Q2 2020 SB Financial Group Inc Earnings Call
SB financial group's second quarter, 2020 conference call and webcast I would like to inform you that this conference call is being recorded and that all participants are in listen only mode. We will begin with remarks by management and then open the conference up to the investment community for questions and answers.
First I will now I'll turn the conference over to Sarah Amicus with SB financial. Please go ahead.
Good morning, everyone I would like to remind you that this conference call is being broadcast live over the Internet and will be archived and available on our website at <unk>, our dot Youre State Bank Dot com.
Joining me today are Mark Klein, Chairman, President and CEO.
Tony Cosentino Chief Financial Officer.
Ernesto Guyton, She's technology innovation, and operations officer, and Jon Gathman Senior lending officer.
This call may contain forward looking statements regarding SB financial performance anticipated plant operational result, an objective.
Forward looking statements are based on managements expectations and are subject to a number of risks and uncertainties.
That could actual.
[music].
That could cause actual results to differ materially from those expressed or implied on our call today.
We have identified a number of different factors within the forward looking statement at the end of our earnings release, which you are encouraged to review.
SB financial undertakes no obligation to update any forward looking statements, except as required by law. After the date of this call.
In addition to the financial results presented in accordance with gap.
This call.
Well also contain non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP measures is included in our earnings release.
Well now turn the call over to Mr. Cline.
Thank you, Sir and good morning, everyone Greater heavy wall, where those are welcome to our second quarter 120 conference call and webcast. Once again, our comments today as with prior quarters supplement our earnings release, we filed yesterday.
It certainly has all been I challenge this past quarter for company Weve navigated a this pandemic.
Even as we were able to close.
Over $224 million in residential mortgage loans.
Processing 83 million in P.P.P. alone that help save nearly 9000 local jobs.
While successfully closing our first acquisition over 12 years.
We're all measures a great quarter.
During that all of our customers could have their financial needs met him a safe and efficient manner required the dedication of.
Each of our staff members that I must say they've responded quite well.
Highlights for this quarter, including $1.1 million pretax mortgage servicing rights in Permian and 1.2 million and merger related costs.
Include.
Net income of 3.7 million up 1.1 million worth 39% increase over the prior year quarter.
And when adjusted for non-GAAP items net income was 5.5 million.
2.3 million or 73%.
Adjusted return on average assets was robust hundred 88 basis points off from a prior year quarter just 109.
Net interest income of 8.9 million was flat to the prior years or 5% reduction in interest income was offset.
By the 26% reduction in interest expense.
Loan balances for the quarter grew 71 million improving our year over year growth to over 87 million or just over 10%.
Included in that were PPP balances of 83 million and eating loan balances.
As of 16 million.
Excluding these items year over year loan balances were down 12 million.
Deposits from the prior year increased 151 million or 18% year over year again.
In balances of 52 million and retention of P.P.P. funding and business do days.
Have increased growth beyond traditional core levels.
Expenses were up 2.6 million due to higher mortgage commissions, and the 1.2 million and you'd merger costs I just mentioned.
Mortgage origination volume increase this quarter as I mentioned, the 224 million up over 125 million or 127% year over year.
Asset quality metrics were elevated from the prior year, although our level of 64 basis points of nonperforming assets remain strong.
We set aside 1.3 million in provision in the quarter of which approximately 1 million was related to cobot 19 reserves.
We continue to assist our clients as needed with payment deferrals in the quarter, although over the 510 clients that had requested forbearance and April 38% made a full contractual principal and interest payment in July.
We remain committed to our five key initiatives, we've communicated over a number of quarters growing and diversifying that revenue stream.
Organic growth for scale, a deeper product set and each household for scope.
Operational excellence and everything we do for our clients and lastly.
Asset quality.
Revenue diversity.
This quarter mortgage volume on loan sale gains were up from the prior year, 127% on volume and 384% on loan sale gains.
Noninterest income increased to 8.6 million from the prior year quarter of 3.7 million. Despite a mortgage servicing impairment of 1.1 million.
Adjusting for that impact noninterest income was up from the prior year of 5.3 million 421%.
Non interest income to total revenue increased to 49%.
And would have improved 52% when accounting for the impairment.
Our current mortgage pipeline continues to be near capacity.
Over 400 loans in process for another 93 million.
We are on pace to deliver our biggest production year ever.
Total volume now likely to exceed 600 million Mark.
Pick title as we reported in prior quarters joined our company March of my team and the results for this quarter were reflective of that increased mortgage volume.
Abby waters and her team achieved a new record for transactions and revenue in June and for the quarter delivered revenue of 609000.
Her to just 309000 for the prior quarter.
We continue to introduce peak to our state bank lenders and client.
As we expand their presence.
Outside of the Columbus Metropolitan market.
