Q2 2020 Hancock Whitney Corp Earnings Call
Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation second quarter 2020 earnings Conference call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this call may be recorded.
I would now like to introduce your host for todays conference Trisha Carlson Investor Relations manager you may begin.
Thank you and good afternoon. During today's call. We may make forward looking statements, we would like to remind everyone to carefully review the safe Harbor language that was published with the earnings release and presentation and in the company.
Most recent 10-K and 10-Q, including the risk and uncertainties identified therein.
You should keep in mind that any forward looking statements made by Hancock Whitney speak only as of the date on which they were made.
As everyone understands the current economic environment is rapidly evolving and changing.
Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market. Our economic development is inherently limited.
We believed that the expectations reflected or implied by any forward looking statements are based on reasonable assumption, but are not guarantees or performance or results and our actual results and performance could differ materially from those set forth in our forward looking statements.
Hancock Whitney undertakes no obligation to update or revise any forward looking statements and you are cautioned not to place undue reliance on such forward looking statements.
In addition, some of the remarks. This morning contain non-GAAP financial measures you can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables.
The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website, we will reference some of these slides in today's call.
Participating in today's call or John Harrison, President and CEO, Mike Achary, CFO and Crystal Luca Chief Credit Officer, I will now turn the call over to John here. So.
Thank you Tricia and good afternoon, everyone. Our timing for this quarter's earnings release and coal is different than a normal practice and we thank your for joining US late in the day today's economic environment is challenging involves daily sometimes ARINC and lot of those challenges and volatility we took significant steps in the second quarter two continued de risking.
And our balance sheet.
After building a solid <unk> for credit losses in the first core and then issuing subdebt in June we made a strategic decision to Opportunistically divest a large portion of our energy portfolio.
2014, we have communicated a goal of reducing or injury related exposure.
We went from a high of 13.4% of total loans to just under 4.5% as at March 31st our plan to diminish watch upon any impact from this portion of our loan book will successfully working the book down to a less material level in recent months are growing consumers due to an ongoing supply demand mismatched right.
Exacerbated by the global pandemic, leading to a decision to accelerate redemptions in exposure. We were pleased to reach an agreement with Oaktree capital management and so over half the energy portfolio as of March 31st, including the entire RBL book and a substantial majority of the larger relationships in midstream energy services, some but not all.
All of the credits in the sale were in default.
Remaining energy concentration is a portfolio of mostly granular support service credits with an average outstanding balance of approximately 670000.
We have a healthy reserve and the remaining portfolio at 5.7% of energy loans and the transaction brings our energy portfolio sharply down to 1.7% or total loans excluding PPP.
Nonperforming loans and criticized loans declined significantly as shown on slide eight and not in the deck and all but two of the remaining loans or pass rated credits to complete the transaction, we booked a special provision of 160, Megan or dollar and 47 cents per diluted share in the second quarter. In addition to releasing the exist.
The reserve on those credits of 82 me.
Additionally, based on updated economic forecast during the second quarter. We've built what we believed to be stronger level of reserves for potential pandemic impact in our markets. So additive to the special provision for the loan sale, we booked a provision of 147 million or a dollar and 34 cents per diluted share racy else alone.
It's now stands at 2.3% excluding PPP.
On a positive note loan payment deferrals applauded the onset of the pandemic began expiring in June.
As noted on slide 10 from a peak of 3.6 billion and Outstandings in May deferrals ended June at 2.7 billion and were further down to 1.4 billion as of July 15th.
We expect the trend to continue through mid August all else equal.
And an 8-K, we filed in late June we indicated an expectation of more than 50% of deferrals returning to normal payment upon maturity since that date through July 15th our expectations have been further refined such that we currently expect two thirds to three quarters of our commercial customers to return to normal payments, while we work with the remaining.
Our either a structured solution or a second before stepping back from credit the core businesses within our company improve linked core broken loans and deposits both reflect the impact of PPP fundings PPNR was up 2.4% linked quarter and the kept expenses under control despite the sizable cost it overtime and other.
<unk> expense is necessary to assist over 12000 are primarily small business clients with BPP luggage looking forward, we remain committed to helping ballpark lives and associates managed through this pandemic event and we believe we're making decisions and the best interest of our shareholders with that I'll turn the call over to Mike Achary for a few additional comments and details.
Thanks, Sean Good afternoon, everyone. Our second quarter results reflect a loss of 117 million or $1.36 per share. They include as John mentioned 160 million special provision for the energy loan sale as well as an additional 147 million provision.
Related to updated cobot 19 forecast and modeling.
Excluding the special provision for loan sale at a 21% tax rate earnings would have been 9.4 million or 11 cents per diluted share.
We're calling out the tax rate since our second quarter effective tax rate was 39%.
Due to our year to date loss tax credits and other tax related items, we were able to report a profit after tax excluding the sale.
We do expect the effective tax rate to normalize in the back half of the year at about 18%.
Loans for the company increased 1.1 billion from March 31st this growth included 2.3 billion in P.P.P. fundings, partly offset by the energy loan sale before 97 in about 500 million in Paydowns on lines of credit.
As a reminder, we had a similar amount of line draws in the first quarter. His clients built liquidity in an abundance of caution associated with the uncertainty surrounding Cobiz 19.
