Q2 2020 First Citizens BancShares Inc (Delaware) Earnings Call
Well, ladies and gentlemen, please standby your conference call would be good momentarily once again, ladies and gentlemen, please stay on the line.
[music].
And gentlemen, thank you for standing by to walk into the first citizens Bancshares Q2 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session, who asked a question. During the session. You did press star one on your telephone if you require operator systems around the program. Please press Star then zero as a reminder, today's conference is being recorded.
We're not luxury filters conference call Mr., Tom <unk> director of Investor Relations you may begin.
Thank you Kevin Good morning, and thank you all so much for joining us. It is my great pleasure. This morning to introduce you to our chairman and Chief Executive Officer Plank, holding as well to our Chief Financial Officer crack next.
To provide an overview of the company and our second quarter results after which we'll be happy to take any questions you may have.
We're also delighted to have several other members of senior team well, that's and they too will be available for Q and I.
Our remarks today <unk> earnings presentation that is available at first citizens Dot Com Slash earnings presentation.
I should note statements made during the call and statements included in the presentation materials, maybe forward looking statements and the factors that could cause actual results could differ materially no statements are listed in the earnings press release.
Presentation materials, and the company's FCC filings and if any non-GAAP financial measures will be discussed on the call or included in the presentation materials that reconciliations of those measures to comparable GAAP measures are available in the presentation materials, which are posted on the website.
And with that I'm going handed over to Frank.
Thank you Tom and good morning, everyone.
All of US had been through a challenging for plus months now and I want to start by saying how proud I am of this organization for rising to the occasion.
I think the best it can be for our customers communities and associates.
We'd like to think of personal reasons as showing its best in trying times and I genuinely believe we're doing so.
As we move into the presentation, we will give you some specific examples that speak to this point.
Today represents the first time that we've conducted an earnings call.
We concluded that as we've grown at issued more securities into the market and are getting a lot more attention for both analyst and investors that all of our constituencies would benefit from the calls so thank you again for joining us and we're delighted to be here.
Prior to diving into our second quarter result.
We thought it would be helpful to quickly review a few pages on who we are and what we think about ourselves. So we will briefly do so and then moved to the second quarter earnings commentary.
Well, we begin on page three.
Oh I'll note that first citizen has operated since 80 98 and I've personally been.
The good fortune to be a part of the organization since 1983.
Over the past three decades, we've grown assets from approximately three and a half billion dollars to almost $48 billion today.
Deposits. So 41 of the half billion as of June 30, we now rank as the.
Approximately the 38th largest U.S. back.
Our Chief Financial Officer, correct mix will cover our second quarter financial performance later in the presentation.
Despite a challenging environment, we've achieved a return on assets of close to one personnel.
And they return on common equity of 11.4 O personnel in the first six months of 2020.
The core of the franchise the attractive markets are the Carolinas represents 73% of our deposit base.
With many adjacent markets in the greater southeast for Merrell into Florida.
Beginning with my predecessor, However, we have from time to time expanded out of market as we saw opportunities.
We will touch on this in more detail shortly.
But we're pleased with all the all of our geography.
And to an extent we are a national franchise.
Our debts Carolinas footprint offers clients a full selection of retail business and commercial services.
Our fee based lines of business integrated into the client relationship and are focused on providing a holistic banking.
Relationship.
We take great Pride in our Forever first brand and brought over 100 years customers a trusted first citizens with their money and their financial futures.
Outside the Carolinas markets, we operate more of a business in commercial focused model that is located in high growth M. S. A is that we find attractive.
We have been in many of these markets now for over two decades.
And had been able to bring the same Brandon style of banking that distinguishes for citizens in the Carolinas.
We remain relatively profitable every year in modern history and most importantly, we've remained purposefully grounded in the belief that delivering better banking helps people a little better lives.
We work very hard to consistently live up to this ideal.
Let's move on the page to the next page I.
I won't spend a lot of time on page four.
Oh.
In our key drivers of long term success, but suffice it to say that we're proud of all aspects of the organization and we believe the attributes listed on this page and enable us to deliver very good result for all our stakeholders consistently over time and we'll continue to do.
So going forward.
Advancing the page five.
Our top 10 deposit markets are all within the core of our southeast footprint.
Relative to the broader U.S. these markets have very good underlying demographics.
Our deposit numbers are from June 32020, but the rankings on June 32019, FDIC data given the new rankings are not yet out.
You will note a lot of number for a number five market share rankings.
Typically it is the very large money center or regional banks in positions, one two and three and we're actually okay.
So with this as it really distinguishes our high touch go to market strategy and leaves us lots of room to grow.
Now, let's look at page six.
As you can see from our concentration by state on page six the core of our franchise is in North and South Carolina.
