Q2 2020 Byline Bancorp Inc Earnings Call
Good day and welcome to <unk> Bancorp Inc. second quarter 2020 earnings conference call all participants will be.
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Thank you call. Good morning, everyone and thank you for joining us today for the byline Bancorp second quarter 2020 earnings call, we'll be using a slide presentation as part of our discussion. This morning. Please visit the events and presentations page by lines Investor Relations website for access to the presentation.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition, a byline bancorp that involve risks and uncertainties, including the impact of the cobot 19 pandemic.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's I see filings, which are available on the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
With that I'd like to turn the call Overdeveloped, Alberto Pieraccini, President and CEO, Alberta.
Thank you Tony and good morning, and welcome to everyone on the call. We appreciate all of you joining us. This morning with me on the call today, our Lynsey core read our CFO.
I wouldn't be our chief credit officer, along with Mark loosen out.
Last night in addition to the regular earnings release, we also announced on one would be retiring effective August 14th.
Oh enjoying byline, what the acquisition of first stab and starting in 2018 and has been a valuable member of the credit and executive management team since that time.
Personally I've had the privilege of knowing all one cents well before that and the organization has benefited from always many contributions over the last several years.
While we will certainly makes seeing and working with a one on a day to day basis. I know, we can continue to count on his friendship support and council and the years to call.
I want to take this opportunity to formally thank all one for his work and contributions during his time at the company.
Marks to send out will be taken over four or when as our next chief credit officer, we're fortunate to have someone to Mark's caliber experience knowledge of credit and banking in the organization.
Mark joined by dialing one year ago from MB financial where he had been a senior credit officer in commercial banking prior to this time at M.B. markets served in similar roles at first married JP Morgan Chase and its predecessors, Mark is very familiar with our credit culture has excellent working relationship.
Inside and outside the company and it's a season credit officer and manager I would like to welcome Mark I know you will very much enjoyed getting to know EM over the coming quarters.
Next I'm going to go through the highlights for the quarter and provide you with an update on our efforts to support clients and then and and the actions we talk to navigate through the current environment. I will then pass the call over CMNC, who will go through our financials in more detail I'll come back at the end with some closing remarks before.
Turning the call up for questions as always you can follow or comments with the help with the back you can find in the Investor Relations section of our website.
Clearly the cobot 19 pandemic has created a challenging operating environment for traditional banks characterized by high degree of economic uncertainty unprecedented government actions and extremely low interest rates notwithstanding I'm very proud of the way our team executed to support customers and.
Take actions to further solidify the balance sheet and deliver solid financial performance given the environment.
<unk> performance standpoint, net income for the quarter came in at 9.1 million or 27, 24 cents per diluted share while our pretax pre provision net income was 28.4 million, all 18, and a half million quarter over quarter.
This quarter, we continued to build our reserve with provision expense, increasing by 1 million into 15, and a half million, which increased our allowance for loan losses to 136 basis points from 108 basis points last quarter, if we exclude the impact of PPP loans.
Total revenue increased 5.5% from the prior period to 65.4 million.
Although we had strong earning asset growth the impact of lower rates brought our margin down to 371 basis points, which resulted in flat net interest income compared to last quarter made significant progress and repricing liabilities and Saar cost of deposits declined 39 basis points from the prior quarter.
36 basis points at the end of June.
Non interest income was up 39% from the first quarter and we saw a gain on sale revenue rebound nicely over the course of the quarter demand and pricing for government guaranteed loans returned to more normal levels. After the dislocation we saw during the first quarter.
Quality of our deposit franchise was again, but it in the second quarter total deposits increased by 17%.
Almost all the growth coming in noninterest bearing and other core deposit categories, which favorably impacted our deposit mix. You asked that side was primarily impacted by funding over 630 million in P.P. loans provided to over 3600 customers.
It's helped drive strong broken loans and deposits given the majority of those dollar stayed on the balance sheet.
Loans, excluding PPP declined slightly for the quarter and were reflective on the of the uncertainty in the environment.