Deposits were up 2.3 billion is PPP bonding remain for the most part in consumer D.A. accounts.
Also the balance sheet was flush with liquidity with almost 760 million at quarter end and 17 billion an untapped sources of funding.
Consistent with our intra quarter comments, the margin declined 18 basis points linked quarter, mainly related to the fed rate moves at the end of March.
Slide 23 notes the headwinds and Tailwinds in the waterfall chart notes the basis point impact right up.
We believe the nimble mostly stay in a range of a couple of basis points plus or minus from where we are now at least for the next couple of quarters, which is about as far out is we have decent visibility.
John has already covered the loan sale and provision discussion points, but I would like to mentioned that for the quarter. We use Moody's June forecast for a macro economic assumptions. These are listed on slide 18 in our earnings deck.
We believe these scenarios present, a reasonable mix of economic forecast and are appropriate for our hcl modeling purposes.
Our fee income balances were down in most areas either related to market dynamics or stimulus payments, reducing overall fees.
Secondary mortgage income is offsetting some of those declines and whats, becoming a very favorable rate environment for mortgage banking with increased volumes.
Noninterest expense was down 7 million linked quarter reflect an equity write offs of energy related credits in the first quarter.
The increase in personnel expense was mostly related to annual merit increases in April and overtime pay related to mortgage lending and PPP applications.
Our capital remains solid and an excess of regulatory minimums, including buffers as detailed on slide 28.
TC He did fall below 8% to 733 as of June Thirtyth.
However, we expect to rebuild to levels closer to 8% by year end.
36 basis points of the drop from last quarter was related to the loan sale with another 56 basis points due to the impact on T. C of the 2.3 billion and PPP funding.
Finally, we do expect to pay our quarterly dividend, but our in consultation with our examiners as always the board reviews, our dividend policy quarterly.
With that I'll turn the call back to John.
Thanks, Michael just open the call for questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound Jackie.
Our first question comes from Michael Rose with Raymond James Your line is now open.
Hey, good afternoon, guys I'm certainly understand the loan sale I think a lot of us were surprised by the magnitude of the the severity that you guys sorry, he just give some rationale as to why.
Why to sell now and maybe why didn't you hit the bid.
A couple of months ago obvious you were de risking the portfolio and maybe what does energy lending look for Hancock Whitney going forward is is it a business that you continue to plan to being thanks.
Thanks, Michael did this this is John I'll start and my can add color Chris can.
If we look back in time, we've been ratcheting the concentrations down really since since 2014.
And ahead in the last couple of years, a good bit of quarter over quarter improvement in the book and then as we got toward the end of the year.
End of last year supply demand mismatch began to get worse.
We all saw what happened to ask fears in the market took place around storage capacity and whatnot and when looking in the future the likelihood in a pandemic environment that demand was going to go up fast enough.
With the the challenges that RBL, particularly companies and RBL business had with raising equity.
Just in the private market.
The concern was that demand just wouldn't get up fast enough to cover some of those issues and we would see further deterioration in the book.
And we had a buyer who was both sophisticated had to capacity to purchase a meaningfully all of the RBL midstream and a very large percentage of lumpy credits and the services side. So I think the degree of and the quality of the partner that we had allowed us to do a transaction that was more conclusive.
And just small pieces at a time and so while certainly would admit the discount appear steep I think time will tell whether it was a steep discount or whether it was a reasonable discount just overtime and so.
The benefit to to us into shareholders is the fact that the book is now de risk from an energy perspective.
And the residual book has a far lesser average loan size than what we saw so I think the average outstanding on the book, we saw it was over $11 million.
And the residual amounts about a million dollars per loan so I'd say.
And that by the time you take out all the zero balance is about a million alone. So in terms of going forward Michael.
The booked it remains our primarily small to medium sized businesses.
With a more diversified revenue stream and just simply the scale of the book being less and the client size being something that we believe is a lot less risky from an investor point of view.
As a business that while I think the balance sheet will continue to diminish.
The content of it is something where a lot more comfortable with.
Hi, Mike This is Mike so.
Things I would add too to John's comment, it's probably first and foremost is on Friday, we announced that the the agreement to sell the portfolio was was executed and then this afternoon, we actually were able to close the transaction. So all aspects of the transaction are really kind of behind us now.
The other thing and I would add I.
I think this is this is obviously pretty important but we'd look at all of these activities that we've kind of undertaken in the first half of this year as part of our overall de risking strategy. If you will so we proactively built reserves pretty substantially in the first quarter, we added to that in the second quarter.
Aside from the loan sale, so our Hcl to loan stands at about 236 basis points right now we raise some sub debt during the second quarter and then took the opportunity as John mentioned to deploy some of that sub debt. If you will.
Toward further de risking our balance sheet through the sale of.
A big part of the energy portfolio. So again, we look at all of those activities really is kind of an overall de risking plant.
I appreciate all the color and just as a follow up wanted to talk about the dividend a little bit we had a larger bank in Texas today.
Note that.
Regulators related not giving them any guidance around using the C car for quarter look back in terms of dividend test I mean, where do you use that for you guys given two consecutive quarterly losses. It doesn't look good for the dividend, but there also are some countervailing forces maybe maybe you can just walk through how you guys think about.
