Q2 2020 Western Alliance Bancorp Earnings Call
Third quarter 2020.
Our speakers today are Kinda County, President and Chief Executive Officer, Intelsat, Chief Financial Officer.
Oh Sophia the presentation today via webcast.
Hi.
Www Dot Western Alliance Bancorporation dotcom.
I will be recorded and made available for replay after a few PM Eastern time July 17th 2020 through August 17th 2020 at nine am Eastern time.
With 187 [laughter] resource for.
75.
[music] one year old ones.
[laughter] 019 [noise].
Oh gosh during this call may contain forward looking statements that relate to your expectation.
Projection.
Your plans and strategies.
Thanks or trends and similar expressions concerning matters that are not historical facts.
Forward looking statements contained herein reflect our current driven.
Ultra performance and our such.
Risks uncertainties assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results.
So just crossed.
Looking statements.
Factors that could cause actual results to differ materially from.
The results are included in this presentation. So related earnings release in our filings with Securities Exchange Commission.
Except as required by law the company does not undertake any obligation to update any forward looking statements [noise].
Now for the opening remarks, I would like to turn the call over to Ken Vecchione. Please go ahead.
Good afternoon, and welcome to Western Alliance the second.
Core earnings call joining me on the call today, our Dale Gibbons and Tim Brown, our Chief Financial Officer, and Chief Credit Officer, I will first provide an overview of our quarterly results and how we're managing the business in this current economic environment and then Dale will walk you through the banks financial performance.
Afterwards, we will open the line to take your questions I'd like to focus on three trends that were present this quarter and will continue throughout the year P. piano strength.
Other provisioning expense and balance sheet growth combined these trends will support earnings in capital growth and dividend distribution throughout 2020 and 2021.
Starting with our second quarter results Western lines generated net income of $93.3 million, an S 93 cents, which was up 12% over the previous core.
Tangible book value per share of 27084 cents was an increase of 4.2% over the previous quarter and 12.9% year over year driving these results was record operating pre provision net revenue of $194.7 billion up 27.7.
<unk> year over year, and 19.1% quarter over quarter with strong operating PPNR ROI growth of 18 basis points to 2.56%, which benefited from a recognition of $13.9 million and payment protection program that fees. These results demonstrate.
That's a long term earnings power Western Alliance core business remains strong amid the current economic and market volatility and will support significant ongoing capital accumulation provide financial flexibility to fund balance sheet growth and accommodate changes to the allowance for credit losses for revisions to the.
Economic outlook.
In the quarter, we recorded provision for credit losses of $92 million persons 51.2 million in Q1, which was primarily attributable to changes in macro economic forecast assumptions and net charge offs, a $5.5 million Dale will go into more detail the bid on the specific drivers of Barbara.
Visions, but our total loan Hcl two funded loan ratio now stands at 1.39% or $347 million continuing our strong balance sheet momentum from 29, P. loans increased $1.9 billion this quarter to $25 billion.
And deposits grew $2.7 billion to 27.5.
Without the inclusion of Triple Pete loans grew a more modest $117 million and deposits demonstrated strong growth of approximately $1.6 billion [laughter]. The lower adjusted loan growth reflects muted demand for which we held back on marketing activities and directed our focus.
The low loss high quality loan segments. In addition to assisting our clients with their triple P. applications. We are encouraged by our pipeline our opportunity to continue to grow in low risk asset classes throughout the crisis. We have continue to attract new high quality relationships to our bank at.
Pricing and terms that would not have been available to us in other circumstances.
Furthermore, this quarter's positive operating leverage supported our expanding PPNR as our strong efficiency ratio improved sharply to 36.3% compared to prior year.
Becoming more efficient during this economic uncertainty provides the incremental flexibility to be maintained PPNR.
Looking ahead, we will continue to invest in new product offerings and infrastructure to maintain operational efficiency, but Q2 levels are temporary and will eventually rise back to a sustainable level and the low fortys. However, our branch like business model and our National business line strategy continue to give us a competitive advantage.
Average.
Finally supported by our healthy PPNR generation Western Alliance remains well capitalized with the C.T., one ratio of 10.2%, which puts us in position of strength uniquely prepared to address what's ahead and this uncertain environment.
Now, let's take a moment to provide an update on Western Alliance response.
Oh that pandemic first and foremost I want to acknowledge that health and safety of our people and clients. Our of our office is concerned we continue to fall CDC protocol and state by state returned to work guidance as our organization returns the office our business continuity plans have been working as anticipated.
Want to thank all of our people will continue to go above the call of duty to get the job done and serve our clients in this unique environment.
As I initially described on our Q1 earnings call Wall, Judy credit risk management strategy is focused on establishing individual bar level strategies and direct customer dialogue to dissolve long term financial plans our approach to payment deferral requests is to look for resourceful ways to partner with.
Our clients along with assessing their willingness and capacity to support their business interests.
We ask our clients to work hand in hand, with us whereby our clients contribute liquidity capital or equity as an integral component to modify the payment plans. Our approach collectively uses the resources of the bar government bank's balance sheet to develop solutions that extend beyond the six month window.
Provided for the cares.
Since April one wall has funded 1.9 billion triple P. loans, which provided expedient liquidity to all were 4700 clients and benefited more than 150000 employees.
At quarter end 2.9 billion or 11.5% of loans have been modified with the bulk of these phones, receiving principal and interest deferrals.
Excluding the hotel franchise finance segment, which we executed a unique sector deferrals strategy. The bank wide deferral rate is approximately 5% the vast majority of our borrowers elect to utilize their own resources or triple PE funds to bridge their business through the coated prices I will provide an update.
On the portfolios most impacted by Cobas later on but I didn't want to highlight in our hotel franchise finance portfolio. Our sophisticated hotel sponsors continue to see value in and support their properties with 92% to deferrals achieved by posting additional liquidity as a company.
And at a future payment deferrals are differentiated deferrals strategy provides our customers a runway to resolve their liquidity issues and allow the appropriate time to recover.
I'd like to Cookie cutter Big Bank approach, we establish the expectation that the burden of responsibility of solving the long term cash flow props remains with our client base and our gaming book all borrowers continue to make interest payments as 90 day principal only deferrals were approved for 37% of the portfolio.
Yep.
[noise] today, 95% of our clients are open for business and are experiencing a strong rebound of demand these facts and the daily conversations with our people and clients help me feel confident that our credit mitigation strategy in early approach to proactively managing our risk segments is bearing fruit and puts questionable.
It's in a strong position to come out on the other side of the pandemic in better shape than our peers.
Ill now take you through our financial performance.
Thanks, Ken over the last three months Western Alliance generated net income of 93.3 million or 93 cents per share.
