6 million of PPP loans that were paid off within 21 days of funding we had a net.
$474 million of PPP longs for which we expect to earn in aggregate $18.7 million in lenders fees.
As shown on dislike the vast majority of the PPP loans that we process, we're in a mounts less than $350000, an earning a 5% fee.
Looking at the number of PPP applications process, you can see that 96% of these loans were under $350000 underscoring Vanco Pope's continued leadership position for the small business customers.
While the vast majority of the PPP loans process war for existing customers.
We added 246, new customers that we hope to grow into larger relationships in the future.
Now moving on to slide six.
Let me discuss the loan modification program we implemented.
Help our borrowers manage through the impact of depend dynamic.
At June Thirtyth, we had approximately $3.1 billion in loan modifications granted.
Accounting for 24.2% of our total loan portfolio.
The majority of the modifications up Hayman deferrals related to our theory portfolio with just $151 million for CN islands, and $147 million in consumer loans, which largely represents the residential mortgage loans.
In terms of timing you can see in the chart that the bottom of the slide that the peak of our modifications was from mid April to mid May and these modifications have fallen off significantly since then.
As you can send the pie chart, the vast majority of our loan deferrals or more than 95% of loans modified war for a short duration of 90 days or less.
We're now in the process of having discussions with this borrowers to determine their need if any for additional deferral support.
We have been proactively reaching out to our customers throughout this pandemic prices.
Well it is still too early to project with a high degree of accuracy due to the fluid situation based on our discussions to date. We currently expect approximately 60% plus or minus OVARA commercial borrowers were request a second deferral.
For those borrowers that we'll consider a second round of modifications support will be requesting we will be requesting on <unk> best effort basis concessions in the form of additional collateral hayman reserves or some other type of credit enhancement like additional guarantees.
Yes.
Moving on to slide seven.
The hospitality sector is clearly one of the industries that have been most heavily impacted by the pandemic.
As such we would anticipate the majority of our business customers requesting a second roundup modifications.
We'll be from our hotel motel borrowers.
However, as previously noted our hotel motel portfolio is largely composed of limited service facilities and these properties have been much less impacted by the locked down then the destination full service hotel properties, we believe.
The rebound for this properties will be felt much sooner than the other type.
Other property types in the hospitality sector.
It is also a positive factor that 73% of our portfolio is represented by flight properties and 93% of our hotel motel exposure is located in major M. essays in which we operate.
On another positive note. We are pleased to see that month to month occupancy trends have stabilized for a number of our larger hotel operators and they have been able to operate at or near breakeven during the month of June.
We also have some hotel borrowers who have already indicated they will not require a second deferral.
Even though occupancy trends that down year over year. They have other sources of income or liquidity that will enable them to resume servicing their diet as agreed upon.
That said the duration of depend dynamic and the impact is having on customer behavior and the economy has been longer lasting than any of us would like as a result, we expect the majority of our hotel motel borrowers may need some additional support by way of payments relief.
Until their cash flows further improve.
Over the last quarter, we have undertaken a very comprehensive review of our hotel motel portfolio loan by loan.
We analyze each crowded and placed them into one of the three categories low medium or high in terms of how long. We believe it will take the property to stabilize and return to a more normalized level of occupancy and cash flow.
This review took into account factors such as the location the type of hotel the customer base and current operating trends were available.
Based on this review approximately 75% of our hotel loans were placed into low or medium categories. The remaining 25% that were placed in the high category include properties, such as airport hotels, where we expect occupancy rates to lack H.
General economic recovery, given our assumption that business travel will remain muted for an extended period of time, however, when factoring in the low LTV and guarantor support on these loans we believe.
Should this scenario of an extended recovery period play out any potential losses to be experienced on these loans will be manageable.
With regard to all retail portfolio. The majority of this is represented by strip mall types of properties menu of larger properties of which are anchored by grocery markets and as we have noted before the tenants of our retail CRD properties, a largely service oriented businesses.
As most cities and states across the country in various phases of reopening many of these tenants the operating at some degree of limited service absorbing social distancing requirements as such a retail property owners by enlarge a beginning to receive some level of rent payments from there.
Tenants and thus we are beginning to see some stability for these borrowers.
Based on our discussion today with our retail CRB customers. We currently anticipate that a fair number of these borrowers will also need an additional round the rig.
Additional round of deferrals, but not to the same extent of our hotel motel operators.