Ability to pay the dividend capital adequacy. Thanks.
Sure be glad to so.
So look we think in believed that our capital ratios.
Really do help us support the payment of the dividend in the third quarter and kind of on a go forward basis.
But look we've been real transparent with our examiner's through so through really the entire process of looking at de risking our balance sheet through the reserve builds as well as through the sale. The energy book, we've kind of kept in constant contact with with our examiners and.
They they absolutely support the actions that we've done and as we said in the deck and on the script.
We do intend to pay the third quarter dividend, but of course, we're incomes consultation with our examiners.
As well as our board.
So that process should be completed within the next 30 days or so and then we'll kind of go from there.
Great. Thanks for taking my questions.
You bet. Thank you Mike.
Our next question comes from Kevin Fitzsimmons with D.A. Davidson. Your line is now open.
Hey, good afternoon guys.
If we could just touch on deferrals I recognize that.
Appreciate that detail, but Pete good announced declined.
Just curious what your outlook is on where the settles in other words is probably.
Some remaining first round deferrals that have not yet insured and I'm not sure where you're right in the process of having conversations with.
Folks that may need around to deferral. So if I did my math right I think your as of mid July you're roughly at a little over 6% of loans deferral, and where you think that might settle.
As as you progress out over the next several weeks and get into more of a round two scenarios.
Chris you want to take them, yes sure Yeah. This is Chris Luca.
As you pointed out it.
Right now we're settling out as at least 715 at around a little over 6% closer to 7% right now deferrals, that's come down pretty steadily since since the peak and as we also indicated earlier on in the conversation, we've kind of refined our expectation around.
Now and customers going back to normal payment.
To the two thirds to three quarters level.
Which basically indicates that the remaining portion is where we're we're focusing our attention.
Mostly around structured solutions to.
Handle issues that may.
Linger longer than just.
The regulatory guidance around less than a 180 days and to the extent that a customer feels that they're closer to resolving their operating challenges than we would entertain a shorter second deferral on to kind of bridge that gap. So we have.
Have pretty active dialogue on a weekly basis.
With our client facing teams to ensure that we're executing on.
The plan more focused on a structured solutions to the extent that anything additional.
Goes beyond that timeframe and we're feeling pretty confident in a lot of the conversations that we're having.
Certainly a lot of them are focused around the hospitality sector, including hotel and some of our full service restaurants.
Clientele in the New Orleans market, but overall I think.
We see some real positive.
Dialogue going on between us and our clients to to kind of bridge.
The divide here as it relates to the pandemic.
Great. Thanks, Chris just one quick follow up if.
On the subject of de risking are there any other then obviously monitoring the loan book in deferrals for for cope at 19 are there other.
De risking type of activities or moves that you guys are evaluating and you think you have at your disposal and as it related point are there any expense initiatives that you're considering that might be.
That might fall into that line as well thanks.
Okay. This is John I'll start I started at the end and work my way back to credit.
In terms of expense.
A treatment you know we've had a good history of of taking good views of rationalizing expenses.
In both good times and bad.
Certainly the environment that we're in now leads to volumes of various activities being somewhat diminished.
Some of those are coming back like fee income and et cetera.
Some may take a little longer and so we'll be taking I think a very disciplined view of expenses around every category ranging from office space too.
Two facilities.
To a non people really expenses.
Also in terms of workforce.
Obviously hiring very few folks right now and that's predominately because very few folks retrading.
We have extremely good retention of team members at the moment, but we arent hiring heart aren't aren't hiring very many.
When vacancies appear so I do think expenses.
We'll be a more favorable story as we go through the back of the year, but not ready to try to rapidly bookends around numbers as of yet.
In terms of a credit net and the first and second question I couldn't tell if you meant around other books that we thought were selling you're not if you did I think the answer to that as we have no. Other plans at the moment to do anything like that in R&D dialogue with anyone but you obviously never say never but that's not our intent and then in terms of just credit in general.
I mean, obviously, we've tightened credit certain sectors and Chris you want to go in any specifics on that I mean again.
We're learning from a lot of the deferral activity and we're utilizing.
Some of that experience to.
Really tightened our underwriting guidance to the field.
And to our credit officers and.
We have been focus for for a while around making sure that the types of transactions that were onboarding.
Our.
Yes, chunky and sizable in nature.
And certainly that that sort of thought process continues.
But overall when we think about some of the sectors under focus thats in the in the earnings release.
We are providing general guidance.
Around.
Just ensuring that existing.
Account.
Our our criteria as well as any new relationships.
It might be considering.
With the idea that some of those sectors under focus are ones that we're going to be a little bit more selective and cautious about before we consider.
New opportunities Kevin This is John the page that Chris is referring to is on page 16 of the investor deck and.
Thats, a little bit of a more enhance slides minimum we had last quarter, where we had whole sectors and for that slide we divided between the subsectors in some cases, even within the sub sector and broke those into tiers of concern. So you can somewhat see from that page.
That the the the total book of loans that we have under the most.
Intense look right now is a bit smaller than maybe what we talked about a quarter ago.
And Dan I think as we get towards the end of the year.