RSP a seven day production came in at less than 400000 for the quarter as our efforts were clearly focused on new PPP initiatives.
We processed over 607 day PPP loans for 83 million a balances to small business owners.
All of our markets with 70% of our commitments.
Through existing clients.
Our focus and commitment.
What are the small business owner and the detail on our production reflects that commitment.
97% of loans were below 350000.
And only 15 of these loans exceeded the 1 million dollar Mark.
The average balance on our loans was 124000 with the median level just 42000.
Our intention now is to retain these loans with existing clients certainly pending loan forgiveness.
And to expand our relationship with each of our new 216 commercial clients.
Our team is ready to serve small businesses again with the expected next phase.
Of the PPP lending program.
We have had an LP oh and the in Annapolis market for just over a year now and this quarter showed the potential that market with a focused and motivated leader and staff to serve a new market with residential and consumer lending products. This quarter, we close 16 million environment and have originated 23 million.
Through the first six months.
We are on pace to deliver our short term goal now of generating $50 million in residential loan volume annually.
Wealth management assets under our care rebounded in the quarter with the overall market improvement as our total assets under management have nearly recovered to the prior year end level of 500 million for now at $495 million at quarter end.
This pandemic has added unique challenges and this business line, but we certainly look forward to engaging all of our new PPP clients with potential well solutions here in the coming months.
Second key initiative.
Our scale.
Loan asset levels were elevated in the quarter due to the PPP efforts I, just mentioned as well as our clients deposit level surging.
As they focused on personal and business liquidity with discretionary spending levels declining.
Most importantly regarding scale was our successful closing of the union transaction in the quarter.
Well, we have been focused on organic growth through improved financial performance nearly the entire last decade, the opportunity to grow our company via M&A. After a few near misses.
Certainly refreshing.
Our comp our conversion team is very engaged as we integrated Eaton acquisition financial in June.
With operational integration now scheduled for later this year the last quarter.
We believe were well positioned from a capital and operational standpoint to pursue a.
New and likely larger transaction here in the near future.
We feel our business model and growth potential is an attractive selling point to any new potential partner.
Loan growth from the prior year quarter was inflated by PPP and the Eaton expansion as we discussed.
But we are starting to see some improvement in our loan pipelines as business activity is improving in our markets.
As such we remain optimistic of our ability to grow loan balances organically once again in the second half of this year.
And was predominantly an agricultural lending lender.
Which will supplement our current AG team with not only more balances, but with another season egg lender Adrian Fred.
Actually we are also focused on introducing our full slate of lending and deposit products to these new Eden clients as well.
Our deposit base expanded to 991 million up 151 million or 18% included in that growth is 52 million at need and deposits and our estimate that 75% of the PPP funding remains in our clients operating accounts.
This program and pandemic environment, we've encountered this past quarter.
We've increased the need for us to provide more options by which our clients kind of access our services and their financial assets.
Everywhere anytime.
So this and we have become and are becoming more flexible and how we engage with our clients.
The electronic aspect of client servicing engagement and delivery continues to accelerate and we are preparing to participate fully.
Third as our strategy for deeper relationships more scope more service the per household.
This quarter.
Slide client, calling continued to be re channels.
Your phone calls and digital communications.
Our commitment this quarter was to proactively contact each of our commercial clients and assure them that we were prepared.
To provide for their liquidity requirements when called upon.
This proactive calling effort to 100% of our clients was directly responsible for our successful participation in the PPP lending program and prepared us for the likely next phase of small business lending programs.
Notably.
With our clients liquidity needs at the forefront.
Over 94 million and working capital lines, or 63% of 150 million and revolving lines.
Remains available for our clients commercial operations.
Finally, our dynamic referral process continues to be a focus for our company.
This quarter, we added over $31 million in new related business from 213 close referrals.
Quite an accomplishment that we feel given the distraction that headwinds in the market from this pandemic.
Operational excellence, our fourth thing.
We have traditionally had a nearly six to one split of residential mortgage originations between external originations and internal refinances.
However, 2020 has seen a fairly dramatic shift and volume as this year, we have done one third of our originations from internal refinances.
One third from external refinances and a third.
And the purchase and construction business.
Well refinancing internal mortgages is necessary.
I'm going to longer term relationship with local realtors remains a critical ingredient.
The business line and to the purchase market.
This quarter the level of internal refinances elevated our amortization and caused significant impairment to our mortgage servicing rights.
We did see a gradual shift to purchase business late in the quarter and our pipeline is much more weighted to purchase activity away from refinance today.
Capacity optimization continues to be a key driver in both of our processing centers and we intend to seek opportunities to improve not only.
Front end, but backend capacity in the second half of 2020.
We have increased our servicing portfolio now to over 8400 loans with principal balances of 1.26 billion.