However.
Through both organic organic growth and acquisitions, we've been able to expand our loan and deposit concentrations in Georgia.
Agenus, Florida and California.
Each of these four states have greater than a 5% share of both our total loan and deposit portfolios.
Now turning to page seven.
When you look at our loan book from on high with regulatory data. It may look like we're a concentrated CRT lender, we'd like to point out.
What we'd like to point out is that really we're a small to midsize see an idle lender.
As one third of our book and close to three fourths of our commercial real estate portfolio are actually loans secured by owner occupied real estate that is essentially see an eye in nature and.
And supported by underlying cash flows from these businesses.
As you can see from the credit quality metrics on the right hand side of the page our credit quality is very good with low nonperforming asset in charge off ratios.
And that our allowance for credit losses covered the second quarter annualized charge offs over eight times.
Moving on to page eight.
We know our business will.
And I've been successful.
Credit risk managers over time.
This page gives you a 20 year snapshot of credit performance and comparative results.
Slice of the say that we're very confident in our credit risk management skills, and our ability to weather economic downturns, our net charge off ratio has remained well below the U.S.
Well below the average of us banks during good economic times and the last crisis, our peak was significantly less than the industry.
Please turn to page nine.
A significant benefit of our strategy is the exceptional deposit base that comes with it.
It is low cost relative to the industry and has proven stable over time.
A recent deposit growth relative to peers is a testament to the success of our strategy.
Moreover, many of our top customers have been with US 20, plus years, which is a further testament to the fact that our strategy works longer term and over the cycles.
Turning to page.
We believe we have a very attractive portfolio of fee businesses and importantly, they are very much built around our core customer base and consistent with our strategies or yeah.
Our wealth and mortgage businesses served primarily our Carolinas and surrounding markets.
Whereas our merchant card capabilities serve customers across our entire footprint.
We are always considering ways to efficiently expand the full range of audit of our products and services, we offer the clients across our footprint and we have recently expanded our wealth platform into Atlanta.
In the quarterly discussion will touch on the fact that some of these businesses saw lower volumes in Q2 with the shutdown similar to the rest of the market.
Importantly, they are now rebounding in each of these businesses are ones that we really like.
Our core to our strategy and our integrated into our core relationship based approach.
And now to page 11.
While our day to day strategy and culture focuses on organic growth.
M&A has been an important component of growth for personal reasons in the past decade alone. We've done more than 25 acquisitions. We believe this experience has given us a strong core competency muscle memory. If you will and has enhanced our company in many ways.
We've had great consistency and tenure in our operational conversion team throughout these acquisitions, which is only reinforced our methodic disciplined approach to converting acquired institutions.
This team is second to none.
And with the conversion of Integra next month. They will have just three branch conversion three branch conversion left to do in November.
And I believe that they are delighted to have a brick.
The majority of what we've done have been open market acquisitions.
But we were quite well also quite active in the FDIC space.
These transactions, we believe we not only step down in assisted our regulatory partners, but we estimate that the net impact of these transactions for our shareholders resulted in over a billion dollars in capital creation.
Going to page 12.
Our capital levels have been consistent and strong overtime.
We have worked down our tier one common levels.
Acquisitions and buybacks to levels more in line with our peers. We have added capital via our March issuance of both perpetual above preferred stock and subordinated debt.
If you will we balance the capital stack as a means to optimize returns to our shareholders moving forward.
We will continue to utilize our capital on opportunities that provide the best long term value for our shareholders, which might come in the form of organic growth M&A and continued share repurchases.
Please advance to page 13.
We wanted to simply give you a snapshot of part of our team being myself and five of my key partners.
We all worked exceptionally well together and on average we been with first citizens more than 26 years.
In short I believe we have a very successful partnership.
Now moving to page 14.
I would be remiss, if I didn't touch on how our strategy culture and financial goals, all really become one.
We revisit our goals each year, but in short it revolves around our people and customers delivering our best each other.
When we do it right. It's a win win for all and while we pay attention to all the metrics indicative of how we're performing in its simplest form we focus on growing tangible book value and we watch it would vigilance.
And finally, turning to page 15.
And as I've mentioned.
We very much believe if you do it right. It's a win win for all and that the market we'll see this.
Overtime the efforts of all our first citizens associates have consistently translated into market leading returns for our shareholders.
I Hope this overview was helpful and now I'd like to turn it over to Craig to walk you through our second quarter, Greg. Okay. Thank you Frank and good morning to you all.
Continuing where Frank left off in the deck I.
I would like to briefly discuss our second quarter earnings results, which are included on page 17.
And then I will move on to more specific pages that detailed the drivers behind our results for.