As mentioned net income was impacted by elevated provision expense for credit losses, driven by the adoption of Cecil in Q1 and changes in the economic outlook during the quarter.
Net interest income increased 29.4 million, primarily as result of loan growth in lower rates and liabilities as interest expense was cut in half.
Operating non interest income fell 5.2 million to 11.1 from the prior quarter as lower levels of financial activity generated lower fewer fees.
We also have benefited from several non operating items during the period, including a recovery of approximately 40% or 4.4 million of the mark to market loss on preferred stock holdings, we recognized in Q1.
Additionally, bank owned life insurance was restructured resulting in an increase of my 5.6 million as we surrendered and reinvested lower yielding policies. In addition to this game this should moderately increase boldly revenue prospectively.
Finally, noninterest expense declined 5.7 million, primarily from an increase in deferred compensation expense of 3.3 million related to triple B loan originations.
A 52% decrease in deposit costs, and 64% decline in business development and travel expenses.
Strong ongoing balance sheet momentum, coupled with diligent expense management drove operating pre provision net revenue of 494.7 million [noise].
Is up 27.7% year over year I believe is the most relevant metric to evaluate the ongoing earnings power of the bank.
Our strong PPNR covered an 80% increase in provision cost from Q1 to 92 million, while driving EPS up 12% to 93 cents on a linked quarter basis.
Turning now to our interest drivers investment yields increased four basis points for the prior quarter 3.0 to however, the overall quarterly port folio yield decreased by 32 basis points from their prior year due to the lower rate environment.
Loan yields decreased 45 basis points following declines across most loan types, mainly driven by the 83 basis point reduction in one month LIBOR during the quarter.
Yield reductions were partly offset by an average yields on our triple PD lones of 5.02%.
Prospectively, we expect loan yields to trend toward the end of quarter spot rate shown before 60 cents.
Interest bearing deposit cost fell by 50 basis points in Q2 to 40 basis points as this quarter received a full benefit upper proactive steps taken to reduce deposit rates immediately after the FOMC cut rates twice in March.
Spot rate of total deposits at quarter end was 20 basis points.
Total funding cost declined by 34 basis points, what all of the company's funding sources are considered including non interest bearing deposits and borrowings.
The spot rate on total funding cost of 31 basis points is hired in the quarterly average due to the issuance of subordinated debt mid quarter at 5.25%.
Expects funding costs you have stabilized at these levels as no further actions are anticipated.
Demonstrating the flexibility of our business model, despite a transition to a substantially lower rate environment. During the quarter net interest income rose, 10.9% or 29 million during Q1 to 298.4 million up 17% year over year.
Our origination of PPP loans, coupled with strong balance sheet growth going immediate steps taken to reduce the cost of interest bearing deposits counteracted the decline in prime and LIBOR.
Triple P. lending supported our net interest margin during Q2 as SB eight fees were recognized resulting in a loan yield of 5.02% in this sector. We estimate most of triple P. loans will be forgiven within eight months from origination.
The 43 million in Triple PD Lone fees, we received from the SP, a net origination costs, one third or 13.9 million was recognized in the second quarter.
Net interest margin contracted three basis points to for 19 during the quarter as our earning asset yields fell 34 basis points, but was offset by an equal improved good in finding costs.
Our outsized deposit growth in mountain cash reserves will continue to place downward pressure on the NIM until excess liquidity can be deployed which we expect will take two to three quarters.
With regards with our asset sensitivity our rate risk profile has declined at notably over the past or were there last year and we are now asymmetrically positioned to benefit from any future rate increases as 70% of our loan portfolio is behaving as it fixed rate since floors on variable rate loans have low.
Partially been trigger.
Our estimated net change of net interest income and a 100 basis point parallel shock higher is 4.2% portrayed 2% over the next year and we now project to zero net interest income at risk if rates move lower.
Turning now to operating efficiency on a linked quarter basis, our efficiency ratio improved 550 basis points to 36.3%, which continues to demonstrate our industry leading operating leverage.
As mentioned earlier that noninterest expense improvement is related to an increase in deferred compensation expense of 3.3 million unrelated triple key loan originations plus a 52% reduction in deposit cost and 64% decrease in development in travel costs.
Normalizing for Triple B net loan fees and interest the efficiency ratio for acute due to would've been 38.4.
Additionally, our branch light model has given us flexibility to identify two locations that we are transitioning from full service offices to loan production facilities.
Our core underlying earning power remains strong as pre provision net revenue our away increased 18 basis points from the prior quarter, 2.56% and return on assets was flat and 1.22.
While we expect a 2.56 is a high watermark is elevated liquidity will hold down the margin. We believe we'll continue to maintain industry leading performance. This provides a significant flexibility to find ongoing balance sheet growth capital management acts actions or any credit demand.
Our balance sheet momentum continued during the quarter as loans increased 1.9 billion to 25 billion and this pop deposit growth of 2.7 billion brought our deposit balances to 27.5 billion at quarter end.
The loan deposit ratio fell to 19.9% from 93.3% in Q1 is our strong liquidity position continues to provide us with balance sheet capacity to meet all funding needs.
Our cash position increased to 1.5 billion as deposit growth continues to outpace credit expansion. While this is this compares to margin near term. We believe it provides us with inventory for good credit growth is demand reserves.
Of note during the quarter, we issued 225 million of bank level subordinated debt to ensure ample capacity to support our growth trajectory by bolstering our total capital ratio.
Finally, tangible book value per share increase the dollar 11 over the prior quarter to 27, 84, an increase of $3 or 19 cents or 13% over the prior year.
The vast majority of the 1.9 billion in loan growth was driven by increases in Cnine loans of 1.6 billion residential loans of 154 million and construction loans of 138 million.
Residential and consumer loans now comprise 9.8% of our loan portfolio, what our construction loan concentration continues to trend downward and is now at 8.8% of total loans.
Excluding PPP loans loan growth was 117 million, which was affected by line paydowns from drives during Q1.
And offset by growth in residential and construction.
Highlighting our continued focus on growth and low risk assets hacking innovation loans were flat and total well within the category capital call and subscription lines grew 35 million.
Mortgage warehouse loans grew 325 million.
Residential mortgages grew 165 million.
Corporate finance loans decreased 233 million compared to the increase we saw in Q1 as borrowers repaid or lines rise, reducing utilization rates down from 38% to 17%.
In all loan growth was fully funded by deposit growth.
We continue to believe our ability to profitably grow deposits is both a key differentiator in the core value driver to our firm's long term value creation.
Notably year to date deposit growth of 6.1 billion is higher than the annual deposit growth of the company in any previous calendar year.
