Q2 2020 Fulton Financial Corp Earnings Call
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<unk>. Please go ahead Sir.
[music]. Good morning, Thank you for joining us for full financials conference call and webcast to discuss our earnings for the second quarter of 2020.
Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer, joining Phil Wenger is curtain Myers, President and Chief operating Officer, and Mark Mccollum Chief Financial Officer.
Our comments today, we'll refer to the financial information and related slide presentation included with our earnings announcement, which we released at 430 P. M. Yesterday afternoon. These documents can be found on our website that f. you L. T dot com by clicking on Investor Relations and then on news.
The slides can also be found on the presentations page under Investor relations on our website.
On this call Representatives of Fulton May make forward looking statements with respect to fulton's financial condition results of operations and business.
These statements are not guarantees of future performance and are subject to risks uncertainties and other factors and actual results could differ materially.
Please refer to the Safe Harbor statement on the forward looking statements in our earnings release on slide two of today's presentation for additional information regarding these risks uncertainties and other factors.
Fulton undertakes no obligation other than as required by law to update or revise any forward looking statements.
[noise] in discussing Fulton's performance Representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings release announcement released yesterday and slides 14 through 16 of those non-GAAP financial measures to the most comparable GAAP measure.
Sure.
Now I would like to turn the call over to your host Phil Wenger.
Thanks, Matt.
Good morning, everyone. Thank you for joining us.
Today, we will follow our usual call format, beginning with some prepared remarks personnel.
Quite a high level overview of the quarter next Kerr Meyers, our president and Chief operating officer will share some thoughts order business performance for the second quarter 2020, and then Mark Mccollum or Chief Financial Officer will share the details.
Of our financial performance and after that.
I'd be happy to take your questions.
[noise] Cobot 19 continues to have a significant impact on our world and our company.
But all things considered we are pleased with what Fulton was able to achieve in the second quarter.
I want to start out by thanking our employees for all they've done to serve our customers throughout the pandemic.
It was truly inspiring to watch our team members.
Who had their own questions beers and challenging personal situations.
Manage their own me.
While continuing to fulfill fulton's purpose of changing wise for the better for our customers.
Thanks to the dedication of our team the flexibility of our customers.
And our investments in technology and digital platforms, we have continued to provide needed banking and financial services throughout the pandemic.
We successfully successfully administered the SBH paycheck protection program or PPP.
Oh, providing more than $1.9 billion in loans to businesses.
And nonprofit customers.
We offered loan deferrals and payment relief to consumers and we put in place.
New benefit programs to help our employees throughout this confusing.
And difficult Todd.
When I spoke with you in April Fulton had a responded very quickly to keep employees and customers safe.
While continuing to deliver central financial services to the communities we serve.
Now a three months later, well our unwavering focus on health and safety continues.
We now be viewed a virus is just one more factor we need to deal with as we go about our day.
[noise] working hard to ensure that our teams energy remains focused on achieving our longer term.
Priorities.
Our growth.
Operational excellence.
And effective risks risk management and compliance.
In June we gradually began to expand lobby access for customers and currently we.
We have resumed regular lobby hours at 146 of our 223 financial centers.
And a team of leaders from across our company has put in place.
Our plan to gradually re onboard employees, who have been working remotely.
This process will take place over the remainder of the year and can be adjusted or reversed at any time, depending upon the private progression of cobot 19, and the associated safety protocols that health experts recommend.
Turning to our financial performance in the second quarter, our consumer and commercial lines of business performed relatively well.
Given the environment in which we're operating.
In consumer we saw increases in deposit balances.
Growth in residential mortgages and relative strong performance in wealth management.
In commercial or loan pipeline remained stable.
Deposits increased even after factoring out funds received through PPP.
And we sell continuing resiliency in a number of fee income businesses, including merchant services.
Investment management and trust services and swaps.
Several several credit metrics improved during the quarter and you'll hear more detail about that in a few minutes.
However, I will need to wait until we know more about the depth and duration. The cobot 19 pandemic over the next six to nine months to be able to understand the longer term impact on our customers customers.
We have been and we'll be very actively managing our expenses over the remainder of the year to help mitigate the anticipated negative effects for the pandemic.
