Q2 2020 Origin Bancorp Inc Earnings Call
Good morning, and welcome to the Arching Bancorp Inc. second quarter 2020, <unk> earnings Conference call.
We still this event is being recorded I.
I would now like turn the conference and of course Reagan head of Investor Relations. Please go ahead.
Good morning, Thank you for being with US we should our earnings press release yesterday afternoon, a copy of which is available on our website all to slide presentation, we will refer to during this presentation.
Please refer to slide two of our slide presentation, which includes our safe Harbor statement regarding forward looking statements I'm used to non-GAAP financial measures.
Well that's joining by phone. Please note the slide presentation is available on our website at Www Dot origin Dot bank.
Please also note that our safe Harbor statements.
I'm on page five of earnings press release, followed the FCC yesterday.
Oh comments made during today's call are subject to the safe Harbor statements and our slide presentation and earnings release.
I'm joined this morning, but wouldn't Bancorp's, chairman President and CEO Dr. Miller, our Chief Financial Officer, Steve Brawley, President CEO Borgia Bank Glance Hall.
Our chief risk Officer, Jim Crotwell.
Our chief credit a banking officer Preston more.
After the presentation will be happy to address any questions you might have.
At this time I'll turn the call over to you Greg.
Thank you, Chris and good morning.
37 years of being part of origin and running this company for the past two decades seeing many different cycles throughout my career.
As we continue to live and learn through a period of time that no one expected or predicted I know that leadership strategic planning along with strong talent acquisition is what will lead us through this period of time, not just survive, but end up in a position of strength with an opportunistic attitude.
I can point to multiple strategies that were put in place a couple of years ago that significantly enhanced revenue during the second quarter.
Community Bank mortgage model in a mortgage warehouse strategy or two examples of this.
Our community Bank mortgage strategy provided.
71.7% increase in revenue compared to the same period in 2018, well, we began implementing our new strategy.
Year over year mortgage banking revenue has increased approximately two and a half times, where they similar size staff.
Mortgage warehouse strategy positioned the company take advantage of dislocation in a market to enhance our portfolio with quality relationships, while driving strong growth in non interest bearing balances.
We believe that our ability to execute on our strategies what makes us unique in the marketplace. During the last earnings call I close my remarks by highlighting for strategic areas of focus for our company as we navigate through the rest of 2020.
First and most important.
There's a health and safety of our employees and customers. This has been at the forefront of our decisions throughout the covert 19 pandemic and we continue to balance the health and safety of our people, while maintaining a first right customer experience I dropped it was remain open to their lobbies are serving customers by appointment we also.
I have effectively leveraged our technology infrastructure, which has led to an increased usage of our online and mobile banking channels. These strategies had been successful and managing the health of our employees and customers as well as highlighted in strategic focus we have in partnering with fintechs to provide a better than peer customer experience with our digital platforms.
Next is our continued commitment to serve our customers and communities.
Throughout the PPP loan process.
Thank you did an incredible job and supporting our customers and being responsive to their needs during a critical challenging time and they will continue to do so.
Lance will get more into the details of where we currently staying with PPP, but again I'm extremely proud of our bankers have responded.
I'm also proud of the fact that we're standing by one of our core values of corporate individual could and individual commitment to our communities, but taking a portion of our PPP loan fees and making contributions to a broad range of local charities food Bank service organization and educational institutions, including historically black colleges and universities throughout Louisiana.
Mississippi and Texas.
Times like these are what our customers and communities needed smokes throughout our history, we've been leaders in our communities and we continue to do that today.
She protection of the third strategic area of focus and we took steps in the second quarter to strengthen our position our results for the two first two quarters had been impacted by provision expense and increases in allowances for credit loss, but our credit quality remains sale nonperforming and pass the percentage of remained stable during the quarter, we have not experienced credit strike and culture.
Well with our current portfolio and we're well positioned to defend our balance sheet.
For strategic area of focus is expense management or last call. We told you that expense management was I continue to focus the buyers and even more so in the current environment. We continue to evaluate all aspects of our business as well as developing plans to reduce expenses in the near and long term, Steve will discuss the details around expenses later in the presentation.