Posits grew 2.7 billion or 10.9% in the second quarter driven by increases in non interest bearing DDA days of 2.3 billion, which now comprise over 44% our deposit base.
Triple PD Lone related deposits grew 1.1 billion in savings and money market accounts were up 845 million.
HM ways contributed to total deposit growth by adding 136 million in tech and innovation increased 262 million as capital raising activity during the quarter was active.
Excluding triple fee related deposits growth would have been 1.6 billion EUR, 6.5%.
Regarding asset quality special mentioned loans increased 292 million nonperforming loans rose 53 million during the quarter.
One half of the increase in SM loans are from the hotel portfolio generally consistent with our previously discussed tech and innovation rating guidelines. These loans were downgraded as we do not have clear line of sight to more than six months of remaining operating liquidity. These borrowers our current however, as they made loan prepayments.
That we required for us to consent to a deferral modification.
Our other borrowers in the segment are also paying as agreed or provide cash paid or provided cash payments when that that when coupled with the payment deferral have no additional debt service requirement until sometime in 2021.
Second Weve aggregated an event planning and leisure sub segment in which the business models are essentially dependent on social distancing relief and in some cases, the resumption of group events.
Over the 150 million dollar total exposure to this sector 60 million has been moved special mention and 40 million to nonperforming.
While the portion moved to FM has over a year of current liquidity. It was downgraded as the revenue models have been sharply impair.
The loan moved day nonperforming has had now has limited remaining liquidity.
The remainder of the migration to special mention is fairly granular from our clients spread throughout our metropolitan markets, where liquidity has been Titan.
These loans are generally collateralized by an array of assets that include real property.
Frequently alone may be downgraded to ask them because of liquidity concerns, even though collateral average maybe considerable for this reason migration to special mention as a low correlation to ultimate credit losses as over the past five years less than 1% has moved through to charge offs.
Our allowance for credit losses rose $86 million during the quarter as a change in mix through the balance sheet at least 4.2 million of reserves and changes to the outlook accounted for 96.2 million, including covering five and a half million of net charge offs.
Revisions to the sequel, Cecil macroeconomic outlook assumptions, which have declined since March 30, Onest, but have generally stabilized since April accounted for the entire net reserve Bill.
They are ending allowance related to loan losses was 347 million, excluding held to maturity securities or 1.39% of funds loans, an increase of 25 basis points.
The current reserve build reflects our best estimate of the future economic environment as of quarter end, including the impact of government stimulus programs and credit migration actions.
We have mid migrated to a consensus economic outlook, a blue chip economic forecasts as it tracks largely management's view of recession and recovery.
Net credit losses of 5.5 million were recognized during the quarter, which were mainly attributable to small business and cnine borrowers.
In all total loan Hcl to funded loans increased 25 basis points to 1.39% in Q2 as provision expense for loan losses of 87.3 million significantly outpace.
Net loan charge offs relative to most other banking companies are lower consumer exposure continues to result in took lower total loan losses.
I'll now turn the call back again.
Thanks, Phil.
I would now like to briefly update you on the current status of a few exposures to the industry's generally considered to be the most impacted by the coated Nike pandemic.
During the last two weeks of the core Tim Bruckner, the credit administration team and I conducted the most extensive quarterly portfolio review process in the banks history.
To review covered 95% of walls outstanding loan balances. Excluding purchase friends is residential mortgages are $2 billion Hotel franchise finance business focused on select service hotels represents approximately 8.2% loan portfolio the financial flexibility of these borrowers.
Maximize by working with financially strong institutional operating offers with deep industry experience expertise and conservative underwriting structure is focused on loan to cost.
You could see rates are tracking national averages currently around 46%, which have tripled compared to the lows in April up around 15% and are now only a few percentage point show a fully covering estimated operating expenses.
At approximately 55% occupancy select service hotels are also estimated to cover amortizing debt service as a testament to the operating models of the select service hotels revenue per available room as on 55%, but they have been able to shrink their cost structure by over 40% and as a result.
Difficult tell is operating at breakeven.
Nearly 85% of our hotel portfolios either pay as originally agreed on a proactive payment deferral plans that bridge into 2021, we feel positive about the trajectory of the portfolio and that our proactive deferral strategy will produce relatively stronger credit performance given the active support of our sponsors.
Demonstrated through the material upfront payments made to receive deferral plans to augment the strategy, we nearly doubled the reserve on the portfolio this quarter and increase the hcl to loans ratio by 93 basis points to 1.95%.
Mr depended portion of our technology and innovation segment is primarily focused on lending to establish growth companies with successful products and strong investor support which provides greater operating financial flexibility in this environment overall significant sponsored support had an active fundraising environment continue for the.
This growth firms, 81% of loans of greater than six months remaining months liquids the up from 77% in Q1.
Additionally, we had over 50 client success, we raised over 1.4 billion a new capital since March 1st.
$509 billion gaming book is focused on Oct strip middle market gaming link companies, whose revenues driven by local demand factors, 37% of the portfolio is 90 day principal only payment deferral as they continue to cover interest payments. Additionally, these clients benefited from 28 point.
$4 billion Triple PD Lones inclusive of our recent closure mandates in Nevada to limit certain affectivities businesses, representing 95% the portfolio. Our open for operations. Upon reopening all casinos borrowers are performing at or above their co bid operating plan.
And no loans for downgraded to criticized or classified.
At quarter end.
Lastly, our commercial real estate portfolio continues to perform as 99% of our industrial leases. Our current 90% of our office rents are paid on par with the national average the sub segment of CRT showing signs of stress with the industry's retail.
Wall CRB retail exposure of $676 million is focused on local personnel service based retails troops centers with limited merchandise retail exposure similar to HFSA, we are utilizing deferrals to support a path to recovery for these borrowers while we.
Streamed sponsor support with high level of additional payment reserves of note, 67% of wives investors see our E retail tenants paid maze rent payments compared to 50% Ashley.
We continue to generate significant capital and maintain strong regulatory capital ratios, we tangible common equity to total assets of 8.9%.
Common tier one ratio of 10.2% an increase of 20 basis points during the quarter, excluding triple PD Lones TCV to intangible assets is flat from Q1 at 9.4% inclusive of our quarterly cash dividend payment of 25% per share tangible book value per share rose about 11.
The quarter to 27084 cents, an increase of 12.9% in the past year, we continue to grow our tangible book value per share at a rate significantly faster than our peers. As it has increased three times that of our peers over the last five and a half years.
In conclusion, we expect loan growth to be fairly flat Q3, as triple P. pay offs forgivenesses are largely offset by the organic growth and low risk asset classes, depending on the timing of the realized triple B forgiveness organic loan growth should offset triple b runoff, resulting in.
