Q3 2020 Mercantile Bank Corp Earnings Call
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I would now like to turn the conference over to Tyler Deur from Lambert Mercantiles Investor Relations firm. Please go ahead.
Thanks, Charlie Good morning, everyone and thank you for joining mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the third quarter 2020, I'm tired or with Lambert IR Mercantiles Investor Relations firm and joining me today are members of their management team, including Bob Kaminski, President and Chief Executive Officer.
Sure Chuck Christmas Executive Vice President and Chief Financial Officer, and Ray Reitsma, President of Mercantile Bank, Michigan.
We will begin the call with managements prepared remarks and presentation to review the quarter's results then open up the call to questions. However, before we begin today's call. It is my responsibility to inform you that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans.
And objectives of the company's business [laughter] the company.
The company's actual results could differ materially from any forward looking statements made today due to the factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward looking statements made during the call. If anyone does not already have a copy of the third quarter 2020 press release and presentation deck issued by Merck.
Our call today, you can access it at the company's website www Dot Merck make dotcom at this time I would like to turn the call over to Mercantiles, President and Chief Executive Officer, Bob Kaminski Bob.
Thank you Tyler and good morning, everyone.
On the call. This morning, and we'll provide you detailed information on the Companys performance in the third quarter amidst a challenging operating environment as well as an update on continued activity definitely related to the pandemic.
First I guess I want to recognize the tremendous efforts of our debt.
Well I can tell team for their persistent resolved and I'm going to below NAV.
And navigate the continuous and often unique challenges presented from the pandemic throughout this year.
Our Paramount focus has been on the health and safety of our employees, which has created the necessity for flexibility and our team has consistently risen to the challenge right now working remotely and a new environments. These efforts have helped mercantile delivered strong results while successfully serving our customers.
[laughter] filling their banking needs in a variety of ways.
Forget all demonstrating the continued strength in a number of performance areas for the third quarter.
Share earnings of 66 cents, which again included a strong provision for loan losses as we continue to build our reserve as a result.
Related issues.
This sustain financial strength allowed us to continue our regular cash dividend program.
Board declared a fourth quarter cash dividend of 20 cents per share.
We are pleased to provide this consistent cash return to our shareholders within this time of uncertainty and Chuck will provide further updates on the many moving parts in our financial statements during the quarter.
That's the health and safety of our communities is a top priority our facilities have been updated to incorporate physical and social justice see modifications included our lobbies, which reopened in late June.
Our team and clients remain adaptable alternative methods of banking activity engagement as we continue to closely monitor for developments and revise our plans accordingly.
All timeline the cold winter related activities can be viewed on slide four of our presentation.
Our commercial lending team remains focused on the paycheck protection program.
Successfully originated a significant volume of SDN loans for businesses in our markets are.
Our teams that work on the forgiveness phase of the PPP process continues into the fourth quarter as we assessed one recipient clients with gathering and submitting the required information to allow the rendering forgiveness determination by the Sta.
[noise] deficient efforts of our lending growth, but PPP have helped to create no relationship opportunities the businesses that face challenges and the application process with the incumbent banks.
I think that the initial stimulus program needs of these clients and the application process. We are now in a position to grow those relationships through discussions about their full banking needs.
Our teams diligence and dedication to our communities as illustrated by our timely and responsive assistance to these businesses as an endeavor to take the neatest steps for an economic recovery and growth.
We also remain focused on meeting the traditional credit needs of our existing clients, while strengthening our pipeline and find new customer relationships.
I will provide you with an update on overall portfolio performance and the status of the customers receiving assistance for our payment deferral programs, which have largely reverted back to full contractual loan payments as such our asset quality asset quality remains strong and our focus on sound credit underwriting.
He has led to a low level of past due loans and nonperforming assets.
Well the World series, starting Tonight I want to borrow baseball terms just first for you at our retail mortgage team knocked the cover off the ball in the third quarter as we achieved another record breaking level of mortgage banking income.
Growth of our mortgage lending team and 2020 has allowed their dedicated efforts toward ensuring a strong pipeline, especially during the upcoming months, which reflects normal seasonality.