Now we're getting into the results of the quarter starting on slide three total assets increased to 6.6 billion during the quarter with one of the drivers being over 3000 companies to which we made PPP loans totaling approximately 563 me.
Net income for the quarter came in just under 5 million or 21 cents per share diluted EPS, we had our highest quarter ever pretax pre provision income at 27.1 billion, which is 44% higher than our first quarter results.
You can see our net interest income is up nearly 3.5 million a quarter driven by PPP and mortgage warehouse income our noninterest income is up nearly 7 billion for the quarter.
I'll turn it over the last provide more details our PPP loan process and our cobot lending response.
Hi strike origins community banking market model gives us a competitive advantage and that our executive market leaders and bankers are incredibly close to our clients.
I saw this manifests itself in our aggressive in quick actions throughout the pandemic and getting learn forbearances to these costs are.
Our bankers are actively engaged proactive and are consistently communicating with our clients about their unique operating and financial situations.
As governments in Texas, Louisiana, and Mississippi have opened for more business from Q1 to Q2.
Focus has been on supporting our clients and communities through loan Forbearances and PPP loans.
As you can see on slide five or just had just over $1 billion encoded forbearances outstanding which represent a 21% of our loans held for investment excluding PPP loans.
We have spent significant time the past two weeks talking directly with each of these clients to understand industry specific Cobra deferral needs.
Our clients are probably indicating significant reductions in the level of forbearances needed over the coming months.
We expect to see our cobot forbearance levels declined to about 8% of loans held for investment over the next several months and as you can see where we anticipate our forbearance concentrations to be for the deep dive sectors. Jim will cover later in the presentation.
Looking at PPP results, we have funded $563 million in loans through the end of the second quarter, which is supported over 3000 companies and 63000 employees across our communities.
With an average PPP loan size of $185000 and immediate loan size a $38000. We feel that this program has been a very strong success and supporting our small business community.
As we move to slide six we highlight our success and continuing to grow core deposits.
Total deposits ended the quarter at $5.37 billion.
Which was an increase of $816 million or approximately 18% compared to the previous quarter.
While a large portion of this growth was clearly driven by PPP funds, we continue to see a nice increase in organic deposits throughout our markets.
We have specific in meaningful examples around new deposit relationships, we've created during the quarter because of our execution around PPP when certain competitors good or whatnot.
As a strategy we feel we can continue to grow organic deposits, while continuing to also reduced deposit costs.
If we think about future loan growth levels I think it's important to focus on our lift out strategy that has served us well.
We believe stressed environment is provide us with an incredible opportunity to attract talent because of our award winning corporate culture and community banking market model.
We believe the lift out strategy, a smarter way to grow low relationships as these bankers have deep insights into our desired prospects.
You'll continue to see origin leverage our culture advantage as we continue to increase the talent level across our markets.
I'll turn it over to jump to take a deeper dive into our loan portfolio. Thanks, Lance before we get into the industry deep dive I'll briefly wont to point out slot seven where you can see that our loan portfolio continues to remain well diversified.
No significant changes in concentration from what we have previously disclosed.
We continue to monitor industry sectors that may experience or more protracted recovery from the ongoing economic downturn, specifically the sectors of hotels energy non essential retail restaurant and assisted living.
The list of sectors, it's not as broad as flows in the presentation for the first quarter, which indicates strong asset quality across our portfolio prior to cope with knock thing.
If you will turn your attention to slide eight you will see that the selected sectors totaled approximately 11.4% of our total loans held for investment excluding people pay loans at quarter end.
The first segment broken out is our 64 million dollar hotel portfolio, which totals 1.3% of loans held for investment and historically performed well as evidenced by no nonperforming or past due loans as of quarter Rand.
I mentioned on the call for the first quarter, we are confident in our hotel portfolio, which had an overall loan to value of 41% going into the pandemic.
All of our hotel loans have personal guarantees from strong individuals with cumulative liquidity in excess of $200 million.
On slide 10, we have a breakdown of my energy credits, which represents 1.3% of our loans held for investment.
