Q2 2020 Enterprise Financial Services Corp Earnings Call
Please standby.
Good day and welcome to the F. C Earnings Conference call Today's conference is being recorded.
This time I want to turn the cost how much it must jumped mr. Jim loudly.
President and CEO of Enterprise Financial Services Corp. Please go ahead Sir.
I think archery and good morning, and welcome to our 2022nd quarter earnings call.
Well, that's quite a cool.
Continued to be well see.
Joining me on the call. This morning to Turner, she couldn't hear and operating officer about company.
Goodman.
Within enterprise banking truck.
And Doug Hoffman, Chief Credit Officer, then of course banking drops.
Before we even I would like to remind everyone to call. It a copy of the middle East and accompanying presentation can be found on our website.
Presentation Ernie.
Well funded on.
Form 8-K yesterday.
Please refer to slide she'll be patient kind of forward looking statements.
Most recent 10-K for reasons why actual results may vary from any forward looking statements that would make today.
You got the unique circumstances second quarter presented I'm pleased with our results over quarters, we earn 56 cents per diluted share, which compares favorably to the 48 cents we earned in the fourth quarter.
I didn't complete yes.
Current quarter decreased from the weak quarter, primarily hurting you recognized in the Triple B program and the slight reduction in our provision expense.
Slide three shows our corn Democrats.
Yes.
During the quarter, we focused our efforts.
First and foremost we continue to focus on the health and safety or suits.
Lifelock large so cute surveys has guy that's firearms division continued to work from home all non branch personnel until at least after labor day.
Where do you know lobbies library going to opening.
I told you know the points based continues problems like say sleep, well and it's person meetings.
Interactions.
Secondly worked closely with our clients to navigate opportunities and challenges presented by the current economic environments.
Execution.
Well, it's a focus for the first part of the core.
We previously provided some initial statistics in our success that's gotten he will provide much more color on impact their performance had on a quarterly financials.
In addition, Scott will spend some time almost probably get uses its except the onboard.
Points.
And the recently kicked off while these initiatives to build on existing relationships as a result work will be success.
The government or future soups, yes.
On close monitoring.
Our loan portfolio, especially areas, we had previously identified this potentially challenging.
We'll spend some time on these portfolios that are credit statistics would tell you that many of our claims continue to perform well.
The ones that potentially could be challenged had been aided by the federal stimulus programs and the deferral we provided early on.
That being said, we did see opportunity up into strong earnings to bring our loans to total loans to 2.07%.
Double digit meet an additional $20 million, which we believe is prudent and positions US well you continue to wasn't the current environment.
Let me focus for the quarter, what's deserving our net interest income I wasn't sure Justin deposit pricing response, that's monetary policy.
And continued focus and establishing pricing floors for floating rate loans.
Which resulted in record levels of net interest income 65.8 million for the second quarter.
You should drive strong pretax pre provision earnings which was nearly 82% return on average assets that's far in 20 Twond.
Finally, we took advantage of your truck is definitely it's been completed age.
Million dollars subordinate debt raise.
Proceeds, which waterpark capital position to take advantage until opportunities and our challenges that's a future Michael.
As we continue into the second half 20, Twond, we will remain.
On building after reserving a strong core earnings momentum well remain vigilant on the quality of our loan portfolio.
This is indeed, a delicate balance, but one that our diversity in terms of lines of businesses and geography affords us the spread opportunities.
No I like what I called it during the call of that Scott Goodman supervise bunch more detail about triple piece success along with.
And business line up Scott.
[music].
Thank you Jim and good morning, everybody.
The second quarter was a particular with challenging one in many ways and those factors certainly impacted quite behavior and portfolio dynamics.
Well triple to dominated our attention and the dollar impacts for Q2.
Overall movement no loan and deposit book also reflected a business mindset, which was characterized by a flight to quality.
As it relates not liquidity.
And opportunistic positioning around decline rates.
As I mentioned in the call last quarter, given our companies focus on privately held that family owned business.
And then early commitment to devote significant resources toward the payroll protection program.
At quarter end cores, nearly 3800 triple to loans, resulting in an 808 million outstanding.
With an average loan size up $224000.
But this isn't a build and manage all internal process.
With an automated solutions to interface with yesterday were key factors there are successful execution.
Yes.
In addition to assist in our current clients that's real food.
We were able to process over 600 other businesses within our markets through the program.
Well now as we approach the forgetting that says we are leveraging these conversations convert these businesses to full relationships as well as expand revenue without clients.
They are using a theory project based approach.
Collected data.
And the systems that we built the warmest triple food to digest sales campaigns.
I would expect this it's important to help ensure greater consistency visibility and accountability.
Early results are encouraging with over half of these non clients within other business to the bank.
Loan balances, which are outlined on slides five and six.
683 million for the quarter and 19% year over year.
But the major impacting over 800 million Outstandings for you and I category as well and triple coupons.
Well some borrowers grew lines the top end of Q1 has a defensive mode.
It's all this behavior reverse itself dramatically in Q2, that's tripled.
On we're just first four businesses don't pass reserves.
Houses on revolving lines of credits declined to one another and 65 million or the quarter.
As compared to 57 million dollar increase that you want.
[noise] sector level and business unit details are outlined on slide number seven.
Yes, we typically isolated has its own category.