On the expense, but we saw expenses declined during the quarter, reflecting both lower costs and the impact of PPP loans. Despite increased cost related to covert 90, our efficiency ratio improved to 53.7%, reflecting both lower expenses and higher revenue during the quarter.
Given the rate environment additional costs and changes related to that pandemic and they need to continue investing in both our infrastructure and digital capabilities, we continue to explore opportunities to operate more efficiently.
Credit quality showed good improvement during the quarter past two levels remain stable and nonperforming loans declined both in absolute terms and as a percentage of the portfolio grew less than one person that reflecting solid resolution activity that charges increased to 57 basis points from 48 basis points last quarter.
Were impacted by the resolution of a nonperforming commercial relationship provision expense remained elevated and we remain cautious given the uncertainty around the virus economic downturn and the impact of any additional relief efforts with respect to capital and liquidity, we took the opportunity to increase our tier two.
Capital by adding $50 million and subordinated debt, which pushed our total risk based capital ratio to just under 16% our balance sheet liquidity continues to remain strong and is reflected by the decline in our loan to deposit ratio to 88.6% a higher proportion of investment securities.
Approximately 2.7 billion in total funding availability, we believe the combination of our strong capital and liquidity position positions us well to continue support clients and communities throughout the crisis.
Lastly, we paid a common dividend up three cents per share for the quarter.
Slide four provides additional information on our Kogut 19 response offers and detail on the P.P.P. program as I mentioned earlier, we were able to help more than 3600 companies access to $630 million in P.P.P. loans.
The average loan came in at 168074% up the loans made were less work or less than $150000. We continue to originate new PPP loans and expect to begin processing forgiveness applications request in August we anticipate most of the balances will be forgiving unexpected.
Process to be completed later this year and in the beginning of 2021.
The P.P.P. program had a significant impact on various line items and Matt drags on the second quarter included in the appendix. We've provided a summary of the areas where it had the most them back. So that you can better understand our performance, both with and without the impact of PPP.
Turning over to slide five we improved more than 1800 loans and leases for the pearl totaling $639 million or approximately 17% of our portfolio modifications were primarily 90 day deferrals of principal and interest payments.
Commercial deferrals were granted on a case by case basis, and we required customers to provide a formal request, which included a customer statement under condition of the business. The steps there taking to recover from the disruption to the business and the deferral made in most cases, we asked for some type of credit agreement enhanced.
To the loan in consideration of the deferral.
The remaining contact with borrowers who received their pearls and are receiving regular updates on their business. We utilize this information evaluating extensions on deferrals as of July 16th we had granted second deferrals on less than 10% of the initial deferral amount and expect second deferrals to be no greater than 30.
<unk> of the original deferral them, a majority of borrowers coming up deferrals have resumed normal payment activity.
Slide six provides an update on our exposure to industries that I've seen the most impact from cobot 19, we continue to have a small level of exposure with these industries collectively representing 10.5% of our total loan and lease portfolio excluding PPP.
The largest puncture continues to be restaurants at 142 million or 3.3, 0.8% of the portfolio excluding PPP.
Slide seven and eight provides additional detail on the individual portfolios that make up the select Cobbett 90 industries details include basic portfolio characteristics industry concentration areas as well as a percentage of borrowers receiving deferrals or SP, a subsidy payments in the case of our government guaranteed borrowers.
In the appendix. We have also included detail on the collateral makeup for each of these industries, along with P.P.B. funding, which includes borrowing and non borrowing customers I mean take away from this summary is that while we have limited aggregate total exposure to early impact industries the portfolios care.
Dr rise by good granularity and our exposure to any one particular industry segment is manageable now I would like to turn over the call to linseed, who will provide more detail on our results.
Thanks, I'll start out good morning, everyone.
Additional information on our loan portfolio on slide nine.
Our total loans and leases were 4.4 billion at June Thirtyth, a net increase of 531 million from the prior partner our originated loan portfolio increased by approximately 611 million not for the quarter, primarily due to the PPP line.