Underscoring the impact of the Cobbett 19, we have folder increased our coverage ratio as of June Thirtyth 2020. So this two segments of our portfolio.
Well hotel motel properties, the coverage ratio increased to 1.2 or 3% from 1.04% as of March 31 of 2020.
Excluding impact of purchase accounting discount.
The coverage would be 1.41% for our hotel motel portfolio.
The retail CRD properties, the coverage ratio increased to 1.46% from 1.15% as of March 31 of 2020.
And excluding the impact of purchase accounting discount the coverage ratio would be 1.6% for our retail CRD portfolio.
No I will ask all likes to provide additional details on our financial performance for the second quarter Alex.
Thank you, Kevin beginning with slide eight.
I'll start with our net interest income, which totaled $809.8 million. This compares with under $19.3 million the preceding first quarter.
Which included 5.6 million in purchase accounting discount accretion.
Rich a large pay off off on a quite long.
While we had an increase in average laws and earnings assets. This was more than offset by a decline in our net interest margin.
Our net interest margin declined by 52 basis points to.
2.79%.
Core basis.
Excluding purchase accounting adjustment.
Our net interest margin declined by 33 basis points.
Our core margin was largely impacted by.
Our temporary increase and excess liquidity.
Which we expect to reduce and deploy into second half off 2020.
Without the increase in excess liquidity in the second quarter, our core margin would have declined by approximately 11 basis points for the second quarter.
The compressed our net interest margin was largely attributable to a significant decline in our average loan yields due to the repricing of.
Our variable rate loans, following 250 basis point reduction in rates in March.
In addition, our interest earning assets included a significantly higher balance of.
Lower yielding assets due to the excess liquidity there was a built up when the pandemic crisis merged.
Together with a strong growth in core deposit throughout the quarter.
So excess liquidity had an adverse impact to our net interest margin.
These factors were partially offset by.
59 basis point decline in our cost of interest bearing deposits, reflecting rate reductions in our money market accounts and time deposits.
Together with EUR 1 billion dollar anchors in noninterest bearing deposits, our total cost of deposits declined 47 basis point.
On the prior quarter true 87 basis points.
Well not accounting, though we are amortizing those fees earned I'll keep your loans over a 24 month expect your life all these loans.
And the second quarter off 2020.
We have recognized.
$2.57 million in PPP long phase and we would expect this amount to increase.
And the third quarter with a full quarter us contribution from our PPP alone.
We believe the second quarter represents the throw off.
And our net interest margin.
And the we expect to assist some expansion and the second half of 2020.
Due to the falling factors.
First.
Given that we already had a full quarters impact from the rate reductions as March.
Sure to see relative stability.
Yes.
Loan yields going forward.
Switching to support growth in our interest income.
Second we have additional opportunities to pass through lower rates on our deposits as our CVSR maturing at much higher rates than what is currently at prevailing.
So we expect to have continued reduction in deposit cost.
Which will help.
In our interest expense.
And finally.
We have built up significant excess liquidity.
We plan to redeploy into higher yielding earning assets and reduce higher costing deposits and the second half of the year.
The magnitude and timing of the deployment of our excess liquidity to will certainly be an important factor and doesn't look much of our net interest margin.
Well, we are currently expecting our net interest margin will expand throughout the second half of 2020.
In excess of 3% by end of the fourth quarter.
Now moving on to slide nine.
Our noninterest income was $11.2 million.
2022nd quarter.
Hey decreased 15% from the preceding first quarter.
The decrease was largely due to the impact of course 19 lockdowns.
What's the resulted in a significant reduction in business activity and the account transactions.
As such we had our decline and deposit service charges, reflecting reduced non sufficient to fund and analysis is.
Well as lower international service and the wire transfer fees.
These reductions were partially offset by a higher loss servicing fees quarter over quarter.
Moving onto noninterest expenses on slide 10.
Our noninterest expense was $67 million a decline of 7% from the preceding first quarter.
In terms of significant variances I was salaries and employee benefit expenses declined by $3.7 billion.
This was primarily due to a significant increases and the number of loan transactions processed.
During the quarter as a result of.
Sps PPP program.
The other major factor contributing to lower noninterest expense was a reduction in our professional fees.
It's declined by $1.8 million or.
54% quarter over quarter.
I will note that this is.
Second consecutive quarter without considerable reduction in professional fees.