Hey, down a second crown triple through loan pool to most impacted the general see an eye loans across all markets as well as the enterprise value lending sector.
Hey off activity on Investor on scenario with also elevated in the quarter get minimally so the borrower living for low fixed rates.
Permanent debt markets.
Despite these factors.
That's the crux let glow.
Loan production during the quarter net of Triple coupons generally solid.
So April and June posted cyclical levels of production.
Now than they volumes were down following the height of the triple due process.
Activity with most prevalent and that yeah, yeah, sorry construction.
Hi, good cultural and mortgage sectors.
Like insurance premium finance activity was also stable.
Well in the quarter from schedule premiums on existing loans and several of the closings.
Deposits are outlined on slide number nine.
Well what significantly in Q2 rising by 710 million.
For 21% over the last 12 months.
Much of an increase from and and non interest bearing accounts, that's represented 29% total deposits.
The quarter.
Well a majority of the growth is related to Cripple Creek proceeds.
Roughly 60 million of the increase relates to our ongoing sales process focused on relationships and vehicles balances with existing clients.
While also lowering our cost of deposits that's king will expand upon during his comments.
Well remain a key objective for our company.
And have proven overtime, we will continue to position ourselves to take advantage of opportunities that's capitalize on disruption within our this end markets.
That said.
Well not look past credit for the sake of growth.
And your focus squarely on my holding the quality of our loan portfolio.
For the quarter credit quality remains sound with stable and theory.
Levels.
Lots that targets.
Slightly lower classified loans.
Slide number 10 provides a breakdown of the loan portfolio by product industry rate structure, and Doug will provide more details of her comments.
But from a high level diversification and make a hallmark of our portfolio.
Understand buffer against material geographic or industry specific economic weakness.
Now I'd like to handed over to our Chief credit officer doesn't jockey for more color on crack spreads.
Yes.
Yeah, Thanks, Scott and good morning, as well to everyone.
In addition to our success in the Triple B program, which as Jim and Scott mentioned earlier was a primary focus in Q2, we continued to support our clients most severely impacted by the pad dentek. That's in the Biden pain relief he got loan modifications.
As we collected in slide 12 enterprises provide payment modifications on just under 600 loans totaling $685 million for 12.8, they send the total outstanding excluding triple Pete.
53% of the pain at modifications for contractual P. and I'd payment deferrals.
47% with principal only proposals.
Over 90% of the principal payment default carried at 90 days for a lot.
Well they continue to communicate regularly with our clients. We quest for second round payment defaults could they had been limited to a handful of loans going to primarily in the hospitality sector.
Usually quasi I'd be considered on individual basis.
And in the context of more comprehensive longer term solution that may include enhanced financial participation from older its gearing towards.
In the form of increased guaranteed and would that sort of its reserves.
During our two woman's call I provided in depth comments on certain portions of our loan portfolio that was viewed as most susceptible to the children economic environment.
The enterprise value London portfolio highlighted on slide 13.
Represents our senior secured term and working capital credit the private equity sponsored companies saw considerable pay them at companies would be outstanding balances on working capital like that had been drawn up in the prior quarter.
We did engage in independent third party to conduct in evaluation of the portfolio during the second quarter.
<unk> independent firms final report had substantially confirmed our internal view of the risk in the portfolio with minimal risk rating changes and no material impact to our vision for allowance for loan losses their calculations.
375 million dollar hospitality portfolio highlighted on slide 15.
We've done that report some modest financial improvements, we view that hotel occupancy rates climb back up into the mid 40% range and restaurants reopening to the public.
However, as a result of new governmental restriction ordered in early July on restaurants bars, the mother travel related businesses.
Anticipate a more prolonged environment operating stressed within the industry.
Overall, we remain confident in the relative quality of our hospitality portfolio given the weighted average LTV.
Personal recourse and basketball relationships.
Other industries previously highlighted including aircrafts.
Oil and gas agriculture, and life insurance opinion finance and demonstrated stable performance that is consistent with our overall strong asset quality results for the second quarter.
Updated charts on those portfolios are provided.
Thanks.
That's Kim will further comment on asset quality results for the second quarter remained solid at 40, plus day delinquencies below 20 basis points classified assets, maybe modestly lower in $97 million from 105 million.
Non performing loans lightning slightly to $41 million from $37 million.
Net charge offs for the quarter totaled only 309000, then year to date net charge offs to around $1.5 million.
Now I'll turn it over to can Turner.
Thanks, Doug and good morning, everyone I'm going to start my comments on slide 16, which is the quarterly earnings per share trend as Jim noted, we posted 56 cents of earnings per share, which advances from 48 cents a share in my first quarter.
This slide certainly reflects and demonstrate the challenges and the opportunity that the current economic environment.
Fees and net interest margin challenges have been mitigated by PBP loan interest.
And expenses have benefited from us reduction and traveling point entertainment walks for those a little bit further later.
Although provisioning was favorable to the first quarter, it's still cut otherwise strong earnings and half during the second quarter.
Overall the earnings profile that we worked hard to build is paying dividends and helping to advance the strength of our balance sheet.
On slide 17, the net interest income trend you can see it expanded to $65.8 million with core coming in at about 95% of that Beth aided by $4 million of interest and fees from payroll protection a loans, which.