I'll sold were up 9%.
And balances up 13% over the prior year quarter.
Expense levels for the quarter were up from the prior year, but when adjusted for the additional 125 million in mortgage volume Commission expense and the Eden merger cost I, just mentioned growth drops from 28% to just 6%.
We continue to limit spending in our offices and among our staff.
The cost containment measures, we put in place in the first quarter to shore up declining net interest margin included were hiring freeze limited travel expense and reduced employee gatherings to name a few.
Fifth and final initiative as asset quality.
Plant forbearance request were prevalent at the beginning of the quarter and at its peak, we had 510 loans with 195 million on payment deferral.
As a majority of our forbearance approvals were for three months, we are evaluating the request of a smaller number of clients currently requesting extensions for a second.
Three month period.
However, as I stated earlier.
Earlier.
We have had a number of clients returning to full payment status here in July specifically 86 of 200 commercial loans have returned to contractual.
Terms.
Or 43% 31 of 62 consumer loans or 50%.
And 77 of our 248 soul of mortgage loans or 31% have all returned to contractual payment terms.
We had provision expense for the quarter of 1.3 million and now for the year 1.9 million. Our loan loss reserve is now above 10 million and the reserve ratio was up nine basis points from prior year to 1.1%.
If we adjust for the PPP balances this reserve would increase to 1.22%.
Our coverage of nonperforming loans now stands at 136% and is still above the midpoint of our peer group.
We remain optimistic that our past conservative loan underwriting that has led to median peer level loan growth. The last few years will pay dividends as just pandemic dissipates.
That said, we do anticipate some stress on our loan portfolio in the second half the year as liquidity and business activity levels tighten a bit.
In the quarter, we set aside a million in reserve for covert 19 related credit losses, and now for the year 1.2 million.
We expect to identify additional provision expense in the coming quarters, but we also expect to offset.
This with fees from the PPP loans I mentioned earlier.
And now our CFO, Tony Cosentino will provide.
More details on our quarterly performance Tony.
Thanks, Mark and good morning, everyone.
For the quarter.
We had GAAP net income of 3.7 million or 47 cents per diluted earnings per share.
As noted by Mark our earnings were impacted by a 1.1 million impairment on our mortgage servicing rights.
And 1.2 million and Eden merger costs absent those items net income would have been 5.5 million.
Up 2.3 million, which is 73% increase.
Highlights for the quarter include.
Total operating revenue up 39.6% from the prior year and up 48.3% when we adjust for the elements are impairment.
Operating expense of 28% from the prior year, but up 14.4, when we adjust for the merger costs.
Loan sales delivered gains of 8.2 million for mortgage small business and agricultural.
Up 6.3 million from the prior year.
And margin revenue as we indicated was flat.
As we break down the second quarter income statement start with our margin.
And interest income was flat from the prior year, but up 3.8% to the linked quarter, our average loan yield for the quarter of 4.46% decreased by 64 basis points in the prior year.
Overall, earning asset yield was down 93 basis points to the prior year.
Clearly the PPP loans depressed or loan yield overall in the higher levels of cash balances were not as expected.
As our clients PPP fundings are utilized in the coming quarters cash levels will decrease and we're starting to see some improvement in our loan pipelines.
On the funding side as expected, we reduced the cost of our interest bearing liabilities from the prior year.
For the quarter the rate on our interest bearing liabilities was <unk>, 0.89% down from the prior year by 39 basis points and down from the linked quarter by 23 basis points.
Net interest margin for the quarter at 3.32% was down 56 basis points for the prior year.
As the impact of PPP excess cash in eating we're headwinds to our margin.
Total interest expense costs are down by 26% from the prior year and down 18% from the linked quarter.
We continue to look for opportunities to improve margin in the coming quarters with an expanding loan pipeline.
Further declines in funding costs and higher loan origination fees.
Total noninterest income of 8.6 million was up 4.9 million or 133% from the prior year.
Reflecting the higher mortgage origination volume.
We did have a 1.1 million servicing rights impairment in the quarter.
And when we adjust for that impairment noninterest income would have been up 5.3 million or 121%.
In the SP a arena, our originations were down from the prior year with volume of point 1 million compared to 4.1 million in the prior year quarter.
Our title agency had a very strong quarter.
Closing a record number of transactions in delivering revenue a point 6 million, which was double the revenue in the second quarter of 2019.
Second quarter mortgage projections production and yields Ics clip eclipsed all records for a company.
We anticipate that mortgage volume in the third quarter and the second half of 2020 to remain strong.
The shift to refinance volume as Mark indicated continued in the second quarter purchase volume did however pick up late in the quarter and our current pipeline has a higher share of purchase volume.
Total gains came in at.