And the preceding first quarter professional fees were down quarter over quarter by 45%.
During the pandemic, we have further tightened up discretionary spending across our organization.
Which have resulted in declines across most expense line items, including advertising and marketing expenses.
As a pandemic has continued and now expect to be part of the near normal for some time.
We have evaluated our staffing is in light of the changes in our operations due to coking nine Chen.
We are taking their perspective that this is an opportunity.
More efficiently utilize our personnel.
As a result.
All in the third quarter the company affected a 4% workforce reduction in light of the impact a coffee 19 pandemic is.
Having all the economy AD business environment.
This will reduce our salary and benefit expenses by more than $1.5 million per quarter beginning with.
The third quarter.
I would just note that we have recorded a full amount of severance expenses related to their staff reduction of seven of the $80000 an hour compensation expense and the second quarter of 2020.
Our effective tax rate for the quarter was 26.8%.
An increase from 19.9%.
In the prior quarter due to our higher level, all presented pre tax income compared with a projection from the prior quarter.
Well the remainder of the year, we are presented on the effective tax rate approximately 23.5%.
Now moving on to slide 11.
Ill discuss some of our achieve deposit trends.
Our total deposits increased by 10%.
On the end of the prior quarter to a record for $10.1 billion.
We saw the strongest growth in noninterest bearing deposits.
Chris increased by approximately.
$1 billion or 34%.
From the end of the prior quarter.
Approximately $326 million of the increase was attributable to PPP related deposits.
Why the rest largely reflect our commercial customers building up liquidity.
This strong quarter over quarter increase in noninterest bearing.
The positive contribution to the considerable reduction in our deposit cost and the second quarter.
If you recall our cost of deposits picked in the third quarter of 2009 chain before beginning a month by month declining trend so its lowest level in the years.
And the current third quarter.
We have $1.6 billion, so the Cds maturing at an average blended rate of one.
1.81%. So we're looking forward to having another quarter of meaningful reductions in our cost of deposits.
Now moving on to Slide 12, I will review our asset quality.
Due to our ability to work with our close to nine Chen impacted borrowers under their Caris Act.
Despite the significant stress on the economy during the second quarter.
We have relatively modest increases in delinquent loans criticized loans and performing loans.
Oh loss experience, however continued to be.
Minimal.
Net charge offs, representing just two basis points off average laws and the quarter.
Now moving on to slide thought Chen.
We have recorded a provision for credit losses of.
$17.5 million and quarter, which increased our allowance for credit losses.
After net charge off by.
$16.9 billion 261.
Great and million dollars as of June 32020.
The provision for the second quarter reflects.
Declines and macroeconomic factors.
And it has the qualitative factors, including additional reserve on top of that for our hotel motel properties.
And.
Additional management overlay for all coffee 19 March five months.
Our allowance for credit losses increased $261.8 million as of June 32020.
One other $44.9 million.
At the end of the first quarter.
Moving on to slide four Chen.
As a percentage of total loans, our a lot for credit losses increased to 1.26% at June Thirtyth fall, 1.15% at March 31st.
When purchase accounting discounts are included our coverage ratio increases to 1.54% of total loans.
Or 1.6% of total loans.
If you also exclude PPP lungs.
As a side note.
Our PPP laws are included in our sand I portfolio.
Moving onto slide fixed Chan.
Let me provide an overview of our liquidity and capital position.
We entered the Kogan 19 pandemic from a strong position and this was further strengthened.
With us strong buildup and liquidity during the quarter.
The 1 billion dollar increase in noninterest bearing demand deposits was a major factor contributing to the reduction in our deposit costs and certainly.
Supported our liquidity needs during this volatile and uncertain economic crisis.
Looking at our overall liquidity position.
It remains very strong as of June 32020, and our primary sources funds continued to be customer deposits.
[noise]. We also continued to maintain a robust capital position with our total risk based capital ratio.
Tier one common equity ratio and tier one capital ratios all strengthening from March 31st 2020.
We also continued to grow equity with our book value per share and tangible common equity per share increasing quarter over quarter by 1%.
And year over year by 5%.
As of June 32020, we maintained a meaningful cushion of access capsule.
Above the minimum amount required to be considered well capitalized.
We had and minimum 3.23% and cushion or.
$433 million and access capital before any of our capital ratios reaches the wall capitalize threshold.
Finally, I'd like to note that we have completed our quarterly goodwill impairment analysis.