Instead of focused on sectors will be talking about individual credits and so I think over the course of the next quarter as the deferrals are completely retired as we know what the credits are that end up meeting modest modifications versus.
Additional restructuring than they were going to see migrations based on actual risk writings and not just sectors under focus but paid 16 was intended to give a little bit more detail that was helpful. We thought for investors to understand what part of the book could be at the most risk or less risk.
Also just kind of add to that I mean, the reality is during the last earnings release. This was all fairly new we were really focused on broad categories and over the past quarter, we've been able to kind of refine our understanding.
Such that in certain areas and in certain situations, we realize that maybe it's slightly less of a concern and in other areas. We still have the same level of concern and where have the same level of intensity around managing those transactions and books of business.
I think the last thing too to add.
Related to this question is look I think we feel good about where we are in terms of the de risking activities, we've done up to now.
Theres nothing else out there as John mentioned on the horizon as far as we can see.
And we believe we've done a significant amount of de risking and really look forward to kind of a return to more or less than normal level of provisioning in the second half of the year normal in this environment. It was kind of a wildcard, but as best we can tell.
We should be able to return to kind of a more normalized level of provisioning and that would also imply.
A level of profitability as well.
Okay. Thanks, very much gas that's helpful.
Okay. Thanks for the questions.
Our next question comes from Kecy here with Jefferies. Your line is now open.
Yeah. Thanks, good afternoon guys.
So.
A follow up question on the deferrals.
The the loans that are come our that are not carrying that are.
Going back for a second wave is there is there a concentration.
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From slide 16 that Youre seeing there like a pattern.
Yeah, I think what we're seeing in general is.
Some of the hospitality related credits hotel and restaurant are the ones, where the deferral has expired and were in the process of essentially executing on the structured solution I think thats, probably the most obvious.
Pattern.
Okay. So this is this is John I know you haven't had a chance to see the whole deck and they just went out at an hour ago or so, but if you look at pages 12 through 15.
That highlights the sub sectors that we mentioned on the far right, you'll see what the deferral dollars and percentages are as of July 15 now.
Caveat to that is we're in deferral maturity season, right now right and so every day those numbers are coming down and so when doing a comparative.
Within the Midcap space that date, the as update really is meaningful so ours is as of the 15th and each day those numbers come down a bit.
Okay, great. Thanks, I'll take a closer look.
And then on the capital build Mike I think you said you want to get back your you expect to get back to 8% Tc by by year end I mean.
If we got a lot of forgiveness of PPP, you'll you'll be there.
You know at seven nine X X PPP.
Plus you've got lower provisioning coming post the divestiture.
So is there something that I'm missing do you expect loan growth to kind of bounce back here like what would why would Tc not not come back meaning meaningfully given.
PV forgiveness and and less provisioning.
No we absolutely think it will.
You're right if we just back out the PPP loans were at 789.
We've also talked about having a good deal of excess liquidity on the balance sheet that I think will largely subside by the end of the third quarter. So thats. Another dozen to 15 basis points. So look weve I think we'd be very disappointed if we're not back over 8% by year end.
Okay.
Great and just one last one on the PPNR front the service charges I think I'm trying to Mike you guys said that those have come back later in the in the quarter.
Is there a trend line that we can point to like.
You know June versus April just to get a better line of sight on the service charges.
On service charges.
It's I wish there was a simple answer but it kind of depends on which charges were talking about so if you look at the hit from Twoq to one Q, it's a pretty big number of about 10 million pre tax of that number.
Depending on how you counted 40% to 60% of the overall 10 million in reduction was really the presence of stimulus.
And by stimulus I'm talking about beneficial unemployment payments building.
PPP deposits into business accounts, and just really what was early quarter fear driven hoarding of cash and so in this AFFO de charges in regular deposit maintenance account charges were dramatically down so that was about half I'm going to call it 40% to 60% of the 10 million hit.
Those will come back as deposit account balances normalized another million, maybe maybe one or so were directly way fees and those ended in July.
And then the remainder would be in transaction related fees that were very much diminished just when you cannot the economy was largely shut down and so those would be like annuity sales loan fees that are not amortized.
Debit card volumes and cetera, So both annuity in debit card balances have both.
No we're not at normalized levels, yet, but they have resumed more so in July than June.
Time will tell whether that sticks around for the whole quarter, but but it looks maybe pretty good right now, particularly given the rate environment for new cities.
And and so that I think we'll start seeing some return on three key it's very hard to project. What this service and in a CFO de income patterns will be because it's tied to the excess balances in the deposit accounts, so without a place to deploy those funds. We don't we're not getting the type of.
Finished income benefit you would get from that excess liquidity right. So we're staying very liquid right now for that reason because we do expect those deposit balances diminishes people begin to use the money.
No.
Totally different topic goes to secondary mortgage income where that revenue, which we thought would would ease up a little bit more in the into Q did not in a continued booming right through the second quarter and really through July. So far has still remains stronger than we would've anticipated how long that last I don't.
No but.
It's right driven and there is a somewhat attractive.
Percentage of first time homebuyers, beginning to get into the market probably due.
To the attractiveness of rates. So we'll see how long that actually holds up does that does that help you or do you have any other she'd like to.