It's kind of difficult climate. The team has increased market penetration to enhance revenue and achieved strong residential mortgage loan production levels.
Our team to put forth a tremendous effort to ensure the entire loan origination process from receipt of an application to closing is completed and is structured and timely manner.
Franchise will have more detail on mortgage production in their comments.
Turning to our to our operations, but the ongoing investment and deployment of technology as alternative delivery channels, which has only been accelerated by the current environment an evolution in the way banking is done appears to be at hand.
Mercantile has been able to reduce this number of locations from 53, So what will be 37, once our recently announced optimization in our branch network is completed later this year.
Our current footprint can be viewed on slide three.
We continue to engage our customers. So we can take a holistic approach to their needs and understand how patterns and preferences of interaction with us are evolving, especially in view of the reality is brought Bob brought about by coal with 19.
We consistently aimed to reevaluate our interactions across the board conforming to industry best practices, while seeking to break new ground across a number of important areas.
As we look back on the past two quarters that we're so heavily impacted by the pandemic the health and safety of our people has been Paramount This fall.
This focus on our people as reinforced our commitment to pursuing best practices, the environmental social and governance with particular emphasis on the social component as well.
As we work to meet the needs of our stakeholders.
Our board of Directors, which includes recently introduced members with diverse business experience, our management team and our staff remain committed to fulfilling the ever changing roles as reliable and dedicated a community partners and leaders.
In addition, we continue to build our internal diversity equity and inclusion programs that have facilitated ongoing meetings featuring guest speakers. We have brought in virtually to provide forms for our employees.
Our goal with these programs to help our team members process and address the issues that have been brought to light in our country and our communities in 2020 regarding of racial justice and diversity equity and inclusion.
We have had ongoing discussion groups within our organization, where staff are able to listen and learn about others that provided an opportunity for introspection.
We are firmly committed to maintaining these solid corporate practices bill on integrity and trust, while working to diligently cultivate and strengthen our critical relationships with our diverse communities our employees our customers and our shareholders.
Together, we have built an incredible foundation that positions us well to sustain and build on these efforts for continued success.
Also my introductory remarks, I'll now turn it over to Ray.
Thanks, Bob our loan portfolio increased $17 million third quarter 2020.
Since we don't have a $37 million increase in commercial loss and a $20 million decrease in regional loans, primarily mortgage loans held for sale.
Professional manner and winter chief administered the origination of over 2100 PPP long earlier. This year has continued to yield opportunities to grow our base of commercial relationships.
Additionally, our construction pipeline remains solid at $99 million of commitments and commercial construction and development.
Which we expect to fund over the next 12 to 18 months.
Asset quality remained strong as nonperforming assets totaled just $4.6 million or 0.11% of total assets at September 32020.
Let's break down can be found in the financial portion of our presentation on slide 22.
Additionally, occurring commercial past due loans at quarter end, our nominal in dollar terms.
And just $213000 representing six borrowers over.
Overall pass through information can be found on slides 11 and 12.
During the quarter, we undertook a review of the risks ratings associated with the loan portfolio, resulting in a provision for loan losses of $3.2 million parking adjustments to the risk rating of 159 specific credits.
Those relationships move to the wash.
In contrast in the prior quarter, the provision expense of $7.6 million generated entirely true quality.
These actions room, the allowance for losses to total loans to 1.27% when excluding the impact.
Oh.
Payment deferral the peak of the program in mid July impacted 730 borrowers represented $719 million that exposure.
Presently as of October 19 extensions our place beyond September 30 repeat borrowers representing $12 million exposure has seen place six current.
The current modest deferral numbers, when combined with our expectations luminance future costs and are strong pass through performance are positive indicators.
The risk rating process, it's a portfolio of strong characteristics, referring reflecting strength similar to that of the pre crisis economy as seen on slide eight.
Gaming accurate risk ratings will may remain a key focus in the upcoming quarters and our borrowers continue to report results impact revenue and.
[music].
We continue to monitor the financial condition performance of credits, particularly on the fine segments auto dealerships on sales and lodging assisted living restaurants and movie.
None of these individual segments account for more than 5.1% commercial loans the composition of the segment.
