Q2 2020 SmartFinancial Inc Earnings Call

Good morning.

<unk> financial second quarter, 2020, <unk> earnings call.

Participants will be in listen only mode.

Sure you assistance. Please signal conference specialist I personally Starkey followed by zero.

After his presentation will be opportunity to ask questions.

Not at this event is being recorded.

Now I'd like to turn the conference over to Mr. Miller Wellbore Chairman. Please go ahead.

Thanks, Nick Good morning, Thanks for joining us. This morning for Q2 2020 earnings call. Joining me today are Billy Carol our President <unk> CEO.

Ryan Krasinski, our CFO and <unk>, Jordan, our Chief Credit Officer.

We're just started like to refer you all to page two of our debt. This morning for the normally customary disclaimers and forward looking statements hopefully you will take a minute review these.

First I'd like to say that I hope each of you are healthy and say.

This is a very challenging time for all of our families. Our communities in our businesses, but this industry and our bags for doing incredible job of being intelligent diligent in flexible, but as we continue to learn how to serve our clients and these uncertain times.

We did just finish another really good quarter for Smartbike.

I can't say enough about how proud we are the team here at the bank is we continue our progression and execution of our strategic plan a few highlights from the second quarter.

We did complete integration of Progressive financial group and we're glad they are now fully rebranded and integrated into our Smartbike family glad to have them.

Net income for the quarter was 6.2 million, a really strong quarter for us our diluted D. P. S increased 115% over Q1, and our diluted operating earnings per share not gap increased 60% over the quarter.

The past 3 billion dollar Mark in asset size, which is a big big milestone for us.

Tangible book value stands at $16, a 90 cents, which is a 6.6% improvement year over year.

And also our P.P. numbers are very impressive for our bank. It currently to date 292 plus million dollars of loan book.

We feel very good about where we are at all parts of our bank are historically conservative credit culture, Sherman us very well right now.

With that I'll turn it over to building and let him jump into some of the details of the corridor.

Thanks Miller.

I'm really just to start out not to Bury the latest Miller alluded to we really had a nice quarter and I'll hit on a couple of areas and then turn it over to run the Dod and air financials, and then on the wet to dive into credit a little bit first obviously, we'd continue dealing with the pandemic in navigating. This current situation has been challenging for all of us.

But again our team has continued to work diligently to execute our plan, while staying safe and healthy.

I will spend a lot of time on it but as noted in the slide deck on page five we continue to keep the situation part of mine and we'll do so until we see these cases subside.

Even through this challenging time, we've got a company to run and her team has done some great things over the last few months a few of those highlights we did close to 3 billion dollar Mark in assets jumped over that 3 billion dollar Mark and there's no are set a great miles said, a we had record deposit growth to 198 million dollar.

For the quarter assisted somebody TPP deposits, but nonetheless, some very nice numbers speaking of PPP Redskin to report on this in just a moment, but weve continued some nice work there and now done over 2800 loans, resulting in over 290 million in production just outstanding work from our team.

On this project definitely punching above our weight class on this effort.

After closing air Progressive financial deal at the end of first quarter. We've now got the bank integrated converted that went very well and we've now rebranded all those offices growing your footprint down the I 40 corridor west toward Nashville.

Most all cost saves realized by the end of June on this deal we look forward to seeing it really generate some nice benefits moving forward.

Jumping into the financials, you'll see the quarterly highlights on page seven never deck.

Net income for the quarter 6.2 million dollar from a GAAP standpoint, and operating net income of 7.3 million. That's a solid 40 sit 48 said quarter operating quarter, even with an eye emphasize with continued reserve build a 2.8 million.

For the last three months due to the market uncertainty.

Margin did tighten as we expected in loans did contract a little bit outside of the PPP lending, but that was expected as well with a few larger project payoffs that moved to permanent financing.

But we were able to mitigate those are those that those areas with some other pickups.

We reported I believe our strongest pretax pre provision or like order at 101.53% annualized coming in at 11.9 million.

As shown on slide eight I. This is a great slide slide eight a draw your attention to it shows our outstanding revenue growth.

In our overall growth trend line.

Record net interest income with continued balance sheet growth record non interest income with a great mortgage corridor as well as a full quarter if I knew it from our new insurance subsidiary and probably one of the most important things to note due at all this we kept our expenses in check when really nice trends in our efficiency ratio.

I've got some other comments as to what I expect as we move into the second half, but but overall very solid results from our SMB K team. This quarter. So now I'm going to turn it over wants to dive into the financials, then he'll passage threat to dive into portfolio when credit so I'll close with some additional comments after that so Rob let me give you the.

Mike Hey, Thanks, Billy and good morning, everyone.

We have gone through yet another eventful quarter.

Want to take this opportunity to say thanks to our associates for their hard work through the ups and downs of his pandemic. Our associates work together I remain focused on soundness profitability and growth of our company.

Let's start with slide nine balance sheet performance trends.

On the asset side loans grew 50% annualized on a linked quarter basis and grew over 31% year over year, our growth for the quarter was probably primarily driven by 293 million and PPP loans on the liability side deposits grew over 33% annualized linked quarter basis and grew over 12.

Year over year, we continue to remain focused on steady consistent growth.

Turning to slide 10.

Our operating return on average assets for the quarter was at 93 basis points, an increase from the 60 70 basis points reported from the prior linked quarter.