For the second quarter, we are nearly 154 million, but before preferred dividends and nearly 149 million.
After dividends. This represented a 24.8% increase and net income available to common shareholders over the second quarter.
Last year.
Earnings translated to $14.74 per share and Aro HBV of 1.36%.
He of 16.43%.
While we did post strong earnings during the quarter, we did face earnings headwinds that were reflective of the ongoing coated pandemic and the low interest rate environment.
However, we were able to largely offset declining net interest margin and a higher reserve.
With positive fair market value adjustments on our equity portfolio and gains on sale in our Fs investment portfolio.
Addition, we fully participated.
In the FDA PPP lending program.
Which contributed to gross and net interest income compared to the second quarter a year ago.
Now I'll turn to pages 18 to 19, well I will provide some insight into our net interest income net interest margin.
Consistent with most of the banking industry low interest rate environment is challenging for us. However, as you can see on page 18, we are pleased that despite the impact of the rapid decline in interest rates. During the first quarter, we're able to grow net interest income over the comparable quarter last year, and we're only slightly down.
From the first quarter.
Although the fed cut the federal funds rate by 150 basis points during the first quarter the impact of falling rates was more visible and our financial results during the second quarter.
This led to a slight decline and net interest income compared to the first quarter due to lower interest income on investment securities and overnight investments.
Partially offset by lower deposit interest expense and interest and fees on ESB loans.
On page 19, we lay out the dynamics surrounding our NIM compression.
The first quarter incest, the comparable quarter a year ago.
As the NIM roll forward at the top of the page shows.
Our NIM declined by 41 basis points in the second quarter as earning asset yields were fully impacted by the interest rate reductions that occurred late in the first quarter and were only partially offset by lower deposit costs as the roll forward at the bottom of the page shows our NIM declined by 63 basis points on the same quarter a year ago.
For mostly the same reasons impacting the linked quarter.
Quarter decline.
We do believe that NIM is nearing a trough as we felt most of the impact of lower rates in the second quarter.
While we do project a further decrease in our earning asset yield in the third and fourth quarters. We believe that it will be largely offset by further decline in deposit costs as well as declines in excess cash related to separable ESB deposit balances.
Excluding SBC, a PPP lions, 69% of our loan portfolio is composed of fixed rate loans of our variable rate loans, 46% are tied to prime 46 tied to LIBOR floor with the remainder to us treasuries.
Therefore, while we believe that loan yields will decline in the third and fourth quarters as a portion of our fixed rate book matures or rolls off and his replacement lines at lower rates all of our variable rate lines of reprice and the fixed rate portion of the book serves as somewhat of a buffer the future declines in yields to the extent magnitude.
He asked in the second quarter.
Well our cost of deposits is already low at 18 basis points, we do see a drifting back down to a single digit basis points costs, similar to where where it was during the 2006 to 2018 timeframe before the fed rate hikes.
Pound for pound as you can see we funded a lot of PPP loans most of them. We're on the smaller into the spectrum with an average loan size of 138000.
Therefore, our weighted average origination fee was 3.65%.
While we do not see these loans, having a significant impact on our NIM moving forward. They will have a large positive impact on the absolute level of our interest income.
To the extent the lines are forgiven and leave the balance sheet weighted towards the end of the third quarter and during the fourth quarter with full early recognition of the origination fee flowing through the net interest income they will have a positive impact on our NIM to the extent, let's go to full maturity they will cause a slight drag on them.
To conclude we expect both NIM and net interest income X PPP impact to be down, but most of the decline is behind us, but at PPP forgiveness plays out as we expect it will have a positive influence on both.
Because they are now I'll turn to page 20.
And discuss second quarter non interest income.
The story on our noninterest income is twofold first as we noted in the current quarter two linked quarter highlights.
We did realize a significant increase in the fair value.
Market adjustment on our equity portfolio portfolio.
The increased during the quarter more than offset the previous quarters decline in fair market value.
To give you some background beginning in 2015 and as an offshoot of our M&A strategy. We began accumulating a portfolio of bank stops, where we had a strategic interest and at points in the cycle, where we saw value.
It's always our intention at the time to purchase of the equity securities to hold them for intermediate to long term periods.
The guidelines around equity strategy are incorporated into our formal investment policies.
Well not significant to our overall investment portfolio strategy or as a percentage of our total investment portfolio. It has been a consistent and access and successful part of our portfolio.
What we've received in March was a severe dislocation in the market, where many bank market valuations descended well below one times tangible book value.
Just as we view this dislocation as a good time to buy back our own stock, we equally style opportunity to purchase stock at low valuations in some institutions, where we were comfortable with the risk we took on.
While we did not hit the bottom perfectly we got close to it and it worked we recognize that such opportunities are rare.