Other highlights during the quarter included the opening of a new financial center in Baltimore, continuing our commitment to growing our presence in urban markets. We also announced the creation of the new Fulton forward Foundation.
An independent nonprofit private foundation funded by Fulton Bank.
The foundation will provide financial impact gifts to non profit organizations that share fulton's vision of advancing economic empowerment.
Particularly in underserved communities.
The foundation is an extension of the banks pulling forward initiative.
Which promotes diversity equity and inclusion encourages the building a vibrant communities.
Fosters affordable housing.
Drives economic development and increases financial literacy in the community survival.
In April in addition to our traditional and ongoing support of our communities. What we bank made an extra 500000 donation 500000 dollar donation to the foundation to support Gobain 19 assistant programs in the markets we serve.
About a week ago, the foundation announced distributed those funds.
Do nearly a dozen worthy worthwhile community programs.
So as you can see we've accomplished a lot in the first half of this year.
Under very challenging circumstances.
Now I'll turn things over to Kurt So he can discuss our business performance in more detail.
Thank you Phil and good morning, everyone.
Our second quarter performance saw solid results in certain areas of commercial and consumer lines of business.
We also saw challenges as well as the full quarter impact of code 19 was felt throughout our footprint.
Our participation in the Paycheck protection program or PPP was a highlight as we stood up processes redeployed team members and help preserve over 100000 jobs. During this critical time.
In total we originated a little over $1.9 billion in loans to the issuance of more than 10000 PPP loans.
As noted last quarter, we continue to work with our customers. During this difficult time and are providing payment relief ranging from three to six months, depending on the product.
Slide three provide you with an update on the loan deferral programs, we have been offering our customers. During this time, new deferral activity has slowed considerably since mid April.
For our commercial customers. We are just now starting to see the expiration of those 90 day deferrals.
If an additional 90 day deferral has requested.
Our own risk based underwriting and approval process will occur while it is too early to determine the level of second deferral requests. We're confident that the total will be meaningfully less than the initial deferrals.
Shifting to loan growth are.
But were impacted materially by the PPP program.
Excluding PPP.
Commercial loan balances declined for the quarter with average balances decreasing 420 million during the period.
This was largely driven by reduced line utilization during the second quarter, we've seen a decline in commercial line use from 33% to 25% or $340 million.
With PPP funding and the gradual reopening of the economy within our footprint certain businesses, we're able to pay down there borrowings.
As you can see this did decrease in line utilization accounted for the majority of the commercial loan decline when you exclude PPP funding during the quarter.
Looking forward our commercial loan pipeline at June 32020 remained relatively flat from the first quarter and is essentially unchanged from a year ago.
In our commercial and our consumer lending business, our residential mortgage results continued to be very strong producing linked quarter loan growth of approximately 5% in spite of significant refinanced activity.
Deposit growth has been a very it's been very strong for the quarter as well as PPP funding to date has largely remained in the customer deposit accounts and consumer deposits have also benefited from stimulus checks and the reductions in consumer spending.
Deposits grew over 2.5 billion during the quarter with $1.7 billion this growth coming in non interest bearing accounts.
We're also pleased with our progress in repricing our deposits deposit costs declined 26 basis points during the quarter from 62 basis points down to 36 basis points.
Turning to fees, our mortgage company at a very strong quarter with both elevated originations and strong gain on sale spreads.
Total residential mortgage originations for the second quarter of 2020 were $811 million, an increase of 67% from the same period last year.
Refinance activity accounted for 54% of originations in the second quarter of 2020 come.
Last year.
Our mortgage pipeline sits at 879 million at quarter end, which is the highest level ever.
Our wealth management business also performed better than we had anticipated this quarter.
As a stock market has rebounded quicker than we had expected and we continued to see the benefit of our high level of recurring fee business our assets under management administration Red 11.1 billion at quarter end.
Moving to credit certain credit metrics showed improvement over the quarter, our nonperforming loans were flat linked quarter and down 8 million from a year ago net charge offs were 4 million down from 11 million last quarter and represented nine basis points on an annualized basis.
Despite these positive near term credit trends our outlook remains cautious it is too early to fully assessed the impact of covert 19 on or regional economy, and the related impact on our borrowers.
You can see on slide four and five we have limited portfolio exposure to some of those industries that have been impacted the most by proven 19.