In addition, we also continued to produce strong operating pretax pre provision earnings and the amount of 11.9 million or 1.53% an average assets an increase from the 1.37% reported in the prior linked quarter.

Our operating return on average tangible common equity for the quarter returned back to a more normal level at 11.5%.

Turning to slide 12, excuse me turning to slide 11.

We continued our consistent trends with our book value intangible book value growth at June Thirtyth, our tangible book values that 60 90 per share.

On the lower Graf our operating efficiency ratio was approximately 55% an improvement from me over 65% from the prior linked quarter.

Now moving on to slide 12, net interest income.

For the quarter, our net interest income increased 3.1 million to 25.7 million when compared to the prior linked quarter with higher earning asset balances and lower funding costs offsetting lower yields.

During the quarter, we digested the full effects of the 150 basis point rate cut and dealt with the many moving pieces associated with our participation in the PPP program.

During the quarter, our average interest, earning assets increased 532 million, which was primarily attributable to one the full quarter to exit from the progressive acquisition to participation in the PPP program and three overall increases in our liquidity position.

Our increases in average interest bearing liabilities was primarily driven by an increase of 169 million an average interest bearing deposits stemming from the full color the full quarter effects of progressive.

Increased deposit growth and increases of 185 million borrowings. This increase in borrowings is primarily from utilization at the TPPL that facility.

At this point, let me give you some backfilling the PPP program.

Our participation in the program provided us with 293 million of loans with an outstanding average balance during the quarter of 209 million.

We recorded 10.5 90 deferred loan fees net of origination costs and had 1.9 million of these loan fees accreted into income during the current quarter.

We funded 200 238 million over 80% of the loans utilizing the feds PPL that facility with an outstanding average balance during the quarter of 108 million.

We view this funding as an ideal match for the loans and it also provides us favorable regulatory treatment.

Our tax equivalent net interest margin for the quarter was 3.63% a decline of 27 basis points when compared to the prior linked quarter.

This decline was really was within our expectations. Additionally, our yield on interest, earning assets decreased by 61 basis points, which was offset by default by a 43 basis point decrease and our interest bearing liabilities.

Moving on to loans the yield on loans for the fourth quarter was 4.87 per cent compared to 5.35% for the prior linked quarter.

Included in the loan yield for the current quarter was 888000 of loan discount accretion, which was a decrease of 1.19 from the prior linked quarter and the current quarter. Also include the previously mentioned 1.990 PPP alone fees.

We have also continue to add liquidity to our balance sheet as shown on the lower right portion of the slide.

This liquidity build how did result in some in compression as these increased liquidity balances have significantly lower rates. This negative this negatively impacted our margin approximately 70 basis points, we've chosen to keep an increased liquidity position. During this time to assure we meet the needs of our clients.

Moving onto interest bearing liabilities when compared to the prior linked quarter, our interest bearing deposit cost decreased 39 basis points to 0.17% and our overall cost of total deposits decreased 37 basis points to point by 4%.

We still see some opportunities for further rate reductions that are interest bearing deposits with over 10% of our time deposits maturing and repricing during the third quarter.

The PPP program also affected changes and some of our other interest bearing liabilities during the quarter such as a 91 million dollar reduction in our broker deposit accounts I 50 million dollar reduction are fed discount window borrowings and an increase of 238 million from the utilization of the feds PPL that facility.

Looking forward, we are forecasting a third quarter margin and the 3.4 or 5% range a contraction from the second quarter, primarily due to loan rate resets and the effects of the PPP program.

This forecast includes estimated loan accretion of 10 to 15 basis points were approximately 860000, an estimated PPP loan fee accretion of 15 to 20 basis points approximately 1.2 million.

Moving on to slide 13, operating non interest income.

We had another great quarter for operating non interest income.

Over the past several quarters, our associates have been focused on building this revenue.

For the current quarter, we experienced in over 24% increase from the prior linked quarter and over 61% increase when compared to the second quarter 2019.

Our operating non interest income to average asset ratio was at 45 basis points consistent with our prior linked quarter.

During the quarter service charges on deposits accounts decreased 61000, primarily due to lower consumer activity and fee waivers offsetting this was a 232000 an increase in interchange fees, which was primarily from having a full quarter of activity from progressive.

Insurance commissions, which is our newest noninterest income component reported its first full quarter revenue of 473000, an increase from the 269000 reported last quarter.

During the quarter, our mortgage team did an amazing job with reporting all time high production levels of 931000, an increase of almost 60% from the prior linked quarter.

We continue to see a strong pipeline coming into Q3 due to the current low rate environment, we are anticipating slightly lower levels of revenues looking forward into Q3.

And lastly, our investment services income decreased by 74000.

In the current quarter due to current market conditions looking forward our forecast for the third quarter is having noninterest income at 42 basis points of average assets or $3.3 million.

Turning to slide 14, you'll find our operating non interest expenses.

During the quarter, our non interest expenses reflected expected increases in the majority of the components, which was primarily from a full quarter affects the progressive.

During the quarter as Billy had mentioned, we fully integrated progressive and are achieving 90% of our targeted cost saves we expect that during the third quarter, we should hit our cost save target.

Overall, our noninterest expenses were in line with our internal expectations looking forward our forecast for the third quarter as having noninterest expenses around 18 to 18.5 million, which salary and benefit expense products and 11.1 to 11.3 million.