Partially offset by a decrease of 80 meant that our fired loan portfolio.
Yes, ending balances on our lines of credit remains relatively stable from the end of the prior quarter decreasing by just 5 million, although the utilization rate decreased to 58.5%.
The 2.8% in the prior foreigner.
Turning to slide and we'll look at our government guaranteed lending.
Well I'd like to recognize our small business capital team for being ranked number two and I'd be a duvernay lending as of June thirtyth, congratulations to the whole team for their hard work and dedication.
Our traditional SBS business saw significant slowdown at the end of the first quarter and extending into April and May.
Drinking in July we started seeing stronger production to be a duvernay and U.S. government guaranteed loan.
We at 80.3 million of lung commitments at the end of the corridor, which was comparable to the prior quarter, but they'll will lower our normalized level of activity during the second quarter. Our managed government guaranteed portfolio increased by 119 billion to over two and service.
Deposit trends are outlined on slide 11.
Significantly and keep him.
Had a very strong quarter of core deposit growth with our total deposits, increasing 720 million to 5 billion at June Thirtyth. The growth was almost entirely driven by increases in our lower cost deposit category not done, notably noninterest bearing demand in interest bearing checking deposit.
At June Thirtyth noninterest bearing deposits have increased 35.7% in total deposit 30.5% at the end of the prior quarter.
And these lower cost areas and the flat yield curve a lot of to reduce our time deposit improving our overall deposit Mac and resulted in our total cost of deposits declined by more than half or 39 basis point from the prior quarter, while our cost of interest bearing deposits declined 53 basis point.
Moving onto net interest income and Martin.
Noninterest income came in relatively flat for the quarter 52.6 million.
Our net interest margin what 371 in the second quarter down 46 basis point from last quarter accretion income on acquired loans at 3.2 million contributed 22 basis points to the margin for the second quarter down from 29 basis points in the last quarter.
Excluding accretion income or net interest margin, what 349, a decrease of 39 basis point.
The decrease was due to a decline in earning asset yields resulting from the decrease in short term interest rate. The addition of lower yielding TPP loud and effective yield up 2.65% any excess liquidity on our balance sheet.
The earning asset compression was offset by the decline in our time deposits in borrowing cost.
Primary driver that the lower funding costs, where did the cost of time deposit Steve decreasing by 63 basis point and money market that by 62 basis point.
Lower cost of deposits and then growth in noninterest bearing deposits offset the margin compression as outlined in the drivers of NIM change.
Looking ahead to the third quarter, we would expect to see some continued compression and our reported net interest margin given a full quarter impact that the PPP loans as well as additional drag due to operating with our level of liquidity.
That's the offset this pressure to some degree with additional reductions in our core and our cost of time deposit as deposits into were 14 basis points lower than the average for the quarter.
We have 573 million in Cds maturing at a weighted average rate on 23 in second half of the year, but even with the lower cost of deposits that we expect we don't believe it will be enough to prevent further compression in the margin.
Included in our planned exit by that provides our projected accretion on our acquired loan portfolio.
Turning non interest income on slide 13.
In the second quarter noninterest income increased by 3.6 million from the prior quarter increase was primarily due to higher net gains on sale the government guaranteed loans as well as a decrease in the fair value adjustments on our servicing asset during the second quarter, we sold 78.7 million of government guarantees on compared with $61 million.
In the prior quarter.
For the second quarter sales the net average premium with 927 well. This is below the line we saw last year they'll high enough for the economics of selling alone even more beneficial then retaining them.
During 2000 and into July we are seeing improvement in the secondary market as buyers have returned and demand is increasing.
And I felt premiums are beginning to return to more normalized level and closer to pre pandemic premiums.
Turning to slide 14, our noninterest expense was 37 million in the quarter, a decrease of 6.5 million from the prior quarter.
Expenses were managed during the quarter in did benefit from the deferral of salaries and benefits expense associated with their origination of PPP loud and other expenses trending down for the quarter. We continue to spend prudently the corner associates and operate safely and efficiently to serve our customer due to the combination of our higher revenue and.