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Yeah, that's great. Thanks, guys.
You bet thanks, guys.
Our next question comes from Brad Milsaps with Piper Sandler Your line is now open.
Hey, good evening guys.
Hey, Brad.
Mike just curious if you can maybe comment on on a charge offs away from the energy sale in any particular.
Sector that.
That encompass those charge offs outside of what you had to take on the energy portfolio.
Yeah I'll start this is John and Chris can add color. If you like when you get the non energy charge offs. There were a small number of credits.
Some in the behavioral modification book, which is quite small.
There was a a fraud.
In a construction company and several those were somewhat in play before the pandemic began and there were some signs that we thought were pretty bright they'd be able to work through it and come back and actually do well. The pandemic took the wind out of that sale and as a result, we opted to go ahead and proactively take those charges in.
To Q.
So.
It really wasn't any particular sector. It was more the inventory of credits that had some weaknesses that were maybe headed better that the pandemic eliminated in our opinion, a chance of them extra recovery and so thats been dealt with anything to add to that Chris I think thats a fair summation.
Beyond that just a normal stuff that happens every quarter really havent seen a big uptick in like consumer losses or anything like that.
Caused by the pandemic as of yet I think also fair to say that again, we took a proactive approach to dealing with issues that we havent in the past but.
Our say for the year, that's been our Emma.
Got it and then just back to the energy sale I'm curious.
At what point with this isn't something that you guys. You know contemplate early in the quarter or maybe earlier in the year, when you're sort of going through your initial.
Cecil estimates just kind of curious kind of how it you know transpired and how it will impact your thoughts around provisioning going forward I appreciate that.
It's very difficult to predict but you guys know you expect it to.
To go lower and then also just curious any any color you could give us on kind of marks and MP versus midstream versus service as you kind of went through the process kind of what you saw.
In terms of what the market kind of demanded there.
Yes. This is John I'll start and kind of tackle the first question.
We've we've made no secret our desire we wanted to take down energy concentration over course of time and have successfully done that and the book really was improving.
The.
We were beginning to get towards the back of the year and I think I may have mentioned that on a call at some point.
We were getting a onesie twosie offers some of those we took most of them. We did on individual credits. The discounts were not terribly attractive because generally these were credits that were already distressed if for whatever reason a buyer was trying to accumulate debt.
Forward for their own purposes.
This transaction was the first opportunity to do something conclusive in a meaningful step towards a big de risking maneuver and that really because of that because the size of it and unfortunately drove the discount to be higher than I think we'd all like to see but that was just our reality.
So in terms of discounting between books you know when these portfolios come together generally just comes to comes down to eight number I'm sure. There were individual numbers were very different on the other side, but we're not privy to that and it would be improper force discuss it even if it were so I think you just kind of look at the whole pool and look at there were certainly credits in that book.
That we expected zero loss from there were incident and credits that might have had material loss in and so by the time drove them altogether.
You get a number we viewed as what our current expected losses may be if our darker scenarios came to fruition and then the other opportunity to exit at all right now and redirect those resources and the company's focus towards business, we want to grow versus shrink and that led to the decision you have anything else you want to them, yes just.
Just briefly that you asked a little bit about the process bread and.
I mean look this is something certainly we've thought about overtime.
As we've gone through the process of reducing our kids concentration pretty substantially over the past few years.
And a number of factors I think came together in the second quarter.
Brought us at the conclusion too.
To kind of initiate a process and that's what we did we had multiple individual firms that were.
Involved in taking a look at the book and.
And again, we received multiple bids and.
It was fairly competitive and we were pleased really what's the process played out.
And as John indicated typically in a process like this you're not going to get folks to differentiate.
Pricing by credit or even by segment of the book So for the most part it was really a portfolio sale with portfolio level level pricing.
Okay that helps.
Yes, no that's great and it just any additional color Mike on.
You addressed is a little earlier, but just magnitude of.
Provisioning or yeah, I know, there's so many unknowns, but just any additional color would be what would be helpful. There.
Yeah, I mean, it's it's really hard to to put a number on that so we're not going to go there in that regard, but suffice to say that.
Again, we we've really kind of completed the de risking that we thought was necessary in the first half of the year.
And we look forward returned to a much more normalized level of provisioning.
Both in the third and fourth quarter, what that is will depend on a number of different factors.
But I think that.
We've built reserves substantially and don't really at this point.
Look at or are looking at building reserves too much beyond where we are now.
Hey, Brad This is John opening I would add.
And just staring at numbers Npls are now down 33% in criticized commercial down 34%.
The deferral percentages are I've, obviously significantly reduced and the ones that don't come back to normal payment will migrate to an answer probably through the end of the year and I think we'll all in all of our about what that has the one big wildcard than I think none of us really no.
I would direct as the economy game and that has a big impact from an AC all perspective, as we apply different scenarios right. So if it seems as if the resurgent infection rate has not led to the somewhat knee jerk reaction of close everything and that is much more measured this time around if that continues.
Dan I think the futures, maybe a little more brighter.
We end up with with massive closures that that'd be a little more tough, but all things equal in the current posture that you would certainly expect provision to decrease meaningfully.
Great. Thank you guys I appreciate it.