Deal that about 2.6% in the quarter, you'll note that we transition that flies in the presentation to be reported a net interest income and margin given the minimal impact of noncore acquired book.
Net interest margin at 3.53% declined by about 25 basis points.
X paid a P.P.P. loans that were 3.62%. So we think that trend given all the pressures on interest rates a loan pay downs and excess liquidity is reflected on the strike from the flexibility of the balance sheet that we have.
Our liability management the trends that we experienced as a result of PPP and customer gathering liquidity did eight our funding costs total liabilities came in at 50 basis points in total deposits were at 27 basis points with BT, a rising 8% to 29% total deposits.
From a net interest margin perspective, we remain modestly asset sensitive and given where notably LIBOR or has trended at June thirtyth and where.
We're seeing a LIBOR curve, we do expect a men to stabilize.
Moving forward, excluding the potential impact of.
PPP forgiveness.
Slide 18, I will review briefly credit trends are really more specifically here are our posture on provision they I think dog and Scott covered the asset quality, which you know what was modest kind of modestly better in the quarter in our view despite that.
We had another quarter of a significant provision which is.
Largely driven by being a movie baseline forecast and all I'll dig into that here in the second so allowance for credit losses improved to $110 million, which is roughly 2.07% of loans, excluding TPP balances and that's a 38 basis point Bill.
From March 31st and that trend reflects largely the changes in the economic forecast since that time. So when you use a blend of.
The Moody's baseline S. One stronger and that's three moderate recession that 80%, 10% and 10%.
We do not adjust the qualitative factors to be less stringent if anything our qualitative factors a just for a more specific and severe items in the forecast.
And I would just say that the baseline in the second quarter reflect a steep decline in GDP through early 2021, and unemployment peaks this quarter and remains greater than 8%. The route 22, I think when you really look at the model than you compare the data from 31 at 630 I see.
The biggest changes that the.
The severity or the length of time that we're going to extend that were projected to experience.
Stress both on unemployment and GDP is longer than it was previously so where you had a more aggressive or optimistic recovery I think that recovery assumption has shifted out slightly from the first the second quarter and that's why you're getting another quarter at the outset say $20 million of provision for credit losses.
I just from an overall perspective, we believe our allocation of FESIL is reflective of the intent a which is to aggressively build reserves one the forecast the gas and in advance to the actual deterioration in the loan portfolio.
Again with that said the asset quality metrics are stable and we really not experienced any specifics significant stress related to the current environment.
At this time and you know we were positioned well as we move forward, whether the economic forecast plays out or gets worse or any of that has improved so we feel good about where we sit from reserve and capital level and coverage at the end of June here and you have Doug had mentioned that there were some nonperforming loan activity in the quarter.
It's really driven by Wanni, the our relationship that got placed on nonaccrual and that credit was struggling pretty coded and between a $3 million charge off and another million dollars in specific reserves that credits been clearly identified and.
Marked accordingly so.
Sorry for the deep dive there on credit as a thought it was productive never got going on.
I'm on slide 19, a fee income came in at $10 million and the second quarter and that's down from 13.4 million in the first quarter largely due to seasonality in that in a tax credit book and then also the second quarter includes the full implications of overall economic activity.
Cash management and service charges and well have all been negatively impacted either from levels of the market and well or deposits with earnings credits from PPP funding and then just overall lower volumes and within our business customers. Both in the card space as well as a service started space.
It's Watson warheads continue to be strong, but swaps are following up a our record first quarter for us the decline sequentially from the first and the second quarter and that's really reflective if you think about the overall volume in the loan book its a consistent a consistent theme and then in miscellaneous than the first quarter. There was a bold again.
Gain of out of about $700000.
Slide 20 on expenses, they dipped under $38 million in the second quarter.
Largely supported by reduced travel and client entertainment as well as seasonal payroll taxes that we paid in the first quarter.
And then the offsets the for the current quarter of moving forward were merit increases and we did do some premium pay for associates, who were on the on the customer facing side of the business, it's consistent with the industry trend there and then the in the first quarter the FDIC crowd.
That was exhausted and so we're.
Back to sort of full strength on the FDIC insurance premiums but.
Nonetheless, we continue to support employee families in the community were impacted and you know, we're still resulting in a 51% core efficiency. So that's a solid start to the year and we're happy to see some modest improvement.
In the expense run rate from the first for the second quarter. We continue to do the things that we've always done which has been prudently support our associates and you know operate efficiently and with high levels of of customer service you know with our business continuity in our current operating environment built on a run.
Mode strategy that serves four markets and international verticals.
I'll conclude my comments on slide 21, which is a snapshot of the capital trends.
Capital is strong and we increased the flexibility and optionality during the second quarter, we raised just over $60 million would appear to 5.75%.
10, no call five sub debt instrument and that's fully included in tier two capital a we did that opportunistically given market conditions and all the uncertainty it affords us additional flexibility that's a holding company and the bank level, which allows us to bolster bank cap.
At all and moderate dividend activity. There are currently that cash is sitting at the holding company and that's where we expect to maintain it for the foreseeable future.
It's probably worth noting there were no share repurchases, we halted that in March and our modest dividend policy during the current environments paying paying off while we're at 18 cents a share and we've been there for all three quarters of the year.
Combined with our earnings profile.