We have expanded our disclosure from last quarter to provide additional subsectors and details on areas of focus.
Most of the loans are secured by real estate or other forms of collateral, which should help mitigate losses in the event of default.
Our loan portfolio is diversified from a geographic product and collateral perspective.
I will remind you that our internal house limit is 55 million to anyone borrowing relationship, which we believe is lower than other banks. Our size. This strategy has helped us maintain a diversified portfolio.
In addition, our owner occupied commercial mortgages represent close to half of our overall commercial mortgage portfolio.
We continue to generally land to experienced borrowers that have stable cash flow and sizeable equity positions.
Now I'd like to turn the call over to Mark to discuss the financial results in more detail Mark.
Thank you Kurt and good morning, everyone in the call. We have taken feedback from many of you to provide additional cobot related disclosures during the past two quarters and this is reflected in today's presentation.
Unless I note otherwise the quarterly comparisons I will discuss or with the first quarter of 2020.
Starting on slide six earnings per diluted share. This quarter were 24 cents on net income of $39.6 million.
Second quarter earnings in comparison to the first quarter benefited from a lower provision for credit losses.
Our fee income also produced strong results and our operating expenses were better than our expectations on a core basis.
These positive trends were offset by a linked quarter decline in our net interest income.
Moving to slide seven our net interest income was $153 million a decrease of 8 million linked quarter and in line with our guidance a full quarter impact of the 150 basis point declining interest rates as well as a decline in commercial loans, excluding PPP loans due to the rapid decline in line.
The 40 basis point.
Of linked quarter compression and our net interest margin was slightly higher than our internal projections and was driven by the sharp decline in interest rates for the quarter influx of PPP loans as well as excess liquidity. We're currently experiencing.
Our loan to deposit ratio declined during the quarter from 98.5% to 95.1%.
On the liability side. In addition to the progress we made this quarter and lowering our deposit costs. We believe our deposits can still repriced lower as CD maturities occurred during the second half of the year.
These maturities totaled approximately $900 million over the next two quarters at a blended average rate of approximately 1.5%.
Turning to credit.
On slide eight our second quarter provision for credit losses was $20 million versus 44 million last quarter and $5 million a year ago.
This decrease in provision was driven by the pace of decline in the economic outlook during the second quarter as compared to the first quarter as well as lower net loan charge offs during the quarter.
Our Cecil methodology utilizes Moody's for the macro economic assumptions that drive our models and we also consider an employee qualitative overlays to our models based on a comprehensive review of additional financial and economic data.
Non performing loans as a percentage of total loans decreased to 83 basis points, excluding loans originated under PPP.
Compared to 90 basis points, a year ago and declined to 75 basis points, including the PPP loans.
Our allowance for credit loss related to loans at June Thirtyth was 1.53% as a percentage of total loan balances an increase of 13 basis points from the prior quarter.
This ratio excludes PPP loans from the calculation.
The allowance for credit loss coverage ratio as a percentage of total nonperforming loans was 183% at June Thirtyth 2020.
Moving to slide nine noninterest income excluding securities gains were $53 million down, 3% from 55 million last quarter, and 54 million a year ago.
This result was better than our guidance, which are predicted a decline of between five and 15% and was driven by outperformance in mortgage banking capital markets and wealth management revenues.
Mortgage banking revenues were up 3.7 million from the prior quarter. Despite recognizing a 6.6 million dollar mortgage servicing rights impairment charge during the quarter as interest rates rapidly declined and expectations for prepayments increase.
With respect to mortgage loans that we originated for sale, our new commitments were $573 million for the quarter on all time high for the company and our gain on sale spread of 2.89% for mortgage is sold was significantly higher than our recent trend as the sharp drop off in interest rates has incurred.
Demand for mortgage assets.
Capital markets revenue, which is primarily composed of swaps revenue was also higher than we anticipated coming in at $5 million compared to 5.1 million last quarter.
Despite the decline in line utilization, which impacted loan balances, we did see solid originations otherwise, which drove this result.
We did execute on a small investment portfolio restructuring during the quarter involving the sale and reinvestment of $85 billion of investment securities.
This resulted in recording approximately $3 million of securities gains during the quarter offset by a similar amount of expense to prepay some higher cost FHLB advances.