Hi, Matt.
We recorded non interest income during the third quarter to $13.3 million of $6.6 million or nearly a 100% from the prior year quarter.
As can be seen on slide 15, this improved level of noninterest income largely driven by a 228%.
And mortgage banking.
Reflecting the success of ongoing strategic initiatives designed to increase market share a higher level of re fat finance activities stemming from historically low rates and increased share in the purchase market and an increased percentage of long hole.
For the third quarter of 2020 purchase mortgage loans originated were up 50% over the comparable quarter in the prior year.
While refinance activity increased 103%.
Slide.
October applications in backlog suggests that refinance opportunities will persist in the near future and purchase applications are seasonally high levels.
Continuing to enhance mortgage banking income through increased market share, including increased share in the purchase market remains a priority. We will continue to hire proven mortgage loan originators.
Non interest income from payroll services grew 8.7% despite a high level of unemployment during the quarter relative.
Relative to the prior year comparable quarter.
Service charges on accounts decreased 4.2%, primarily due to larger balances offsetting charges.
Got it and debit card income increased by approximately 5.7% as activity within the accounts began to recover from reduced activity during the year.
Year to date activity is approximately last year, despite the pandemic induced reduction in action.
That concludes my comments I will now turn the call over to John. Thank you Ray as noted on Slide 13. This morning, we announced net income of $10.7 million or 66 cents per diluted share for the third quarter of 2020, compared with net income of $12.6 million or 77 cents per diluted share.
For the third quarter of 2019 that.
Net income for the first nine months of 2020 totaled $30.1 million or $1.85 cents per diluted share compared to $36.1 million or $2.20 per diluted share for the first nine months of 2019.
Let's see is from bank owned life insurance claims and a gain on the sale of a four rash facility increased that income in the first nine months of 2019 by $3.1 million or 19 cents per diluted share.
Excluding the impacts of these transactions diluted earnings per share decreased 16 cents or 8% during the first nine months of 2020 compared to the respective prior year period.
The lower levels of net income during the third quarter and first nine months of 2020 compared to the respective 2019 periods resulted from higher provision expense and overhead costs.
Along with lower net interest income, which more than offset increased fee income.
Turning to slide 14 interest income on loans declined in the 2020 periods compared to the 2019 periods, primarily due to FOMC rate cut aggregating 225 basis points since the beginning of the third quarter of 2019 with a 150 basis points of those cuts occurred.
In the first quarter of 2020.
Interest income on securities during the 2020 periods benefited from accelerated discount accretion from call US government agency bonds totaling zero point $3 million during the third quarter and 3.0 million during the first nine months of 2020.
In total interest income declined $4.7 million during the third quarter of 2020 compared to the third quarter of 2019 and was down $8.1 million. During the first nine months of 2020 compared to the first nine months of 2019.
Interest expense declined in all categories. During the 2020 periods compared to the 2019 periods, reflecting the decline in interest rate environment.
In total interest expense declined $2.6 million during the third quarter of 2020 compared to the third quarter of 2019 and was down $5.1 million. During the first nine months of 2020 compared to the first nine months of 2019.
Net interest income declined $2.1 million during the third quarter of 2020 compared to the third quarter of 2019 and was down $3.0 million. During the first nine months of 2020 compared to the first nine months of 2019.
Provision expense increased significantly in the 2020 periods compared to the 2019 periods, primarily reflecting the kroner buyers pandemic and its impact on the economic environment.
Provision expense totaled $3.2 million during the third quarter of 2020 and $11.6 million. During the first nine months of 2020 compared to 0.7 million and $2.5 million during the respective 2019 periods.
The relatively large provision expense recorded during the third quarter of 2020 was primarily associated with the commercial loan risk rating adjustments Ray mentioned earlier, while the large provision expense recorded during the second quarter of 2020 was primarily comprised of the allocation associated with the newly created opened 19.
Dynamic environmental factor.
And an increased allocation related to the existing economic conditions economic environmental factor.
The COVID-19 factor was added to address the unique challenges and economic uncertainties, resulting from the pandemic and its potential impact on the collectability of loan portfolio.