<unk> expenses, our efficiency ratio improved to 53.7% in the second quarter from 67.2% in a prior quarter.
Looking ahead to Q3, we anticipate that expense level should stabilize next quarter back in the range of 40 to 43 million dollar.
Next well take a look at asset quality.
Albert on my sense, we thought positive trends in the quarter or non performing assets decreased to 82 basis points of total assets from 105 basis point at the end of the prior quarter, primarily due to the resolution of nonperforming loans.
At June Thirtyth, our nonperforming assets included 3.8 million of government guaranteed.
And from 5 million at the end of the prior quarter.
But in government guaranteed nonperforming loans, our nonperforming loans to total loss ratio was 91 basis point.
Down from 118 basis points at the end of the prior quarter.
Our net charge off for 6.1 million in the quarter 3.4 million of the net charge off during the quarter related to one loan to fitness company that had been in our nonperforming loans from more than a year.
Had been struggling prior to the pandemic and with the additional pressure put on the fitness industry did that Hum order their business with severely impacted which led to the charge off of our remaining exposure.
Provision expense was 15, and a half million, which was largely related to an increase in qualitative factor it.
The quarter included 7.3 million to address the impacts of coal that.
Provision increased our allowance for loan losses to 117 basis points to total loans and leases.
In addition to the traditional allowance as a percent of loan and lease not Frac. We also analyze the allowance in conjunction with acquisition accounting adjustment impacting our acquired portfolio.
At June Thirtyth, the acquisition accounting adjustment lots, our allowance leap losses represented 160 basis point of total loans only the EUR 186 basis points when TPP lines articulated.
Turning to my last slide on our liquidity and capital Shannon I liquidity and capital positions are very strong.
Significantly increased our liquidity during the pendency and at June Thirtyth, our cash and securities as a percentage of assets with just under 25%.
During the second quarter, we increased our regulatory capital issuing 50 million of subordinated debt Jan.
Additional capital affords us flexibility at the holding company and bank level.
We viewed that as an opportunistic time to raise capital and solidify our balance sheet during an uncertain environment.
We did not repurchase shares during the quarter and maintained our modest having said that.
Capital ratios increased during the quarter total capital increased 536 basis points to 15.86% NRT 18, one ratio increased by nine basis point to 12, 33 or capital ratios are strong and an excess of well capitalized level at June thirtyth, our tangible book value per share with $15 than 47.
That up three and a half for second quarter over quarter and up 12% year over year, but that I would like to pass the call backs Alberta.
Thank you Lindsay I'll wrap up today with a few comments about our outlook for the remainder of 2020 and our priorities going forward.
For most of the past few months, our focus in terms of loan production and doesn't matter from clients was largely centered around PPP now that we are largely through that process. We are resuming our traditional business development efforts and loan pipelines are just now starting to build back up.
We anticipate the build to be gradual given the uncertainty in the outlook accordingly, excluding PPP loans, which we expect to start paying off during the second half the year as forgiveness is granted we would expect our total loans to be relatively flat for the remainder of 2021 area, where we are seeing improving loan them.
And is for seven a bonds and our pipeline of government guaranteed loans is building faster and should continue to drive a solid contribution of gain on sale income in the back half of the year.
The challenging environment for generating net interest income growth puts more focus on expense management, we're continuing to tightly manage our spending from a longer term perspective. The pandemic is clearly accelerated the trends towards digital banking and we're seeing more customers, becoming comfortable conducting transactions digitally this will pay.
Right additional opportunities for us to evaluate the appropriate size of our branch network and make adjustments that will further enhance our level of efficiency in closing while depend AMAK is ongoing we will continue to operate with a conservative approach. While the economy has shown signs of improvement it's impossible to predict that continued impact.
The pandemic and the economy and the effectiveness of any additional government stimulus if any are capital and liquidity levels remain robust providing us with a great degree of flexibility. Furthermore, the quality of our franchise and most importantly, our team of talented and engaged employees positions us well do manage.