Net loan growth being relatively stable, we anticipate another strong quarter of deposit growth Q3, primarily by executing on our deposit initiatives and achieving our market share gains in mortgage warehouse.
Anticipated deposit growth and resulting liquidity will primarily be deployed into residential mortgage assets to improve returns on cash over the next several quarters. However, as triple PD Lones roll off and liquidity continues to rise pressure on NIM will also continue until to be fully deployed into productive ask.
Assets, while we're pleased with our deposit growth the pace is exceeding loan growth and as Dayl mentioned it will take several quarters to redeploy this liquidity into low risk loans were assets, providing deals greater than the feds current offerings.
Operating PPNR is expected to decline modestly as triple B income begins to abate loan balances loan balance ounces growth grow began growth begins to reignite and the deployment of excess liquidity continues and deferrals loan origination cost returned to normal levels.
Our long term asset quality and loan loss reserves are informed by the economic consensus forecast, we should consistent going forward should preclude material increases in reserve levels from this point the pace timing and size of future net charge offs are uncertain to us as we have not seen a material increase.
Recent delinquencies or sub standard migration.
Finally, our strong capital base and access to ample liquidity will allow us to both take advantage of any market dislocations to grow in low risk areas and to address any credit demands in the future.
At this time del Tim and I are happy to take your questions.
I will now begin the question and answer session.
Good question.
And your attention.
If you are using the speakerphone, please pick up your handset before passing.
Your withdraw your question. Please press Star then.
The first question today comes from Casey Haire of Jefferies. Please go ahead.
Yes, thanks, good morning, guys.
Hi.
So first question on the hotel book the the deferral strategy you guys. There looks it's more than six months can you just give us some color.
On on what the what the average term is and how how how how far in advance of you guys.
Deferred these and then what is what the occupancy sounds like it is near sort of breakeven levels. What is in your reserve build forecast going forward you habit, reaching 50, reaching that 55% level I'm just some color there given that this is obviously is of concern.
Yes, I think the hotel franchise finance book of business is the most misunderstood and our approach is not fully understood as well. So let me take a half a step backwards and give you a larger picture as to what we're doing and why we're doing it and then get directly to your questions. There KC one.
First misconception is deferrals are good thing, okay payment deferrals require cash collateral paydown of debt upfront. They prove will provide liquidity to the project.
Show from the borrowers point of view project commitment, which is very important or they flush out any early problems, we need to deal with so when we say we have a six plus six program. What that means is our bar gave a six months of payments upfront that we deposited.
Into a bank account, which we pull out on a monthly basis as debt service coverage ratio debt service coverage is due debt principal and interest us I should say is due and they don't get to their six month deferral process until six months from today. So that's what 6.6.
Means all right and.
Well, what we're trying to do here as we look for people, who provide the liquidity and commit to the projects again. It helps us understand if they do not want to do those things than we need to take fast action to preserve the 40% of equity that's sitting.
In front of our debt.
That is the philosophy around our approach as specific answer to your question today about 51% of our portfolio is in the six plus six deferral buckets.
19% is in the three plus three buckets about 9% is in the as paying as agreed and another 3% is in the three plus six bucket and then we've got a whole bunch of other plans five plus five two plus two you know all those.
Five plants, depending on that particular bar and that amounts to about 10%. So all in about 92% of our hotel book is paying.
As a as agreed or is on a deferral program now we still have about 6% that were in the process of document the and we expect that to fall into any one of the buckets I just described but all in overall, 99% of our hotel book is.
Paying as agreed even if they're on a deferral because we are attaching those funds that are sitting in a bank account, where they provided the liquidity upfront.
The other specific question you asked is let me just give you some of the numbers here for US. The current occupancy is about 43, 44% that is three times higher than the lows in March the HDR is.
$44 that too is three times higher than March.
We did say at 45% based on our book of business here that the company is breakeven breakeven on an on an operating basis and at 55%. The company does begin or the book of business does begin to cash flow on a one to one ratio inclusive of all amores.
Asia.
I think that address all of your question I wanted I would add a couple of things 10 Brock.
First I'd say this was.
Not the easiest thing to execute I don't want to downplay that the this took a concerted effort of our people.
And and initial discussions with borrowers were difficult because we're solving for a period.
Significantly longer than most viewed co that in the first 90 days as a crisis and so we went out from the start and said lets solve for periods.
Sufficient to return to stabilization and Thats, what we did and we solve that not just with Armani and our deferral, but with contributions from our very significant sponsorship in that space. We did it because it was the right thing to do our borrowers did it because they could do it.
I think thats, a very important point on that and we have so many now that come back I'd say I'm. So glad that we took this approach so 50% of our portfolio slightly more we'll have to deal with these issues again in middle of 2022, alright, another 20% 2021.
Sorry.
Another 20% or so we'll deal with towards the end of the year. Okay. So we've given enough of a runway here. This what's most important thing that we can do to help our clients is to give them a long runway to come back up to operating levels that they previously experienced initially as Tim said they resist.
But once they talk to us once they saw was happening they saw some of the wisdom in the approach that we deployed.
Okay did I answer your questions there.
Yes, no those those pretty comprehensive I'll have to go back and read it myself, but that was.
Dell question for you on the on the NIM.
Slide six by my math on the spot rates it looks like it's about it exited the quarter at 390.
Just does that sound about right number one and then number two what is that that loan yield spot rate of 466, what does that presume for for the PPP loans at five two in the quarter on Twoq Thats, a lot higher than what we've seen from peers.
So just some color there.
Yes so.
That assumes five owed to for that for the quarter as well. So so what we did in terms of recognizing triple fee revenue is we've estimated doing the effective interest method and gap how long of these loans there last and from integration what we have a what our borrowers are thinking in how they're behaving we think that the average life of these is going to.
About eight months and so we're taking their triple Pete.
Average low fee, which is about 2.7% and we're recognizing two thirds of that really over this eight months and then there's a tail for the part that might not that might not pay off. So you should expect us to show something of a level loan yield on the triple B that I think some others doing maybe a little different to a different approach.
I would hope that I would hope that our number would be would be on the higher side of where you are in the in the higher threes for the quarter, but frankly kind of remains to be seen a bad I mean, we've had this massive increase in core deposits. We think that we're on track for a number of strong quarter of.
Our deposit growth in the third quarter, while low while the loan balances won't be moving as much because where we are dealing with the paydowns on triple B as we originate credit and other another high high quality categories. So thats going to help us in terms of inventory build but it doesn't help us in terms of the NIM, but we think thats going to be really important in 22.
Anyone.
Great. Thank you I'll step back.