We elected to postpone the adoption of seasonal as permitted by the carriers that however, we are running our CFO mile concurrently with our incurred loss model based on.
Based on preliminary results, we do not believe the loan loss reserve balance determined by the seasonal model is materially different than the loan loss reserve balance as determined by our incurred loss model as of September 32 in 2020 similar to results at the end of the first quarter and second.
Continuing on slide 15 fee income increased in the 2020 period as compared to the 2019 periods, primarily reflecting significantly higher mortgage banking income.
Excluding bank owned life insurance claims in the gain on sales of a former branch facilities. During the first nine months of 2019 fee income during the first nine months of 2020 increased $14.4 million or 88% when compared to the first nine months of 2019.
Reflecting increased refinance and purchase activity along with the successful implementation of several strategic initiatives over the past couple of years mortgage banking income was substantially higher during the 2020 periods compared to the 2019 periods third.
Third quarter 2020 mortgage banking income was $6.6 million higher than the third quarter of 2019 and income.
An income during the first nine months of 2020 was $14.5 million higher than the first nine months of 2019.
Credit and debit card income return to pre cobot levels during the third quarter, reflecting a recovery in transaction volume in the second quarter.
Well not quite returning to pre Kogan levels service charge on an account income during the third quarter was much improved from the second quarter in large part, reflecting higher transaction levels from our business customers.
Continuing on slide 16 overhead costs increased in the 2020 periods compared to the 2019 periods, primarily reflecting higher compensation costs and expansion of our main office back in 2019.
Salary and benefit costs were up $3.1 million or 22% during the third quarter of 2020, when compared to the third quarter of 2018 mortgage.
Mortgage banking related compensation costs were up $1.3 million, while the bonus accrual increased $1.2 million.
The bonus accrual recorded during the third quarter equated to three quarters worth of accrual as no bonus accruals were recorded during the first and second quarters.
Due to the economic environment.
Salary and benefit costs were up $4.4 million or 11% during the first nine months of 2020, when compared to the first nine months of 2018.
Mortgage related mortgage banking related compensation costs were up $3.7 million, while the bonus accruals were essentially the same.
Occupancy furniture and equipment costs were up a combined zero point $6 million during the third quarter of 2020, when compared to the third quarter of 2019 and up a combined $1.5 million. During the first nine months of 2020, when compared to the first nine months of 2019 in large part reflecting the fall of two.
Sales 19 completion of our main office expansion we.
We expect fourth quarter overhead costs to be similar to that of the third quarter included in the fourth quarter will be a $1.5 million writedown on branches that we are scheduled to close this quarter and being offset by a much lower bonus accrual as there is no catch up involved in the fourth quarter.
Continuing on slide 17, our net interest margin was 2.86% during the third quarter of 2020 down 31 basis points from the second quarter of 2020, and down 85 basis points when compared to the third quarter of 2019.
It will but within the guidance we have provided in the previous call.
The yield on earning assets declined 40 basis points during the third quarter of 2020, when compared to the second quarter of 2020, while the cost of funds declined nine basis points. During the same period income.
When comparing the third quarter of 2020 with the third quarter of 2019, the yield on earning assets declined 128 basis points, while the cost of funds declined 43 basis points.
The yield on loans was down 15 basis points during the third quarter of 2020 compared to the second quarter of 2000.
The second quarter of 2020, and down a 103 basis points when compared to the third quarter of 2019.
In large part, reflecting the FOMC is aggregate 225 basis point reduction in targeted federal funds rate mentioned earlier.
We are recording the origination fees and direct origination costs of PPP loans equate into a $15 million net increase to interest income on commercial loans using a level yield method.
Third quarter 2020, net accretion totaled $3.0 million assume.
Assuming no forgiveness transactions, we expect to record net accretion of $2.5 million during the fourth quarter of 2020, and 2.1 million 1.6 million.
1.2 million and zero point $8 million during the first second third and fourth quarters of 2021, respectively, but the remainder during the first half of 2022.
The yield on securities during the third quarter of 2020, and the first nine months of 2020 benefited from accelerated discount accretion I'd call US government agency Bops.