Which took into account the recent decline in our bank valuations and a prolonged coffee nine came from dynamic.
And determined that slowing Paramount has occurred.
With that let me turn the call back to Kevin.
Thank you Alex.
Let's move onto slide 16.
As we move into the second half of the year, we continue to deal with a great deal of uncertainty regarding the length and impact of the current crisis.
Given the impact to cover at 19 is having on the hospitality and retail sectors in particular.
We are not currently pursuing new loans in these areas.
And while this has had an impact on our loan pipeline, we're budgeting for meaningful loan growth for the full year driven by higher levels of business activity by our corporate banking warehouse line and residential mortgage teams.
In addition to relatively healthy loan growth, we anticipate that a number of other factors will contribute to improved performance into second half of the year.
First as Alex mentioned, we believe we should see expansion in our net interest margin due to stabilization in our loan yields continued reduction in really deposit costs and deployment of our access liquidity second.
We continue to see strong demand for refinancings, you know residential mortgage.
Origination business, which should lead to higher levels of production and gain on sale.
And finally.
We will continue to look out for opportunities to make adjustments in our overall cost structure to reflect the new environment too. We are operating in Alex mentioned, the recent staff reductions, we made will save approximately $1.5 million per quarter.
And optimizing our use of human resources is an ongoing initiative that could result in additional cost savings into future.
Over the longer term the changes, we are seeing and customer behavior, particularly related to the use of our digital banking platform. During the pandemic well certainly create additional opportunities for us to evaluate and optimize our branch footprint.
While the crisis continues we will remain conservative in our operating philosophies, maintaining a strong capital position.
Growing core deposits.
Staying disciplined in our expense control and building our credit loss reserve.
We believe this will enable us to continue supporting our customers and communities, while delivering solid performance for our shareholders.
As we have been communicating to our customers and communities throughout the pandemic.
With hope we will get through this together.
No we wouldn't be happy to take your questions and add any additional color as requested operator, please open up the call.
We will now begin the question answer session.
Good question, you mean press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
[noise] question from Matthew Clark with Piper Sandler. Please go ahead.
Hi, good morning.
Good morning.
In the press release.
You mentioned additional initiatives in light of the new normal designed to restructure our balance sheet can you just.
Provide some more color on how you plan to restructure the.
The balance sheet.
Sure Matt you.
That's all it management believes Matt a balance sheet restructuring is one of the key to effectively deal with this very challenging environment.
Let me start with our liquidity build up during the quarter.
We have about $1 billion off.
Noninterest bearing deposits and partially about $350 million is coming from.
PPP long deposits, but.
The access like 700 million plus it's coming from.
Noninterest bearing deposits up from the up customers and we believe this really strengthening our balance sheet position because if you recall, we have like a 99% of a loan to deposit ratio.
And the funding side, we had a quite expensive funding cost we have had but it wasn't really management's real big focus has to stabilize the funding side and we were able to.
Shave those low cost funding side fish again enables us to.
Kind of use effectively for our operating efficiencies.
So we both signal a good funding sources, Oh, we're kind of a strategy to the assets side is more fee income driven as well as dealing with again is very.
Compressed interest rate environment.
But certain products, such as where Hollis businesses and also some mortgage businesses given this rate environment. It is very attractive, especially for the warehouse.
Businesses.
The credit costs, we have seen is very very minimum.
And fee income. So we can also recognized from there.
So the asset side those are the area. It's obviously, we'll we'll continue to.
Look for the industry very close to specialize and maximize our earning asset opportunities.
And also.
As we discussed during the prepared remarks, and Oh, no discussion expense control.
We have made up quite a good strategy implemented already and we see the reduction started but I think this will continue going forward are examples of those expense controls, obviously effect shift utilization Oliver.
H. all.
A recent Jim or resources for should be already says $1.5 million per quarter.
Savings by will continue to do that and also a we learned lessons.
From the office space in the optimization opportunity. So we are evaluating a the office spaces or occupancy expenses I think are we can't get some efficiencies from there it might take a little bit time, I don't expect that we have a.
Big dollar amounts of <unk> savings from the occupancy is next quarter or true, but that's a more longer but certainly we think there will be coming in terms of a expense savings and also a branch consolidations.
Optimizing the other branch locations and kind of <unk> recently, the technology driven businesses are convinced us that it could have much more our French effective branch consolidation, which will save our expenses.