Thank you.
Our next question comes from Ebrahim Poonawala with Bank of America. Your line is now open.
Hey, guys. So most of my question I mean asked and answered just one follow up I guess on the energy book why not sell the entire book you on why we kept the remaining 250 million I'm just wondering given.
It seems like you just wanted to.
Moving to investigate oil went nowhere thing.
Kind of sold at the best price you could get so that you don't have to worry about this impact on stock has diminished so why not sell the entire.
Yes.
It is John I'll start the.
The honest answer is when you get into the very small credits the appetite for a buyer is very low.
When you get into credits that you have $300000 balanced $500000 bass should not a lot of appetite. So the on the larger in the few remaining large credits we have.
And when you are fairly.
Far down the road workout situation. It can become problematic to include one of those credits in a portfolio sale.
So those items that were meaningfully close to a resolution one way or the other it's better to leave those alone and in the rest was just very very small and there was also a large number of counts to de lever zero balance right now there's no real incentive for a buyer to buy zero balance at zero right and just take the remaining commitment.
So that's the reason in Ebrahim, just to dig a little bit of color to John's points.
On the book that we sold the average size of the relationship was about 11.3 million and we sold about 44 relationships.
In terms of what's left.
The average size of the relationships only about 670000, it's well over 240 different relationships. So what we have left is extremely granular.
And again to John's point.
Not sure that there was much of an appetite by folks to acquire that granular of a portfolio and we should also call out there were two credits that were not pass right. So it was a better performing book in the vast majority of what's left is really kind of bilateral.
Relationships.
So these are or.
True customers and much of what we sold.
Was the syndicated book.
Got it and what so Mike would you mind just what's done.
Make book.
Well at the end of the quarter.
Yes, It goes beyond just the energy loans.
Our total snick book about 1.8 billion.
So again.
Our concentration in Snicks is down pretty substantially.
Presale Vocera Bert versus post sale, so post sale, it's about what 8.5% before that it was about tenant near 11.
Alright, Thanks for taking my question.
Okay.
Our next question comes from Jennifer Demba with Suntrust. Your line is now open.
Yes.
I think it give us some color on the mortgage pipeline is now just wondering what kind of.
Revenue impact you're expressing the second half a year and how much momentum is carried.
That's a terrific question.
The first one is easier to answer than the second but the first one the pipeline is still full.
In fact, just this morning, we were we're looking at the pipeline and it's still so full for refinery that it's somewhat getting in the way of of working with portfolio relationships that while they're not quick revenue their valuable and so our dialogue was do we need to peel off any resources to focus.
On the primarily private banking portfolio that we expect to retain and so so the pipeline still very full in terms of revenue second half.
All things being equal you'd expect secondary mortgage to be similar in Threeq you to Twoq you if that holds up.
But I'll confessed to your I'm really surprise, Jennifer I Didnt expect.
They are the beat that much more refile business out there, but it just keeps on coming in so we're glad to take it.
So I think three Q auto looked like Twoq, you if that pipeline stays where it is right now fourth quarters, a little too far to think out there, but sadly I don't think we're going to see rates going up really in the near term.
And.
But there are just you would think it'd be an end to the refi business the volumes were actually producing.
Thank you.
You bet. Thank you for the question.
Our next question comes from that only with Stephens. Your line is now open.
Hi, Thanks for taking my question.
Just want to go back to the asset sale and I think most of us have been assuming that the the midstream assets are lower risk and therefore midstream assets have lower loss content.
Would you agree with that assessment of midstream assets and I guess, the RBL asset sale makes sense given sort of losses, there just trying to reconcile that the midstream sale. Thanks.
This is this is John it's a good question.
That is a business historically that has done very well.
If you look at a forecast and these things ripple right. So if you see a lot of pressure in RBL.
You began or at least you could begin to see more pressure on contract rates for transport and storage on the midstream side.
To date, I think Chris if I'm right. There was only one significant concern in that book, but as you begin to look forward. If we're right or if we began to see or darker scenario. There we could end up with problems in the midstream remaining book and so made the call to do a much more broader action of energy in total.
Yeah.
And the fact that those were syndications without core relationships, Matt. It followed a pattern. We've been following in terms of of managing more towards more granularity and more full service relationships and so that's really why was included what's downside risk potential and the the lack of offsetting liquidity.
Okay that makes sense. Thank you for that and then shifting over to total loan balances if I exclude that PPP impact and the energy book loan sale. It looks like loan balances were still down sequentially and you've mentioned that previous line draws or or pay down just curious where where you think loan.
Balances go from here and if credit is tightening in certain segments that you mentioned before.
Should we assume that loan balances continue to contract from here X PPP.
It's a good observation I think the the headwinds.
Do not appear our do appear stronger than the tailwinds in the very near term and.
Forgive me for for do an anecdotal zone, you, but but I think there clickable.
First in terms of just attrition from the portfolio other than amortization, we're seeing very very little.
Attrition in the book I customers that are out pricing existing debt.
Plots appear to be more hunker down the downside to that and thats the upside that we see less run off.
Relative to prior quarters in the book, particularly the commercial book the downside to it is is the same things happening everywhere else and so there's just not as much deal flow available. So its hard tail is that hunkering down and clients who are for whatever reason or out of our on unhappy where they are but they're not willing to take.