Total risk based capital expanded a 14.4% see Q1 is up to 9.91% and that's a 33 basis point improvement over the first quarter and then tangible common equity the tangible assets. When you exclude BPP loan balances is up 8.67 per cent compared to 8.4 to pursue.
At the end of first quarter. So yeah, we're operating in a position of strength, both from an earnings and balance sheet perspective, a including a 110 million dollar allowance for credit losses at the end of the first quarter.
Specifically, our pretax pre provision return on assets as nearly 2%.
$76 million year to date and affords us the ability to continue to be open for business, while bracing for the additional uncertainty that is ahead of us.
We continue to focus on fortifying the strength of the balance sheet and maintaining the earnings profile, which affords us the opportunity to position us to deliver long term value to shareholders. So we appreciate those of you who have joined today and we'll open the line for analyst question.
[noise] if he would like to ask a question. Please send nobody [laughter].
Pat.
Using your speakerphone. Please make sure your mute function is turned off to allow your signature each I equipment again press star one.
Question I'm apart from just a moment hello, everyone the opportunity to signal for questions.
And our first question comes from Michael Perito KBW. Please go ahead.
Hey, guys are good good afternoon, I hope you all do well thanks for taking my question.
You bet and I hope, you're well too.
Hi, Internet banking I wanted to start on credit side. So you obviously another sizably provision you guys provided a good amount color are you prepared remarks about it but I guess my question is just on the deferrals.
Based on the chart I forget what slide it but it would seem like a lot of those NIAID hurdles would probably come up you know in the next month or so plus or minus and I'm. Just curious I mean I'm sure as you guys got in your feet under you in the PPP program behind you've had some more time kind of look at these credits and how they have been cash one over the last month or so and what are your.
Expectations for kind of the deferral activity I mean, do you expect the majority of them to come back to full payment at some point in near future and have you noticed any pockets of areas, where other than hospitality, which I imagine is that the obvious one where you know additional deferral help might be needed going forward.
Yeah. Michael This is Bob you. Thanks to your question you can see on slide 12, I believe it is the full actively was certainly is heavily weighted towards the end of March and drops in April.
Most of those deferrals war for period of them and so April may or June so none of those now or return to.
The regularly scheduled contractual payments.
As I mentioned, well listen the whole unfold right now it's it's limited request the second round payment defaults and as you pointed out it really is probably pass until more hospitality sector.
I think we'll continue to see some adopt.
Especially if we spoiled smell locked down version two point, though for an extended period of time, but as we sit right law would seem limited activity bar most of the payments are returning a in July.
On commercial real estate global we saw some payments deferrals on March and April I think the collection of Red.
Continue to trend upward.
Thus far we've not really seen a separate round of request from modes owners and developers.
Peter.
Got it and then on this slide 12, it and the number of modifications right and you good art is.
Were there any barger.
Like average loan size isn't any particular month like yours, we think about the 383 modifications in April down to 99 in May. This would there are kind of a content fall and that they'll be mountains loan balances that were impacted by those girls that that we could assume or or was there some differentiation and kind of the size of loans and when deferrals came in.
So I would say that it's I think some of the larger commercial real estate developer owners.
Early options and made.
Ah kind of pre Emptive requests on March and April so larger commercial real estate loans, we probably saw early on in the process just to preserve liquidity impossible.
And then certainly audit more traditional small and I'd businesses throughout April and May, but I don't know that I could tell you from a latent perspective that larger loans were deferred later on the process in the earlier, but certainly commercial real estate I think was early on in the process.
Well.
A couple more questions from me one just kind of on the economic outlook in your local markets. What's left to do with kind of you know the assumptions, you're making from sito, but but more so I know you know mid quarter. There was some optimism Jan about some of your markets and there's been quite a few areas. The country now that kind of backtrack to better I'm just curious.
Maybe provide just kind of an updated view of your for kind of core markets and what you're seeing on the ground level from an economic standpoint at this point given any government restrictions on on economic activity.
Yeah sure. So I'd say that not have has got comments as well, but going around the horn.
There are certain industries, but obviously have greater impact.
Others relative to slow downs lockdown the that meet your.
Our recent survey of our clients distribution manufacturing.
Joe that performance continues to be good but as it relates to the economies in Saint Louis and Kansas City, which kinda mirror each other we've seen some upticks recently like many communities in the country you indications.
Authorizations and trended up slightly.
That's really there hasn't been a reversal in terms of of economic activity currently and I would say that Oh, well first see it obviously.
And restaurants, and hospitality things of that nature.
No Phoenix My Cat.
Got it.
Pretty hard and.
I would tell you in general.
Operating businesses and real estate developers and things of that nature and forged ahead.
And then I'm wondering in Mexico took a very cautious conservative people can get go.
And probably to the detriment of its hospitality business.
Because it really has never folio, and frankly, and but our exposure there is de minimis and in those categories and so I think they'll be slow and cautious to open fully.
But I think in general those outside of those industries that I've mentioned hospitality in restaurants and things of that nature.
No they haven't had.
Lay off they continue to operate a number that we see them currently on when we do get numbers. All these companies are pretty decent.
[noise] extremely helping them I can expand on that it's a tough yeah go ahead.
Yeah, I I'd say, there's no what Jim said certainly its high industry, depending upon the business owner, but I think there's more optimism pessimism about the general comment that business owners.
Yeah, just based upon I made the comment that.