Before we move forward to the next slide let's touch base on income taxes for the current quarter, our effective tax rate was 18.8%, which included an additional tax benefit from our overall reconciliation of our tax rates from operations and the final effects of the cares axle installation.

Looking forward our forecast for the third quarter is for our Texas, our effective tax rate to be 22.5% to 23%.

During the first quarter, our acquisition of Progressive was the primary driver of growth during the second quarter, we experienced almost 200 million and deposit growth from both our participation in pp probe and the PPP program as loan proceeds were deposit into smart bank accounts as well as overall deposit growth.

With our noninterest bearing deposits, increasing 213 mine during the current quarter, coupled with the excess deposits from our transactional account growth and the ppps that facility.

We look at 83 line of time deposits roll off with 85% of them being wholesale Cds.

At June Thirtyth, our noninterest bearing deposits increased to 25% of our deposit portfolio and our time deposits decreased to 26%.

Our money market savings in interest bearing demand accounts remained consistent levels with our overall deposit growth.

At the lower level portion of the slide we had another great quarter in reducing our deposit costs and are trending downward towards the fed funds target rate. This graph gives a good depiction of our continuous efforts on Lauren deposit costs.

With that said I'm handing over to slides threat, Bret Jordan <unk>, Chief credit officer to go over loan credit related EMPA Reg.

Thank you Ron beginning on Slide 16, you can see our portfolio distribution profile did not change considerably from first quarter to second quarter <unk>, excluding the impact of PTP loans on the whole.

We saw approximately $269 million and total balance growth for the period.

While holding a consistent profile in our portfolio mix with the exception of the impact of the PPP loans, all RC enough portfolio will further discuss there's PPP long shortly.

As we stated in our first quarter call our bank loan mix stayed relatively consistent after the progressive savings merger with roughly 80% of the portfolio being real estate secured loans and for second quarter that mix. Excluding 50 people did not swing considerably with real estate secured still holding at approximately 83%.

We ended the quarter with CRT capital ratios of 91% and 273% in their respective regulatory gotta segments still below the target levels and very manageable as we move forward through the remainder of 2020 collectively our second quarter results demonstrated consistent portfolio diversity and development, while being strongly boosted by nearly $293 million.

It PPP loan fundings.

Moving on to slide 17, our overall credit quality metrics continued to perform very well third quarter, our NPL ratio, what 0.28% total assets at quarter end as you may recall, we've seen a slight tick higher in Q1 due to the inclusion of Oreo assets from the pit the progressive merger.

Similar spiking classified loans and delinquencies in Q1 also the result of the progressive merger impacts were both managed down to more historical levels. During this quarter.

Net charge off for the period were zero percent and below peer group beverages overall asset quality continues to whole consistently for quarter yen and our outlook for solid <unk> credit performance. The balance of the year is cautiously optimistic we believe our historical conservative credit culture as well as additional post cobot credit extension to.

Factors that we communicated to our lending teams early on in the pandemic, we'll continue to generate solid results in portfolio performance and our footprint and portfolio diversification will add stability and support continued strong performance in this area.

Slide 18 update you on our positioning of Cobot 19 related payment modifications in the loan portfolio at the end of the second quarter approximately 25% of our overall loan portfolio had received and were in some stage of a modified payment structure due to the cobot event. This was slightly higher than our 21% positioning at the end of Q1.

It was due primarily to some continued demand through April in early may for clients that elected to analyze the duration of the initial closure events before seeking some form of assistance.

Hospitality overnight or vacation rental properties.

And restaurant and food service industry clots have led the way in modifications, representing nearly 47% total modified loans in those segments. This was in line with our expectations at the impact of closures on gathering place as an accommodation space as well as closures of beaches and similar vacation destination style areas continued through much of the quarter ending only in the latter portion of my.

For most of our footprint.

Totaling just over 600 million imbalances that received Kevin modifications. This will be challenging task to administer but our relationship teams did a phenomenal job reaching out to our clients early and often through this period inquiring house more bank could assist them. During this historic time.

Our associates worked hard to ensure that we assisted clonch wherever possible in order to create a stronger since the security and peace of mind as we could until circumstances allow them to regain some degree of normality in their operations.

As I mentioned this came in late May for many clients as restrictions began to eat and we've been encouraged by the feedback from those clients that June was a much stronger month and they anticipated due primarily to continued relaxation of closures and restricted access to public venue.

As we look at the mix of our modified portfolio in the Bar chart at the bottom of the page. We're encouraged by the number clients that are already back on the normal out payment structures, thus far into the month of July.

As of Friday July 17th roughly 34% of our initiated model forgot modification loan count and approximately 37% of the initiated modified loan balances had already expired and converted back to their original payment structures by the end of July nearly 50% of all modifications will have expired when coupled with the feedback from most.

Lives.

There is little concern going back on their regular payment schedules at maturity of their cobot assistance and a very small portion of request to date for any longer extensions of those modifications. We anticipate this trend to continue and such that we will be at approximately 15% of the portfolio modified by the end of this month and we will.

Continue to see that number track down as long as reduced restrictions or an order.

And covertly cases remain controlled and manageable the reasonable local and federal government mandates.

As I mentioned earlier hospitality and restaurant bar exposures continue to be larger segments of our portfolio, having salt and continue to leverage covered much as expected from the beginning these segments have been substantial have seen substantial impact due to the profile of this event slides 19 to 20 give you some general portfolio summary data about the overall.