As we disclosed in the first quarter, we have no direct exploration <unk> production exposure in our energy portfolio.
Our nonperforming balance and energy services comprised of one relationship it's been a long from workout and has remaining balance of $2.3 million.
On slide 11, we provided information on our non essential retail portfolio.
This segment represents 3.1% of our loans held for investment.
61% of the sector consisting of loan supported by National credit tenants.
As reported last quarter nonperforming loan in this segment represents a single credit that was placed on nonaccrual during the first quarter. This year.
As a result, the significant impact back overnight clean on this particular property, we charged off 1.6 million during the quarter, one may enough, which was reserved for in the prior quarter.
Through the total portfolio.
Overall free covered loan to values are low at 56%.
On slide 12, we have a snapshot of our restaurant sector, which accounts for 2.8% of our loans held for investment.
You can see we have no past or nonperforming loan balances as of June thirtyth.
Moving to slide 13, its assisted living which currently represents 2.9% of loans held for investment at quarter end with an outstanding balance totaling 140.2 million.
On a reserve allowance of approximately $4.2 million.
During the quarter, we were successful selling one of our nonperforming loans within the sector for 3.2 million, which resulted in a write down of 1.8 million with a loss being fully reserved for in the prior quarter.
In addition, we elected to take additional write downs totaling $2.5 million, which was also reserve for as of March 31st on to nonperforming loans in this sector.
Due to the potential negative impact of code nighttime.
As of June Thirtyth 2020 classified loans within this subsector totaled $11.7 billion, representing an increase of $1.5 million as mentioned on our last call. We are actively evaluate opportunities to reduce our exposure and the sector.
Slide 14 reflects trends in several of our asset quality ratios 30 days past dues to loans held for investment excluding PPP loans improved 2.5 vote for sand at quarter end nonperforming loans to reduce 2.63% <unk>.
As we continue to assess the impact of the continued economic uncertainty of all on our portfolio. We saw an increase in the ratio of classified loans to long tail for investment, excluding PPP loans from 1.67% to 2.02%.
We did experience an increase in the quarter, our current level of classified loans only in line with the levels reflected a year ago.
Charge offs increased to 58 basis points annualized for the quarter net of PPP loans, primarily driven by the relationships mentioned previously.
In total of the 6.6 million in charge offs during the quarter 5.5 million where reserve for as of March 31 2020.
Again, given the economic uncertainties, we elected to take these write downs.
At the bottom of the slide we have some information all bizarre for the quarter.
During the quarter, we built our reserve to approximately $70.5 billion, which represents 1.75% of our loan portfolio net of pay payloads and mortgage warehouse.
The primary drivers that are increase reserve for the downgrades mentioned previously as well or from the assumption change within obviously, so model specifically the increase other reversion period within the Hcl model.
Based upon review a for cash provided by Moody's analytics, we adjusted the reversion period for one year to one and a half years, which contemplates that we would return to historical loan loss averages and 2023 with reversion to this level during the second half of 2021 through 2022.
Now I'll turn it over to Steve.
Thanks, Jim starting on Slide 15, you could see trends related to our net interest income in margin.
Our net interest income for the quarter was $46.3 million, an increase of 3.5 million over the linked quarter.
The largest increase in net interest income what the reduction of our deposit cost of over $3.6 million.
Followed by $3.1 million in P.P. loan interest and fees earned during the quarter and also positively impacted by the increase in book yield and volume on a warehouse loans.
We have talked before about our asset sensitivity and the net interest income results for the quarter were reflective of falling interest rates.
And the bottom right you can see your NIM waterfall, where we see decrease loan yields contribute to a reduction in 66 basis points.
It was partially offset by 37 basis points lepton them from deposit cost reduction.
TPP loans had an impact on our margin of six basis points.
Slide 16, we report trends of yielding cost.
You can see the impact of falling rates had on our loan yield declined 63 basis points when excluding P.P.P. loans.
The focus of reducing deposit cost we were able to decrease our overall cost of deposits by over 40% during the quarter to 54 basis points.
Our mix the fixed and floating rate loans at quarter end had not changed significantly from the prior quarter.
Slide 17, I want to go over some of the changes in our non interest income.