Moving to slide 10, our noninterest expenses were $143 million in second quarter.
Included in this amount was 2.9 million of FHLB prepayment penalties as noted above.
Excluding this cost total expenses were at the low end of our guidance and declined two and a half million dollars from first quarter levels and $4 million from the second quarter last year.
While many of our expenses have been declining as a result of could 19 certain expenses have increased as a result of the pan.
Including special bonuses for frontline personnel contributions to cope unrelated charities pp E expenses to keep our employees and customers see and certain other costs.
These expenses totaled approximately $3 million for the quarter.
Our effective tax rate was 14% for the quarter as compared to 10% in the first quarter 2020.
This was primarily due to higher pre tax earnings in the second quarter.
Slide 11 focus is on our liquidity.
Since mid March we've maintained excess cash of approximately 200 $600 million per day.
This number has increased throughout the second quarter as we have not seen the run off in PPP funding, we originally expected.
This impacted our net interest margin moderately and despite stabilization in the markets, we would anticipate maintaining extra liquidity until we have a clearer picture when when PPP funds will be utilized.
We're currently registered to use the PPP loan facilities through the federal reserve, but we've not yet had to tap that funding source as we've had strong deposit balances throughout the quarter.
Slide 12 gives you more detail on our capital ratios.
We've evaluated our capital and liquidity under a variety of stress scenarios and then all models, both the bank and holding company maintain sufficient regulatory capital and liquidity to maintain our current common shareholder dividend, which is our intention.
Lastly on slide 13, we would like to provide our thoughts about forward guidance for the third quarter.
With significant uncertainty still existing in the economy, we're not providing guidance beyond the third quarter at this time.
Our third quarter guidance is as follows.
For loans for the third quarter, we expect overall loan growth.
To be plus or minus 1% to 2%.
Residential mortgages will continue to lead the way with positive gross with commercial loans producing flat to modest declines in growth.
Deposits.
We would expect deposits to experienced growth of 1% to 2% in the third quarter with seasonal municipal deposit inflows offset by modest PPP deposit runoff.
We expect our net interest income to be in the range of 150 to 153 million for the third quarter of 2020.
We're not anticipating material amounts of PPP loan forgiveness two per in the third quarter as we currently expect loan forgiveness activity to increase in the fourth quarter.
We expect our non interest income to stay similar to second quarter levels in the range of 50 to 53 million.
Mortgage banking should continue to be a bright spot as our pipeline is very strong and our third quarter is a seasonally busy time of the year.
Overall, we expect operating expenses to be consistent or slightly lower than the second quarter in the range of $139 million to $142 million.
Lastly, we expect our effective tax rate to be between 11, and a half and 12.5% for the third quarter.
With that we'll now turn the call back over to the operator for questions.
Thank you.
Hundreds ask your question, you'll need to press Star 100 telephone to withdraw your question first the bank. Please stand by equal opportunity Rosner.
Our first question comes from French early with 5% you May proceed with your question.
Good morning.
Thanks, Greg.
Starting with.
Just to.
I ask the last quarter to and I know, it's a it's that's really the wildcard for the back half the year, but.
Market fish, just wondered if you could maybe update us with your thinking on.
Provisioning I realize you guys aren't going past the third quarter in terms of guide so maybe.
Any color you give for your thoughts and a Cecil world.
Provisioning in the in the third quarter.
Yes, so so Frank as you know.
Under a seasonal model youre, providing each quarter for your current expected future credit losses. So.
If we get things exactly right.
And then our provisioning in future periods, we've already covered all the loans on our books so our.
Revision really becomes.
The entry a once you calculate what your allowance needs to be for the third quarter.
That's just becomes the last part of that equation.
So you factor in loan growth you factor in changes to your portfolio mix you factor in net charge offs and then the wildcard that youre, referring to is you factor in changes in your forward look on what macro economic assumptions are being used in your model.
So based on all of that.
You would say if we think we and I say, we've been both our company in the industry have gotten things right.
This quarter that can imply then next quarter, if you're not changing news macroeconomic factors then you're just accounting for those other things, which is changes to your portfolio, which were giving guidance on that.