Celebrated discount accretion totaled zero point $3 million during the third quarter of 2020.
Positively impacting the quarters net interest margin by three basis points.
Accelerated discount accretion totaled $3.0 million during the first nine months of 2020 positively impacting the period's net interest margin by 11 basis points.
Negatively impacting our net interest margin during the 2020 period, and especially the second and third quarters of 2020 with a significant volume of excess on balance sheet liquidity depicted by low yielding deposits with the federal Reserve bank of Chicago and a correspondent bank.
The excess funds are primarily a product of federal government stimulus programs as well as lower business and consumer investing is spending.
Overnight deposits averaged $450 million during the third quarter of 2020 and $280 million. During the first nine months of 2020 compared to our typical average balance of $50 million to $75 million we.
We expect a level of overnight deposits to stay at elevated levels for the remainder of 2020 and well into 2021.
Excess liquidity lowered our net interest margin during the third quarter of 2020 by about 30 basis points.
The cost of funds has also been on a declining trend, primarily reflecting the falling interest rate environment, but in terms of magnitude and scale not to that degree experience on our yield on loans.
We currently expect our fourth quarter net interest margin to be in a range of 2.75% to 2.80% again that assumes no forgiveness of PPP loans.
As noted on slides 18, 19, and 20 as our mortgage banking income mortgage loan originations increased substantially during 2020 periods and especially during the second and third quarters of 2020 in large part reflecting significant.
Refinance activity stemming from the decrease interest rate environment, coupled with the ongoing success of the strategic initiatives that were designed to expand market penetration enhance gain if activities and operate more efficiently.
Mortgage loan originations totaled $237 million during the third quarter of 2020 compared to $133 million during the third quarter of 2019, an increase of almost 80% mortgage.
Mortgage loan originations totaled 600 $646 million during the first nine months of 2020 compared to $258 million. During the first nine months of 2019, an increase of about 150%.
About 61% of the mortgage volume during the third quarter of 2020 consisted of refinance applications compared to about 53% during the third quarter of 2019.
Approximately 81% of the mortgage loan originations during the third quarter of 2020 have been or will be sold on the secondary market up slightly from the 79% during the third quarter of last year.
Continuing on slides 21, and 22 22 states.
Standard quality metrics in the loan portfolio remained very strong with continued low levels of nonperforming loans and loan charge offs.
Nonperforming loans as a percent of average loans equaled only.
12 basis points at September 32020.
The balance of other real estate owned was about 500000 at quarter end.
Gross loan charge offs totaled only $125000 during the third quarter of 2020, while recoveries of prior period loan charge offs totaled 250000 the reason.
The resulting net loan recoveries of $125000 equated to two basis points of average total loans annualized.
Additions to nonperforming assets totaled $1.6 million during the third quarter of 2020 with a net increase of $1.2 million recorded in non performing assets during the quarter.
Over the past 12 months the balance of our loan loss reserve has increased by over $11 million or about 45% with the coverage ratio, excluding PPP loans growing from 88 basis points to 1.27%.
Capital as shown on slide 23, we remain in a strong and well capitalized regulatory capital position the tier one leverage capital ratio was 9.8% and a total risk landscape capital ratio was 13.8% as of quarter end the tone.
The total risk based capital ratio was over $126 million above the minimum threshold to be categorized as well capitalized.
There was no share repurchase activity during the third quarter of 2020 as in late March we elected to temporarily see share repurchase activity to preserve capital for lending and other purposes due to the uncertainties surrounding the COVID-19 pandemic. We currently have about $10 million available in our repurchase plan.
On slide 24 in to conclude my remarks are some comments on the 2021.
Due to the high degree of uncertainty that currently exists we will not be provided earnings performance guidance as we have done on past conference calls.
However, we are able to offer key considerations or should be factored into any earnings forecast of our company clear.
Clearly economic conditions asset quality, PPP forgiveness activity and mortgage banking operations are expected to have the most impact on our operating results for the remainder of this year and into 2021.
In closing, while uncertainties remain that may impact Mercantiles financial condition and operating performance in future periods. We note that we entered this stress environment was strong asset quality and a solid capital position we are paid.