We typically have about 20% of our net revenue from non interest income, but this quarter, we performed particularly well in mortgage banking revenue and for our noninterest income increased by nearly $7 million as a result.
Other changes in non interest income category included a reduction in insurance commissions quarter over quarter, which is expected due to seasonality of the business. Our insurance revenues. This quarter were greater than the same period last year.
Also swap fee income this quarter was extremely positive for us as our customers were able to take advantage of the low interest rate environment.
Slide 18 covers our noninterest expenses.
As we look at the trend over the past five quarters, you could see progress in our operating leverage, especially in the most current quarter.
Well, we see improvement in these metrics are expenses did increase in the core current quarter based on a few factors.
Our mortgage bankers aren't a million dollars more in conditions due to the high mortgage production during the quarter.
And as Greg mentioned in our earnings call for the first quarter, we took a small portion of our P.P. loan fees to paint kind of bankers, who worked around the clock to deliver to our customers.
Lastly, we experienced higher medical insurance expense of approximately $600000 due to increased claims this quarter.
One of the areas of focus is centered around technology strategy and the pandemic has given us a stronger focused on this strategy.
Lance and his team are consistently examine how our customers are engaging with us through our online and mobile channels and we're focused on providing providing value and building loyalty through those channels.
As well as looking at ways to enhance our service delivery.
We believe that in the future, we will be able to hold our expenses in line, where she reductions from the Q1 2020 in Q4 2019 levels.
Now I'll turn it back over to drink.
Thank you see on slide 19, as we look at our capital ratios, we remain well capitalized going into the second half the year. When we funded the PPP loans, we were able to retain most of the resulting deposits on our balance sheet and the increase in their average balances calls reduction in our leverage capital ratio as we evaluate a number of factors late in the quarter.
We began to use the federal reserve liquidity facility for PPP loads, which we anticipate providing a lift in our labored capital ratio in the second half a 2020.
Significant temporary increases that our mortgage warehouse lines of credit toward the end of the quarter calls, but we believe that temporary decline in our total risk based capital ratio and we believe our capital ratios will increase throughout the years will begin to normalize our mortgage warehouse balances.
Considering the on president nature in global challenges in the past several months.
I'm pleased with the performance of our company for the quarter Historic pretax pre provision earnings historic levels of mortgage production and historically high non interest income all because we remain focused on our strategic plan and delivering for our customers and communities.
While there is uncertainty in the markets are what we will take place over the next several months, we're putting ourselves in the best position based on what we know today.
That is how we've operated company for over a century I believe in our team and our strategy and I'm proud that so many of you have chosen to partner with US as we continue to build long term value. Thank you for your relationship. It we'll now open it up for questions.
We will now be getting the question answer session to ask your question you that press Star then one and your Touchtone phone.
Or using the speakerphone. Please pick up your handset before passing kids. If you look likes what type of your question. Please press Star then too.
Oh pause momentarily to assemble a roster.
Our first question comes from not only what Stevens. Please go ahead.
Good morning, guys.
More and Matt.
I wanted to start on on slide eight de selected sectors that you guys provided.
I think the Oh overall balance was around 547 million in the second quarter I think the same slide a quarter ago was around <unk> billion. So.
Just walk us through how you further refined your your focus last on the selected Subsectors and.
Does this imply your feeling better about credit today within three months ago or just the statement that you've had more time to talk through this over the last three months.
Yeah, Matt.
There and.
Pandemic start into the first quarter.
We've got very aggressive and transparent areas that we believe could have could be impacted through.
Now I'll turn this health crisis, let's say and a we included transportation. We include all health care and a few other areas include the second quarter.
Became because of deep dives in a lot of work with individual credits talk into these clients actually going out and visit them. During this time.
We recognize its strength in the transportation portfolio.
In the overall strength in the health portfolio less assisted living.
So as we continue to work through the second quarter, we saw those trends in the <unk> and our comfort in those areas that they surely work, what we would call a code it impacted asset class. So.
We removed those and feel very comfortable and confident in that.
Okay got it.
And then in the assisted living book I believe there were some some charge offs in a second quarter.