And net charge offs, which you've seen what our performance was this quarter in terms of net charge offs in terms of nonperforming levels et cetera.
But another wild card and all this certainly is going to be as loan start to come off deferral, what our incidence rate is of of those loan staying current.
Second round deferrals or whether we start to see tier.
Okay.
In the seasonal world the way you're thinking about it if.
You've gotten things right the models right and even in the face of higher charge offs potentially at some point in the third or fourth quarter, we might see you could see provisioning.
Even cover charge offs as those reserves of actions have already been taken in the end of life alone sort of world.
Reasonable.
That is that as a possibility yes okay.
And then just wanted to try and get a sense of how.
Conservative your fee income guide might be.
You talked about the record mortgage pipelines seems like the MSR impairment is based off of.
Expected prepayments, which I guess is already baked into your model at this point. So just wondering if you could talk little bit about maybe the puts and takes.
Fee income.
Threeq, you being sort of in line with the Twoq results.
Yes, yes, I think Youre right Frank when you think of where you know and again, we always let the folks on the call here judge, where we're being conservative or aggressive but.
You know in that you know this past quarter, we had mortgage banking revenues included a $6.6 million right down in our MSR impairment you have the current value with average written down to kind of mid 60 basis point range at this point.
So how much further in a further write downs might have to occur in the third quarter.
Really sort of anyone's guess, but.
But.
Depending on the level of MSR impairment in the third quarter, I think thats, where.
There could be.
To use your word a wildcard in those third quarter numbers.
We also.
Had swaps revenues in the.
Second quarter.
That were strong.
Our pipeline maintains relatively stable as Curt noted on the call.
So depending what third quarter originations are that's another factor and then the last thing I would mention on fee income would be wealth management revenues and where the stock market is about 81% of our revenues are really tied to stock market valuations.
Although a lot of those are kind of.
Paid earlier in the quarter. So the fact that we had a fairly strong stock market in early July should.
Bode relatively well for that business as well.
Right. Okay, and then just one final quick one if I could I was just surprised to see within yields in the loan book.
A significant compression that we saw in the Cree book.
Linked quarter and I wondered if there was anything sort of funky there is that just related.
Two.
Variable rate loans within that portfolio, just give a little color. It looks like came from from down from four two to three five.
First quarter.
Yes, so I mean, I mean, obviously with the rates dropping Frank we have we have 6.4 billion of loans tied to one month LIBOR. Another one and a half billion tied to one year live were both of those dropped.
Pretty fast, particularly from kind of mid May one.
And a lot of those commercial.
Real estate loans are tied to swaps.
So our swapped revenue.
You know is strong, but then with a higher percentage is now portfolio being variable rate that would account for most of them.
Gotcha, Okay. Thank you.
Thank you. Our next question comes from Shacey here with Jefferies. You May proceed with your question.
Thanks, Good morning, guys.
Right.
Yes, so I wanted to touch on.
I appreciate the guide here, but.
The NIM.
Outlook, given given me the wide variance in the loan growth just some some.
Good ones and.
And tailwinds that might be there Mark I know you mentioned you got some CD repricing benefits.
But you just somehow.
As we think about NIM in the third quarter here.
Sure Yes.
So we don't give NIM guidance, we've given I guidance, but the but to give you. Some other data points to help one thing I would comment is we have we show you we have about tenant a half billion of interest bearing deposits in either demand or savings.
Those averaged about 21 basis points for the second quarter, but we've continued to very actively manage that and for the month of June those interest bearing non maturity deposits were 15 basis points. So in addition to Cds I would expect to see that non maturity demand will continue to what price down a little bit.
Lower as well.
When you also consider margin.
Our PPP loans for the second quarter that impacted margin negatively by about three to four basis points.
And the excess liquidity that we're currently sitting on impacted margin about seven basis points.
For the quarter. So the question really then starts to become for margin again, when do those PPP customers use those funds or do they not utilize them.
In which case.
And then we will take other measures as other loan maturities and securities come due over the back half of the year to Whittle down on cash position, but until we know now for sure as I mentioned, we're going to continue to hold higher liquidity. We just think it's the right thing to do this part of a stone unknown Cohen.
Yes, yes, I get that.
On the PPP, sorry, if I missed this in the release for the deck, but the the blended loan yield on that.