8.1 million, which was 4.0% on our sold volume of 205 million.
Our servicing portfolio of 1.26 billion provided revenues for the quarter of 783000 is on pace to deliver 3.2 million in total revenue in 2020.
Not surprisingly the market value of our mortgage servicing rights declined again, this past quarter as our calculated fair value of 65 basis points was down 33, and nine basis points from the prior year and linked quarters respectively.
And did result, as we said in the 1.1 million impairment.
At June 32020, our mortgage servicing rights were 8.2 million.
Which is down 20% from the second quarter of 2019 in down 9% from the linked quarter.
Our total impairment on the balance sheet.
Now remaining is 4.6 million.
Total operating expenses this quarter were 11.7 million, which is up 2.6 million or 28% from the prior year and up 24% compared to the linked quarter.
The higher level of mortgage volume drove compensation higher and as mentioned earlier, we had 1.2 million in merger costs for Eaton.
For the year operating expenses up 3.3 million or 19%.
However, if we normalize for a similar mortgage volume.
The peak title acquisition and merger cost the year to date growth is 1.3 million or 7.6%.
And if we adjust our year to date operating leverage for them illness, our impairment in the merger costs operating leverage goes from 1.0 on a GAAP basis to 2.1 on an adjusted basis.
Now as we turn to the balance sheet loan Outstandings at June 32020 stood at 901.5 million, which was 75% of the total assets to the company.
We had loan growth of 87 million.
An asset growth of 174 million from the prior year and were up 71 million and 115 million respectively from the linked quarter.
TPP loans of 83 million, even loans of 16 million have inflated our year over year growth levels.
Adjusting for these two factors loan balances declined from the prior year by 12.2 million as our loan pipelines contracted due to the pandemic.
Deposit levels are up 151 million or 18% from the prior year as clients are maintaining higher levels of liquidity.
In addition, a large percentage of our dispersed PPP loans have been retained in our clients operating accounts.
And even acquisition added 52.3 million in deposits in the quarter.
Looking at our capital position, we finished the quarter to 137.9 million in equity, which is up 3.9 million or 2.9% from June 32019, and our equity to asset ratio stands at 11.5%.
Or 12.3% when we exclude the PPP balances.
On a per share basis tangible book is up 36 cents per share from the second quarter of 2019.
We've been able to buyback a number of shares below book value. This year and again, we recently announced a new buyback authorization of 500000 shares.
Regarding asset quality total nonperforming assets of 7.7 million or 64 basis points are up 3.3 million from the prior year and up 1 million to the linked quarter.
Including our numbers are point 8 million in accrued restructured good credits these restructured loans to elevate our nonperforming level by seven basis points.
And absent these accrued restructured credits our total nonperforming asset ratio would be reduced to 57 basis points.
We continue to monitor the at risk segments of our loan portfolio.
And thus far those clients have remained at day since March 31 of this year.
Provision expense for the quarter was 1.3 million up from both the prior year and the linked quarter.
Our absolute level of loan loss allowance at 10 million is up from the prior year by 20.6% and our allowance to total loans percentage has increased a one from 1.02% at June 32019% to 1.11% currently.
So in summary year to date net income on a GAAP basis of $4.3 million down <unk> point 5 million or 11% from the prior year.
However, adjusted year to date net income of 7.9 million is up 2 million or 33%.
On a pretax pre provision comparison year to date GAAP earnings are up 1 million or 16.3%.
And when adjusted for almost Saar in merger costs. These pre tax earnings are up 4.1 million or 55%.
I'll now turn the call back over to Mark.
Thank you Tony I want to conclude my remarks today with a.
A clear call out of appreciation to all of our employees and clients said have endured up a fairly challenging past three months.
We have for the most part opened all of our offices currently but certainly under different conditions in all of our varied markets.
The efforts of our staff to.
Small businesses and home buyers as we mentioned and new clients of Eden State Bank in the quarter, we're both noticed and well appreciated.
I'll now turn the call back over to Sarah for questions.
Sarah.
Thank you.
While we're waiting for questions I would like to remind you that today's call will be accessible on our website and I are dot EULAR State Bank dotcom.
Now ready for our first question.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pricing Nikki Keith to withdraw from the question Q. Please press Star then to.
The first question is from Brian Brian Martin of Janney Montgomery. Please go ahead.
Hey, good morning, guys nice quarter.
Wondering ram thanks, Yep at a lot of work lot of unknowns, but.
Weve wires altogether and produced a nice quarter, you're right. Thank you yeah. Thanks to the Mark I appreciate the disclosure that added color. This quarter from you on in your prepared remarks, and the modification is just kind of curious.
With with the.
Positive migration, you've seen so far we would it what are the my order the total deferral stand today kind of in July and.