We are pleased with our third quarter operating results and financial condition as of September 32020, and believe we are well positioned to navigate through the unprecedented environment created by the kroner buyers pandemic and other events.
Those are my prepared remarks, I'll now turn the call back over to Bob. Thank you Chuck that now concludes managements prepared comments and we'll open the call to the Q and eight.
Well now begin the question and answer session.
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First question today comes from Brendan Nosal with Piper.
Hey, good morning, everybody how are you.
But Brendan Oreo great. Thanks.
Just want to start off on the margin here and thanks for all the the puts and takes you guys offered in your prepared remarks.
Just thinking back to the last quarter's call I believe you said the expectation for the margin with a normal level of liquidity.
Peter you forgiveness was about three tend to treat your team and just.
Just curious if this is it.
Yes, and expectation once liquidity does eventually roll off to more typical level or is there more pressure from net figure for what you bought previously yes.
Yes, Brent I think there might have been some us communication because the numbers you just quoted excluded the excess liquidity.
So that was the difference between what we actually reported and that calculation. So.
One of the things will balance sheet during the third quarter was everything pretty much was steady from where it was at the end of the second quarter.
So and part of that was our excess liquidity position.
We ended the second quarter or soon thereafter with about four but about $450 million.
Deposit with the fed and the correspondent banking it was pretty much that average throughout the quarter and thats pretty much where we are at right now so.
A lot of stabilization, there which is good.
But certainly a tremendous amount of excess liquidity that we certainly don't need.
Clearly, we would like the our borrowers in our depositors start using those funds if anything from a macro standpoint to make sure that the economy continues.
To to recover.
But it appears that were in a state of steadiness.
And at least so far here are the three weeks into the fourth quarter, we haven't seen any change in our balance sheet structure. So.
So income and looking at our margin for the fourth quarter compared to where it came in at a third quarter, but we are expecting some slippage there.
Two main to main items there are three main items I guess so.
Certainly.
So the bigger one would be that the reduction in ppcs loan fees that were going to record again, we're using a level yield method. So that goes down over time and I gave you those numbers.
We did have.
One of the things, we don't really budget for our any prepayment fees.
We typically get those every quarter, but those are very difficult to predict so we really don't.
On predict those and then the.
Our methodology of trying to manage interest rate risk with our bond portfolio, whereby we buy.
Heavily discounted bonds during periods of rising interest rates.
Vast majority of those bonds have now been called.
So we don't really expect much of that to take place in future quarters, including the fourth quarter. So those are the three primary items that get us from a margin in the mid two ways to maybe have been to seventys.
Got it that's perfect and totally understand that the the first cigarette quoted exclude any impact from excess liquidity.
Perfect just one more from me, who maybe talk a little bit more.
Talk a little bit more color on the credit downgrades that drove the provision this quarter just kind of any couple of thoughts on industry concentration there characteristics et cetera, and then as you look ahead are there any more credits that are on your shortlist or for more downgrades or did this quarter to action pretty much true up the risk ratings.
What the environment is today.
This is ray.
Your last question.
Definitely is we've made these downgrades we feel like we completed the job. We tried to even look ahead to say are there any in the fourth quarter that could potentially give us issues and we downgraded those as well so.
We feel like based on all the information that we have today, we completed that job and.
He also worked hard at all we credits that had requested an experienced.
Furloughs in their payment.
Through those richer fluid.
45% of those showed no change in registry, we downgraded about 40% of those one match.
And the balance which was a relatively small number of another 14%.
Another batch so.
We feel like.
All the information Thats available to evaluate our credits.
Pro and we downgraded everyone that we see revenue so small issues now or.
Having issued in the next quarter.
It is it has this is Bob just to amplify that we had planned as we went through the summer months.
Our attention when the pandemic first started and the severity of economic shutdowns was occurring that we weren't just going to have a knee jerk reaction and downgrade the portfolio without some variable data from our client the financial statements and do it at a very systematic way that occurred during the summer into the fall and as Ray indicated.
Included with the end of the third quarter, we feel really good about where we stand working.
Working with our clients don't exactly where they are in terms of their economic recovery in any challenges that remain ahead for them, but but to underscore we felt really good about the status of the portfolio and the the reserve and the associated grades with those particular credits.