Two of our three quarters had production that looked a lot like what we're used to.
And if they did this owners are getting a little more comfortable ceiling on or another environment, you know making decisions completing transactions.
So things like refinancing commercial real estate, continuing with construction projects.
Looking forward with.
Yeah, we caps and buyouts to take advantage at the low rate environment, but those are all things that you know we've been doing in the last quarter I'm not getting old.
The feeling that businesses are willing to that short term.
And then opportunities that are opportunistic said the slower to pull the trigger out longer term capital spending I think that's where a pipeline would say, let's say, they're still out there, but that's probably extended.
[music].
Yes.
Okay.
Helpful. Thank you and then just lastly, Kenyan to kind of summarize on the margin I guess, you know near term honestly, but it seems like a lot of liquidity build in a quarter or it is going to stick around for bad so that will kind of keep margin overall depressed relative to where it wasn't the first quarter in the fourth quarter, but but it sounds like most of the compress.
And that that you expect it to experience, it's kind of walk through and you're hoping to be able to keep it more stable than bend to corn and dropping experience in the second quarter or is that fair summary.
Yeah, I would say that's accurate I think that we expect that even even though there's there's some loans that are going to reprice off over the longer and back then maybe one month LIBOR that there's some opportunities on the deposit side, but you know time deposits brokered CD that'll that'll provide an offset there. So I think fundamentally you know your points well take it off.
What is liquidity look like where do you go with it and even if you deployed in this environment, you're probably going to happen margin dilution, but when you're looking at.
You know the sort of 12 31, or you know a year ago basin and what that looks like I think we feel like it. It has bottomed or is bottoming out sort of largely you know within a few basis points. There now that's a LIBOR behavior sort of notwithstanding right. So if we get further ammunition of a one month LIBOR.
More which seems hard to from here you know that what sort of video only you only point that could cause with a little bit of additional pain, but we're pretty close to zero at this point.
Got it helpful. Just one last quick one if I could speak and just.
On the top of margins no plants from you guys right on in terms of the P.T. lawns and selling <unk> or you know kind of outsourcing the servicing I have some of your peers have done that it at this point. Your your plan just to hold them and service on your cellphone card at the model.
Yeah. Our view is that we did these four largely our customers and we don't want to outsource that experience to the customers and I think we invested the time on the front end. So no. Initially just end to the manpower to get through round, one and then on the system side to get a more sits.
The matic approach for both a round two processing and then ultimately the forgiveness piece and so for us to give a you know a meaningful portion of the economics that we have coming to us and also outsource that customer experience, which we think help differentiate us in each of our market. We don't feel like that's the right business strategy.
Makes sense just wanted to confirm thank you guys appreciate it.
Thanks, Mike.
And if you find that your question has been answered you may remember yourself from the Q by pressing Star Channel. Our next question is from Jeff Rulis with D.A. Davidson. Please go ahead.
That's the money.
Well I guess.
Question, maybe a follow ups or Doug on that on that slide 12 on the modifications I think you mentioned deferrals at 12.8% Alones.
Suppose you listed modifications by month, certainly maybe that doesn't reflect that.
Figure as Weve.
Got to discussions of deferral extensions or not is the 12.8 P is at the peak or have we come back from.
Figure that was somewhat higher as has deferral have expired and maybe come in.
Yeah, Jeff I'd say, that's you know it remains to be seen what really happens in some of the broader economic conditions. It may impact the portfolio, but the view right now as I think that's probably close to the peak and we'll see a lot of these loans.
Turning now to their regularly scheduled contractual payments and then those portfolios hospitality hotel restaurants other businesses more severely impacted I think it's where we'll be focusing our attention on such a ground barrels but I.
I think at this point in town the broader portfolio is Jim and Scott have commented on it really.
Weathered the storm they maintain good liquidity they've been aided by the stimulus.
And successfully you know tat filmed a triple Pete.
And now or in the position that they can we turned the payments. So I think we are kind of hit the high watermark and.
Barring any significant changes I think we'll see those numbers start to come down though.
Okay. So if I follow you you know if we maybe this oversimplifies the but if you pick up about the percent of deferrals in the hospitality sector. We could I mean, a good proxy would be whatever percent of deferrals that age say those largely see extensions, but the remainder.
Not that's a pretty good said.
Section and.
How do you think deferrals will play out.
All things being equal.
I think that's a fair value.
Okay, Great and then just isn't Keene I would just just add to that very quickly. If it's what we're seeing and 30 day deferrals for example, where we kept the deferral short does any indication. We've had very few 30 day deferrals that have come back and the for one or more time that doesn't mean that they don't exist that we're talking.
Dozens or a dozen not hundreds of though so I think that's a reflection that people and we tried to work with borrowers for the length and time of deferral that they needed and even when we kept in short at 38, the multiple classes and very limited.
So that the beacon set too much but it begs a question so as those come in has that take more driven by.
Why you in terms of your requiring more information or sat front, we're a little more accommodating and then as you asked for more information or is that more customer Brigham that hey, we took us out of abundance of caution and as we see it now where we're going to pull back from extended Berger.
So Jeff maybe that's been help you know is we provided pain relief through modifications to borrowers we adjusted the risk rating on those credits.
To what we call our monitor rating, which is just one step above our lowest pass rate and.