Thank you can just give a little color on where that is there maybe I just couldn't back into the number as you were given the details there.
Yes, I know I threw a lot of numbers around there Brian we have a number of loans that are under for all as I mentioned brothers consumer commercial or mortgage mortgage would all be Freddie Fannie loans, which again have begun to return to full PXI.
Jon Gathman is with US here. This morning, I know he's been deep into the forbearance world, particularly on commercial and the consumer and as I mentioned Freddie Fannie we're following generally the spirit of the.
Nationwide program offered through Freddie Fannie but.
If I might I'd like to ask John to give us a little bit of color on the forbearance.
Positioning John.
Yeah I would just.
Add to that were just entering so we took the approach and all our forbearances, including the very advantaged offer three months at three months just expired here in July we're currently processing a potential second round, whereas in the very early stages that the numbers are very small at the moment, maybe half a dozen commercial loans Freddie Fannie.
Onto that program there are eligible for up to 12 months, but we're offering a three month at a time, which is consistent with their guidance and.
Permission on what we can do but it's a very early stages and we are seeing as as I speak some additional second round with the numbers have been much smaller this go around.
We also took the approach and consequently.
Because we took the approach of a more needs based analysis in the second go around which again. We're currently processing. The first go around was more of a proactive if you met certain thresholds in certain criteria we set.
You obtained for Barents. This is more needs based so customers are.
Depending on the type loans supplying us with financials and different.
Records that were assessing on a loan by loan basis.
Okay, and then what Brian.
And just kind of Jon Werther deferrals that today I guess as of July I guess is any different than where they were at at June June thirtyth relative to kind of what you've seen come off or is it I guess, you're still working through that at this point.
Well in the first round there were no additional forbearances in the month of July so that those first round numbers them. Our gave you were accurate as of today, So I can around where it right in the midst of and again I don't have the exact number but.
Hi, Anecdotally 2030, maybe.
That are in process as we speak.
Got you, Okay and the ones that are Rick if they are requesting is there any pattern I get to the ones that would be requesting second deferrals or not really the too too small a number of just not enough to detailed as of yet.
Yeah, I think that's accurate if there's any pattern emerging it's certainly in the retail sector and the commercial real estate sector. We're starting to see some of those second forbearance requests come in we had a few just this week, but again, it's very early in very small numbers and yeah. I just want just one follow up comment Brian as I mentioned.
We've certainly seen.
A large increase in those da balances because generally speaking when you add Forbearances in addition to PPP and the decline in.
Discretionary spending on the business is part of liquidity has improved dramatically and we've noticed that in our balances and I've got this is this is John again, I would just point out I guess the other sector not I think about it would be maybe hotels as you might imagine and we have a couple of those that have requested a second for barron's.
Yeah Okay.
And that number Brian has stayed consistent at that 35 million dollar level that we that we disclosed at end of Q1, we've not had any additional or any any downgrades of that.
Portfolio, Okay, Yeah, 'cause remind me.
What the at risk exposure is I guess, if you guys kind of in your mind as you kind of segregate the pieces that are more at risk today, where do those stand today.
Yeah, the at risk number which is a manually adjusted number. So we look at its about 109 loans will look at those loans in certain industries, and then kind of pared down from there, but the number that we've internally analyzed to 71.2 million 109 loans for 6.71% of our portfolio.
Okay, and the biggest component to that John or what is it I guess if you.
From a sector standpoint.
And whether it was held a restaurant.
As Tony mentioned, its hotels, which are presently just right around 33 million.
Okay, and any other sectors, I guess you'd call out whether it be restaurants or whatnot in there the retail piece as you break them out.
Yeah, we don't have in that number we don't have our commercial real estate portfolio, we're starting to see some stress as I mentioned on retail and even office space. So thats not in that number but inside that 71 million not really anything additional to hotels our restaurant portfolio.
While is concerning is small and primarily backed by SP. A so our exposure there is minimal our biggest exposure.
If there is one and that is in that hotel sectors because of the pure volume and pure number of that.
Okay. So no other big numbers, just broke it out and on the 71 million total 33 as hotels that no other big a lot of other small components in there nothing other a substantial portfolios the call out.
I don't I don't think so again, we have a nursing facilities in there for 6.6 million and then the another one just looking through list religious organizations churches $3.8 million and so far those portfolios have performed.
Well, we expect <unk>, okay perfect I appreciate all the details thanks, Chad in the maybe just touching on the mortgage markets. It was just a great quarter and just kind of Youre kind of your outlook on on mortgage just in general into into the third quarter and just kind of the second half of the year and maybe just one for Tony and the gain on sale margin Ivy.
We picked up quite a bit.
I guess, just kind of the mix and whatnot, but if you could give any thoughts on just how you're thinking about that.
If you step into the back half of the year it'd be helpful.
