Q3 2020 Community Bank System Inc Earnings Call
Welcome to the community Bank system third quarter 2020.
This conference call. Please note that this presentation contains forward looking statements within the provisions of the private Securities Litigation Reform Act of 1995 that are based on current expectations estimates and projections about the industry markets and economic environment in which the company operates such statements involve risks and uncertainties that could cause.
<unk> actual results to differ materially from the results discussed in these statements. These risks are detailed in the Companys annual report and form 10-K filed with the Securities and Exchange Commission todays call presenters are Mike Tourism, Tryniski, President Chief Executive Officer and Joseph.
As executive Vice President and Chief Financial Officer, They will be joined by Joseph certain Executive Vice President and Chief Banking Officer for the question and answer session gentlemen, you may begin.
Thank you Jason.
Good morning, everyone. Thank you as well for joining our Q3 conference call. We hope you and your families as well.
Well it was certainly different than the last last day to day, sometimes minute to minute focus dacogen TPP loan deferrals industry that acquisition and we seem to have settled into a reasonably attractive operating kids.
Operating earnings for the quarter were a bit better than we might have expected given the yield curve and muted right the man.
Our non banking businesses had a strong quarter.
Year to date.
4% on the top line at over 6% on the bottom line, so very solid performance from those businesses.
It was also very good for mortgage banking.
Right.
Hello.
Consumer deposit fees.
You bet acquisition was also very additive to our performance.
Real negative in the quarter Notwithstanding litigation role Joe will discuss further was credit excluding mortgage lobby.
Oh loan book was up about 1% with slight declines in every business.
The mortgage business was quite strong and we sold over $100 million more rate conforming production into the secondary market where premiums are at the present moment your job.
Yes.
So overall, we are satisfied with the quarter and with current operating trends given the environment because.
As we head into the last quarter of the year and into 2021.
You need to be mindful and focus I'm, that's what headwinds, including credit the economic environment interest rates. Despite the floor and headwinds we think we're in pretty good shape to capitalize on opportunities that we expect.
No.
Thank you Mark and good morning, everyone as.
As Mark noted the earnings results for the third quarter 2020 were very solid, especially in light of the economic challenges in industry headwinds we faced throughout the year. The company recorded 79 cents in fully diluted GAAP earnings per share for the third quarter. Excluding four cents per share for litigation reserve expense net of tax affected two cents per share.
Acquisition related expenses net of tax effect fully diluted.
Operating earnings per share were 85 cents for the quarter.
These results were one cents per share higher than the third quarter of 2019 fully diluted operating earnings per share of 84 cents and nine cents higher than the linked second quarter 2020 fully diluted operating earnings per share of 76 cents. The company's adjusted pre tax pre provision net revenue per share or $1.10 was consistent with that.
Third quarter of 2019, and two cents per share higher than the linked second quarter results I will next touch on the company's balance sheet before providing additional details on the company's earnings performance for the quarter.
The company closed the third quarter 2020, with total assets of $13.85 billion. This was up $401.1 million or 3% from the end of the linked second quarter and up to.
$2 in two excuse me $2 $2.25 billion or 19.4% from the year a year earlier, Similarly average interest earning assets for the third quarter 2020 of $11.96 billion were up $852.5 million or 7.7% in the late second quarter 2020 and up.
$2.15 billion worth 21.9% from one year prior.
The large increase in total assets and average interest earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Scoop and Trust Corporation, and large inflows of government stimulus related funding and PPP originations.
Ending loans at September Thirtyth, 2020 were $7.46 billion up $605.5 million or 8.8% from one year prior due to the stupid acquisition and the origination of $507.4 billion of PPP loans.
Ending loans were down $69.4 million to 0.9% from the end of the linked second quarter due to a decline in business activities and the Companys markets due to the COVID-19 pandemic.
The company's average total deposits were up $823 million or 8.1% on a linked quarter basis, and up $2 billion or 22.6% over the third quarter of 2019, a significant portion of these funds were invested in overnight federal funds sold which increased average cash equivalents in the quarter to 1.3 billion.
Dollars $635.1 million or 95.4% higher than the third quarter of 2019, and $478 million or 58.1% higher than the linked second quarter balances.
The company's capital reserves and liquidity profile remains strong in the third quarter. The Companys net tangible equity to net tangible assets ratio was 9.92% at September Thirtyth 2020. This was down from 10.08% at the end of the second quarter, but up from 9.68% one year prior.
The Companys tier one leverage ratio was 10.21% at the end of the third quarter, which remained over two times, the well capitalized regulatory standard of 5%.
The company has an abundance of liquidity resources Nics is extremely well positioned position to fund future loan growth. The company's funding base is largely comprised of low cost core deposits.
At September Thirtyth, 2020, checking and savings account balances represented 71.3% of the company's total deposit base.
A combination of the Companys cash and cash equivalents borrowing availability at the Federal Reserve bank borrowing capacity at the federal home loan Bank and Unpledged available for sale investment Securities portfolio provided the company with over $4.8 billion of immediately available sources of liquidity.
The company recorded total revenues of $152.6 million in the third quarter of 2020, an increase of $4.3 million or 2.9% from prior years third quarter.
The increase in total revenues between the periods was driven by increases in net interest income banking related non interest revenues and non interest revenues derived from our financial services businesses net.
Net interest income was up $1.7 million or 1.9% between comparable annual quarters, driven by a $2.15 billion or 21.9% increase in average assets between the periods offset in part by 61 basis point decrease in net interest margin the company's fully tax equivalent net interest margin was 3.12%.