Yes, so as you know to 1% coupon and our our fees were just about $60 million, we're amortizing that over two years, so thats about seven and a half million dollars a quarter that comes in so the blended yield on our PPP would be about 2.5%.
Okay Gotcha okay.
Alright, just last one from me on the credit front.
No.
The forecast that you guys used.
What what can you tell us about it in terms of like.
As we think about talking to you guys again in three months.
And what the out I mean, I know, it's a fluid situation, but like what does your current forecast have and it doesn't have more stimulus any sort of.
Macro GDP factors that that you can point to that we can look at three months down the line and say, it's gotten worse or it's gotten better.
Sure Casey we don't.
We don't have any additional stimulus in there we are currently using moodys for all the macroeconomic variables.
And.
Both we employed in our models as well as some of the macroeconomic variables that we look at for our qualitative overlays.
So we are using the Moody's model that was as of June 9th.
That model assumes an unemployment rate as of the end of December of 10.2% and at the end of 2021 of 8.5% now unemployment is not actually used embedded in our models, but it is one of the larger qualitative overlays that we consider.
Then we also use Moody's for all the other economic data for assumptions on the Triple B bond rate housing starts et cetera.
Really all comes through their analysis that we rely upon.
Thank you.
Thank you. Our next question comes from Chris Mcgratty with KBW. Sir you May proceed with your question.
Great one number.
For us anchors that Chris Hey, Phil.
Okay.
Mark I want to go back to the III comment just make sure unclear. The guidance you gave for Q3.
I guess first question is that.
Hi, good FTD number or is that just a GAAP number.
The GAAP number.
Okay.
And I know you said most of the fees will come in in Q4 was there any.
PPP.
Fees realized in Q2 and.
Does that guide assume that seven and a half at the very many thing right.
Yes. It does we've been we've been as those loans have been onboard and we've been we started amortizing over the two years at that time.
Okay. Okay.
And do you have to the average balance with a few pit loans in the quarter.
Average balance was about 1.3 between 1.3 in 1.4 billion.
Okay, Great and then maybe my last question.
Yes branches have gotten a lot of attention.
At the industry level, given that given the radwatch revenue headwinds.
Can you just remind us where your where are you guys are in terms of thoughts on branches I know you collapse the charters appears back.
Just wanted to get their sense on the ability to R&D expenses out over the next year. So.
Yes, so we.
Going from 270 branches down to two.
To 23.
And we continue to look at opportunities for consolidation and I believe that they do exist. So we we do believe we can drive more expenses out.
There are so thank you so much.
Thank you. Our next question comes from Daniel its Meyer with Raymond James You May proceed with your question.
Hi, good morning, guys.
Yeah.
Just wanted to touch on the deferral information appreciate all the.
Closures there.
How many of the of those deferrals.
He said that Theres been.
Hi, there is an expectation for the the amount.
Post renewal, if you will to come down but.
The of the of the amount that you.
Disclosed are there any.
Re deferrals, if you will in that number and what's kind of a trend in terms of what's going correct versus whats.
Tim being being renewed there.
Hey, Dan its Kurt just a little more insight to that we've just started to have those first 90 day deferrals.
Expire and we are evaluating second deferral requests.
Less than a third of them have.
Expired and of those a it's been a meaningful reduction in the request for second deferrals and Nick will have.
Better data for you in the third quarter, but as we are starting that process. We are seeing a a meaningful decline in second deferrals.
Okay. Thank you.
And then.
As we look at I'm looking at the criticized and classified loans on slide four.
So.
I was kind of surprised to see no criticized and classified and the hotel Markel bucket within Investor Real estate.
What's your read there on why that segment has held up well.
Don't don't have any specific things I mean, we are very conservative in our underwriting.
In hotels overall.
Again, we have 75% lower of cost.
[music].
Or market value.
At origination.
And.
We have.
Also very strong cash flow when we originate and then that portfolio is performing overtime.
They have also a large portion of those have received ERP.
Support that's a business that has has been significantly affected and a lot of those have received PPP.
Okay.
All right that's all for me. Thank you.
Thank you. Our next question comes from Eric with Boenning and Scattergood.
A series of questions.
Good morning, guys Fair warning Eric.