Yes, sure as you know we've been committed to the business line for GE is gone 12 13 years now.
And Columbus as just doing a great job the they'll probably do 50 plus percent of all that volume we continue to add staff marginally not necessarily Brian on the front end production as much as.
The middle of the value chain, which would be a underwriters and the processors and closures, but also on the back in for the quality piece, because we know we have to be pretty pristine when it comes the quality of that portfolio, but now we're very.
We have been bullish and are bullish on the business line, we'd like it Tony in and Matt Booms have done an outstanding job in hedging all of that volume.
One time, we were comfortable with about 20 million in <unk> and volume in fixed rate mortgages and because of the risk. We didn't want to go any deeper and the hedging process has allowed us to go.
Deeper and broader with that pipeline and course balances the risk out nicely.
And so we've got that set up nicely our encompass platform.
Color literally ubiquitous and is available for all of our producers regardless of whether they're working on site or from home.
To process, all these mortgages and they've done.
And our nest owned company have all just done an outstanding job.
And to move onto our 1 billion dollar in.
Annual production goal, we just recently informed our board, though we're adding some additional management responsibilities to the business line defining at a little better from the top.
David Homily is going to.
Be adding some managerial depth and.
Taking a more responsibility to approve mortgages on our books as well as exceptions, so we're getting a little more.
Definition, and a little more identification of that business line and how it is we're going to run it and take it to the next level, which is a billion dollars a year and mortgage originations, but with a flat yield curve and no.
Increases insight on the intermediate and long in.
We'd like the business line and it is certainly a shored up our operations and.
Till the yield curve Steepens, we're in and we like it and we continue to develop deeper relationships in all market markets tennis nice now to have.
Ryan Indeed, now contributing and.
Delivering their 50 million that we envisioned when we went through Indianapolis originally so we'd like it and we're we're bullish on it and we intend to continue to expand it as far as gains I know Tony can speak to those.
Yes sure Brian.
We went into the quarter, you know kind of anticipating a you know 150 million type a quarter in terms of volume. That's what it was looking like as we were getting there to the quarter. We weren't sure what was going to happen with pandemic I think early on it it started to really accelerate and pricing became.
A very profitable I'm as on the yield curve kind of move down.
The bifurcation of pricing between purchase and refinance and I think the general market was fine with maintaining a little extra yield because we weren't sure what was going to happen in the future on defaults et cetera. So that for the most part added to the ability to really expand the spread on each one.
And we sold.
I think hedging we did some nice things there and we were in place to do some nice things to take care of our pipeline in our portfolio.
Which allowed really are our yields to be a really spectacular relative to anything we've seen for some time. So the combination of 225, 20 or 24 million a volume and.
Yields probably 140% higher than Weve traditionally have led to the quarter that we had.
Yes, I guess in thinking going forward, Tony I mean, those those yields that you you're I guess anticipating let's say in the back half of the year into next year it.
I expect that to trend a little bit lower near term or kind of hold that and then trend pinned down into 21, but just more big picture.
Yeah I think.
You know knock on wood I think the the yield picture is going to stay where it is probably for the Romanesque rest of 2020, because I think pricing and a yield curve is going to stay right where it is so we're not going to have as much volatility our hedges going to perform a little bit better and you know as as Mark.
Has said before you know, we really have to applaud, our emilo's, who who deliver to us great clients that we know we're going to close so we were able to hedge at a much higher percentage in which enables us to improve yields on the backend. So really it it's kind of work from front end to backend then I think as we look at vote.
All of them, we would expect probably 180 to 200 million dollar Q3, if things continue the way they are and we'll see what happens in Q4 as seasonality comes into play, but we feel very good about 600 million for the year and Brian just one can just one comment you know we all know it's all about pull through and that's.
Really what Tony just talked about which is the quality of my lows. We have that when we take an application that we have a high probability is going to make it to the other end and when you get in the 80% to 90%.
You can obviously make.
Good forecast on what it is we can do on on the hedging side, so kudos to tone in the math and all that group for a.
Not only.
Accepting all that volume, but improving the margins on the way out. So that's all good no I appreciate thanks, and how about just stepping over to the margin for just a minute guys just the.
Yes, it it sounds as though.
The cash levels Liquidities will drop a little bit if you get the loan growth those sound positive as well as making a little bit more progress on reducing the the funding costs. It just.
How you're thinking about Directionally the margin and then yes, I guess the Tony to assist the impact this quarter of PPP on the margin how much was that impact in in Q2, and then and just as you look at the the margin ex PPP kind of going forward just with those couple of things I mentioned to you guys mentioned on the call how you're thinking about that Corp.
Okay.