As I referenced earlier, the overall equity portfolios felt the market depth at the end of the first quarter and consequently, our first quarter results included a 51.4 million negative fair market value adjustment.
During the second quarter the stock prices of the Securities rebounded we sold the bulk of the securities for realized gain of 37 million.
In addition, we recorded a positive 27.5 million dollar fair market value adjustment during the second quarter, bringing the total fair market value adjustment during the quarter to 64 and a half million dollars. This resulted in the $116 million increase in the fair market value adjustment marketable echo.
With these securities highlighted on page 20.
So now into the second part of our noninterest income story and this relates to what we call our core fee generating businesses.
As Frank alluded to earlier most of our noninterest income business lines are heavily integrated with our bank business and rely at least in part on branch referrals in general most of our income and these lines of business are stable in recurring with great dependent on further customer acquisition expanding relationship.
Shifts with existing customers.
As expected we did we did see an impact on noninterest income from the code the pandemic.
And the resulting stay at home orders, but as I will discuss most of the core businesses are rebounding nicely.
The most pronounced negative impacts of the koby pandemic during the second quarter when deposit service charges due to both excess deposit balances from the stimulus programs and the fact that we work with our customers on a local basis to help relieve pressure on overdraft fees.
Deposit service charges were off back close to 50% in April and May by June had returned to 80% of pre code that level.
Merchant income was also down by over 40% in the April timeframe due to a drop in consumer spending the returned to pre coverage levels in June we attribute the increase in June to the fact that a large part of our merchant income revenue stream comes from doctors and Dennis than many returned to their operations in June.
Cardholder income was negatively impacted by 15% to 20% in the March and April time frame. The return fairly quickly depreciated levels in May and June.
Wealth management income was more heavily impacted in the brokerage area as branch closer branch closures and stay at home orders impacted sales. However revenues from our Trust division held up well and assets under management are only 3% off of the all time high due to both the return and market asset price.
As as well as organic growth.
Mortgage division was a bright spot during the quarter as higher originations and gain on sale drove overall mortgage income higher mortgage production increased by approximately 50% in the first half of 2020 compared to the first half as 2019.
In terms of the outlook for non interest income moving forward. We are pleased by the end of June and many of the most heavily impacted areas levels return closer to our at pre k. that levels.
Going forward the level of noninterest income will depend on the extent to which economies remain open. However, all else equal we could expect to see continued growth in the mid single digits, which would be consistent with prior years growth rates.
System with prior periods. We will also continue to assess opportunities to recognize gains in our fs investment portfolio.
Okay. So now moving onto page 21.
On noninterest expense.
On the slide we have broken it down for you and two core components and provide us some highlights and commentary to the Rightsized page.
Given that we've provided a lot of break down here and want to focus on what we see as the key takeaways.
For starters when you track our expenses over the last five quarters and consider both organic growth and acquisitions. We think we have done a good job holding expenses in line.
More expenses will be coming out of our recent acquisitions and while code that saved us in some expense categories such as travel.
And via a hiring freeze implemented at the outset of the pandemic and also added expenses and other categories and looking at current quarter expenses versus the same quarter a year ago, if we subtract out the impact of acquisitions on both quarters expenses grew by 3.8%.
Overall, we're pleased that were being prudent and managing our expenses.
As we look forward our baseline for expenses with savings from acquisitions realized is somewhere in the range of $96 million to $97 million per month, so a modest increase.
Areas, where we intend to increase spending or in the digital space in the technology projects surrounding our operations, which are primarily efficiency place. These projects have been well thought out and the timing is right to do them in effect, we're redeploying merger and hiring freeze savings into some of these positive investments.
I'm going to go I use the term baseline on expenses and I think that term is fair we watch our expenses very closely and this baseline as our current thinking and we're comfortable at those levels, but keep in mind. We are continually looking at the expense levers, we have and constantly evaluating them for exam.
I will certain blank branch closures could be accelerated and hiring freeze could be extended but the real takeaway I hope to impress upon you is that we believe we're being good stewards here and expenses are continually monitored and reviewed.
When you look at our efficiency ratio on the page. It was obviously impacted by the decline of our NIM.
We have a very low deposit beta and benefit greatly from higher rates, but also note that our efficiency ratio typically remains a bit higher than peers by design and that goes back to our high touch go to market strategy and the deposits and businesses that go with it lastly, it goes without saying that the rebound in our core fee.
Businesses will also do its part to keep the efficiency ratio down.
So next turn to page 22, which highlights our balance sheet as of June Thirtyth.
I won't spend much time on this page as there is more detail on the line items in the page calm.