The next question comes from Brad Milsaps Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning.
They'll just wanted to.
Thank you I understand the.
The TPP fees on a go forward basis.
Billion nine.
Implied.
57 million in growth the I think you mentioned that.
The net origination costs, yet about 43 lab, we recognized.
About 14 this quarter can you help me understand where the geography of where.
Some of those speed will show up in terms of.
The reduction and in operating expenses going forward I mean, I think you get the same place.
Overall, but maybe starting from a little lower point that thought.
Yes, Thats I think Thats I think thats, probably the biggest delta. So so we did a billion just under 1 billion 9 billion. A 60 in loans. We had some people surrender had a couple of of early pace and so that number is down to about 1 billion stuff and today, we received fees of $49 million from the.
SBA not 57, and then we netted certain cost against that and that's how we get to the 43 million going forward.
I'm not looking for any cost cost relief, obviously, because the origination process has ended but I'm not looking for better. So so the 3.3 million that weve highlighted in the in the release.
I think thats going to come back up in compensation expense. So that is going to that is going to rise again, and then to remain in so that gets to a net 43 million work. We took a third of that in the second quarter, we're probably going to take another third of that in the third quarter and then we're going to have a tail into the fourth and may be a drill down a little bit into the first of next year.
In terms there kind of recognition. So so I think a two things one is maybe that dollar amount was a little bit higher because some of these were very short term or or refunded and then to the average.
Low fee was shy of 3% it was about 2.7.
Okay. So bottom line, you've still got 20, not only to recognize most of that's going to come through net interest income.
Yes that will all come through net interest income.
Got it.
Got it I understood.
And then just too.
I'll up on the margin.
You noted the deck, you've got 78% or loan book essentially acting as fixed rate.
Thus far I mean, I know, it's early but.
Okay.
Yes.
Since some of those floors.
Obviously, there's probably not a lot of.
I think from bank the bank right now so.
Just kind of curious kind of your thoughts on being able to defend those.
Loan floors as as we kind of move through the year.
Actually it has been less challenging that it has been another another downward environments and I would tell you that today.
And this is unusual.
Two or three years ago, when we put on a low with a floor we'd have the though the loan docs are in there and of course is to close disposing assess or the borrower, but it but it triggers 25 to 50 basis points below the variable rate and so it's like out little bit an afterthought. It is probably not going to hit me. Most people think loads or rates are going to plummet as they did today that's.
Not the case today, how we how we are written how are these are written is usually Adam as a LIBOR floor assumption of 1% well I was under 20 basis points today.
So then go in knowing okay. This loan is priced at L. Plus 325, and now is never considered to be below one.
So Dave added the gate the floors whats active and it's going to be active for.
Im until LIBOR gets above one and then we can go to variable rate structure surprisingly, we're not losing business because of the floors.
Got it and then final question just looking for some of the segment data I didn't notice there was.
Look like a negative provision in the other NGL category.
In the quarter that reserve actually went down.
Any color there kind of relative to kind of what you did with the rest of the portfolio.
It's not so much of portfolio thing is that is that when we updated.
For the the Cecil outlook and the and the migration.
From from Mark Sandy's.
Analysis to a consensus forecast it resulted in different allocations for for certain sectors.
And.
See an eye loans in particular kind of came down.
In part in that in that regard.
Okay, great. Thank you.
Next question today comes from EMEA, Brazil or.
Cargo. Please go ahead.
Hi, good morning, guys.
Maybe we can start on the credit migration.
Special mention this quarter. It certainly doesn't seem like that was the primary reason for the second quarter Prevision I guess looking ahead, how should we think about future credit migration relative to the current allowance if they're seeking migration special mentioned is that already pretty much included in the.
Existing expectations and I guess more specifically if theres migration out of special mentioned that into classified would that drive incremental necessity to build allowance from here yes.
So as I kind of alluded to the loss rates for SM loans does not have a high correlation in terms of in terms of migration and.
Thats reflected in our formulas, we don't see that in the in the math in that and the emergence of loss and so migration to ask them is usually driven by illiquidity question. So even if we've we've had a loan that was at a 20% loan to value, but there's a liquidity tightening going on at that borrower that's going to go to ask.
And even though the risk of loss most people would say we'd be essentially zero. So in terms of what can migrate to ask them I think we kind of highlighted that we thought we'd see some SM migration in the hotel book because they are they're under liquidity stress as those you know as as occupancy rates really dropped in that quarter. Now if you go from there to tick.
Classified or to nonperforming it is become a different category and those loss assumptions do generally climb when we moved.
To a classified assets, we're going to look at the collateral behind it and we're going to recognize a reserve based upon our we underwater are not relative to expectations. So that could be a different a different result, but SM migration really has almost no effect on on provisioning.
Okay. That's helpful. Thank you and then maybe switching to the technology portfolio.
Certainly encouraging to see that over 50 clients over $1 billion was was raised in the quarter.
Looking specifically at the 14% of tech loans last quarter that had under six months of liquidity, where those included in that 1.4 billion of capital raising activity and I guess those companies that are coming up to that kind of.
Deadline are they having as easy success, raising incremental rounds, and what's happening to the valuations if they are.
Yes, so some of that money was raised.
For those customers that were in.
Sam last.
Quarter that we're able to raise their raise liquidity and then move out that's a constant number that kind of moves in and moves out relatively speaking the tech and innovation book stayed relatively flat in terms of the SM movement. So that was very encouraging to me because it means that.
The.
The investors are continuing to.
Because even in the projects or investments they've made and are continuing to put capital into their into there.
Companies so.
I would add just 10 bruckner quarter over quarter, we actually saw improvements and businesses with.
With our ml less than six months, if you look quarter wanted.
Quarter too and so what we're seeing as a high level of activity and some cases the rounds are.
Smaller, but we're seeing sustain sponsor support and really strong strong activity in the sector so quarter over quarter Armel lessons sex improved Q1 to Q2, yes, I'll give you a two pieces of interesting facts about our book, which.
For the Tech and innovation the medium equity invested in our portfolios is six times our loan commitment today.
And it is 10.6 times the current outstanding loan balance. So it gives you a sense of how much equity is going into the into the companies.
And also on the fact that even though we give a commitment about half of that commitment is not drawn down on at all because they have so much equity and that leads us to why we have talked two to two and a half times, depending on what time of year, you look at deposit to loan to loans in the tech and innovation business.
Got it and then in the gaming book, I guess I'm kind of surprised to see the level of allowance allocated to that portfolio relative to currently adversely graded loans.
Is that is that an indication that that things could still get choppy in the future or.
Is that is that formulaic because it didn't seem like there was there was much expected loss content from your prepared remarks.