Sure and you know I think you know as we've talked about Brian we came into the quarter with up pretty robust pipeline, which made the Eaton acquisition just perfect for us because it provided extraordinarily low funding costs for us to to fund that pipeline, obviously with everything going on in the marketplace pipeline kind of went into a stall Pat.
And and.
You know the bond markets went away. So we didn't have an a ready use really of that cash to to deploy it.
We think loan pipelines are coming back and we'll come back I think John Nods is headed it's starting to improve a little bit.
And I think we'll see some.
Some maneuver here in Q3 as cash starts to to move a little bit out of the bank and do some things.
You know PPP, we'll see what happens on on the next phase of that and specifically for PPP. We took all 300000 on the fee side on amortization in Q2, and our interest income for the three months on the portfolio was about 160000, so just a shade under 500000 between the two which leaves us.
You know 2.7 million of unrealized fees.
I'm going forward.
You know, we've we've talked about the utilization of that obviously keeping in mind, a higher provision levels for the second half of the year, which is kind of our intention right now because we think mortgage is going to be able to provide significant income levels for us.
For the second half a year and we won't need to rely on the PPP funds for a tangible book value growth necessarily.
Okay. No. That's helpful. So the total fees on that PPP I was going to get to that any how Tony was about 3 million is in total is what you expect on that from the PPP.
3.1, Okay, perfect Alright, and then just the forgiveness you guys are expecting is there I guess.
Given the low sizes alone.
And as I guess, the expectation would be a pretty high level forgiveness is that fair and just kind of how you're thinking timing wise is it.
Fourth quarter first quarter kind of event is that where you're at today or is it different than that.
Right now, we're expecting that to be a fourth quarter event Theres a lot of talk as you know Brian about diminimus forgiveness levels anywhere from 150000 $2 million, which would encompass think at the lower end, 86% of our volume at the higher end, 97% of our volume.
In terms of numbers Alones. So yeah, we expect that to be right now that forgiveness the payments the the Sps covering the the interest do.
We'll end here in the fourth quarter. So we anticipate one way or the other the SP will come out with some guidance in the fourth quarter I know, that's coming out fast and furious as we speak they've just introduced last week there for given this pipe or system more online system, which is portal, yes. Thank you which is different than the.
The regular seven a portal so yeah, we fully expect a lot of that to happen here in the fourth quarter of this year.
Okay perfect that's helpful and.
Tony just that that impact of the Oh, I guess that you gave the dollars are up I can back into that the basis point impact the PPP in the quarter.
But maybe just onto the just the reserve building you mentioned that Tony with the mortgage revenue in the PPP I guess the expectation is today that given the uncertainty in the economy that.
We should anticipate some level of further reserve building as you as you get into the second half of the year that's consistent.
Yes, I think we've set aside a million nine through six months, we've had and you know a 650000 charge offs with basically no loan growth. So you know that that's kind of where we get to our a million to that we've set aside for coated I would think as we look at the second half of the year our expectations are that pro.
Vision levels are probably in line with the first half of the year.
And we'll see what happens I mean, as as we've seen Brian and I'm, most everybody's talked about.
We really don't have exposure to credit card or consumer type lending of a big number. So we haven't seen charge offs were related to cobot impacts as we sit here today now we're not naive enough to think that we're not going to see some of that but we haven't seen it on the consumer side and it's really about where we are on the commercial side as John has talked about and where.
With that weakness is so.
You know we're going to have further.
Reserve building of call. It you know million five to 2 million maybe in the second half of the year, but we think we'll have you know a solid two and a half to 3 million of additional PPP fees to fund.
And mortgage revenue and income will deliver where we need to be on the net income side.
Gotcha, Okay no that's helpful.
And how about just.
The loan growth it sounds like its.
Well, we picking back up so I guess from the standpoint, the pipelines are our building today, so you'd expect some net growth in.
And the second half of the or kind of excluding what goes on with PPP. That's the.
I think it's a fair thing to say as Weve.
Marketing of alluded to pipelines are building and we're starting to see some return to normalcy in terms of borrowers.
We're going to come under pressure of a couple of large clients selling so that that net net will provide some pressure the other direction because I don't think I think some of those customers have decided there's just not a lot better price or time to do so.
And don't want to see out what cobot is going to do their operations. Although they are very strong customers, but those aren't customers were necessarily losing to competition. There just couple of businesses have sold but yes. The pipelines on the other side of built nicely and we have some nice things coming here, we believe in the third quarter and look forward to.
One offsetting perhaps the other.
And Brian one comment from where I said.
We know we're going after work harder to find the quality of the deals that we found before particularly this environment, but I think it's a testament generally to the quality of the clients that we have because many of those clients that we have fortunately have great liquidity and good balance sheets and are still expanding and doing things and so.
We're happy to participate with them and again I think it's a function of.