So with that you know our communication monitoring a financial information requirements et cetera ramp up.
And so you learn constant communication that goes far worse, so whether its stimulate a biopsy whereby the bar or it's just part of our normal.
Monitoring and surveillance of the portfolio when credits or.
Downgraded to a monitor rating.
Okay. Yeah, I was just trying to get a sense for.
It's customer behavior, or I guess, what you're saying, it's an active conversation and it's it's come for both sides. Yeah. Jack that we're not just in the were not encouraging just borrowers to request paying deferrals. So we're not encouraging that right. We're encouraging borrowers to do the right thing in terms of preserving their liquidity.
I'd and reducing expenses and overhead and what they can do we're willing to do our part in terms of supporting them to bridge the timing gap.
But it does require certainly more participation from their perspective.
And you know we're looking at interest rates were looking at interest rate floors.
Looking at more collateral increasing guarantees.
Debt service reserved all those types of things are part of our conversations as we explore any additional request for payment deferrals.
Got you.
Real quick on on the expense shabby did you guys see a comp expense deferral benefit in the quarter and if so what was that.
Hmm.
<unk> not we didn't we didn't have any workforce reduction we actually if anything had some yeah. We had her normal merits run for there and we had our.
Premium pay running for so if anything I think the expiration of premium pay for the third quarter should provide a little bit of room.
Moving forward on that line items.
I should clarify I guess related to PPP, yet some some banks if I've kind of booked a deferral benefit I'm talking about but I guess you guys getting in the quarter.
Yeah, I'm I'm not sure I'm. Following the question on on the cost piece of that Jeff a week in terms of didn't loan originated.
Yeah, and Oh, Oh, yeah, yeah.
I understand deferred Fas 91 gold Fas 91, Yeah. We are we really just a for the income there weren't a material amount of expenses that were directly associated with that that ended up getting tougher and so you know what you're seeing a line item Yep Yep, Okay fair enough and then last one key in just a.
You mentioned I think he said Moody's baselines about 80% of being put on the Cecil methodology. Just wanted to clarify you mentioned a June thirtyth view, but as of that point I think the latest baseline was actually a June night.
Kind of baseline is that correct I mean is in that's it even a bit dated.
As a 630.
Yeah, and I think that's part of the reason that we layer in you know what we're learning and outside the war also layering in you know the modest recession. So the net of those to drive.
You know a little bit worse or or more conservative result, and so that that's the way we've been a really dealing with Adam I think two you know our.
Our our posture is that no we're gonna reserve to what the current model of and then just not to give too much color after quarter end, but I think there was a bit until why update that's available and you know that resulted in produce.
Materially differ in a allowance for credit losses. So yeah, we feel like from overall materiality perspective, where we're right there and we're we're fully reserved so if these assumptions play out you know we should expect to the out a more normalized provision moving forward, but also to the extent that they get worse, where we're in striking difference and with our.
Are you know pretty pretty earnings to be able to to put it away and move forward.
Thanks, I'll sit there.
Thanks, John.
Your next question comes from Andrew Liesch Piper Sandler. Please go ahead.
Hi, good morning, guys.
It could be tough question at this point just.
Credits year, the slipping at or below and that had been modify it sounds like there's been some good progress.
Got it folds Matt.
It would be or.
<unk> clients that requesting an extension of that AFFO. If you look at those customers. If you look at some of the higher with the school that affected loan categories and then the collateral behind them to be very well underwritten I'm. Just curious how do you think it's up a loss content bucket.
Yeah, I think Andrew I'm, just sort of given given everything.
I think it's our view that the forecast we're using reflect.
Overall, you know the environment. So both as a positive from the mid again in a you know in a in the P.P.P. program as well as the negative that you know deferrals are being encouraged that that's increasing loss content. So.
Our our current view is is that we're building a reserve based on the forecasted at some point in time later this year early next year, we'll start to be able to to see the indicators to bring US together. So you know without without perfect clarity you know if there's an individual alone as Doug noted that you know with her work.
Through it looks like it's not going to make it that's obviously going through the downgrade processing it specifically reserved but from an overall perspective, you know, it's really baked into the forecast and that's one of the reason why.
We're not adjusting downward the the forecast to you know to for any potential upside there.
Okay.
That's helpful.
And just on the PDP loans 70, 808 million I mean, just what are you thinking on but what are the quite your client thing I'd like to stuff the timing of like the forgiveness and paying down how long you expect them building on the balance sheet.
[noise] Kantor with if I told Scott and all you guys got.
I would if you're saying you know it's a it's a prediction right I think what I would say as I feel better than I did.
First round CPP with to change and the terms of you know extending out of time, there was not as have to spend the money.
Shifting to or would they say, they're not that it's the apply the salaries, but I think the conversations that we had with business or if they tell me their confidence and then getting more forgiving elevated problem.
It was last quarter.
Timing wise I think that's a little bit of all of a crapshoot, but.
For the first fit out on it.
Now with that said I think we were expecting to start seeing material forgiveness at this point last quarter and we're not seeing it. So I think disgust point I think theres more optimism that left for the balance is going to hang around longer term, but I think if we were thinking most of that was gonna be resolved and we know what's still gonna be here by the end of the year <unk> email.
To push that out one more quarter because again, we're not we're not.
Deep into forgiveness at this point in time.
Okay.