But I will point out that our total assets grew by over 10 billion or about 27% since the second quarter of last year. This growth. This growth was primarily funded by an 8.8 billion increase in deposits of which approximately 3.5 billion related to recip.
A couple SBK PPP deposits and stimulus checks and another 1.4 billion related to acquisitions.
Therefore organic deposit growth was quite good representing over 44% of the year over year deposit growth and an 11.9% growth rate.
This further reinforces the point freight made earlier, we're pleased with our banks positioning in the market.
Now I'll turn to page 23 to discuss the components of our loan portfolio.
When you look at our loan portfolio, excluding approximately 3.1 billion in net PPP lines, we're about two thirds commercial and one thirds consumer on the commercial side, we do all types of small to mid market banking, we excel in banking professionals, hence a lot of owner occupied commercial.
Real estate and on the consumer side look to bank those customers as well.
In terms of consumer loans.
They consist of residential mortgages installment direct and indirect loans residential loans and credit card loans.
Organic loan growth was somewhat muted during the second quarter growing at an annualized rate of 3.4%.
Most of the growth within the within commercial lines with owner occupied real estate loans, having the most significant impact.
We do expect that loan growth will remain muted and the flat to low single digit percentage growth.
Area.
Throughout the remainder of you're giving given the uncertainty in the economy surrounding coded to.
Turning to page 24, you've heard me reference SBK PPP line several times.
Our team did a fantastic job.
Here for our customers in this time of ongoing uncertainty.
As a testament to our associates and our market presence, we extended lines to more than 23000 of our customers totaling $3.2 billion. Our average loan size was 138000, so definitely on the smaller end of the spectrum.
92% of the loan units and over 48% of the loan amount were extended to customers with a loan size under $350000.
Under 1% of the loan units and 15.5% of alone dollars were extended to customers with a loan size greater than $2 million.
The geographic concentration of the lines was fairly in line with our commercial loan portfolio distribution and in terms of industry concentration. The top five industries were medical construction professional services dental and service.
We collected a weighted average origination fee of 3.65% and fees totaling $116.9 million.
Based on what we know now our expectation is for a significant portion of these loans to be forgiven towards the end of the third quarter and in the fourth quarter with spill over into the first quarter of next year.
With forgiveness the fee income recognition will will accelerate and flow through net interest income during those quarters.
At the end of the day participation in this program to a ton of effort working creativity of both our bankers and back office associates.
They put in many days of long hours to get it done for our customers. We're very pleased that we can make such a big impact for thousands of our customers throughout our entire footprint.
Next I will turn to page 25, and discuss our payment extension program.
Extensions were initially made to performing customers on a 60 or 90 day basis.
Currently payment extensions are active on 5781 account.
And on 2.1 billion, an outstanding loans, which equates to approximately six and a half a percent of our total loan portfolio.
Represents payments of around $53 million.
This represents a 61% decline in the number of active extensions and a 63% decline and outstanding balances since June thirtyth.
At their peak, we had payment extensions on 19655 accounts, representing 6.9 billion in loans. So currently active deferrals are down by 71% in terms of units and 70% in terms of outstanding balances.
93% of these accounts made their most recent payment and the remainder within 15 days of their payment due date the past due rate with represents balances 30 days or more past due is low at point to 1%.
Requests for further extensions are currently minimal in June at less than 3% of was with expiring payment extensions request of the second extension.
Payment extension requests peaked in late March with about 5000 requests per week and averaged around 200 per week in June.
Next I will turn to page 26 and cover our allowance for credit losses at June Thirtyth, I will refer to allowance for credit losses as Hcl throughout my comments.
The table on the left hand side of the page Walt forward, our Hcl at the end of 2019 to the Hcl as of June Thirtyth.
The point adoption of Cecil on January one of this year, we reduced our hcl by net amount of $37.9 million.
This was composed of a 56.9 million dollar reduction in the Hcl related to non PCD lines, partially offset by the $19 million reclassification of our PCIA loan credit discount to the Hcl.
The 56.9 million dollar reduction in Hcl on our non PCD loans related to lower reserves allocated to our commercial loan portfolio, only partially offset by reserves allocated to our consumer portfolio.
The reduction in reserves on commercial loans was related to those loans, having relatively short lies and having experienced minimal historical losses, and therefore lower losses were projected over the forecast horizon.
Conversely, the Hcl for consumer the consumer portfolio increased at a higher loss projections and longer longer portfolio lives.
The reserve for unfunded commitments increased by $8.9 million, primarily due to the inclusion of he lot balances previously excluded from the reserve calculation.
The net impact of Cecil adoption net deferred taxes increased retained earnings by approximately $37 million, which composed of one an increase of 43.8 million from lowering the hcl non PCD lines and a decrease of $6.8 million from increasing the risk.