All right fantastic. Thank you for taking my questions.
Thank you.
And as a reminder, if you have a question you can press Star then one to join our question queue.
Our next question today comes from Damon Delmonte with KBW.
Hey, good morning, guys has gone today.
And then David how are you.
Good thanks.
So first question just wanted to clarify Chuck in your comments regarding expenses you.
You said you expected fourth quarter to be similar to the third quarter. And then you also noted that there would be about a million and a half of a write down on the bridge.
On the branch closures that are taking effect here in the fourth quarter does that is that 1.5 million included in that outlook for relatively flat quarter.
Quarter over quarter basis or is that excluding it.
Does that include the David So let me so on an overall basis, we expect the cost to be flat included in that is the $1.5 million and write downs that we'll be recording throughout the quarter as the branches close.
But as I also mentioned.
The bonus accrual, we did not accrue anything in the first and second quarter because of obviously the pandemic as we work our way through the year and we see our performance and as we talk with our compensation Committee. We are in the process of Formula of formerly formulating bonus plans and based on those discussions that are.
Calculations, we needed to not only accrue for the third quarter, but we needed to catch up for the.
For the first and second quarter. So on an overall basis those two items, so a lower bonus calculation in the fourth quarter compared to the third kind of offset the 1.5 million dollar expected and write downs on the branches.
Got it okay.
So for this.
Well just to make sure I'm sorry, So then something like around 20 little bit over 25 million then is reasonable.
So it will be the same as the third quarter, David will be okay. Okay, I can understand that.
They offset perfectly okay got it.
And then I.
Yes, with respect to the PPP forgiveness process.
What are your what are your thoughts on when you guys hearing on timing of this do you think.
Kind of yeah.
Well into the fourth quarter here do you think we're going to see much forgiveness in the fourth quarter or do you think everything is going to kind of be.
The election coming up next month and whatever and soon after that you think is going to kind of being put on hold until we get into 2021.
Yes.
It does raise very hard to predict how that process growth is going to go we stand ready to act on whatever guidance and actual items, we get from the FDA and those have been somewhat first to date.
How those will roll low for the remainder of the quarter.
Very hard to predict but the bottom line is we will be ready.
As soon as practical as soon as that information is available to us we have the mechanisms in place electronically.
Electronically to deal with the information. We also have people in place to deal with that information, So we're ready and waiting.
We've actually started the submission process working with our clients provide them with the tools as ray said to be able to make those submissions for their forgive us.
Customers are still working through that process, what their financial advisors on their accounting side on the legal side to make sure the documentations that order.
Through our electronic portal Veeva now started the submissions to the government have not received any response as yet, but we understand that they've got up a lot that they're trying to work through on their end from the Sps standpoint, So as Ray said already or very transparent with our clients and available to assist the process towards conclusion for each class.
Right.
This is Chuck another fed by two cents things with the entire bank industry has been waiting on is the expedited process that we're all hoping with the two.
With the trade groups trying to get a $150000 or lower.
It appears that it will be at a $50000 lower clip and while the FDA has provided some guidelines by the.
Not yet opened their portals up to except in those.
Those specific applications that.
That represents about 45% so loans under $50000 represents about 45% in the number of loans.
2100 that we originated under PPP.
Right Okay.
Okay, Great and then on so.
So.
Make sure I read this correctly your loan referrals are now down to like 43 basis points alone only $12 million.
Correct correct.
Hi, guys. So how do we think about provision going forward. It sounds like this quarter you mean are you.
Lastly, the ratings on some and you kind of built up some additional reserving.
As a result of those indicators do you think you go back to.
A similar level in the fourth quarter or do you think you can even go lower than that in the fourth quarter kind of absent any major macro changes.
Yes, David I mean, it's it interesting perspective, they are putting on it and we're and we're looking at it ourselves.
Really theirs and we kind of did that with a second third quarter is really two key drivers risers, the environmental and then there's two specific downgrades.
And we hit the environmental is really hard in the second quarter.