Yes, so first.
We have no Las Vegas strip exposure, Okay, we mostly have drive to and local markets and what's interesting here is they are out performing the same period of 29 team in their initial reopenings. So may 2020 was better than may.
29 team all right, we do have one or two.
Properties, where theyre just performing at co bid plant and that is not that and thats. The worst that we can say then we're pretty we're pretty happy about that some of our gaming establishments are posting.
Win per day at their slot machines that are three times the normal average level right. So in this book we have.
36% of the book has had an interest only only deferral, we have not had any principal deferrals part of what you see in our calculation is manually driven by the model of cost there are some subjective input put in.
On top.
Overlays for what we think is occurring in our book of business, but our book has fairly strong I should say lower leverage than you think you know generally leveraging our book is just under three times debt to EBITDA you go back to the last crisis and anything over a are under our four and Uh huh.
After five times debt to EBITDA had a 90% survival rate. So right now we like our book is doing well. We are encouraged that there is a a return here by our gaming clients customers and I also think it shows well.
Now for that when the economy opens up again, how quickly people want to come back out and and socialize and be settings with other people.
Yes, I think part of what you're referring to the tumor is basically the process of.
Using formulas that were developed during the financial crisis, and extrapolating them to today, which has a different circumstance in a different underwriting and and a different kind of risk profile entirely with 95% of our properties open.
And what we're seeing in the low LTV we are in this sector.
I would put my bet that when we're done with this pandemic and we look past.
Look backward in terms of what happened the Hcl in this sector will have been shown to be higher than it needed to be.
Yes, I might add.
Hi, good.
Tim Rock I, just just add.
The pace of of all these things in the in the currency of of these events go we're seeing.
In late May and then in June.
This this very robust response to the industry the high volumes and and.
And though very very positive.
Good.
The as Dale as saying that the Hcl is based on historical we're seeing results that are outperforming what we have seen historically and that's another way to look.
Understood. Thank you and then just sorry, one more modeling question for Dale just average PDP loans for the quarter.
I'm, sorry, what was that the average repeating the balances for the quarter.
1.1 point 8 billion.
Great. Thank you.
Your next question comes from Chris Mcgratty of KBW. Please go ahead.
Great. Thanks, a question.
Dealer, Ken just wanted to go back to loan growth first I guess.
Completely understand that the near term.
Low risk growth strategy and TPP dynamic.
Perhaps it lasts a couple of quarters I'm wondering kind of your thoughts on how we should be thinking about loan growth beyond maybe the next couple of quarters.
And minus kind of the targets that you're setting forth.
For for growth.
Yes.
So I think as I said in my prepared remarks, it will be somewhat stable to where we are now when you consider the runoff of the triple P. as Dale talked about being replaced by our traditional organic loan growth as we emerged out of Q4.
We haven't done our full planning yet, but I would think that it's going to be no less than what we normally do which is $6 million to $800 million per quarter right. Now I am encouraged that our pipeline is beginning to build and I arrive at that conclusion by looking at the number of loans that come into our seen.
Your loan committee all right those are the largest loans in the bank.
Coming in.
With us from what I'll call brand name companies that you would know very well add better terms.
Okay and add better pricing.
And so we are encouraged by that right now that you know we have to wait for those loans to be approved and we have to of course wait for the for them to be drawn down but as we emerge out of Q4 I would think we're back to our normal run rate of $6 million to $800 million a quarter and we'll update you as we get closer into Q4.
We normally do for that for the next year out.
I think isn't going to partially depend upon what happens to they don't have the situation I mean, I'm I've been encouraged by what seems to be.
A number of firms worldwide that claim to have.
The cases vaccine and if thats the case and if that is a rollout.
At around the end of this year, maybe into Q1 I.
I think that puts that puts confidence in a different level and and I think we would have the the background and we are ready with the infrastructure and we've got the deposit capacity that will be able to take advantage of an increase in demand as competence resumes.
That's great deal in terms of deposits. So it sounds like loan growth treading water to the entity and then resumption. The comments about deposit growth is coming in if I take out the triple B of 1 billion. One is still we're going to half or so in the quarter can you just help us at the magnitude of what you're so what you're likely to see in Q3 in Q4.
Or just how big of the balance sheet is going to be I guess I'm trying to get Armstrong.
Well, it's it's not going to replicate what we did in the first half of the year by Tom, but we're getting traction in our specialty business lines, we're getting traction in and mortgage warehouse, we're getting traction and homeowners associations and we're getting traction in in tech place and and all of those have demonstrated.
Historical momentum and the Q is good for what we're seeing coming in.
Great and then I could sneak one last one in just want to make sure I got the expense.
The expense outlook right. So the deposit costs came down to three and half is that the right run rate that we should be using from here.
I think Thats fair.
Okay, and then the moving pieces with the PPP.
Tom how do we think about this overall expense expenses, they were kind of flat quarter on quarter, but I know, you're making some investments, but any direction extensive yeah. I mean, I mean, we're going to were at 115 that included a credit for Triple B originations of course, we're not doing any more triple B originations and as you mentioned, we're going to be fairly flattish with you know it.
Hey Downs from that program and expects expectation of offsets that development elsewhere. So I don't think we're going to be below 40% on efficiency prolonged I'm not sure. We're going to go right back to 42, I think that may be a little bit, but but I don't think I don't think we're going to many quarters that begin with a three.
As we see that come back I mean, some of they some of the expenses we saved.
Travel expenses business development.
That's really kind of the circumstance that we're in today, we do think that travel helps would have things that helps close deals we think it and so we're going to get back into that when that seasonable from a social distancing and state regulation.
Scenario allows so yes, we're going to be back you know it so I wouldn't look at the 115 I look more at the 120, where we were before in terms of something closer to our run rate.
Perfect. Thanks.
Your next question comes from Michael Young Suntrust. Please go ahead.
Hey, Thanks for the question.
Wanted to follow up for some reserve I think that's gotten a lot of attention I've had a lot of questions about it.
I'm trying to get to a more comparable figure to maybe other banks, if we kind of backed out mortgage warehouse and maybe the large resi mortgage purchase portfolio and triple P. loans, I think you guys might be more on par with other banks, but I didn't know if there is a way to kind of disaggregate that where we could maybe seat.
On the more comparable basis.
Yes. This is talking our own book, a little bit, but when you think through.
Our loan loss reserve compared to other banks first.
Always recognize that we don't have a consumer franchise and thats where level losses will begin to Mount that's number one number two I break our book into.
Loan categories, where we've had no losses resulted finance for 900 million capital call lines 500 million nature way services 300 million warehouse lending 2.9 billion. That's 4.5 billion that Weve never had a loss and then we've got another 4 billion, where we've had limited.