Our on unfunded commitments.
During the six month period ended June Thirtyth 2020.
We incurred net charge offs totaling $14.9 million for the same period, we took provision expense totaling $48.9 million covering current year net charge offs by multiple of 3.3 times.
Of the $48.9 million and provision expense recognized $31.6 million related to the reserve build for uncertainty surrounding code that.
Our net charge off ratio remained low at 10 basis points on a year to date and nine basis points on a quarter to date basis, the Hcl percentage X PPP loans, a 0.76 covered quarter to date annualized net charge offs 8.2 times and year to date annualized net charge offs 7.6 times.
Coverage ratios compared to a weighted average life of our loan portfolio of just under four years.
In terms of our outlook, we expect that the net charge off ratio will increase slightly as the positive temporary impact of SP, a loan proceeds and payment extensions subside the absolute level of net charge offs in the magnitude of the increase.
And thus future reserve builds will be dependent on the economic recovery in the severity of cobot on it.
At the present time, we expect future reserve Bill, we expect that future reserve builds will not be at the pace of the previous two quarters.
Now on the page 27, as Frank covered in his comments one of our keys to maintaining consistent profitability, regardless of the business cycle is solid risk management around our credit portfolios.
On page 27, I think you will see that our credit quality metrics support that our Hcl is prudent and has adequate to absorb current estimated credit losses.
You will notice on the bar graph at the lower left hand side of the page that npis, our upsets prior year in.
And as part of the adoption of seasonal loans transferred from performing PCR pools, and the nonaccrual status contributed to $35.9 million of the increase in Npis from December 30, Onest 2019 to June Thirtyth 2020, the remainder of the increase as prime.
Generally related to acquired loans in general we feel very good about our credit profile and quality metric.
Turning to page 28, I will touch on our deposit base in our deposit growth.
In addition to excellent credit quality, a hallmark of our bank as our stable high quality and low cost deposit base as the bar graph shows excluding the estimated impact of PBP reciprocal deposits and of stimulus checks on second quarter demand deposit growth.
Demand deposits of represented anywhere between 38% and 42% of our total deposit base over the past five quarters.
While we do acknowledge that our posit growth during the second quarter was positively impacted by government stimulus for consumers and small businesses, we experienced strong organic growth on both a linked quarter and year over year basis.
During the quarter organic deposit growth was 31.9% on annualized basis on a year over year basis organic deposits grew by 11.9%.
We attribute this organic growth to multiple factors, including one our day to day market strategy and relationship focus that Frank mentioned earlier in his comments to a flight to quality and challenging economic times.
Three lower consumer spending for broad market uncertainty, leading our commercial and business customers the whole more cash than that deposits counts and finally five tax payment deferrals from April to July.
Overall, we are exceptionally pleased with our deposit base and importantly, with the dedication of our bankers who make it happen every day.
As far as our outlook for deposit growth during the remainder of the year, we expected decline in the current growth rates as our customers continue to utilize their PPP line and stem and stimulus check proceeds.
Turning to page 29, our funding mix shown in the table at the top left hand side of the page illustrates our deposit bases strong role in funding, earning asset growth at the end of the second quarter deposits represented over 95% of our funding mix compared to just over 97% a year earlier.
Yes.
The decline in the percentage was due to an increase in FHLB advances and issuance of subordinated debt during the first quarter.
However deposit composition is expected to continue to remain in the mid to high 90, as a percentage of our funding mix moving forward during the quarter. We did see deposit rates begin to catch up with falling rates as our cost of deposits fell by 10 basis points as I mentioned earlier, we expect the cost of the Pos.
This default to single digits basis points over the coming quarters.
Okay now turning to page 30.
All of our capital ratios will walk forward from December December 30, Onest 2019, and I'll focus my comments on the significant items impacting the the changes in those ratios.
Our total risk based capital ratio ended June Thirtyth at 13.63%, which was up 251 basis points over the prior year end sub debt and preferred stock issued during the first quarter added 224 basis points and year to date net income added 68 basis points the more signal.
Again items offsetting these increases were stock repurchases, which subtracted 92 basis points and an increase in risk weighted assets, which subtracted 44 basis points.
Our tier one risk based capital ratio increased for similar reasons with exception of the sub debt issue, which does not count as tier one capital our common equity tier one capital ratio declined by 54 basis points as the impact of stock repurchases and the increase in risk weighted assets was not offset by the positive impact of.
Net income.
Tier one leverage ratio declined by 74 basis points.
The negative impact of share repurchases growth in average assets. The ESB program and acquisitions, we're not fully offset by the positive impacts of year to date earnings in the first quarter preferred stock issuance.