So those are the kind of a high level basis of our balance it ER and expense saving strategy.
This will continue and this will be our top priority to make sure we deliver a financial result.
And our optimal level in this very challenging environment.
Okay, Great and then.
The.
Yeah.
The core loan the core.
New loan origination rate was 339 I think that includes TPP, though do you have that rate X PPP.
And then.
Yes.
On yields being flat from here I think the core loan yield was for 21.
Ex purchase accounting.
So I'm just trying to make sure on the same page in terms is flat your loan yields and.
We know where the new business came on on a core basis.
Yes, no given this BPP contractual.
Coupon rate is 1%, but oh, we have.
Loan fees or lender fee because our majority it all of those PPP loans are under 350 at a rate of 5% or we can earn so reflecting those amortization of those lenders fee.
The effective interest rate for those PPP.
It was about 3.4%.
So it's not that different from what we originated.
All the laws, including Ppps I think is in the neighborhood of 3.4 person as well for the new originations, including PPP and just separate the PPP, so 3.39 or 3.4%.
And also total loan yield the actual loan yield we had a 4.2 or 3% Oh without the PPP. It. It's a very minor changes, it's a 4.25% it's only two basis point differences.
Okay, I guess I'm, what I'm getting that is how our loan yields gonna stay flat, if you're putting on new production at Threeforty.
And Matt you keep in mind that the ER.
During the second quarter, we had a very low level of SP, a loan productions, because our resources were tied to the PPP activities.
In the second half a year, we expect a a robust up production from the U.S. via unit.
The U.S.J. rates are much more lucrative than the other type of loans and I think I will make some difference into second half also.
Okay, and then just circling back to the excess liquidity the.
The strong noninterest bearing deposit growth, excluding the PTT at 700.
I'm sorry.
Sorry, 650 million or so.
[music].
I guess.
What's your sense it all of that sticks I'm, just given that the.
People pay their tax were able to pay their taxes July 15th and.
Obviously, there is some stimulus money and how that's likely to get spent I guess, how much of that you actually thinking stick.
Sure.
I think is it really difficult to have an accurate.
Expectations, because there's so many moving parts as we mentioned.
The forgiveness of those in a period.
Also.
The deposit or is there on liquidity built up or there are operating a philosophy or their expectation.
However.
I also wanted to talk about non P. P. P deposits that we gathered I know you ask about 315, a 600 350 mill as of the Ppps, specifically maybe that given.
The kind of Experis qualified expense puria extended from to eight to 24 weeks. So just considering 24 weeks, maybe just majority to all of that in the 350.
Can be a drawdown all utilized during the Q4.
That would be our expectation, but how does the remaining 600 fiftys actually it's a little bit more than six on the $50 million that we expect just stay much longer period.
When we look at the actual completion of this.
1 billion dollar.
Yeah increases we saw about 800 to new customers will never had a business with us, but they started to business with us. So we believe that is a non interest bearing deposit customers in this environment very important so I will try to serve them and.
Chain them as much as we can so I would expect that remaining 650, almost 700 million the attrition if any will be a minimum.
To support that we.
We have a look at the actual noninterest bearing deposit balances subsequent to.
June 30, and as a actually last night when I checked it the balance was very stable. They didnt change. So one month it doesn't change at all so we'll see.
But I think this is a really great for us to secure our funding at a very low cost, which is one of our key strategy to.
Enhance our then its margin and the profitability going forward.
Okay. Thank you.
Next question comes from Chris Mcgratty Kate.
The school.
Oh good afternoon. Thanks for the question I want to go back to your.
I understand.
Interest.
That's a 3% margin filing by the end user.
[laughter], Turkey can speak up it's kind of breaking up answer.
Oh that better.
Yeah. Thank you nice what's better Chris.
Hi, sorry about that I've got better out.
Yes, yeah, okay great.
The guidance on the margins.
Good.
Morning.
[laughter].
[laughter] occurs and then.
Thanks.
Okay, Chris I'm going to try and repeat your question sorry.
Yes.
He's asking about tight knit right in reaching an excess of 3% and whether that includes accretion apart.
Yeah purchase discount.
Right.
Okay. Thanks.
No sorry.
Yeah.
Yes to answer your question, Chris Yes. It does include a but I think the core margin is more important and as you know we have accretion income and the last quarter. In Q1, we have accretion income like a five more than $5 million Fitch kind of a overstated in Q.