US through to manage through this period with that operator, we can open the call for questions.
And we will now begin the question and answer session. So you asked a question that press Star then one on your question.
If you're using speakerphone, please pick up your handset footprint and the key.
Withdraw your question. Please press Star then too.
And our great question today will come from Ebrahim Poonawala with Bank of America. Please go ahead.
Good morning, guys.
Maybe morning, maybe.
I guess, so first question, who is good to see a little bit of a rebound back and you don't see looks loads.
And Oh.
Got it looks pretty strong going into Threeq, you just give us a sense or does.
The margins in this what you're seeing it seems that kind of bouncing back and do you see.
That sounds line item and activity going back to what we saw in 2019.
Potentially exceeding that just a little bit more collected on what you're seeing and sustainability and all the outlook.
Sure. So let me break that question into components first I'll address the the kind of the pricing and demand for government guaranteed loans in the market. So I think there maybe I think what we saw during the quarter and we saw it really at this from the start up of water all the way.
Through due to the end of June and it continues is that pricing rebounded. So that this locations. The you know call. It the impact on on just overall capital markets that we saw you know in March you know seem to have worked itself.
Out of this system and we saw.
You know premium levels really you know bounced back very nicely over the course of a quarter and they continue to approach what I. What we would say would be brief cobot levels. You know from from prior to two lets say March so that's certainly a positive as far as.
Overall loan demand for government guaranteed loans, so our as I just mentioned in the in the prepared remarks. Our pipeline. There has certainly you started to build is building faster. So we're seeing a you know if demand were seeing good opportunities I would characterize that as.
Not.
Dissimilar to what we saw you know I've during other times of stress, where borrowers look too you know government guaranteed loans, you know and and they become a viable means of financing for a larger number of borrowers so.
To come back to the to the point of of your question. What we do see is we see with pipelines building back up it's a gradual build its not overnight, but we certainly expect.
Oh, Yeah comes to do continue to recover to pre kogut level, so to speak over the course of the second half of the year.
Got it and it gives us a separate question Lindsay you mentioned.
No margin expect some compression going forward, which is not surprising but.
If you could give maybe a little more color on just the level of compression you expect from this point on what the Fisher points or and you expect any of the defaulted. Good that came in this quarter, how much of that must BPP blue did how much of that duty, leaving the banking took quarter any color on deposits and.
Sure. So easy on your first question in regards to the NIM I was referring to Q3 and I do think that there will be compression in Q3, just given the full impact like I thought on the P.P. loans being being in our number for the entire corridor. So I think that's going to drive some of that also.
You will see a little bit more pressure in terms of our aren't our floating rate loans I think we'll continue to see a little bit of pressure. There I don't think the compression will be adds drastic as we thought as corridor it'll definitely be more muted ed, but you'll still see.
Slight pressure down and then going forward, excluding accretion in P.P.P.I.D. it flattening more into 2021.
And then.
I was going to answer the second part of your question real quick I regarding that deposits in the PPP funds on a lot was TPP funds I think some of it do instead, a higher liquidity in the thats done and and people carrying more cash currently in terms of the P.P.P. funds coming out we do think it well it will trend.
Down slowly over time, whether or not it's all going to be gone maybe at the end of the fourth quarter I I I don't know and we'll both be I do not anticipate that 100% that'll go but I think it'll start to normalize out more traditional level, it's kind of Q4.
Got it and just one last question about doing domes also as things gradually get back to normal going to take me they get reasonable audience.
I just don't wasn't domes, all market disruption, we talked about like.
Hiding dialing Blake.
She gets consumed dual focus back on those.
He is in looking at growth or <unk>.
And if so like when do you think you get back to back more than the party dialing beaming.
The only producers.
Yeah, So certainly.
From a you know food from kind of I think the water speaks for itself are you being that you know it was a quarter, where we were certainly internally focused PPP was a big effort.
So.