Mix helped and geographic representations of smart banks portfolio in these two areas.

With an average LTV, 42% going into the cobot modification cycle, along with a well diversified portfolio, both regionally and product mix, our modified hospitality portfolio was poised to be able to sustain a considerable impact its operations and our client base has shown remarkable management capability to modify their operations their marketing and other.

Were key factors to help them work through this process successfully.

While the majority of clients in this particular segment opted for the six month modification term structure. The feedback we're saving from many of them is they are optimistic about their ability to go back to making regular payments bond maturity of their short term relief structures. Some having opted to do so already in advance of their original modification expirations.

Similarly in our restaurants based ethylene as seen on slide 20.

Many of our clients in this segment. So our six month modification options will as most were closed to the public initially and many are still operational only for drafters takeout and with minimize capacity in their dining spaces, but just as with hospitality gaunce, our restaurant doors demonstrated a remarkable ability to modify their operations to accommodate.

Take out at a much larger volume to manage their staffing needs despite difficult rehire environments and provide quick compliant and consistent delivery of their product to their customers through unprecedented challenges, while our portfolio did have a higher concentration in full service restaurant operations in our tourism market areas of the Gulf Coast and the Smoky Mountains zones. These.

Operator fruit themselves incredibly resourceful through the fourth fourth quarter and developed tremendous game plans for the point when partial and expanded openings unfolded.

Leveraging the benefits of the PPP program and supported by relax restrictions beginning late may and expanding throughout the month of June operators have given us indication that while still not back to pre cobot levels of volume and profitability, they're positive in their outlook to continue to generate adequate business activity and cash flows to successfully re established there.

Loan structures and worked through the balance of the year, assuming no resurgence of code restriction mandates by the end of third quarter nearly half of our restaurants will be back on their normal payment arrangements and over 90% will achieve that position by October of 2020.

So far our client bases optimistic and hope that the balance of this year will trend positively and they will continue to improve as the year goes forward.

As I mentioned in our restaurant segment, the tremendously positive impact of the cares Act primarily the paycheck protection program has enabled many of our clients to financially into some of the toughest months of their business history.

Thankfully Smart bank was able to be there to assist them with this process and provide a resource to help them take advantage of the available loan program that Congress provided to our small business community.

Looking at slide 21.

As of July 14, with the second round of PPP commitment still not fully funded by the SPD Smart Banquette assisted more than 2800 borrowers with access to more than $293 million in PPP funds across every industry segment tracked by any Rcs.

Smart bank provided more than 210 million or 70 or 72% of these loan balances to its existing client base, but was also able to provide nearly $84 million or 28% of the total the prospects across our footprint generating more than 11 million in fee revenue to the bank. This process due to some incredible man hours and dedication shown by our smart.

Mike Associates has been both a tremendous fee generating success and prospecting resource for the company, but it also did exactly what it was intended to do.

You are placed directly into the hands of some phenomenal small business clientele, the badly needed capital to help them manage through a timeframe that none of US we'll ever forget we're grateful that we were able to be part of that assistance and support Jay.

Now I'll turn it back over to Ron to walk you through our allowance methodology and the reason those results for the quarter Rong Hi, Thanks Red for all the detail on our loan portfolio, let's move forward to slide 22, our loan loss reserve.

We continued our reserve build during the quarter with our allowance for loan losses, increasing by 2.8 million or 21% from the prior linked quarter since year end, our allowance at increased almost 60% or $6 million with over 5 million of the increases directly associated with the economic qualitative factors caused by the covered.

90 pandemic.

You'll see in this slide that we have made reference to the PPP loans and have remove them from some of the ratio. Since we are not currently providing a loan loss reserve on these loans as they are guaranteed by the SPX.

Let me direct your attention to the shaded areas of the slide.

I want to point out on the right hand column.

That for the second quarter of 2021, our allowance to originated loans less PPP loans increased the 0.89% and to our total reserves. The total loans less PPP loans increased to 1.53% at quarter end.

At June Thirtyth, we feel our overall allowance reserve coverage is that reasonable levels. We will continue to assess the allowance and the adequacy thereof, as credit conditions change and we'll expect to record similar amounts of provision as or if needed going forward.

Moving on to slide 23.

Gives us some information our current capital position.

Very good trending information here.

Our first quarter ratios were impacted by the progressive acquisition.

During the second quarter, our tangible common equity tangible asset ratio and our leverage ratio were slightly impacted primarily by our just our participation in the PPP program. We anticipate these ratios would trend back.

The prior levels over the next few quarters.

Events that will assist the upward trending will be one the PPD forgiveness process is for solidified and settlement occurs to having are elevated liquidity position subside and three having a better timing matched with the PPP loans in the TPPL funding as during the second quarter. The funding was finalized a period of time.

After loan originations were done.

As of June Thirtyth 2020, our current capital position remains strong and well above well capitalized benchmark, but that said I hand, it back over to Billy.

Thanks, Ron Thanks, guys.

Really some some great summary on finance and on credit in the portfolio and so eyes, we close out let me just add a little bit of color from my standpoint on kind of the the next half year as as we as we heard from Brett.

We understand their loan book really well and as he spoke to we've had a lot of really good one on ones, where there where clients larger exposures in feel really good about where we stand from a portfolio standpoint, I've asked Radnor, Chief lending Officer, Greg Davis, I, just I'm cost I'm asking them daily to continue the content.