Was but it does actually have a impacting the second quarter.
Looks like a much bigger or margin compression actually if you would have 18 basis point of accretion different says Fitch impacted negatively on net interest margin, so I'll present shuffle, 3% or higher.
Until the year and is just core deposit a core.
Net interest margin assuming to consistent like accretion embedded there and I don't think we have all.
I don't anticipate the big pay off or pay down or charge offs hot.
Oh, the purchase the <unk> a purchase loan so it will be a stable and that does include it and our 3% or higher our margin expectation.
That's helpful. Thank you and in terms of just net interest income dollars. Obviously appreciate all the moving parts of the balance sheet liquidity should we expect.
Stability in net interest income gross to net interest income modest pressure I'm trying to get a sense of.
Where to start or the answer to ended there. Thanks.
[noise] shown that interest income yeah, as we discussed Oh, I don't anticipate and also I think as fast that not able to maintain the interest rate at this rate.
Fulfil for like a next year on like for the piping and assuming that there's no big interest rate market interest changes our loan yield.
I don't think it you'll have a significant changes, especially I don't think it will decrease a much further because we did have already under 50 basis point rate reduction.
In fall two hour variable rate loans and it is very.
Low.
Our loan we are running already.
I think you know deposit side is we have more flexibility or we can.
Continue to a better.
Meaning.
The Cds that is maturing.
For Q3.
As I said like it's a 1.81%.
Kevin you. It's in the neighborhood of 60 65 basis point and also continues to alleviate monitor our money market account and we reduced the rate.
And I I didn't see any real alarming.
Negative reaction from our depositors' from the.
Rate that we continues to a lower.
So with that.
I think it on net interest income I don't think it will go back to like it a year ago the level given the rate environment.
About the the dollar amounts of net interest income I think it will be stabilized going forward.
Okay. That's helpful and just that makes sense on expenses. So this quarter included a a little of are taught them another benefit from that the PDP originations, yes merger.
Severance cost in there as well and then you announced a million to half perspective.
Savings I always think about all of this <unk> for expense levels in the back half of the year.
It is absolutely where should that most of the run rate.
Sure no they'll run rate I wouldn't expect it will increase now from Q2 region. As you mentioned, a we had a $5.2 million dollar PPP a loan origination costs I don't think we'll we'll have that repeat it going for it.
But those will be offset it by our already executed no HR optimization plan or 1.5 million savings. So those two or will have let's say about $2.5 million increased compared to.
Q2 going for it.
But as I sat in a it's a kind of expense control is management, it's kind of.
Our focus is Oh, we did I mention like in price Rationalizations, and a continued professional fee reduction a if you recall as I said.
We have a highly elevated level professional fees saw.
Last year.
We have been continuously reducing it and I think there's a further room for us to reduce little bit.
So with all those I think it know about $70 million of a a run rate I feel comfortable to say that.
And in terms of efficient surveys show a it will be in the neighborhood of let's say 55.
For sand and net interest expense over average asset ratio a it will be it seemed like the 1.65 oil and 26% ranges.
Okay. That's great. Thank you [laughter].
Again, it's you know the question. Please press Star then one.
Next question comes from Gary Tenner, D.A. Davidson do you still ahead.
Thanks, Good morning.
Good morning, Alex I Wonder if you I Wonder if you have the average TPP loans outstanding for the quarter versus before eating or 44 somebody for at quarter end.
Sure No we have a total origination balances for under $74 million after $6 million paid off.
Average balance for Q2 for PPP was about a $343 million.
Okay. Thanks.
Then I just wanted to follow up in terms of your your comments on the amount of deposit stickiness, which actually PPP related deposits you feel good about.
When you talk about kind of you know.
Using that excess liquidity.
Part of it made goes into loan growth, which no seem positive on for the back half of the year, but.
Any other plans in terms of being the.
Patent portfolio do you have any goals for how you might that bounce to look towards end of year.
Yeah sure, though in terms of investment portfolio in conjunction with our increased or access to liquidity.
Actually the second half well actually two third of the.
The second quarter, we started to.
Purchase a investment securities. So portal the amount of investment security that we purchased was in excess of $300 million and ER.
The yield is not that great given again the interest rate environment.
I think a rule or utilize because.
Access to liquidity to deployment plan is very important that does have a direct impact for our.