The chance of moving to a new bank or is it just straight up light demand because business sentiment is is poor it's hard to tell exactly why but the ball, but the bottom line is doing and it's very light and so as we look towards Q3, while we do have pipelines they don't looked at bad.
In fact, the pipeline for the end of two Q is the same as the pipeline for the into Twoq last year and that doesn't correlate with that demand scenario.
But as we move to that pipeline the credit risk appetite in sectors under focus began to apply and Weve I think the pull through rate is going to be much lower from pro that third Q pipeline than it was for third Q last year I gave you a lot information, there, but but but there's a lot of any don't mention that points to.
Less water attrition, but much lighter demand and with the secondary refinance.
Activity, causing diminishment in mortgage portfolio, coupled with the run off at the indirect books, which we're not replacing.
Coupled with our appetite being a little tighter on the home equity line side.
And at the upper end and certainly with syndications being more tight than you would see debt would suggest to further shrinkage in the third quarter before we begin to see increases loan balance sheet going forward.
The only other wildcard I'll put in there is some of the PPP balances apparently went to paying down existing debt because the the recovery didnt happen as quickly as people thought and so with no expenses to use the PPP balances to to burn it just went to paying off other.
Or debt in the short term as though as the reopening occurred we began to see some of that come back, but only very very recently and so it's really tough to give you up we're not going to give any guidance because the guidance would be too much of a guess versus an informed decision, but I would just ended was saying the headwinds are outweighing the tailwinds for the new.
Your turn.
Okay. That's very helpful. Thank you got.
Okay.
Our next question comes from Catherine Mealor with KBW. Your line is now open.
Okay. Good evening everyone.
A question on C. thought I noticed that you're waiting between the baseline and you're the various scenarios.
Changed from last quarter, So I guess last quarter, you were 80% baseline.
And then 20% as the key severe scenarios and then looks like now you're at 50% baseline and in 25 actually had better scenario, and then 25 or slow growth scenario themes and Mr. baseline is more optimistic just any kind of commentary on on your thought process there.
Sure Catherine this is Mike be lit led to comment on that so.
Yet you stated the the various mixes between first and second quarter.
Accurately and that there I guess the thing I would point out is.
The mix that we use in the first quarter was was pretty detrimental.
And as you recall as the first quarter was proceeding various moody's scenarios got kind of darker in darker as we went through the quarter.
They also continued to get a little dockers, we went through the second quarter, although now that we're in the third quarter and have had a chance to look at the July scenarios, they seem to be stabilizing a bit.
So the reasoning for for why we change the mix a little bit I think has everything to do with some of the comments John made earlier about.
Our regional economies opening and.
Probably I think on balance doing fairly well.
There's also the.
You know the prospect of additional stimulus out there over the next quarter, so and so that played into our thinking as well.
I think on balance we really look at the two kind of together and we look at the result of how much we built our reserve in where we stand now and feel that we're in a pretty good place all things considered.
Catherine its John one thing I would add is as we look across our footprint. There are pronounced differences in the degree of recovery already experienced market to market and just using something as simple as hotel occupancy.
Average daily rate revenue per available room revpar.
The relativity between markets is extremely different and so where we've seen a lot of questions around New Orleans and the pressure in the city is primarily around the lack of convention and Tradeshow business, but as you get to other markets, particularly particularly the BG markets the beach pricing markets.
In some cases unbelievably the numbers are only like 10, 15% off of where they were a year ago.
So that also plays into this near a difference is trying to draw the wouldn't at around the whole footprint with both good and bad relative to buy Sonic baseline experiences.
Okay.
That makes sense. It's helpful. And then my follow this just on the deferral conversation is there way to quantify the balance of loans that are now off deferral. So they didn't take the second round, but there are undergoing some kind of structured solution and then where would we see that balance of lot of in terms of lower grades.
So I'll take a quick run at that.
Chris Luca.
Hey, Chris if you look at if you look at where we peaked in the way of.
Deferrals, and where we report kind of the 715 numbers.
I think page.
10, really kind of articulate that we peaked at $3.6 billion.
We're down to 1.4.
So the net obviously is kind of whats run off the two point.
$2 billion that have kind of run off I think we also indicated earlier that we're seeing.
Two thirds to three quarters of our loans essentially going back to.
Repayment. So you can assume from that that the remaining amount are the ones that were actively discussing are continuing discuss.
Second deferrals, but really more steering them towards.
Discussion around whether or not a second deferral is really sufficient.
On or whether or not as structured solution is probably the better way to go and.
It's a mix of both of those I don't I wouldn't say that.
That they're all going to go to a second deferral.
Situation summer just needing an additional month or two to kind of get them to what they feel and what we feel is a little bit more stabilized operating rhythm.
But.
From there then we start to explore risk ratings and the risk rating migration related there too and to the extent that the structures that were talking about with our customers on would indicate that.
We should be looking at potentially downgrading those credits some of which may be just downgraded kind of within pass and some might be moving to watch or some sort of special mention substandard category, we'll probably see some migration.
In that regard and I think we've talked about this we did certainly talk about it.
Earlier last month.