The remaining book is I think around $140 million.
What color can you give on on the existing credit profile of the remaining book, what's the risk of further downgrades just trying to understand if those credits that were charged off in Twoq you have any similarities to the remaining book.
In May we got.
This is a point.
I want to make.
The very clear here.
We talked about even in the.
Fourth quarter 19 at first quarter 20 are concerned about assisted living especially those who those assisted living credits. We had that were developer one the doubt our assisted living credits that are supported by nursing home operators appear to do better.
And the ramp up periods are quicker. So what we did was and I want to make this point they charge offs that we took in the second quarter, 93% or that was reserve in the first quarter. So these are legacy credit is primarily for.
Legacy credit that.
We decided and use the term you know.
Claim the slate, we decided that we were gonna get aggressive because two of these credits one assisted living.
And one retail credit.
We're deals that we had on that basically ready to close that would have gotten us out at par in coated.
Basically impacted both of those deals where the where they walked all.
So we decided to get very aggressive [noise] had an offer only assisted living center.
That that was going to close so we went ahead and clean and off the books would had took in I think that was smart they do the other retail deal was actually a self storage center that was going into I mean retail space is going is self storage.
We decide to go ahead and right size that wouldn't and get it behind it. So we didn't have any further concerns or problems. There. The other two credits or assisted living centers that are good operated by the developer that we thought.
The the write down in the last of the sale impacted the valuation is surely it did on the other too. So we decided to write those down as we continue to to exit. This this.
Assisted living a centers that are develop a ruined because we do have some deep relationships and our other assisted living centers that are supported by nursing homes and also supported by.
Patient flow out of those nursing home. So when we look at the overall portfolio. We feel that we have address this appropriately a we have another credit that we certainly are working out of that we feel at this point comfortable that we could exit that without significant loss. So I believe.
With that we have addressed those it is important for us too as I said clean the slate and put ourselves in a very good position as we look at what.
Nobody impacted you know classes or portfolios might bring in the future. So this was a very what I think confident strong moved to make sure that we take care things I understand that it might we and we don't want it to be an indicator of what we think coming in the quarters ahead, we are very aggressive as we classified credits as.
Right things down that we take care of the who put ourselves in a position that they don't linger. So at this point, we feel comfortable that we're addressing this and hopefully we don't see some further deterioration or assisted living but again. This is an area that we will be accident.
[laughter], Okay and then the last question for me around the hotel portfolio.
Not a very large book and origin by any means but.
We're hearing some mixed industry data points based off type of property and you definitely give us a knife.
Take down on on slide nine but.
Can you give an update on occupancy levels.
And then specifically or do you probably would have any extended stay properties, a and how do those occupancy levels compared to other parts of the portfolio. Thanks.
Yeah, Matt I portfolio was his first off primarily in Louisiana.
Yes, there's not an extended stay portfolio at all it's I think brands that are our economy in in a overnights types day, what's interesting about a hotel portfolio and this is what I think differentiates us is that.
100% of our hotels that personal guarantees now we have at this point a portfolio of 64.4 0.0 4 million.
Our added those personal guarantees they there's parcel liquidity in that group of load of $260 million. So significant support for those were seeing right now about a mid fortys occupancy level.
And in that.
Mid fiftys kind of puts us in a position of being able to cover the interest payment principal payments. So we continue to.
Work with these we have so much confidence in this hotel portfolio because of the strength the op raising liquidity and that this isn't an area that we have I mean every time, we do a deep dive, which we just got completed with another one.
We just come out very confident because of the not only the ability for them to support but their attitude and desire to support these properties outside of what we're doing.
Got it thank you.
Our next question will come from Brady Gailey KBW. Please go ahead.
Hi, Thanks, Good morning, guys.
Let me more boring Brian.
So, let's talk a little bit about the looked out strategy.
The you guys mentioned, although you talked a lot of six us in Texas would build on core franchise.
But you know as you think about M&A is not likely gets there wasn't any sri but at least one of near term so.
People like the idea of looked out there was there a geography, but you're focusing on and then I'm just trying to help US spray now you know how big this looked out strategy could be from here.