The takeaway here is that our capital position remained strong providing sufficient capacity for us to grow organically or through acquisition.
And finally, I'll close with page 31, which includes a recap of our outlook for several items that I highlighted as I made my comments on our financial results. Today, We do think all of you for your interest in us and enjoying and then joining us on the call today.
I hope it is clear to you that we're very proud of our associates and their contribution to our performance this year, especially giving given the challenging external environment.
Our focus in strategy have remained consistent and they have been proven by our financial results over time, we believe we're very well positioned to faced a challenging times and delivered good results for all of our stakeholders moving forward.
And with that said I will turn it back over to Frank.
Great. Thank you.
While we're pleased with the quarter and excited about our opportunities going forward. We welcome any questions you may have.
Ladies and gentlemen, if you have a question or comment at this time. Please press the star them one key on your Touchtone telephone. If your question has been answered you wish to move your social MCU. Please press the pound key will cost for almost a couple weeks you and I roster.
Yes.
[music].
Our first question comes from Josh really with Reinhart partners.
Hello.
Just want to start by saying we've been shareholders for going on seven years now and we really appreciate you taking the steps to open up more communication with investors and put more information out we think of.
You can a compelling story. So we appreciate this this step forward.
Just wanted to ask about.
If we are in a lower rate environment for a longer period of time here in NIM is kind of structurally lower.
Are there significant cost takeouts that you can that you can execute and maybe you can touch on is there an intention to get your efficiency ratio more in line with peers, maybe somewhere in the fifties.
Out this Craig next year, all I'll take the first part of that an outlet Elliott Howard our director of financial strategy Amplify My comment there I think just about referenced in my comments, our efficiency ratio is higher a bit by design given our go to market strategy.
The payoff for that is a very low cost of funds.
In times like this we are likely to operate in a range of efficiency ratio between 67, 70% and in better business cycles or our normal business cycles, we're comfortable in the 62% to 65.
Percent range I will tell you that we have very diligent about lowering our expenses that we have a lot of focused also on the the the denominator side of that the revenue side.
As well, but I'll let.
Elliott Howard our director of financial strategy talk about some of the.
Costs that will be removed for both.
Acquisitions, and as we convert those and also.
Talk about a little bit of the impact of this hiring freeze that we've had we've instituted.
Great. Thank you Greg. So we look forward I think the thing we doubled the horizon. Most immediately is the conversions.
Integra in August.
We think compare to where our run rate has been on those acquisitions. This year will save $18 million out of our cost base on annualized basis.
We look to branch closures weve the diligent about looking at our branch network, we close over 100 branches as 2015 or an estimated annualized impact we've done a million into that process with believes impact or communities in places where it makes sense. One thing. We are committed to is our technology digital spend we really see those some.
We will fully to over the past few years and continue to do so so as we move forward outside of the conversion expense hiring freeze. We think we'll have a $15 million positive impact on the following year compared to what the run rate would have been previously and we're going also continue to assess our branch network in terms of how we see how we work hours.
And how we serve our clients because I think thats one of the positive impacts of the go to 19 experience that we've learned a little bit more about our customer base some of their habits and how we can serve them better altered brand strategy.
Okay.
You touched on your acquisition strategy, a fair bit can you talk more about the trade off of.
Looking at new geographies, new markets versus the higher profitability that you'd get from from building density around your core markets and also if you could touch on just how you think about return hurdles in general for acquisitions.
Sure.
But again, so you know when we look at acquisitions in general, but nothing to consider a few things first mostly in the market attractive can we grow there can we sustain the business can we control the credit issues. If you would generate low cost deposits in the market what type of talent is going to come along with that acquisition and as a cultural.
I think overall, we're extremely focused on tangible book value growth.
With that comes in an acquisition standpoint.
Most often end market acquisitions served at best So I think more generally seals pursue in market acquisitions, we will pursue adjacent or out of market acquisitions, when the financial cases compelling.
From the financial metrics, we really look at shortened tangible dilution period and payback we.
We look at the earnings per share accretion.
Well as what the internal rate of return is on the acquisition for acquisitions that are outside of a market that might present, a little bit higher risk. We're obviously going look for a higher rate of return when we look about acquisition.
Are you likely to do any.
Deal that is much larger in size than what we've seen you do which is a lot of smaller deals in recent years is that is that something that's on table.
Yes, I think in this current environment, where valuations are I think there's a lot of compelling reasons.
Earnings impression with NIM compression to consider larger deals I think we're constantly on the outlook for the value of our shareholder and if we found an opportunity that.
Really for the created a stronger institution created better capabilities for customers, we'd certainly consider.
Okay.
In regards to loan portfolio, I think medical and dental loans are roughly 18% total can you talk more about the composition of the portfolio on how you expect it to perform from a credit standpoint, contrasting with Oh, eight or nine or I think losses were miniscule.