I think towards the after we got through PPP I think we started resuming call it more normal activities on the on the lending front both on our on our conventional lending segments as well as our government guaranteed business up all that being said we are being cautious.
That said I think with respect to talent you know opportunities for talent would it be opportunities that they were schedule than we have time them perfectly. So I think we certainly have an open mind to two looking.
For opportunities to add talent provided we have a good sense of the business that they are.
Looking to bring and you know consistent with our with our credit appetite, but I think that's that's certainly something that we what we remain open to to add a little bit to your question on the M&A front I I think as every most of folks on the call no. That's that's a much more muted environment today.
I think activity and and.
Just general talk in with respect to M&A has slowed down considerably. So I think there I think we need to have much better clarity.
Short term in terms of the course of the virus here on the fall beat him how the economy continues to hopefully he'll and rebound and what you know some better certainty into the outlook of of 2021. So I think that one is gonna be probably oh, probably a little bit longer.
Until we have more certainty in terms of the operating environment.
Oh, Thanks for taking my questions. Thank you.
And our next question will come from they can rate with Piper Jaffray. Please go ahead.
Hi, guys good morning.
Good morning.
Good morning, everyone just to start on the outlook for the.
For credit costs going forward I. Appreciate you know it kept the provision in the quarter was tied to just.
Economic situation, so forth I'm, just trying to get a sense going forward.
Human you know the charge off they had in this quarter was more unique in nature and doesn't necessarily peak going forward I'm just how we should think about the provision leasing the threeq you know just given how the world stands today.
I think Nate I, what we would say is we remain cautious there is very much outlook dependent and how things evolve from where they are today. So I would I would say we continue to expect provision expense to remain elevated or for the time be.
There are no is it fair, though to assume that it probably comes down at least relative to second quarter with less impairments I guess within the context to try to get a sense of how criticized classified trends unfolded over the course of the second quarter.
Yeah, well balanced <unk> go ahead go headlands, you got that sorry, I in terms of in terms of like what you're saying what that the decrease then in terms of the nonperforming loans that should help but again just given the uncertainty in environment. We do expect it to be elevated however, I think at every night.
Assuming that the credit environment stays as is and things don't change and the government continues.
Support our small businesses I think I think there, but again as Albert Einstein I think it will still remain elevated and and charge offs as well it gone in the coming corridor.
Okay.
You asked about just to add to your do you do what Lindsay Joe said in terms of you know kind of you know criticized and classified and past due so I think on.
Right. It you know in general was stable I think past dues, you know came down a bit during the quarter criticized and classified you know on absolute dollar terms increased slightly for the quarter, obviously as a percentage of portfolio. They improve so I would say you know trends were stable for the war.
Sure, obviously outlook dependent but but I think we were we were pleased with the way you know credit performed during the quarter and let me just add some clarity on that particular commercial relationships. So this is the same relationship that we highlighted back in in 2018. This is the same.
Operator of you know different Jim facilities, you know in Chicago, and it's a matter of fact, we mentioned during the last quarter's call that we were looking at this situation closely with respect to do that decision I think the.
Owners of the business you know went through a change in ownership they were obviously impacted.
By the pandemic and the outlook for the business you know certainly no change.
Their minds in terms of what they want to do with a company. So we proceeded due to come to a two a final resolution took the charge offs and that credit is no longer you know really we're not carrying a balance on on that credit on our balance sheet anymore. We do have the opportunity you know there so.
I'm upside potentially that will will recognize as it comes if it comes in the form of a recovery.
Got it that's a very helpful.
Appreciate that color Alberto just.
Going back to the core margin outlook from your when do you think you alluded to excess deposit levels and liquidity kind of staying a little bit at least to some extent third quarter just wanted to clarify that.
In particular.
Yeah in terms of the the PBP.
Deposit they've obviously been elevated so you can see our liquidity gone up and as I noted in my remarks are our cash and securities as a percentage of assets is just under 25%. So given given all of that access liquidity and that's causing a drag on our on our margin here, though.