Yeah, Hey, Barry this is lance.
You know I would say that as a strategy for US that's worked out well then we've talked about in the past the success, we've had across all markets in North, Texas Houston, Mississippi.
Where we're going to continue looking them and what we look at where the talent acquisition business and that and that's a key driver for us from a credit perspective, we love the inside a building a drag ever credits versus cone column into industries.
We had the opportunity to pick up some and into the experienced individual in our Dallas market over the quarter as well as in our Fort worth market.
We've also done a really good job of improving our mortgage warehouse.
I'm sorry, our mortgage a in mellow talent as we added a lot of talent in North, Texas in North, Louisiana, and Mississippi, We're going to continue to focus on that and we think that our culture.
As a strong attractor or the way that we sort of build our business through our geographic model, there's an advantage for us.
You know going all the way back to away, though nine.
We thrive during downtime to stressed environment because of our ability to attract bankers and we think that's gonna be the case here again.
Alright, Okay. That's helpful.
If you look at the first half of your the provision level has been running around 20 million a quarter and reserves. So then build aggressively.
How do you think about the need for additional provisioning and additional reserve building for the back half a year.
In Brady this drag that you know we spend a tremendous amount of time, a think where we started.
[noise] mid 0.1st quarter was started projecting.
Based on portfolio growth the strength of portfolio. We did some early projections and I would say that at this point due to the significant uncertainty surrounding.
And did it we feel the major change moving forward will be a key factors in duration of pandemic, which could push you know where I see l. to a range of let's say 2%.
Which would be consistent with our first quarter projections.
But I want to make a pool, we don't feel or expect core credit trends to be a driver in our increase moving forward.
Okay, and then finally from me and if you look good the net interest margin you're excluding the noise from PPP, Tom it's down to about 315 it.
Second quarter.
Again, excluding BBB, how do you think emerge and will trend here you think it'll be a stable looked a 350 level or do you think there could be some more downside.
No, let Ed and again you can imagine the work that goes on internally, where we are today or in our model is is driven by strong C and I will continue driving that model. So.
Steven chasing our team and a lot of works and we'll turn it over Steven let him address a NIM trends.
Brady, we expect NIM in the third quarter and fourth quarter to be flat to a couple of bases points decrease when to give you a little range there.
Okay, and I mean, right I want to thank you I want to add to that Brady that.
That that there are some scenarios that we see two basis points up and down, but but primarily where we were projecting flat.
Got it thanks Derek.
Our next question will come from Brad Milsaps with Piper Sadly. Please go ahead.
Hey, good morning, guys.
Good morning, Brad.
Appreciate you taking my question.
Drake I wanted to you or maybe dive into some of the mortgage performance a little bit more I know you guys. It then.
Working hard to you I make some change in that group, but just kind of curious if you had you know maybe production or loan sales this quarter versus what you did a year ago and then maybe that the change in the gain on sale margin just trying to get a sense of how much of this quarter's performance. You know is you know because of all the.
<unk> thats going on and what part of it is maybe you know more permanent you know at a new higher run rate from some of the changes that you've made.
Yeah, and and again.
The strategy, we put in place two and a half years ago and really running two years ago was.
Put us in a position because had we not [noise] done that we wouldn't been in position to take advantage of the marketplace I want to.
Where we're running at this point with strong pipelines and strong origination about 50 50 origination to refile, So our marketing and this isn't just the f. dug in Houston, I mean, our shockingly, our north Louisiana market is really boom in from a from a origination standpoint.
Mississippi is doing very well so.
So we expect.
Similar activity as we can say through the third quarter from a pipeline in what we're projecting is a decent fourth quarter, so Steve getting more numbers around sale sure.
Oh loans originated I'm going to go back to the fourth quarter of 1900 45 million.
First quarter 110 million this past quarter 258 million you could see the vast improvement in loans originated and in the pipeline December our pipeline with 68 million March was a 165 million and in June was 168 million. So the pipeline is slightly bigger and it was.
Last quarter, so with that pipeline, we feel that we're going to have a really good third quarter.
Almost as good as a second quarter, but definitely higher than historical numbers.