First just a follow up on that deferral discussion I think current in your prepared comments you mentioned that for any of those.
Receive deferral and make a second request will go through a thorough kind of risk based underwriting process given that those that make the second request or likely business is their consumers who have had their cash flow severely impacted businesses maybe operating.
The new significantly below what would be cancers normal.
What does that kind of risk based process and tell at this point what factors you're looking at and at what point do you make the decision that you may need to take a charge off I just kind of curious how that plays out since the.
Some of these loans that you were to look at them as nuance. They may not meet your typical underwriting.
Yes.
Yes, it's a great question. So we are looking at those.
Unlike the markets looking at the bank stocks right now we're looking at it from a capital standpoint.
Looking at from a liquidity standpoint.
Borrower and guarantor support.
To get through.
The crisis, so it's really those mitigating factors.
Beyond just performing cash flow, so that it's very difficult.
To establish were understand ongoing cash flow with those barge right now so we're looking at capital we're looking at liquidity and we're looking at guarantor ability to keep those loans performing through this.
That's helpful. And then just turning to loan growth on slide 13, you've got the range of plus or minus 1% to 2%.
I think you mentioned that the pipeline remained stable at this point just curious what youre seeing if theres any particular sectors, where that pipeline is stronger or weaker than you'd expect it and what could potentially what factors.
That loan growth potentially coming at the bottom or the top into that range for your outlook.
Yes, as we look at the pipeline is stable. The pipeline is very diversified there are certain things that are not in the pipeline because they've been impacted businesses, but it's still remains a very diversified.
Pipeline I think the variability in our growth will be essentially same as this quarter.
It's going to depend on how much line paydowns that we have how much early prepayment we have and how much residential mortgage refinance that we have I think thats, what will move us towards the lower or upper end to that range.
Got it just one last small one.
FDIC insurance expense that was down quarter over quarter, even with the balance sheet getting largest just kind of curious what's what's driving that calculation today and if that's the threeq value should be similar to Q.
Yes, a threeq you guys should be similar to Twoq you. It was a function of our sub debt raise actually in the.
I wanted to first quarter, and we downstream some of that money to to the bank. So the way the FDIC calculates that ratio.
They look at your bank level capital ratios the leverage ratio at the bank level becomes one of those factors so with excess capital to holding company raised in downstream in some of that it lowered the ratio or lowered the assessment.
Thanks for taking my questions.
Welcome.
Thank you. Our next question comes from Russell Nothing with da Davidson You May proceed with your question.
Hi, good morning, guys.
Yes.
Just a follow up on the deferrals, so given where they stand today and it sounds like.
Likely headed lower in the second and third quarter do you guys consider these customers higher risk given that they're in a forbearance program and and if so is that accounted in the current reserves level today.
[music].
For the the current level of deferral just to just to clarify the question. So in the current deferrals or were considering them all high risk.
That's right, yes, Im just trying to get an understanding and to maybe gives you some context for my question.
Very different answers from bank management teams in terms of.
How they handled the deferral process and I received answers to this question in terms of you know, what we think 80% cities our money good and others.
Different answers so I'm just curious maybe that.
Hi level in terms of.
Your view of this deferral level and whether they are higher risks.
We're not because they're in the Port Barents program and if you think they are is that reflected in the current reserves.
Thanks for clarifying so our initial deferral program was offered to all customers.
To accommodate given unknown factors at at that time, we made the process very simple for customers to obtain a deferral and.
We did.
Very limited credit underwriting to do that so we're very accommodating to customers for the first round of deferrals. The now second round up deferrals will have a thorough credit underwriting to qualify for a second deferral and again, we are seeing meaningful decline.
In in those second.
Roundup deferrals so to answer your question directly the first round of deferrals, we do not.
Feel is a risk factor it was a customer accommodation and then this round of deferrals will be more in line with where there's potential emerging credit risk and then Russell. This is mark I think your second part of your question related to the seasonal and how we how we think about those deferrals while the debt.
Birtles because because alone is not.
It's one deferrals, so it's not showing up as the delinquent.
System, it's not reflected in the base model, but it is reflected in the qualitative overlays that are part of our overall.
See from methodology. So it would be captured in order on provision level for the quarter.
That's great color guys I appreciate it thanks for bearing with me as I asked the question.