Our median level growth the last five or seven years, we just we could have grown a lot faster, but 75 million here was a nice number and that's that's one area that we don't mind being a median performer.
And I am hopeful that our underwriting will pay dividends here as we fight our way through this.
Next couple of quarters.
Yeah, and and I guess, the given the talk about credit Mark can you guys have done a great job I guess the.
On the from the exposure standpoint, if it's pretty minimal at that 70 million dollar level I mean, where we're today outside of that are you guys seeing stress and it has there been any change in risk ratings are kinda criticizing classified levels.
As you as you kind of review some of these credits.
Now that we're into this period I guess it take new economic times, I guess has like second quarter criticizing classified so they pretty comparable and then just kind of that exposure outside of the 71 million where there's still.
Maybe some concern or areas you guys are focused on.
Yeah criticizing classified in the second quarter. We did see are classified as increase but that was a noncovered related situation with a large borrower.
So we're working through up here going forward.
We have not downgraded anything related to specifically related to coated but we will be looking in that as these for barron's is roll off in the third and fourth quarter and we'll be taking a harder look at some of those.
But that said the government as you know Brian flooded the economy with so much money. Many of those borrowers have continue to make payments and met or contractual obligations and or under for barron's. So we're working through all of that as we speak.
Yeah, we intend to reassess those your one question I think I alluded to earlier.
Is there anything outside of that at risk industry list that we've put together again manual adjusted.
I remain concerned about two in particular sections of our commercial real estate portfolio retail, which we don't have a huge exposure to but also a office a lot of articles about changes in the workforce dynamic and how that will affect office space and potentially affect prices, but again, we we haven't seen any softening in that per say at the mall.
And nor have we downgraded anything specific are related to that cove, it or current virus impact.
Okay.
And Tony you mentioned the capital obviously being very strong still just the your sense on kind of your appetite to to continue to repurchase shares is that.
I guess, we anticipate the still be active or.
Opportunistic on that front.
Yeah, I think I think both of those words or our our perfect for US you know we continue to believe our stock you know trade that little bit above tangible book value is incredible value and.
I'm really in terms of execution the best use of our capital obviously, we keep in mind that.
We're acquisitive and we feel like we've got some opportunities there are gonna be presenting ourselves to ourselves and that we're in discussions with so I'd say, we're we're balancing both of those out.
Okay. I mean, there's Oh go ahead, Mark well, Brian Brian just one follow up question for Tony I know, Tony and I have discussed this at great length, but in the last five years I think we've we've pulled into the bottom line about 50 million and we have made somewhat of a conscious effort to attempt to do.
Drive some of that back out to our investors in the form of buybacks and dividends and I think Tony is probably half of that has gone back out in terms of those two general programs.
Yeah, but.
About 20 million between dividends and buybacks. So you know about 40, 45% of that 50 million. So you know a we really have have raised equity capital for the future and supplementing what was when when Mark and I forgot your of a fairly weak tangible capital.
Scenario that that we have improved dramatically since that time.
So and increasing tangible book value along the way so.
Yes, it to your point, Tony and on M&A. So are there, yes, I guess sort of market.
Opportunities today, I guess, it or is it on hold for a bit of time until you assess your own portfolio or I guess, just kind of how would you characterize the opportunities you're seeing from an M&A perspective today.
Well, Brian this weve talked at great length, we think theres opportunities out there abound now after we've had three months of this cobot 19 discussion we've worked hard to get our tangible book value up we worked hard to improve our capital position and we've worked hard to grow the old fashioned way, which is one client.
At the time when organic growth, but as I mentioned when now we can jump into the M&A market and to accelerate organic growth with some prudent M&A, where we don't overpay, we know where we can be and we want to be in the.
The three or three and a half year payback arena.
But if we got a a stronger currency, we could certainly do a lot more and be a lot more but we do know that.
Theres opportunistic kind of opportunities out there and we have to be a bit aggressive if you will.
To identify those opportunities because we do feel we have a model that works and one this de centralized than that can provide a little more inertia outside of organic growth. So.
There are out there and we're going to continue to pursue opportunities to improve our reach and improve our performance by a gathering some more scale.
Gotcha. So okay, all right well look I appreciate you taking all the questions guys. Thank you so much thanks, Brian take care Brian.
Again, if you have a question. Please press Star then one.
There are no other questions at this time. This concludes the question and answer session I would like to turn the conference back over to Mark Klein for closing remarks.
Yes. Thank you once again, thanks, everyone for joining us.
We're trying to take care of all of our communities and remain safe a you know as we attempt to improve performance and we look forward to.
The next quarter, and maybe an improved a pandemic environment as well as a GDP and financial markets. As we report our third quarter earnings to you in October. So thanks, again for joining us and have a great.
Weak and quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.