And on the gain on sale do things.
One with a little bit more refinanced you typically get a little bit better gain on sale, but we also had a very good.
Sit down make sure that we're getting as much money as we can on these and we just wanted to make sure. We just had a concentrated effort. This quarter. So going forward. We think the gain on sale will be pretty good if we go back to historical.
Purchase versus refinance that maybe down a little bit again anytime you have rebuy business, you're gonna have better gain on sale.
Great that's helpful.
And Oh Drake just a follow up on that the forbearance discussion you noted in your comments or and in the deck you expect a deferrals to come down from 21% down to 8% can you kind of talk through kind of what kind of give you some confidence around that I know a you know some I think almost all.
There are making you know some form of payment.
This just any additional color there and what kind of gives you the confidence that that you'll see that kind of improvement here of the near term.
Well I think it goes back to the relationship and management relationship we each one of our Forbearances our relationship managers and portfolio managers had been in discussion with them we took a [noise].
Yeah, we got aggressive and I want to make this point early young and we were there is for our customers will address the investor a climate looked at those as potential losses moving forward, we decide to have very good conversation with our with our customers.
I believe this 8% and in that range is conservative based on what we know today and those conversations.
But up by the will make a point that 70% of that 21% forbearance level made payments in during that first 90 days and we just feel very confident that number at 8% Huskies is varied.
Conservative, but I will make this point.
You know with a resurgence and being in a position we're in from an economic standpoint with uncertainty we are still going to be here to help these customers get through this period time somebody wheat, and I'm, not saying that say hey, we know there's an increase but we're going to do what we have to do or we're going to be here for the customers are not necessarily just look at a percentage.
Forbearances.
Got it that's helpful. And then maybe just final question for Steve <unk> can you.
Remind us how much you have left to recognize and P.P. fees over the over the balance the program.
We do as of the instead, we had 14 a half million net fees remaining.
Okay, great. Thank you guys.
Thank you.
Again, if you ask the question at the Star then one Star then one Cascade question.
Our next question will come from coming that someone's with D.A. Davidson. Please go ahead.
Hey, good morning, everyone.
Once again most wanted to just just a quick follow up to Brad's question on the P.P.C.S. What's your best guess on timing I know you have to wait until the SP I actually puts oh.
A platform out there for the forgiveness process to work, but are you visualizing.
Assuming it happens you know mid to later fourth quarter that you would recognize the lions share of the remaining PPP fees coming through the margin in fourth quarter or does that bleed into first quarter 21.
HM two thirds of our PPP portfolio.
Less than 150000 so.
I would say at that 0.0, there's no expectations on our part that and if there's going to happen in the third quarter the fourth quarter.
That's why we've taken a position to these PPP lows as such our customers and we we are not going to.
Yeah actually sell these especially cyrusone release at this point with the thought that two thirds of a portfolio could be forgiven you know wonder 150, So where we would think at that 0.2 thirds of those fees with wood or not whether that's not going to be accurate because a large ones had larger fees.
I think that's fair that they think the lions share of those would be would be brought into income after the forgiveness of those.
I totally agree and one thing I'm gonna have to add is you really have to look at the SB eight procedures. If they turned around tomorrow and give us full procedures will work on it and then we will have the forgiveness as soon as possible, but if it continues to drag and they come out with changes in revisions I.
You'd see some into the first quarter of next year, but that's not because we're not ready it's only because of the procedures.
SPX.
Right and my understanding is even if they come out with the procedures. They have 60 days or so to process it and they're in total control about the timing correct.
Correct, and that's why it's difficult for us and say.
Whether it's going to be the fourth quarter or the first it was totally up to us in our COO our customers I would say the fourth quarter, but we have to give that timing and also the timing at the backend.
So just to be conservative I would say.
The vast majority will be in.
First quarter.
If we could get them quicker we would.
Okay. Thank you just a quick follow up Drake and your your initial comments you had mentioned on focus on expenses and obviously this quarter its been a byproduct of the success in mortgage that you have some of the incentive comp from that but are there any or anything that you could tell us.