Really dig for potential exposures and we just don't see any major concerns right now I'm not that we couldn't get surprised or something but our focus has been it will continue to be on helping our clients through this uncertain times, we believe as long as markets regained some momentum in 2021, we're going to be fine.

Yes, I do think there has been theres been in our industry. There's been this this correlation between a co that modifications and potential credit exposure I, just don't think Thats. The case with US is red alluded to we've done a really nice job tracking these.

We were we were a little or we were aggressive and granting deferrals early on we did that on purpose to help our clients through this.

We're seeing them come through it and we really feel we really feel like we're going to be at a great shape and as rich said, we're going to be at 15%.

Modified.

Totals by the end of July yet and we're going to yeah. We may have some opportunities than we might want to help some folks even pass those November dates if we need to but just to summarize it all with a really good about our loan book right now and and while sure there could be some some issues that bubble up we're well prepared.

Yes to that point you also see US building he really nice reserve just in case, we have some of those issues.

And we've got some nice income tailwinds with PPP anticipating the second half that will help us bolster that reserve.

In the event that we need to so from the loan side reserve size, we feel very very good about where we set as a company.

Our markets are all performing well given the current environment Air smaller MSC model is very well positioned for these current challenges.

While we see and a continued to see some coated I case increases in the southeast our markets for the most part and then open and business has been moving forward.

There could be some step backs in and if we see continued spikes.

We may have a few of those but I do remain optimistic that most all of their communities are really pushing hard now for the masks and public and hopefully that will slow the spread and one and will enable us to normalize quicker.

From a growth standpoint.

We are remaining very disciplined right now I don't think it's a time for us to really get out and push their sales group to go find deals.

We are working with our core base of clients that we know well and also working to leverage a lot of these new clients that have come to us through PPP. So we've got a really nice pipeline. It is a little bit softer than it traditionally would be at this time of the year, but I do feel confident we can continue to can generate some really solid production.

But that said I would expect us to be a little bit softer on the organic side I would expect to a flat to low single digits loan growth in the second half just from a pure organic standpoint.

We've got a great sales team and we are really ready to put or put back on the accelerated the appropriate time, we all remaining a little bit cautious right now.

Let me say, let me speak a quick second just some of the technology items that we've got going on as well I'm probably as excited about this as much as anything we've got going in the company right now first.

We've added net outstanding New Chief Information Officer comes to US He comes to US with experience at five plus billion dollar banks in his skill sets and ideas, we think will take us to the next level from a tax standpoint.

We've got a number of great projects on the board as we move to help really helped move us into a stronger digital positioning for the bank. So.

Thrilled about that more to come about that in future quarters, but but no as a company. We are really working hard on the tech side and they've got some great things in place in some great people in place now.

I believe we're sitting in a really nice position given the current environment. We built this 3 billion dollar platform with a really nice loan, but we're continuing to build their reserves in case of uncertainty and we're gaining efficiency every quarter and building capital through our earning stream every quarter. So it's a really exciting time to be part of this company.

And we are well positioned to be opportunistic as we move forward. So let me stop there and we'll open it up for questions.

Well.

I'll begin the question answer session.

Ask the question like press Star one on some phone.

You know speakerphone, please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then too.

At this time, a pause momentarily to assemble a roster.

First question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.

Hey, good morning, guys.

Morning Cabling Evan.

Hey, I'm, so I really appreciate the detail you're laying out on slide 22 with to preserve a and those adjustments to it I'm curious do.

And your experience you know I know the regulators and examiners love doing.

How how you screen versus peers today.

By into and fully recognize these adjusted ratios once you explained it to them or as far as that goes.

Yeah, I'll I'll take that right and you can comment I think for the most part yeah I think they understand they seen enough acquisition accounting now that they understand the discounts and and how those worksite Oh, it's really a bias, but they are comfortable with those reserves kind of being built into some of that numbers.

As well.

So yes, we've not had really any issues in discussing that with regulators read any any oh, no you're right billion minutes. Each time, we owe we go over this with them you know that's always part of the conversation and once we kind of lay out though.

The accounting treatments they they totally understand the perspective.

Okay, and I I think we talked about this last call little bit too just that and this time this quarter.

Stream, we strong.

Pretax pre provision quarter I'm, just curious what's it up.

[music].

Did you guys internally a discussion debate about whether.

To take more of that a bottom line pretax pre provision and steer it toward the reserve and again I recognize all the adjustments and that ratio looks a lot better at 1.53% but.

You guys, probably get back question a lot I would assume in terms of just the the GAAP ratio screens, where it is and why not take it up given all the uncertainty I'm just curious the puts it puts and takes on that issue.

Ron I'll, let you speak to that obviously as we look kind of with their incurred loss model. You know I think we provided the reasonable in those bills and have the capacity as I my comment too to bolster that if needed in the second half Ron you want to speak to kind of the that component of the calculation, yes, Kevin They are separated the income is.

Really not take into account of where the expense is going to go. We did we did refine some of our qualitative factors you know being on incurred loss model I'm not saying, we're at a disadvantage, but we have to make sure that your auditors.

Our very yes, the oversight on our model has to be there and so weve.

All in all of our movement in the allowance has been supported by our qualitative factors at this point.

Are we getting to the ended the road with that Oh, we're getting close until we start seeing some portfolio movement. So we're uncertain, where we're going to go with Q3 with this but we're ready to to fund the reserve as needed.