Missed a clarification on the tax credit activity in the quarter somebody that but the timing that friend. So that's why I'm kind of rebound back to historical levels or could it be will do better than that if there was that some of these projects are finished up or is it goes into credit environment, that's going to be depressed long item going forward.
Yeah, I think all else being equal Andrew we expected the tax credit business to improve from 2019 to 2000 and pointing certainly not with a a book that was growing this second quarter here was a timing adjusted issue.
I would say the only real headwind I see too.
You know the potential for 20 for third quarter fourth quarter being more robust then you know for them. Then 2019 is obviously a little bit of the uncertainty of just timing of project and clothing, I think certainly everything kind of gotten delayed a little bit the that we're not immune to that and in that part of that business as far as I'm aware and then.
And with LIBOR being as low as it is there are some credits that are held at fair value that that there could be a modest headwind decide to the revenue stream, but I think the sentiment that we expect third quarter in fourth quarter will look more like the prior years is this reality.
Okay.
Great that covers all my questions then too much.
Thanks, Andrew.
Our next question comes from Brian Martin with Janney Montgomery. Please go ahead.
Hey, guys.
Hey, Brian.
Maybe one district Douglas to pick up just on that Ah Onez deferrals in kind of why they shake out Doug I mean, I guess it sounds as though in summary, maybe getting back to a very low single digit level by October is seems realistic, but the trends you're seeing today and then if you're kind of 12% depending on what.
What loan balance are using getting back to low single digits is it conceivable you know if trends continue as you get later this year.
Yeah, I think in terms of Deparle activity, Brian we will expect that to continue to trend downward. The activity has slowed would take it up more cautious and more conservative view, where the first round of 90 day deferral activity was more relationship oriented and just to help customers preserve their liquidity.
The second round in others. It certainly a much deeper dive and requiring more participation. So I do think that activity will be slowly and if trends continue I think realistic to think that that could be back down mid single digit.
Yeah, Okay, perfect that's helpful and just the.
Via the any I guess you usually your reserve is that is very strong I guess, just when you look at it by buckets and the Threed bigger exposure to easy I'll give a retailer hospitality give any sense. It can you give us any sense of where the reserve levels for those buckets are at today I guess do you have.
And faster can you tried any color on that.
So Brian I don't have the reserve levels by bucket for you King I don't know from this year. So perspective, if you could comment there.
Yeah, I would just say I think you know when you when you think about it or were considering whether or not to disclose those into Q, which we expect we filed later this week early next week for purposes of the call we haven't disclosed that but it certainly will take your your query under advisement as we determine what we're going to put in the Q as we finalize that Brian.
Okay I appreciate taking things and then just that the P. P for a minute to it sounds as though you know what with the average loan size that forgiveness you guys had expected it's got common.
Forgiveness is.
Pretty high level based on that extension you have the time period and the fact that you guys have a low.
You know low average balance and then maybe 80% or above that is kind of a fair assessment, yeah with what we know today I know, there's still some uncertainty all that but that seems reasonable as we look forward.
Yeah, nothing out yep.
Yes go ahead.
Yeah, I would you say I don't I don't think read any information that would indicate that it any different than what we thought last quarter, which was really just a high level prediction. So you call it 75 or 8% get forgive him.
Okay. That's cool all right. Thanks, Kevin just the last two system that can you already talked about the state the tax credit, but just kind of wealth and Andy you have a service charge income just kind of the outlook as you sit today kind of what activity and customers account and then the army and the deposit side. The growth you had your big picture.
View on how we should think about those going forward. If there is there a rebound at low for a little bit longer and then look into next year seem a little bit of a pick up there.
Well for wealth.
Typically I mean, obviously, that's tied to the overall value of the equity and fixed income market. So to the extent that those continue to be you know at current levels and then there's not a lot of growth or just sort of up and downs in between I wouldn't expect material growth in the well line item from.
Deposit service charge perspective, I think activity is a little bit lower you know, but I think in the commercial book the president of the deposit largely generator for PPP haven't really caused you know extra earnings credit that maybe weren't there before so.
To the extent to that liquidity gets deployed and.
And we get a maybe a little bit more normalization of business activity I think we could expect us to go back to similar you know Q1 Q1 levels I think it is the sense that we have that both consumers and.
Businesses are going to carry extra liquidity moving forward. So it's not like we've lost customers. In fact, I think we've done a good job of booking new customers, but you know, we're just not seeing those hard charges necessarily sick and then.
And on the on the card side.
As you know that that that's largely a core business card program, you know business spending on travel and entertainment is down so to the extent that that has to pick up moving forward from an activity perspective that'll drive revenue, but what you're also not seeing there at some of those Kerry.
Volume.
Discounts or volume pricing on the expense side. So you know you're you're down in card and and cash management products, but you're also seeing a little bit of abatement and through the expense line of a couple hundred thousand dollars per quarter for each of you know just in the run rate. So just worth noting that even when you see some of those rebound you're going to get a process.
<unk> expense to go along with them.
Yeah got you, Okay, and then just the last so maybe I didn't hear your right came that you were talking about expenses did you make your in your prepared remarks as a comment that the expenses were down from one quarter to cure you thought that they could be a bit lower as you enter between Q from Twoq I thought was the latter, but if I make sure I heard your yeah.