On one of our Investor presentations, where the the reality is is that.
The migration discussion is more of a second half of 2020 as you start to really truly assess.
The.
Longer term impact of the pandemic on those individual credits and structures that you might need to put in place to to bridge that gap on we think it's all pretty manageable at this point in time based on the dialogue that I'm, having with our relation managers and portfolio managers on but I do.
We expect to see some migration on in risk rating.
Across the board.
Across our risk rating spectrum.
In the second half of the year.
Catherine its John I know, there's so much detail, it's really kind of hard to find a theme. So I'll do my best encapsulate some of that for you.
When we filed the the in or are the intra quarter 8-K back in late June.
The guidance that we gave them really wouldnt guidance. He was just a statement of where we were it looked like something a little better than 50%, we're going to returned to normal payment.
And that was early.
That number got up to where it looks more like two thirds a few weeks later in now.
His two thirds to 75% so the trajectory of our expectations and returned to normal payment has certainly gotten better over the course of time.
That said, it's not it's not done and in August 10th is the last big tranche of deferral maturities. So will we have we will have been through all of those additional 90 day deferrals by the second week of August and then by the second week of September we would have passed 30 days.
On all of the returned to pay deferral dispositions, so when Chris as to the into second half its.
There are prescriptive times were I think we'll have a lot more information around sort of what those themes turnout to be so the purpose of given all the details and slides 10 through 16 was to provide the market as much detail as we have to support and explain the reason maybe a little bit more optimistic than we were.
For a few weeks ago now time will tell right. We've got a long way to go I think as a as an industry.
To know really what the pandemic impact is going to be but those will be the broad themes that may be helpful for you.
And that's that's when the Gulf South conference kicks off so that timing is really.
We'll be.
At the time data, although it may be.
We may make them in school.
And then.
Within that.
You can you provide in the deck.
If I didn't see it the update for watch list, one and was there they change in watchlist credit quarter over quarter.
I think I think we gave the commercial criticized numbers.
Back on slide.
Eight in eight and nine is the the NPL change and the criticize change.
For the different whatsoever.
Yeah, it's broken probably for the last time between energy and on energy.
Okay, but in terms of watch with their uptake and flows it at least watch.
We didnt really disclose all of that but clearly.
You know we are pretty actively monitoring all of our credits and so like I indicated I mean, there's there there has been some migration some of the migration that we are seeing is kind of pre coded normal stuff that you would see and some of it is.
You know.
Categorical what I would say is that we did move in Q1.
All of our.
RBL and midstream credits into watch category, So you're actually going to see probably you know a net reduction and watch as a result of the the loan sale.
But yeah, it's a pretty active and fluid process I think by definition unfis deferred we're watching it right. So yes.
Makes sense, Okay, and then one last small question is just on PPP, how much how many.
Teams are dollar amount of PPP fees that we saw this quarter.
How much PPP sable more time.
The dollar amount of PPP, Steve we saw this quarter as it is easy taken the 4% Tom effective yield for the balance of.
Fees only about 13 million.
13, okay great.
Alright, Thats all I got thank you.
Thank you.
Our next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is now open.
Thanks, very much John and team I wanted to circle back to kind of pre pandemic when.
There was a real game plan to hire and spend and had to be very competitive that it is important time with one of your competitors was leaving.
Just kind of curious where that is today I know there's been a lot that transpired since since January and last year when that announced the announcement happened is there's still a hiring thats that can happen as well as sort of new business generation, but isn't the near term.
Yes. This is John Thanks, Chris for the questions. It's nice talking about revenue its fund the.
We have hired one team.
We won't get into where the team came from with some good early progress made.
That said.
It seems like it was four or five years ago, we actually had that conversation so much as happened. Since then so I think the.
It would be safe to say and I'll break it apart we have a number of technology initiatives that while they're about a quarter behind where we earlier thought they would be because we direct you to all the resources to support the automated solutions for ppb funding and forgiveness.
Those are back on on the track about a quarter behind and those will make a meaningful difference both in effectiveness and efficiency in the sales process as we get through the end of the year into 21.
That is continued and we talked about that pre pandemic. Secondly, we are absolutely in the market to higher good talent and those more granular parts of alone and.
Balance sheet.
And should those opportunities come up we'll certainly pursue them.
So I think what we're saying is we would look for workforce efficiency in areas that that are not revenue diminishing and we are willing and have the appetite in capacity to add resources. They will make a meaningful positive difference in revenue.
Great. That's helpful and is there any shift in expenses as a result of that or can that kind of work in your kind of what you are expecting on spending.
You mean, the immune but those two items I just mentioned.
Right.
Yep.
This time by this time I thought, we'd probably be able to talk a lot more about that but so much has changed and there's so much volatility that at this point I think we need to let kind of pandemic related expenses settle some and then we'll talk more about those impacts as we get later in the year when things settle down and we'll do in terms of 21 versus joining.
Okay. That's fine I understand thank you for the out for the color for everything this evening.
You bet. Thank you for taking for asking the question.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. Harrison for closing remarks.
Thanks, everyone for your attention late in the day list. Thank you for moderating the call everyone have a great week.
Ladies and gentlemen, thanks for participating in today's conference you may now disconnect.
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