Well and Kevin false and I mentioned in my comments in a week.

So I'm not so much I mean, we feel good about our loan book right now I mean, we've got it we wait I mean, we are we are scrubbing the portfolio beginning for loss potential out there not and again I said lots that we could have a supply I mean, obviously this this this this pandemic.

That impacted a business in a way that we just weren't we don't have on our radar right now but on the on the hope we feel really good about where we are we think the bill we think our bill right. Now is a is fair and as Ron said, we'll continue to evaluate and second half and forgot when he got a little bit more interlayer little more him, we got the ability to do it.

And I guess on a related question as it relates to the PPP fees.

If we assume the SBA their act together and get the process in place for forgiveness to take place and that all happens.

Actively before year end do you are you are you like a lot of bank situated to get.

A lump sum.

The PPP origination fee flowing through the margin in fourth quarter that you could steer a large part toward the reserve if you chose to.

Yes. The answer is yes, what we're anticipating Kevin is.

Probably about 60% of forgiveness, we're estimating the come through the fourth quarter that'll give us another 4.7 million estimated if that were to happen.

That will go to the margin fourth quarter at that point, probably good timing if the reserve as needed. We will have will have funding our you know.

Income to offset it.

Okay, Great and Ron just I think I've missed it when you were going through the numbers to the 25.6%.

Balances better on modification as of June Thirtyth.

What was that as of July 17th.

That's right.

Oh that was market with a Democrat yes as of July 17th.

Roughly 37% of the original balances had come off of modification. So by the end of the month of July based on the normal progression of these maturities that 25% will be down to about 15%.

Got it.

Okay. That's all my question Thanks, guys.

Thanks, Kevin.

Our next question comes from him off cycle of Raymond James. Please go ahead.

Good morning.

Morning Bar.

I really appreciate the guidance and the commentary it really helps model I just had a couple of clarification questions. Ron the 345 margin that kind of all in a with PPP and accretion that comparable with the 363 reported number this quarter.

Yes. It is.

Okay great.

And then on deferrals I like he maturities kind of flow chart. You guys have I guess the question is of that 25.6, you've seen a good chunk expire now.

I have any of those requested a second round deferral and what kind of gives you comfort for that number will move down below 16% by the end of the month.

Yeah.

Read out your speak to that be happy too.

We we've only had.

About 10 clients that we've had conversations with up on potential extensions of all of their modification structures are not all of them. After the conversations have elected to proceed with this they were I think more so just sort of reaching out to inquire.

So at this stage, we feel very confident that does that those those numbers will continue.

To trend downward as shown on the graph all we're doing a ongoing monthly check in with all of our clients that took one of our cobot related modification structures. Our relationship manager teams reach out to each one of those Clos each month and discuss with them where they are what their outlook is.

And as I said the feedback we've gotten from clients up through the first to check in periods for May and June.

His own a only.

Super majority scale.

They intend to go right back on their regular payment structures as there is mature over the next few months. So we really do at this point in time foresee that these extensions will continue as Billy said, we probably will have a handful here there that may seek some additional guidance at later points, but you know at this stage of the game we feel confident.

In these though in these directions, yeah, and now and I'll add more one of the things you know when you look at the that kind of modification maturities on on on slide 18, I'd I like that as well is one of the reasons, we want to show with the graphically this quarter as Rick said it obviously this this is.

So that situation is is that ebbs and flows what we're seeing as you know tourettes point, we've got we've got a lot of folks that really feel very good about where business sits today, but they also know that it could be fall might be a little bit softer than anticipated. So you might get a little bit of a W are out there and so we are positions.

Your next quarter, even though it looks like this you might see some deferral maturities on into into some latter months, but those should be pretty minimal it would only be with with some of our stronger core clients really more just to help them kind of build some reserves some cash reserves. During this time to kind of get through the winter.

And so we're working with everybody individual and kind of customizing some of that is needed, but I think you will see that trend line continue to move down pretty aggressively.

Great. Thank you I appreciate the commentary.

Last one for me believe that's kind of bigger picture you're at 3 billion now you've got the progressive deal behind you or understanding that organic growth will be pressured your near term. How do you just think about the overall growth strategy at the bank now at 3 billion organic over the next couple of years, but also the secretary of M&A. Thank you.

Yeah, I'll start and I know, you've kind of give some color on on M&A.

You know from from from that point to Mark I do think I really feel like we're we'll get back on a nice organic pace on the sales teams that we built I think we'll get through that relatively quickly. We just want a little more more certainty coming out of our markets over the next step quarter or too.

Obviously, our focus now has been has shifted that we've kind of gotten up to this 3 billion dollar platform, we're really starting to generate some nice revenue growth are some of our ancillary products, whether its investments insurance mortgage those are starting to hit on a little bit better clip. So I think we can continue to refine.

90 continue to improve our financial metrics, just really kind of.

Just organically Standalone that said.

We are pretty opportunistic and I know Miller, we talk about that a lot I'll, let you make some comments on that thoughts around future M&A growth now more we do consider M&A kind of a line of business than Weve proven we understand it Dan can execute transactions, but but as we've said before we're not mandated by the by our board or.

By investors to go out do any deal.

We have continued to this co bid as we always have to build relationships with a few banks and you bankers and and we're continuing those discussions in those relationship bills and you know we're open for business. We are absolutely open for business and at the right time will will hope.

Really executed another transaction, but.

Your diligence will become a little bit more clear and then in the months ahead.