I think that's that's what you're seeing and and as that comes down over time and were able to redeploy our access liquidity into loan growth that'll help improve but I've heard the margin going forward.
Understood I guess I'm, just trying to get out I mean with that with that excess liquidity kind of sit around for at least a little bit your views. The plans just let it sit idle he goes from the reinvestment securities in the interim or just any thoughts on how the liquidity maybe reinvested. These early in Threeq you here [noise].
In Q3, Yeah, I, we are investing it in security and you saw that and Q2 and and are gonna have gonna have to continue doing not at the loan demand is not there now.
Okay great.
Sounds good.
I appreciate all the color and albeit at a disclosures in the side as well. Thank you.
Sure.
And once again if you like your question. Please press Star then one and our next question comes from Terry Mcevoy Steven.
Ahead.
Good morning.
Morning Kerry.
Good morning was there.
I always like to cover your investor deck and this quarter in particular made me smile. So thanks for whoever puts that together, let me let me start with so if I look at hotels versus retail both have a pretty similar deferral rate restaurants has a little more P. P. P.
What portfolio has higher reserves or what portfolio in your mind, you think has a greater loss content.
Given that you can deaconess and some of the stress in both those areas.
Paranoid I'll take a I'll take a stab after all one and Mark a comment.
You know I think I think the restaurants probably offer a.
Great Greater risk I think we're in pretty good shape on the hotels some of the larger hotel exposures are a very well capitalize them.
We feel pretty pretty decent about those.
I'm.
On the restaurants I its more granular we have a lot of a longtime operators are restaurants that are have done very well and we expect them to continue to do well, but just in comparison of the too.
I think the risk would be higher in the restaurant portfolio.
Darien <unk> I would add I would also.
Look to kind of segment the conventional to to be asked me a piece, obviously government guaranteed borrowers today are benefiting from.
Very nice subsidy payments that DSP areas, making traditionally you're talking about borrowers that generally have a weaker credit profile than what we see on the on the traditional commercial banking side of the house that said, we have pretty good granularity because the loan size on the on the.
Yes beside is smaller but in terms when we think about risk you know clearly that restaurant is restaurants are.
Our an industry that that is very much impacted by covert 19, and I think it's just going to be a function of after those businesses you know come off though subsidy payments on the government guaranteed side, how those owners are able to.
Resumed continue to resume operations continued to hopefully grow their business.
To see what what their performance you know looks like a you know at that time and more importantly going forward.
But that that's the color I would add to two olin's comments.
Thanks, and then Alberta, it looks like 30% of your locations are not open from an outsider just looking at resulted it seems to be working but but you tell me what are the customers that their their branches shut down what are they doing as a go into another branch using using their phone to conduct a transaction and then I guess my.
My real question. There is are there opportunities to rethink the size of the branch network based on what you've experienced over the last three four months.
I think very the answer to two to all of those questions is really all of the above so I think we are looking very closely at that I think what we.
We wanted to really analyze and understand you know there's obviously you know short we want to try to the soon which what our short term impact when short term changes from changes that are more permanent but you know two to go to your questions. You know we have seen customers adopt some costs.
Numbers have take into the call at the by appointment model very well some customers are.
Certainly using online banking mobile banking capabilities much more actively than they were before calling calls to the call Center. You know have certainly been very very steady and have increased throughout this period as you would expect.
So the short answer there is you know behavior has customers have adapted behavior has has changed.
And what we want to make sure is that when we look in as we evaluate really.
How we come out of this period that we're making sensible decisions because we don't want to do something that that call. It reduces the attractiveness and the the convenience that the network as a whole offers that being said, we do see that that there will be some upward.
Are these there.
Thanks for that and then just one last question you said August you will begin forgiveness application requests.
Do you feel confident that that a portal or platform will be open a in in August for that to happen or maybe it maybe it's open as we speak.
So I think maybe the last [laughter] word that we got from he has to be a on that and yesterday, we saw communications from them, saying that the portal will be available August Stan.
He personally I think that would be terrific that being said as it's been the case with this program is really a week by week.