But dentist offices face some you new challenges to.
Operating this time with the virus.
Okay, Jim O'brien, our Chief Credit Officer will will answer that question.
Thank you for the question, we do have a good concentration and in dental activity.
What we're seeing is the if you recall.
Our dentists professionals were asked to stand down in the early stages of the pandemic and now they are back at work in their offices or open.
If you look at the detail of the deferral activity, we've had seen dramatic decrease in deferral activity with a very modest 1% asking for a second deferral of David going back to paying but they are open we do not anticipate material deterioration in that portfolio at all.
Okay.
Does that book, mostly dental or is it a mix of medical and dental.
Well, we do have a strong medical book as will the one that just referenced is the dental portfolio.
But we don't anticipate.
Heightened risk issues in either of those portfolios. They both are back at work.
We are and accepting patients and working.
At or near.
Levels prior to cover that in.
And eight nine and 10, where the losses in that portfolio below.
Average losses across your Cnine book.
Yes, they were.
Okay, and you would expect similar performance this time.
With that.
Your organic loan growth. This quarter was was good I think 2.8% sequentially driven by CRT. Most banks are seeing flat or declines organically outside of PPP or you are you taking share in your markets are your March just outperforming the overall economy and what do you expect to here for the next few quarters.
We had a good start in the first quarter of this year and I think I think what has happened is that this has been continuation of that activity.
You know there is disruption in the market with the merger of BBC and also with the issues. The Wells Fargo has been dealing with in North Carolina. The old Wachovia client, that's an opportunity for us. So so I think that disruption in the market has helped us.
With our with our.
Growth strategy of bank and the other side of it too is that even though we were actively engaged in PDP. Our bankers continued to try to attempt to develop business in those sectors that we thought would come through this.
Well and one of those is medical and dental which is a big part of our focus.
Okay.
You bought back a fair amount of stock in the last.
Few years, particularly last few quarters, I think thats relatively new for your organization can can you talk about your strategy there and if that's something that we should expect to continue.
Okay, I will I will ask Tom Eklund, our treasurer to touch on that.
Yes.
We look at our share purchases as a way to return excess capital to shareholders increased future earnings per share and return on equity and we've been fortunate enough that earnings growth outpacing asset growth, which has led to excess capital and when we can fill that void that mergers and acquisitions.
Share repurchases as viable option.
There, obviously looked that in combination with internal asset growth and M&A opportunities essentially it is a way for us the efficiently manage our capital.
Okay. So something we can expect.
We can expect continue here for them for the next for the medium term.
I'll I'll say that we made the decision in the current quarter to suspend.
Repurchases of shares just to be consistent with the rest of the market I would tell you that we will.
Reassess that at the end of the third quarter not trying to send a message we have capital concerns as our capital ratios are certainly.
On the upper end of of the ranges that we target.
But we are just to be prudent and consistent with the industry. We are spending for the third quarter.
Look for us to reassess that.
In the fourth quarter.
Okay, and then lastly.
Im sorry.
I just was it was Craig next battle, a transition from Tom just want to Thats in that.
I appreciate that and lastly from me did I hear right and then your discussion noninterest income.
You have an actively managed portfolios publicly traded bank stocks and that's what contributed to the to the big gains.
Tom Acklin.
Treasure will address that question.
Yes.
We we have that Craig mentioned earlier in 2015, we have added deficient in.
Banks talk where we look for quality bank holding companies or bank.
We consider those purchases to be intermediate to long term in nature and recognize they recognize that many of them not all of them necessarily our candidate for acquisition by us or another financial institution at at a premium.
We had activity during the quarter at you saw in financials, we had.
At the high pulling.
That equity portfolio to that than the third quarter it hit.
A percentage of T. One of 9.64% and as percentage of total assets was 76 basis point.
And 3.6% of our total investment securities.
During the first quarter or during the second quarter, we sold out of it realizing gains of 37 million and additional fair market value adjustment.
And that the 27 million I'll talk about so this portfolio, mostly larger banks. Thanks, you find in the S&P 500 that type of thing or is it because it is a private placements otcs stock small banks, what's the composition Mike.
It it's a little bit of both but it's not really large bank is milk out with a smaller to community bank side.
Okay. Okay.
Interesting.
That's good for me. Thanks, again appreciate you're doing the call.
Thanks for your questions.
And I'm not showing any further questions Tom electro in the call back over to our house for any closing remarks.
Thank you very much for joining us and if you have any questions or as you think about it further balmain just give us call. Thank you.
Ladies and gentlemen can today's presentation you may now disconnect and have a wonderful day.
Okay.