At this point that initiatives or things, you're looking out to more permanently take down the expense run rate that you are you guys are.
Taken an early look at we're starting to implement.
Yeah, Let me turn at Atlanta, you had been a kind of the ring later and and driving to make them expense reduction standpoint Lance.
Yeah, Hi, Jeff <unk>, obviously, with our asset sensitivity <unk> being mindful and smart about expense control and reduction is critical for us.
So yes, we have multiple initiatives going on for starting with.
Really digging into vendor contracts in finding opportunities looking really closely at all of our lease real estate and opportunities when they have their.
And then working through.
We're going through all of our expense structure.
Analysis on 18 on his analysis on branch profitability. It's it's all under going right now and we feel like we have some strong opportunities.
Okay, Great interest that is very quick a point of clarification be the a waterfall that you show on the NIM change with the 66 depends on loan yields is that really entirely.
The effective low rates on your fixed and variable rate loans or is that also reflecting.
The mix the excess liquidity the impact of that a lot of banks have talked about that impact of excess liquidity.
That is not excess liquidity that is really the decreasing the rates over our fixed and floating rate loans.
Okay. So I assume then be the guidance of the margin being roughly stable or going forward X P. P. P really implies that deep the progression of reducing deposit cost is really starting to catch up with that.
What's probably gonna be an ongoing effect of as loans continue to reprice downward.
Yeah, that's that's.
Strategy that we haven't place it we potentially see our ability to drive down.
Total cost of funds to.
Historical level as we saw several years ago and.
That is that that's going to be the.
Challenge that we drive this next couple of quarters to get to that point I think it's extremely important that we made is that.
And our successful with it fresh with that a deposit reduction.
<unk> expense reduction okay.
Alright, great Drake, Thank you everyone.
Thank you.
Our next question will come from not only with Stephens. Please Scott.
Yeah. Thanks for taking the follow up just want to go back to the outlook for for operating expenses.
And Steve you know there were some unusual items in into Q as far as the some of the payout for the P.P. work the mortgage payouts health care.
I think you mentioned how much I got this rather you said that the third quarter operating expenses would be more in line with the for Q or one Q 20 levels I guess would be closer to around that 30, 36 $37 million range I am I interpreting that right Steve.
Oh, absolutely however, if we.
I do have another really good quarter, where mortgage in the mortgage Commission will also increase but if you look at Q1 at 36, one that would be the base.
And without any mortgage increased mortgage commissions. It maybe 36 336, five we don't see a drastic increase at all in there.
Okay understood.
And then circling back on the allowance level.
I believe Drake you mentioned the possibility that the allowance Hcl ratio.
Moves towards that 2% level and Theres, obviously lots of noise around PPP and warehouse. So does that 2% commentary is that compare to the 133 that was reported allowance into Q. What are the ones 75 did exclude P.P.P. it excludes mortgage warehouse.
Matt. Thank you for that clarification, it excludes PPP and mortgage warehouse.
Okay got it or where it was 76 once every seven now we see that continued potential build to what we think would be adequate based on.
The position we're in today in the data that we have would be adequate.
Okay.
And then just the last question thinking about loan balances in the near term. It seems like you've got some nice tailwinds that will continue for a few more months whether it's.
TPP or mortgage warehouse, but at some point those will start to pay down and my guess is it's it's the fourth quarter. So am I interpreting that right that these loan balances could remain elevated in Threeq you, but then.
Move lower at some point in Fourq you in into one Q that your assumption as well.
That that is right on target.
Got it.
Okay. That's all for me thank you.
Thank you Matt.
This concludes our question answer session I'd like to turn the conference back over to Drake loans for any closing remarks.
Well I want to thank you everybody.
Couple of points I mean, historically, our organization thrives in crisis situation and I think we are an opportunistic position to really build relationships and take advantage dislocation I'm very comfortable and our current position I'm very comfortable our balance sheet confident in our leadership team and our ability to navigate through this health crisis.
I'm extremely pleased with the commitment of our people and the strength of our culture lead our customers and communities through this crisis insist sealy. Thank you for your support your partnership and I truly appreciate your participation interest today. Thank you for for attending.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.