My last one just switching gears on on that consumers fees. So I get the full picture guide but.
Just curious if you could.
Give us an update in terms of.
What percentage decline was from lower activity versus the waiver and maybe how.
What the exit rate was at the end of the quarter June versus versus April to get a sense for run rate third quarter.
It was.
A minimal impact from fee.
Waivers, we were very accommodating we participated in the cares program for all five of the states that that we operate so we are very accommodating to customers. However.
Customer request for fee waivers were very limited.
And the driver of that revenue was really activity based overdraft fees and credit card debit card.
Activity, we do see both of those climbing.
Month by month as there is more activity overall.
Great. Thank you very much that's it for me.
Thank you and as a reminder to ask the question you'll need to press Star one of your telephone. Our next question comes from Matthew Breese from Stephens Inc. You May proceed with your question good morning.
Okay and then.
Couple of follow up questions.
So.
On the deferrals that go through the the re deferral quote unquote process and and don't meet the hurdles and therefore need need additional forbearance.
Hi, how are you thinking about moving those loans into.
Other criticized or classified or traditional NPL or MPD buckets should we expect.
Those that don't sure on the next round to move into those traditional.
You know deteriorating asset quality buckets.
I think you'll see some of that but again, it's a underwriting process. So some of those borrowers may request that the second a deferral.
And we will grant that based on their capital their liquidity there guarantor support.
So it won't necessarily mean that that they are a nonperforming or distressed borrower at this point some of them as we re underwrite them on probably we'll adjust their risk rating and and potentially be classified criticized or or.
Or nonperforming, but again, it's an underwriting process.
That that we will look at each one of those customers too.
Have us Brant them the next deferral.
Understood and then could you just talk about.
How much flexibility you have from the carriers act and or from the regulators to push deferrals out meaning it now seems like there is likely going to be businesses and sectors of the economy impacted well into 2021.
Do you have the flexibility to extend deferrals out.
That far into into mid 2021, and we can be carrying these for that long.
Well I would just say.
In regards to the.
In regards to the regulators.
They.
Have much more flexibility.
And willingness to work with banks that than existed.
In.
Oh, 910, 11 time period.
So I think we'll have the ability to extend.
How long it last is really hard to say.
Okay.
And then going back to Frank's question on the provision.
Just wanted to get a sense for how the Moody's forecast have evolved into Q and if you have them into July has the forecast started to stabilize and become a little bit more consistent or have they been as volatile as they were in April and May just want to get a sense for how they have they been moving.
From.
From my perspective, Matt they have stabilized and and I would say they they stabilized because if you think to in March I.
I think there were some banks that we're using like there was a theres one on the 23rd there was another one of the 27, we're coming out every couple of days things were so fast and furious and.
Now for this quarter I mean delay asked model that Moody's developed was June nine was the model that everyone was using four quarter end and again I know, there's a lot of midsize banks that rely on Moody's for their macroeconomic variables. So the fact that they're just slowing down the piece.
To me implies that you're getting some slightly better lens into the future. Although again there are still certainly a lot of uncertainty out there.
Understood and then just last one from me I know regulatory capital ratios are well in excess of minimums.
Tangible common equity could you just give us some sense of where you are comfortable moving that down to a result, even something you're looking at.
Yes, so so tcf.
I really think this quarter is going to be the low water mark.
We would expect a decline back from there and that was really a function of pp p. loans.
Putting those wanted me obviously, it's a zero percent risk weighted asset for your regulatory ratios, but the PPP loans impact booties CE and your tier one leverage ratio.
Unless you are using the Ppps laugh, which we haven't had to use yet as a funding source because the deposits are still sticking around so.
Both of those ratios tier one leverage potentially.
Tangible common equity here in the short run we knew would dropped as a result to PPP, but because we view that as both the right thing to do on our communities.
As well as the short term nature of the program, we were comfortable with that number coming down to 7.4, and then climbing back towards closer to probably seven eight ish range by by year end.
Great I appreciate all that Thats, all I had thank you.
Thank you.
And I'm not showing any further questions at this time I would now let's turn the call back over to Phil Wenger for any further remarks.
Well. Thank you all for joining us today, and we hope you'll be able to be with us when we discuss third quarter results in October.
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Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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