Good limited losses in residential loans.
Consumer.
Muni loans and nonprofit that to adds up to about 4 billion. So as you think about our funnel is 25 billion you can take roughly 8 billion almost off the top for either no or low losses now of course, you're not going to do that but I think you can add a small percentage of basis points to cover your loss.
This is against that 8 billion and then recalculate the reserve ratio and I think you'll find it will rise considerably above the 1.24%. Another thing that I think is helpful. For you to think through when you look at our book and this is how we look at it our construction land and development.
[music].
Which is about 2.2 billion.
The book there is looking very strong and it is responding and acting differently than the prior cycle first we have about a third of that book sitting in.
Lot banking.
And in month banking, we have a LTV of about 55% with.
Well.
Capitalize a highly liquid sponsors.
Private equity or hedge funds that are back that our guarantors here. So that book of business is performing very well, we have no deferrals there and in fact instead of getting deferral requests were getting just the opposite we're getting incoming calls people, saying you don't have to worry about me paying.
Hi, Bill, but you have to be there when I see opportunities and that's an easy thing for us to say, if you're making your payments as agreed to based on the terms that we've usually use will be there to help you. So the C.L.D. book is somewhat different too and then on top of this and I know people like to go back and say well what.
Happened the Western Alliance in 2008, and nine and 10 and drawer from that as some type of regression analysis, but when you look at the prior cycle. The credit physics, if you will from the prior cycle to where we are today completely different almost a full turn around so.
In the prior cycle, you had high unemployment, okay that that stays where we are today, but the prior cycle you had high unemployment high delinquencies high charge offs low home prices you had a rising supply of home prices you had income dropping and you had demand dropping for these homes as well in the current cycle.
Yes employment is higher than the prior cycle, but you don't see the rise in delinquencies, you're not seeing the rise in charge offs home prices are either flat to rising supply has not grown and income with the help of fiscal policies by the government income has risen and demand.
And is higher so when we look at the appropriate reserve for our construction land and development book, we had to put all these overlays.
On top of the historic modeling that you would see in order to represent what we see happening in our book of business. Today. So you put that together you also.
Acknowledged that we have no energy loans, we have limited restaurant loans with very few solar loans, all that stuff collectively together.
Got us to our reserve calculation.
That makes sense and just as we move forward I mean, the main thing that would drive a big Delta in the reserve would the losses in some of those historically low loss categories is that kind of the right way to think about that or would it be the more significant downgrades in.
Other categories that have had historical losses.
Well, I mean, effectively whereas scenario that that you put you pay losses incurred right. Your Hcl cover is what's still in the book out there now if you we have ill or if we had a loss in a category that previously has been zero loss than we expected it to have zero that would inform the.
The analysis and the expectation of loss in what's still out there and gosh, maybe you got that Ron maybe there's a defect in what you're doing there that is embedded in other loans and so in that sense. It could drive a higher provision but for the most part it's almost pay as you go and sustaining a level of reserve based upon your outstanding balance and changes in the outlook of.
The economy.
Okay.
Maybe just one last follow up I think you guys have outlined a lot of detail on some of the most in focus.
Loan segments, but are there any other sort of tangential categories that we should have on our radar screen, maybe see eni relationship or something that might be related to one of the underlying categories.
Just that we should be thinking about EUR, but should be addressed.
I think Thats, a fair question and inside of our CRD book, we have three components to it we have industrial and there.
99% of our borrowers customers are paying their rent we feel comfortable there we have office there, 90% of our borrowers customers and paying rent rate, but we have a CR E book for retail about 700, just a touch over seven and.
Hundred million their 66% of our borrowers customers are paying rent compared to a 50% national average now I'm not saying there is a problem there, but you asked what's what are we focusing on what has our elevated attention today that is an area.
That has our elevated attention.
We don't have to move quickly on it we're watching it.
It has.
It's Scott.
A very strong industrial very strong debt service coverage ratio coming into the downturn of 1.8 times. It has a very low LTV of 48%, we don't have much speculative.
Loans there at all so.
Im not I want to make sure unclear don't runaway, saying there is a problem you asked where are we also watching that is an area that we're watching.
Okay. Thanks for all the color appreciate it.
Your next question comes from David Severini with Wedbush Securities. Please go ahead.
Hi, Thanks. My first question is on the mechanics of the deferral program if we use.
Six and six program as an example, so the first six months there accruing interest you pull the PNM from the accounts that they deposited everything's normal but after the first six months as we get into 2021, what happens to those loans in terms of the treat the treatment.
But do they go on non accrual or do they move to special mention or classified Im just curious as to whether or not they will continue to accrue interest in the second half of the deferral period.
Yes, no. So the low docs have been modified and so the contractual payments now allow for that Theres no new payment done due until I'm going to say may have 21, so you're right I mean, we we take we take the six months they paid upfront.
PXI and then we debit that and we and we recognize that we eminent that liability and we paid alone down over that six months then for the next six months.
What we do is.
Payment regarding principle is deferred and interest payments that otherwise would have been do are now tacked on to principal do as usually at the end of the maturity at a low it could be earlier could be a year out or two years out or something like that where thats going to become too again. So we're going to continue to accruing income increased.
Actively the balance on that low for the next six months doesn't it doesn't move to any classification unless we have information that there is another problem with the situation that has since developed but otherwise it would it would stay like that and then after that expires then they're back to their standard pmnine payments as as originally agreed.
Hi, Thanks for taking Brakarz I would add one just one thing on on.
The interrelationship of our strategy and risk rating because I don't want this point to the mess.
We won as not that's not a direct relationship is the is the deferral in effect or not the does not directly affect the risk rating the weekly dialogue with our bar and verification of liquidity to work through that plan that that as the import.
And.
Calculus, and our risk rating methodology. So all the time, we're in constant and ongoing dialogue with the borrower ensuring that they are closing the gap and that theres sufficient liquidity through this cycle. So if we get to a point, where those mechanics change and we feel differently about that that's one.
We would affect the risk rating I wanted to be Clara.
That's helpful and then shifting gears to.
The provision as we think about the third quarter and clearly there's a lot of uncertainty on the macro outlook, but if we were to assume the macro outlook is stable from here you mentioned about how you're expecting flat or low loan growth what would that translate to in terms of provisioning are we thinking back towards.
I mean, I don't want to be too optimistic and think of 2019 levels, but what should we how should we think about provisioning over the next couple of quarters.
Well, yeah, I won't go back to 2019, either but but I would think that it would fall off fairly significantly.
And that is as you saw this quarter I mean, the entire reserve increase in provision.