Obviously created as we mentioned the COVID-19 factor our economic factors as low as it can go the code factor could theoretically have additional downgrade to it which would cause some additional provision and you know that is either the ranger that factor was designed to be the we don't know whats going to happen.
Faster and.
So far as you know obviously, we look at our asset quality and we're certainly pleased with the performance so far.
Yes, but we're we're up or.
It appears that we're far away from being out of the woods yet so.
So that factor, we will certainly continue to take a look at the other factors.
That we havent touched yet which are the traditional factors at the regulators gave us years and years ago trends.
Trends in past due to changes in collateral values those types of things and things are holding up pretty steady.
So far but clearly at the end of the fourth quarter here and going forward of course that will continue to look at those and and change those if need be I think.
I think Brian Bob already kind of that a really good job of explaining what we did with the downgrades.
In the third quarter saw kind of putting all that together as we sit here today and see what's going on and we feel really good about where our reserve is.
Well, we're certainly going to continue to look at all those factors and if we need to downgrade loans will downgrade loan.
If we need to change from factors.
Environmental factors, we'll we'll do that but.
But all things being equal we're pretty comfortable where were at currently.
Yes, okay.
Okay Thats all that I had for now thank you very much guys. Thanks.
Thank you David.
If anyone has further questions. Please press star and then one at this time.
And it looks like we have a follow up question from Damon Delmonte with KBW.
I think about the press star Damon.
Yes, well I mean.
Nobody else in the queue I figured I could get a couple of.
I've got a couple more questions and while I had the opportunity.
Regarding kind of your book.
I am I thinking about that either getting.
[laughter].
With regards to capital.
Can you give a little perspective on.
You know where the shares are trading today in the possible use of capital to to do a buyback or no even look to raise some additional sub debt.
To bolster regulatory ratios to maybe facilitate buyback down the road and what are your thoughts around that.
No I think there are touching poles and all different directions, David as you've kind of alluded to.
Our many banks many companies are issuing some sub debt and some other banks thinking about different their toe in the water back with buybacks, but I think as we continue to consult with our board and look at our numbers were taking a steady as she goes approach I think as Chuck indicated in his comments the buyback so.
We were sitting on the sidelines right now, but we'll continue to evaluate that make sure that.
But the stock price being where it is that we don't miss any opportunities that we might otherwise take so it's kind of a balancing act to make sure that we're good stewards of our capital and position us for.
For whatever may come down the Pike in 2021 in terms of economic challenges or opportunities to deploy that capital.
Make sure that were up.
We're well positioned to be able to handle whatever that can be thrown at us and take advantage of opportunities in the same manner. So.
I think we continue to evaluate that from quarter to quarter, and look and see where we stand but right now we're quite comfortable where we're at.
Got it okay. That's good and then I guess last question.
Just quickly on mortgage banking.
Can you just do a quick update on your pipelines here in the fourth quarter and kind of how you think that shapes up for that.
For the actual fourth quarter results.
Yes.
Typically in the fourth quarter, there is a seasonal decline in the mortgage business and as we observe our pipeline over the very recent past that has not shown any of those classic signs of a seasonal decline so.
It will it may very well come towards the very end of the year, but in the next month or two.
Expected to hold up at similar levels to what we've experienced in the last month or so.
Okay anecdotally.
Anecdotally Jaman still when you look at houses that they pop on the market that considering that we're almost in November.
Just just for my neck of the Woods in Kent County area of Grand Rapids.
The the houses are on the market very long before their snatched up at purchased by a perspective new home.
New homeowners so.
As the market continues strong as ray alluded to and it's going to be interesting winter months, but I think because of the fact that.
The spring season was pushed back because of the shutdown of the pandemic I think it could create some interesting volume opportunities for us as we go through the winter of 2020 and 2021.
Okay great.
Very helpful. Thats. This this time thats all that I have so yes.
Thanks, David I think Eric.
This concludes our question and answer session and I would like to turn the call back over to Bob Kaminski for any closing remarks.
Thank you operator, and thank you very much for your interest in our company. We hope that you and your families stay safe and healthy and we look forward to speaking with you again at the conclusion of the fourth quarter come January. This call is now concluded. Thanks again.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.