Net interest income and margin and our priority is obviously higher earning assets I ie loan portfolio, which include warehouse and mortgages and as I, Kevin mentioned no. Our SDK production for the second quarter was only 6 million.
And I would expect SPJ <unk> production will pick up so if we have the deployment of our access to.
The alone again that will be our priorities, but I think you know a having investment security to purchase as a backup or alternative to use the excess liquidity will will continue to look forward to continue.
To purchase the investment security.
Okay, and then just to go back to the expectations for meaningful loan growth I think as it was put in the slide that.
I assume that that is kind of on the base of loans a period and excluding the PPP balances.
Yes fair.
That's fair, that's fair and a year over year, though we expect a high single digit or low double digit.
Growth.
[noise] [noise]. Okay. Thank you and then my last question for me I think you guys delayed the.
Earnings release, because of the kind of challenges.
You know how completing the goodwill impairment.
So I just wonder if you could talk about that a little bit give them or the stock is trading at you know the deep discount to tangible book kind of.
How that process, one and then obviously you didn't occur and could well this quarter so any comments on it.
Sure, let me start with or what was the reason why we spend time actually we were very cautious to make sure. We do the right assessment and we wanted to give our accountant enough time, so that they are actually national office signed off our management Oh sorry.
And then and the triggering events was as you mentioned our stock price, where we are wherever we are traded no compared to even tangible book value.
Our trade value is much.
Lower.
So.
Having that triggering event.
We did I have a robust analysis of our goodwill impairment by looking at the income approaches and as I kind of accounting.
I mean, all as income actually validation terminology.
Income approach of versus a fair market value approaches.
Fair value fair market value approaches. So that's kind of our trade is stock value, which does the into the merchant, Laura which might lead to a goodwill impairment, but actually we look at our income approaches, which makes more sense and this income approaches take into consideration of our future.
Sure income going for it you know as five years with a more accurate projection the growth rate and that also after that terminal value. We use so long story short based on our projected income.
Discounted to where the.
Right amount of a discount rate. We conclude is oh, we have so again, that's kinda amounts of cushion or.
The assets fair value over a book value.
So we have a total $465 million sort of goodwill and a cushion that we come out well come out with was about $700 million. So we believe that was a good enough, but our auditor definitely needs to make sure. So we wanted to make sure everybody.
Are you comfortable with that.
So going forward, we'll we'll continue to have the assessment unless our stock price bounced back to the level that we wanted chip so.
But given the a significant amount of Ah access a fair value of a book value that we have determined as of June 30.
You know going forward and we will continue to the assessment, but unless there is a really unexpected big changes of our.
Expected earnings or something.
I I don't know you know well, we'll assess again, but no less likely that immediate.
Quarter first I will have a different.
Conclusion on our goodwill impairment.
Okay, that's great color, Alex I appreciate it and actually if I could squeeze one last question, you're you're doing a perry shows around the honest about 70% range based on the first half of your earnings.
What was what the current thoughts have been in terms of the dividend payout.
Uh huh.
Yeah Yeah.
We feel we feel comfortable about the dividend payout ratio that we currently have.
And our intention is to keep on Kipp, our quarterly dividend at current levels absent any material unexpected developments into future.
This is based upon our strong capital ratios, a we feel very comfortable with our copper situation, including our tier one common equity ratio.
And we are regularly perform rigorous stress testing analysis on our capital situation.
And based upon what we have so far.
We expect and we intend to keep our quarterly dividend on current low current levels, but.
But that is.
Something that we have two to assess every quarter, but that is currently what we have in mind.
Alright, Thanks again.
Okay. Thank you.
Next question comes from David Feaster of Raymond James. Please go ahead.
Hey, good morning, everybody.
Brian.
Yeah, I just wanted to start out on the commentary about loan growth I'm. Just curious what have you guys tightened credit box at all.
With regards to new loan and then B, where are you seeing demand within that commercial segment where are you.
Seeing demand where are you interested in growing.
Well as I mentioned in the prepared script, our corporate banking group, our warehouse line ER business unit and our mortgage unit or those are the units that we expect a to be most active in the second half of the year.
In terms of them [noise] excuse me mortgage or productions are we did not have a very productive <unk> first and second quarter, but I I think that we have a very nice pipeline building up right now and.
The reason that ER.
The performance was not as good as we would like to see a was because of some of the our operations into in the back office and I think we have resolved all the issues. So I I think we can have a much better mortgage up productions and ER and.