And in the quarters ahead, so I think you'll see activity with us and with the with the industry in general pickup.

The more we always keep keep some lines in the water and while you know everything has really been on a little bit of Appalls. A further for the summer for these kind of spring and summer months here I'm hopeful that I think very I'm optimistic that we can kind of as we get more clarity around loan portfolios that we could recur.

Well, some conversations and I'm looking forward to that but up but even absent that I think you'll continue to see.

Prudent in a lot of their areas as we move forward.

Thank you I appreciate that that's it for me congrats on a good quarter and thanks for the time.

Hi, Thanks Omar.

Thank you our next question from Freddie Brooklyn, Janney Montgomery Scott. Please go ahead.

Hi, good morning, guys.

Morning.

Oh I was just wondering on given the recent talk about automatic forgiveness for 18 months below 100000, and just kind of floating around I was wondering what was the percentage of your PPP on that are below that threshold and then you got the fee breakout slides, but didnt see oh loan balance.

Yeah.

Hello.

Working on getting that no get really yes, it's a if it generates a lot of Yemen take advantage of fat.

Yeah.

We've got that we've got got a bunch of them, obviously that that would hit that if that threshold. So optimistic that that we'll get some some of that.

All of that guidance here pretty quick that'll take a lot of pressure offered we'll have that report from the ability, but I'm I'm going off memory, it's about 90% Dow Sevenninety, Yeah, I think where you were at around 90 study.

Gotcha. Thanks, so much and one other follow up I'm just wanted to ask about kind of watch rated loans or hotels and are there any hotels and restaurants that are still rated pass and kind of what what do you guys thinking are going to happen with these ratings in October obviously, we don't know exactly how the virus everything that's not play out, but just kind of curious what your.

Lots are there.

Ricky will speak to the sure I will I guess, just took I guess clarify from the standpoint of terminology owe a better you said you used the term pass a again our watch grade typically is a pass rates, it's not it's not a classified great asset, but Oh, you know as I mentioned I think last quarter and can reach they are.

Practice was as we.

Datapipe class that took a cobot modification, we did move those into our watch list as I mentioned, we're checking in on those on a monthly basis our process. Thus far has been.

As clients come off of their modification structures based on the conversation that our relationship managers are having with them the information, they're providing us on their year to date outperformance and their their forecasts.

You know, we're making a case by case decisions on whether to go ahead and transition them back to their their pre modification.

Internal grade or keep them over to watch list for any additional period just to ensure.

So the answer your question is that though that yes, we certainly anticipate a significant portion of those that are sitting in a watch grade today to transition all over the next few months that for the hospitality portfolio will be a slower progression solely because most of those clients took the six month option.

So as long as they are under their covert modification terms, we're going to keep them in a watch grade until they get back to making the regular payment. So you won't see that portfolio transition back until likely into the third quarter really going into the October month, although based on the feedback we're getting run out better than talking to clients. So the vast majority due until.

The pay based on their current performance that they will low they will transition back to their all other regular payments and we have had a handful that have elected to ought to go ahead and do show early.

So we're we're optimistic that that number will law will will trend back to where it was pretty coded as they as they come off the deferrals, but for the next few months it will definitely at least through the next quarter, you'll likely see that per se particular portion of the portfolio I'll be a higher percentage in the watch category.

Gotcha. Thanks, so much I guess, just one more for me I'm, just curious I've heard some banks as they're doing some of these modifications have been.

Putting loan floors, and some lines that might not have had them before you guys still not at all with any of your modifications or is that cocky cycle.

I think it's really more case by case I don't think we really going in.

To try to make some some term changes or or any real changes to that lives. During this period now we have discussed if we need command and do some other types of modifications or if you need to a second a second phase than maybe we get in there and make some adjustments from from that standpoint, but really nothing.

Nothing to go in that that's changing structure or rates on notes at this point, yes, now I would agree with Billy on that one video we haven't done any kind of.

As I haven't across the board by any means but the standard process was this was solely a adjustment to their existing loan structure. We didn't do any type of pricing adjustments I guess for the positive we didnt have a lot of our client base at the time that we felt like needed such we felt like the those portfolio.

We're price still a pretty well at that point and in many instances, we didn't want to change the right.

Because all they had though they had very attractive rates that point in time for us. So.

That's been the procedure and as Billy mentioned the prior question earlier about second round.

Of co bid requests we have a we are implementing some discussion with clonch, if they're requesting second round about some some additional factors that we will ask them to abide by before we will consider a second round of modification. So we anticipate that though that that will be.

Handle the case by case basis as well.

Gotcha. Thanks. So much is very helpful guys. Thanks for taking my questions and congrats on great quarter.

Thank you thanks.

Thank you are not question from stored lots KBW. Please go ahead.

Hey, guys Mark for dessert.

Hi, everyone is doing well.

Most of my questions have been asked but Rob just wanted to follow up on your expense guidance. I think you mentioned 18 18 half million.

<unk> run rate next quarter, if we went back up the merger charges from this quarter and I think we're at 17 eight so.

How we sold the gap or kind of where that expense creep is coming next quarter or are there any.

Remaining merger charges or.

You know and kind of any ancillary items and they expect to do being that run rate.

I think it's it's a fluid amount I think the commissions the commissions that we're anticipating from the.

On the commission based compensation will probably be part of that although not some new hires some sounds as you saw the salaries trended up upward, but there's no really.