Resulted from a deterioration in the outlook from March 27 to last.
Marks Andy deal in the first quarter to where we are today. So if thats fairly stable as I will be maybe as a bit of a pay as you go in terms of losses. So if we incurred losses were going to if we're going to recognize that if we have migration downward not into FM, but into sub standard in the nonperforming.
That could trigger additional provisioning requirements and charge offs, but job, but other than that.
[music].
If charge offs don't really materialize I think that number could that could draw could drop.
But rather dramatically actually overtime.
Thanks very much.
Bye.
Next question will come from Brock Vandervliet.
Yes. Please go ahead.
Thanks.
Question answered.
Hi.
Kind of thread the needle with the.
Especially in the hotel book the restructuring.
Deferral.
That youve structured, especially the longer longest term ones to mid 21.
Is that not a TDR.
Well, so so the kind of the special dispensation that came out from the FRB.
Extended that window, a little bit so so prior to that rule change.
Banks could essentially do a 90 day deferral on anything without having a fall into a restructuring. So so theres. Some temporary hardship you can basically dole out over the life of alone 190 day push out.
And and that's been the case gosh since I've been doing this for decades.
What they put the allowed is that you could instead for this.
Our credits that have been impaired by that pandemic, you could double that and you can take at six months and so that's how we've done as we said, okay well thats. We can do six months. So we will allow the longest you can go and not have would fall into a restructuring situation and then but then they're paying again so the amount of time did they go.
On a deferral is within that window and within the and within the guidelines that was allowed.
Because because even though it's a year they've prepaid six months of it it at a broad Ken here, there's a difference between a solution to how we bridge the gap over the next year with them versus the deferral pot. So the solution is for a year. The deferral is six months of that year and the other six months they give us the cash upfront.
Got it got it okay and any anymore color on that negative.
The negative provision you touched on it in one of the earlier questions in that one of the national businesses, and I think Theres, a 2 million one and h. away.
Business seems to just unusual.
Timing.
Yes, yes, so so again I mean, we go through this process and when we have all these multi very regressions in them and then you come back and you look and say. Okay. Is is this helpful are are we learning something about this or is something kind of overstated well the h. away loan portfolio is quite small and.
And so it had been in a kind of a separate category caught up in Cnine loans, well when you look at the HFI loans on a standalone basis. The idea that theyre going to have lost behavior anything legacy and I loan or that kind of risk profile is.
It's really overstated I don't know I'm sure there's somebody somewhere I don't know anyone that's ever lost a dollar in NHL Ala because when you make NHL a loan.
You know the HD wave becomes delinquent you get to jump in front of the first physician lender on who's ever house. It isn't that age away. That's delinquent. So I don't pay wage away phase and that causes my age away Association cannot pay they can come after me and they get a room in front of my first mortgage.
So you LTV on that loan is less than 1% I mean, that's just ridiculous that it's going to sit there forever. So you get your money eventually and so a loss rate really on h. away loans should be darn near zero. The reason why it wasn't originally is because it was embedded in large in a larger group of Cnine close because it was.
So small highlighted that change and address that with.
With segmenting that particular target.
Got it okay, alright, thanks, so color.
Your next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks, Good morning.
Yes. Good question on the hotel deferrals strategy can I think you mentioned that you had some sponsors.
Basically come in June.
What we did it this way.
The six plus six.
That said I'm sure. They all would have happily take in the six month deferral without paying six months of accelerated.
So how can you be confident that kind of post coated there's not any negative fallout from the business or relationship with somebody sponsors, but the bank.
Okay, I think Thats a fair question.
66% of our book is with large sponsors and those are sponsors with 25 or more hotels and they generally deal was about 80% of their book is all connected to the top brands, the Marriott and Hilton the high it's right and.
What they have seen from us is our deep knowledge of the industry.
And people like working with other folks that have an understanding of the knowledge of the industry I'm going to.
I'm going to move to a different group for a second to highlight this as well we are gaining a lot of share in warehouse lending.
One of the most if I had point pinpoint the most familiar reason why we're getting new customers is because.
Our new customers are telling us that some of their incumbent banks don't understand the space the way, we do and they don't want to be.
Dependent upon a lender, but doesn't understand the space and maybe do something irrational alright. So back to hotel. We don't we didn't do anything that was irrational. We actually started with the relationship very early by saying you always need to have a lot of equity in this relationship.
That's the first thing we then work through the models of cost we make sure. There is the right debt service coverage ratio make sure they have the right and Hawaiian margins.
Make sure they've got a model that works in Downtimes and you're seeing that now you're seeing the model work in downtimes as our customers are able to lower their HDR and take market share from a lower brands, alright, and move that market share to to their hotels because people.
I'd like to go to a nicer hotel for low oil price all right now all things connected together indicate that our customers like working with us and they know that we understand that market and I think what you're going to see here.
This will play out over time. So you can ask me. This question six months for nine months from now assuming that the economy's returning to normal I think you're going to see a lot of our smaller.
Competitors that just do one or two hotels here and they are smaller banks I think theyre going to lose business to us because over the long term I think our clients want to deal with someone that know how to grow and by the way we're still in business, we're not shutting down lending. Okay. We're not doing any right now because there are no deals but we.
Told our clients if you've got a good deal. If you have an opportunity. We're there to finance you. If you are working with us and showing commitment to your existing projects.
I've called this tough love because I don't think they didn't like it to begin with but I think it I think we've kind of or in some respect for some of them and and and the large majority of our borrowers have resources that are here for the long haul think of it this way.
The comes or certain point, where you kids think your small but not all of a southern your kids. Thank you are really Dom and then they could they return to say point, how did my dad and mom gets so small yet well I think this is what you're going to see with our clients, they're going to say Gee you know we didnt agree with this core approach at first but you know what these these guys had us.
Small approach to this and it was a differentiated approach and what was interesting that people don't stand is it put our clients in front of us to talk to us.
Right before the other banks, even had a conversation so lot of these other banks did a 90 day open ended deferral cookie cutter, you've got it I'll see you in 90 days, we came in with the solution. We said wait a minute you have a bigger front, we have a big abroad. The industry as a bigger problem. The economy has a bigger problem. This is our viewpoint.
This is why we see.
What does that we see it playing out and good or bad at least they can respond to your viewpoint and your vision of tomorrow, and how you want to solve for.
Yes.
I'll try to appreciate the thoughts.
This concludes our question and answer session I would like to turn the conference back over to Ken Vecchione for any closing remarks.
Thank you all farrior time today, we appreciate it we went a little bit longer, but we were happy to do so make sure that all of your questions were answered thoroughly so we'll be in touch we look forward to seeing you again in person one day. Thank you all.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.