Yeah, so they're down from obviously from wants you to Twoq here I mean, I think a lot of where we expect the trend to go will depend on.
How much you know customer entertainment and travel is going to occur certainly I think for the third quarter largely traveled out not you know about a penny a quarter that we're we're saving now and you know there's some back to you know face to face customer.
Interactions, where it's necessary and make sense, but I don't expect that customer entertainment, where we really drive a lot of the major expenses with big events returns in a big way. So I think those will be helpful moving forward and and and they'll continue to persist and then I think will you know some of the premium pay or that we had in the current quarter or deposit.
So optimistically.
We had normal investment on the business overall and I would hope that you know depending on business activity that that we see though does offset particularly to the extent that we're not able to to use it to generate revenue right. So yeah, I think there in a correlation there will always willing to spend.
On the activities that drive revenue there. So our goal would be to the extent that revenue was challenge for the next couple of quarters to be able to keep expenses tighter.
Got you Okay I appreciate all the color thanks for taking my questions guys.
Of course, thanks Ron.
And once again, if you would like to ask a question. Please press star one.
Your telephone keypad well take our next question from David Law with Raymond James. Please go ahead.
Thank you Hello, everyone.
They're doing David.
Good good hope you guys are doing well.
Case, where deferrals get late half the 180 days. That's good that's your illustrate or any industries that could be eligible for deferrals greater than 180 days.
David its dog I would tell you this certainly.
We're taking a view internally that 180 days, just kind of the extent of our flexibility without driven some accounting treatment, but certainly our regulators have encouraged us to provide flexibility and to do that rights gains to assist our borrowers while at the same time, you know preserving and protecting our capital.
So you know and that means we have to provide a longer term deferral. The health of good quality borrower through this period of time.
We may decide to do that decision to do that but it wouldn't be without us taken appropriate options relative to risk ratings and accounting treatments.
On that particular assets.
Okay to get it sounds it sounds like maybe if you could you go past on an 80 days it would cause you to move it to on non accrual or a another you know stance that could have a different.
They said we're certainly.
Certainly that extended concession David could trigger that of course, but at the same time in the event that we receive something in exchange for that longer term.
Concession, we can certainly than a boy I'd nonperforming TDR, so to the extent to borrow wants to provide additional collateral provide substantial reserves.
That is that is a equitable exchange go back concession certainly we could provide something longer than 180 days without triggering.
Oh.
You know nonperforming status.
And those are the types of discussions we continue to work towards in some of them much more severely impacted sectors.
Got it and it have you engaged regulators and those discussions.
We have so we've had discussions with regulators.
You know were due up for our annual sapiens Alis exam.
So we'll continue those types of conversation, but everything that we then.
Provided so far from our regulators is you know and encouragement to do the right things to support our borrowers during this time.
Got it appreciate the color. Thanks.
[noise] and once again, if you like I asked the question. Please signal by pressing star one and our next question from Eric <unk> Private Investor. Please go ahead.
Hi, good morning, or good afternoon detect a couple of things on the hospitality portfolio.
Can you tell me on the the lodging end of it how much of the portfolio was actually younger construction versus just you know and operating mortgage and then is there any kind of concentration in the sort of afford geography is it your run without portfolio.
Yeah orchids instead battlefield, then I'll do my best answer that I would tell you get some construction portion of the hospitality portfolio.
It out specific numbers I'll tell you is below 10% of the overall portfolio.
So very little under construction phase I know geographically, where it's based ever be largely centered and our Phoenix markets.
So I'm in a sort of say Albuquerque, new Mexico market, although more so here in Saint Louis It's really the limited hospitality hotel exposure in the Kansas City market.
And again.
We tend not to go outside of our geographic footprint for hospitality lending.
And I'm not portfolio I think earlier on the call you you mentioned something about Oh, I thought I heard you say something about a third party analysis on.
On the some of your loans and you have you done any kind of revpar breakeven calculation on that portfolio to see where susceptibility maybe versus where you originally made the alone.
I was aware it where it may not swapping break even for the the borrower can make money on it but another thing.
Hey, you stated bank service alone.
Parents.
We are the independent third party review that we have conducted in the second quarter.
Engaged was on the enterprise values lending portfolio.
On the hospitality side I would give us the again, though that the hotel exposure is about $220 million.
It's a handful of larger relationships that we have.
I don't have for you precisely what the revpar occupancy levels need to be but I would tell you. This the trends that we were seeing.
Building up through the end of June and on those.
Occupancy levels, reaching back up into the upper 40% range, we were approaching the point, where those hotels would be achieving near breakeven cash flow.
<unk>, providing returns to the owners, but close to covering debt service.
Okay that hey, Doug Doug I would add I'd, just add to that fear that you know.
He is our some of our larger and more deeply capitalize borrowers as well so theres alternative supposed to that payment that comes from guarantor liquidity gearing towards cash flow.
The balance sheet. So you know we feel good about.
That exposure you know, it's relatively low compared to the 12 total portfolio and.
Those are still there sort of our strongest partners.
Yes.
If that thanks for answering my question. Thank you.
Thank you are.
And there appear to be no further questions at this time.
[noise] great country now thank you all for joining US. This morning, we look forward to speaking with you all again in the third quarter if not sooner.
Thank you for your interest in our company.
This concludes today's call. Thank you for your participation you may now disconnect.
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