Addition, we are starting up a non QM loan program, a which we plan to retain on our portfolio.
So that will contribute to the loan growth and as you can easily see our corporate banking group and warehouse line.
ER business unit are the major units, who will contribute to the growth.
Yes.
Within there have you tightened up.
You know underwriting standards at all or the credit box within the corporate banking space at all and then again within corporate banking, what what where are you seeing demand what segments and where are you interested in growing.
[noise] I'm actually this is Peter so in terms of the credit box overall, we have tightened the credit box in areas that we see a impact from the covet pandemic I'm. So obviously our theory portfolio in various places like hotels in retail definitely we have.
It's a lot more buffer or actually done some moratoriums in corporate banking there are opportunities in that sector with basically maintaining the same credit box. We're finding good opportunities to grow I've, whether that is and asset managers or a capital call lines or tell us.
Hum industries, we see various opportunities that throughout that we see some pipeline meaningful pipelines building.
Okay. That's helpful. And then I guess just on on the reading pearls. Appreciate all the commentary that you guys gave just.
Here you see these redeploy will start coming in would you expect we see additional risk rating downgrade in reserve builds in the back half of the year and maybe I guess, just how do you think about the overall reserve in your comfort level.
Sure you know, we feel comfortable with the level of reserves as we have assess the portfolio very closely I think we've done very deep dive assessments, and particularly the higher risk areas such as the hotel in the retail as well as our C and I portfolio. So we feel comfortable where we are now.
As you move forward, obviously, there's a lot of uncertainties in the marketplace right now so it really depends on the speed of the economic recovery or the success and speed of health vaccines no treatments for for the current a virus lot of variables in place so.
So unless we see no further deterioration and in the portfolio.
Right now these loans are basically put into a pass watch coven 19 rated grade and so the impact on reserve levels are starting to build that you have seen in the second quarter. As you move forward, we just have to see how fast.
Oh, the recovery pace is for our borrowers as we mentioned in our prepared remarks, you know as we assessed the hotel portfolio, which is a I think everyone's looking at that as one of the higher exposures are really you know as as expected what we're finding as we do a individual loan assessment is that.
That is these hotels are much more limited service local or drive to destination type of hotels, and so we have seen or less of an impact. Obviously there has been impact into the market months of March and April theres, some of the artificial kind of Uh huh.
Closures at the economy.
But in the months of June and July we bought we'd look at both the at the Metro regions. So we're looking at individual County hotel data, that's coming out from industry reports as well as comparing that to our our actual portfolio performance and we're actually seeing.
I have hotel recoveries in our portfolio are starting to definitely pick up and we actually have seen some hotels or reach even breakeven points already. So we are monitoring the situation very closely I think we'll continue to assess the risk rating as we move forward as as we always do.
And Ah.
But will really have to kind of see how how the recovery it looks like.
Okay. That's terrific and then just one more kind of <unk> a couple of quick but not one you have the levels purchase accounting remaining on the books.
Does that 3% margin target by the fourth quarter is that inclusive of the PBB and then maybe what are your expectations for the timing at BBB fees [noise].
[noise] Thanks [noise].
[noise] sure.
The remaining [noise].
Total $36 million actually $26 million remaining on the 50, a discount we have and as I kind of it assets to Chris' question earlier.
This accretion impact is reflect it.
And a 3% or slightly higher net interest margin forecast.
Bye.
Q4, and this actually as you know.
The discount is continuously decreasing as we amortize or a recognized as the interest income.
[noise] and then the just the expectations when the timing of the TPP fees.
The two these PDP tanimoto sure sure I've got it got it got it.
Oh, we I think we also mentioned to now turning to create great. The script we.
We estimate a [noise].
Over the next two years or 24 month this real.
Amortize it over.
Pure the using straight line method.
Including the loan fee and a lung cost.
In terms of dollar amount, we recognized about $2.9 million and Q3.
And going forward.
It will be a little bit higher than a kid shoes.
Compared.
Yeah compared to Q2, so it would be about acute about $3.9 million and Q3.
We have a recognize the as income.
So that will aghast spread out the next 24 month.
Okay. Thank you.
This concludes our question, what's your assumption I would like to turn the conference back over to management for any closing remarks.
Thank you.
Once again, thank you all for joining US today, we hope or every one of you stay safe and healthy and we look forward to speaking with you again next quarter, so long everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].