You know kind of evolution here. So so we remain optimistic Terry I think from our point of view is we'll be prepared and we'll be prepared to when that portal opens and we can submit information to the SBK, we'll be prepared to do so but you know.
This point that's the best.
You know gas that we have so we'll we'll leave it at that.
Perfect. Thanks for everything.
Thanks Terry.
And our next question comes from Brian margin with Janney Montgomery. Please go ahead.
Hey, good morning, guys.
Hi, Brian.
Just a couple from me just a follow up on that PPP just in general given you know so much uncertainty on the forgiveness shaygan, Steve any better sense for how you guys are thinking about the forgiveness in terms of just total percentage given the at the low level of your loans and then maybe just as you guys are thinking about it today the timing of when that.
What how much may fall kind of this year versus next year, just big picture I know, there's still a lot, but more details to come out on it.
Are there any I mean I take that one.
Yes. Please.
In terms of the P. P. P. I you know that it's anybody's guess right now so at the rules continue to be finalized and I think the program continues to evolve as we noted in our prepared remarks and in our materials, we have a very high percentage over 70% of our loans are $150000 are lot.
So we think that those on those should have a more expedited process failed to be determined exactly how.
That will take place, but I think those those on that percentage of the portfolio would be faster than the right then and the remaining as it's going to be on a different story, we're really looking at and then more conservative nature and in terms of our forgiveness I don't think it's going to be the entire portfolio. Brian. So we are going to.
I assume that there is some that remains on the balance sheet and we do think a lot of that well get a forgiving in the fourth quarter and then rolling into the beginning at 2021 from there so that I work, how we're kind of looking at where we're a little more conservative in terms of our percentage of total forgiveness, but that was greater than 150000.
Got you Okay I appreciate it Lindsay and then maybe just back to that one follow up in the last question I don't know Oh and answer that but just the reserve levels I guess, just on that restaurant and maybe the government guaranteed book kind of where those sit today just can you give any sense for what those were.
Well you know.
Basically either it's all part of the build in the reserve in our general reserves that we.
Did over the last two quarters.
So there are not specifically identified to.
The restaurant in the hotel industry is just a general.
General reserves for the change in the economy.
Got you Okay, I I think it that was a case if you didn't answer and then just the.
The the deferrals.
Yes, it sounds as though you guys would expect a deferrals to be back down to.
Usually 30% number maybe low single digits, when when you've gotten through all of them.
Look at.
Maybe third and fourth quarter from where they are today that that that's right.
Yeah.
That's fair, Okay, all right and they just the last one was just on expenses, Alberta, you mentioned that you guys continue to look for ways to operate more efficiently given the environment I mean outside of maybe some branch consolidation. What you guys have done are there other items kind of on the slate you guys are thinking about it just you know if you can elaborate a little bit more on your on your comment there and higher think.
What about that prospectively.
I think I think branches are are certainly one area, but I think Brian I think more generally is just continuing to find ways to look for.
Reductions in the cost to operate I think given given were revenue pressures are in the industry. Today, you know certainly putting aside the fact that credit costs, you know our and remain elevated when you look at you know where the yield curve is the absolute.
Level of rage today pressures on revenues and margins.
And the fact that we need to continue to invest in the franchise invest in our capabilities invest in our infrastructure. We have to continue to find ways to operate more efficiently. So I think that was you know more the the nature of my my General comment.
Got you, Okay, Alright, I appreciate it thanks guys.
And at the time there no further questions I'd like to turn the conference stuck average management for any closing remarks.
Thank you operator, and I think from from our perspective first and foremost I hope you. All thank you for joining the call. This morning, I Hope you all remain healthy and safe during this period.
I feel very confident about the strength of our franchise the strength of our team and our ability to navigate through this environment. So thank you for joining the call and we look forward to talking to you again next quarter without operator that concludes the call and I'll pass the call over back to you.
Thank you and this will conclude today's conference we'd like to thank you for today participation and you may now disconnect your lines.
Okay.