There is any line item that that's really pointing to the definitely increase and this overall. It's overall you know our franchise growth is going to be to compensate the difference.

Got it thanks Rocco the color.

Now looking at your branch footprint.

And just given how.

You guys are dents in Chattanooga pretty dense Knoxville are you guys looking at any potential branch optimization.

Co bid and kind of work from home policy is that made you guys.

Kind of look at your branch footprint and evaluate any potential our branch closures this year or next.

Yes, sure we have I think we we work we always evaluate the branches and and while we do have we've got some density in a in a few markets were in most of ours, and we're pretty well positioned to where it would be a little bit probably a little bit more challenging to cut back there are some opportunities, though we are a value.

Right a couple of a couple of options there and we'll continue to do so probably nothing on a on the the major side, but but we've got a couple of opportunities there that we're going to take a look at over the next quarter too.

Thanks.

Hey, guys just one more for me.

Im sorry back to Ron I'm on the fee side on the Olympics service charges were a little bit higher this quarter, which is a little different appears you know given.

You know kind of.

Cutting breaks on fees it create specked out the run rate that 573000 is that a good.

Kind of guide for for going forward, well I think it I think it went higher because we had the full full effects of the acquisition.

So the guidance, we gave you willing so comparing one quarter to the other I think as you. It's hard to do we have seen and service charges alone we have seen a little bit of a decrease because of the activity and ER and the ways, but the overall, nor our guidance our guidance is reasonable and getting back to your non issue.

As expense question to just dawned on me I'm, the big Delta between quarters is because we booked at the loan origination fees for the PPD program, which came out of salaries. So that's it that's part of the Delta also so I apologize for Misnap.

Okay.

What's that number can oman.

600000.

Okay.

Got it.

Awesome well, thanks for taking my questions and congrats on great quarter guys.

Hi, Thank you next door.

Again, if you have a question. Please press Star then one.

Our next question comes from Stephen Scouten Viper Sandler. Please go ahead.

Hi, good morning.

Yeah, they stay that hopped on a little late forgive me if you've covered this at length, but I was listening to your comments about the hospitality credit in particular.

And about second deferral process and I'm wondering.

What the thoughts our around.

More of them, a true kind of restructuring or modification of those loan.

Within the cares act as opposed to an additional 90 day deferral and things where you might you know kind of bridge the gap in the weakness in the 21 from a revenue perspective for those kind of hospitality credits or if it is largely I'm just a plan to.

To keep the loans intact and push out the deferral go longer.

Rick you were you want to.

Take that part time give some color I can't believe.

Stephen we actually it's interesting you asked that we've had a number of conversations internally about.

The possibility of that especially in the the hospitality sector.

You know that the the the positive for US if you look at our portfolio I think as we mentioned.

Kind of going into the cycle here, our loan to value positions on a lot of these.

These relationships were very attractive and it does give us a good bit of flexibility.

To be able to work with clients and we've talked about the possibility.

When and where needed by specific clients in specific areas about the possibility of doing some.

Just some adjusted repayment structures potentially.

Looking at maybe modifying some some longer amortization periods for a short term within that within the force.

Scale of the of the loan maturity. So for example, if you've got alone that's gotten another 10 12 years of maturity, perhaps we let that borrower.

PNR payments based on a longer amortization for a another 18 months or something to that effect and then they go back to a payment that would keep them in their original amortization schedule to your point, giving them a little bit of relaxation or a little bit breathing room over the next a short run just until you know this this whole vars event has kind of run.

Its course.

Thats been so we've had that conversation we haven't settle on any one specific solution at this point frankly, because we haven't had a tremendous amount of demand for it at this point most of our clients as we talk with them are given us the indication that they still feel very comfortable.

That as they work through the balance of their of their remaining a modification period based on their outlook that they expect to be able to go back to their their pre cobot payment structure to of course, that's optimal for us in that but is ideally what we would double we would like to see happened as often as possible I don't know if that answers your question, but we definitely.

Imagine conversation about it but we haven't really settled on any specific offer at this point in time and I'll just add Stephen dressed point any said it we've really not had a lot of folks asking for that I think.

Theres still some some yet to be determined with this if we get a little bit of a W.

Shake and there is a if there is a little bit of a slowdown but as we go through and we've looked we've looked carefully logic property at her book and as we sit down and go through it and we're looking at occupancy trends in Rep, revpar trends and and all of that for the most far most just about all of air properties have had some nice uptick.

Over the last.

And so you know for US up we're optimistic well we will do if we got the ability to do some restructuring some readjust, we'll be glad to do that but we just not had a lot demand for request for that at this point, but would repairs strong ltvs. It gives us ability to do that yeah.

That's a great I mean, that's a great point.

And I think that's you know Arab Arab blow Air Hotel book ceiling compared to maybe some others I mean, when you look in that region, we put the loan to values and there. We've got some really nice space to be able to do some of that so again I. Just don't think you know I don't think we'll have too much.

Trouble kind of helping some of these folks along this process if we need to.

Okay, Great. That's that's great color in encouraging information there. Thanks.

<unk>.

Thank you. Thank you.

This concludes our question and answer session now like to turn the conference back over to Mr. Miller Wellborn. Please go ahead.

Thanks, Nick in closing I'd, just say, thanks again to ought to be for joining US today. We're excited about this bank and opportunities in the future and hope you all have a great day. Thanks.

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