Third quarter 2020, as compared to 3.73% in the third quarter of 2019, a precipitous drop in market interest rates and the significant increases in change in the composition of earning assets between periods, including a $635.1 million increase in average cash equivalents negatively impacted the companys net interest margin.
Noninterest banking revenues were up $1.2 million or 6.9% from $17.9 million.
Dollars in the third quarter of 2000 $19 million to $19.1 million in the third quarter 2020. This was driven by a $4 million increase in mortgage banking revenue offset in part by $2.8 million decrease in deposit service and other banking fees employee benefits services revenues were up zero point $8 million or 3.4% from 24 point.
$3 million in the third quarter of 2000 $19 million to $25.2 million in third quarter of 2012, driven by increases in plan administration and record keeping revenues and employee benefit Trust revenues wealth management insurance services revenues were also up.
Zero point $5 million or 3.6% between comparable annual quarters.
Similarly, total revenues were up $7.7 million or 5.3% on a linked quarter basis due to a $1 million or 1.1% increase in net interest income a $4.8 million or 33.4% increase in banking noninterest revenues and a $2 million or 5.1% increase in revenues from our financial services business.
Yes.
The substantial increase in banking non interest revenues was driven by $2.5 million increase in mortgage banking income due to an increase in secondary market mortgage sales activities, a $2.3 million increase in deposit service another banking fees as deposit transaction activity levels rebounded in the third quarter.
The company recorded $1.9 million in the provision for credit losses. During the third quarter 2020. This amount was significantly less than the amounts recorded in the prior two quarters of 2020 and all the.
$100000 greater than the amount recorded in the third quarter of 2019, the decrease in the provision for credit losses during the third quarter as compared to the prior two quarters was due to improving economic conditions modest levels of delinquent nonperforming loans, a decrease in loans outstanding low levels of net charge offs and a large decrease in a number and.
Now of the Companys loan balances subject to borrow for bear forbearance.
The company recorded loan net charge offs of $1.3 million or seven basis points annualized during the third quarter 2020, comparatively low net charge offs for the third quarter of 2019 were $1.6 million or 10 basis points annualized on a year to date basis. The company reported net charge off the charge offs of three point.
$7 million or seven basis points annualized this compares to $5.4 million or 11 basis points annualized for the nine month period ended September Thirtyth 2019.
Exclusive of zero point $8 million of acquisition related expenses and $3 million of litigation reserve charges. The company reported $93.2 million of operating expenses in the third quarter of 2020.
This compares to $90.9 million in operating expenses reported in the third quarter of 2019 exclusive up $6.1 billion of acquisition related expenses and $87.5 million and operating expenses in the linked second quarter of 2020 exclusive of $3.4 million of acquisition related expenses, Although the company continue it.
Variance reduced levels of business activities during the third quarter of 2022 to the ongoing COVID-19 pandemic, the resumption of certain marketing and business development activities and incremental costs associated with operating a larger organization as a result, the acquisition of Steuben in the second quarter 2020 resulted in a $2.3 million or 2.6.
Net year over year increase in operating expenses Queen.
I mean, the comparable third quarters.
This increase in operating expenses between the quarters was attributable to a attributable to a $1.2 million or 2.2% increase in salaries and employee benefits, a $1.4 million or 13.3% increase in data processing communications expenses zero point $3 million, 3.4% increase in occupancy and equipment expense offset in part.
By zero point $2 million or 2.3% decrease in other expenses and a zero point $4 million or 9.6% decrease in the amortization of intangible assets.
The $5.7 million, 6.5% increase in operating expenses between the third quarter of 2020, and the linked second quarter was driven by a $2.6 million or 4.7% increase in salaries and employee benefits of $1.3 million or 11.7% increase in data processing communications expense zero point $4 million 3.9.
Percent increase in occupancy and equipment expense, a 1.4 million or 60.4% increase in other expenses the effective tax rate for the third quarter 2020 was 20.3% consistent with the linked second quarter.
During the third quarter, the company grew $3 million or.
Four cents per fully diluted share net of tax effect in litigation reserves related to a class action suit brought against the company ports deposit account overdraft disclosures.
The company anticipates it will execute a settlement agreement with the plant of on the matter in the fourth quarter. The agreement will be subject to the final approval of the court and the company does not anticipate that additional reserves will be approved for this matter in future periods.
From a credit risk in lending perspective, the company continues to closely monitor the activities of its COVID-19 impacted borrowers and developed loss mitigation strategies on a case by case basis, including but not limited to the extension of forbearance arrangements at September Thirtyth, 2020, 216, borrowers representing $193 million or two.
0.6% of loans outstanding were active under forward related forbearance as of last week, the outstanding loan balances under active forbearance dropped below $125 million.
Although these trends are favorable the company anticipates that the number of delinquent nonperforming loans will increase over the coming quarters.
At September Thirtyth, 2020, nonperforming loans increased to 43 basis points or 0.43% of total loans outstanding. This compares to 0.42% of total loans outstanding at the end of the third quarter of 2019 and 0.36% at the end the linked second quarter 2020, total delinquent loans, which is.
Foods nonperforming loans and loans 30 more days delinquent to total loans outstanding was 0.79% at the end of the third quarter.
2020.
This compares to 0.85% at the end of the third quarter of 2019 and 0.72% at the end of the linked quarter second quarter of 2020.
The company's allowance for credit losses increased from $64.4 million or 0.86% of total loans outstanding at June $30 million to $65 million or 0.87% of total loans outstanding at September Thirtyth.
The allowance for credit losses at September Thirtyth represented over 10 times, the company's trailing 12 months of net charge offs.
Operationally, we will continue to adapt to the changing market conditions remain very focused on asset quality and credit loss mitigation, we anticipate assisting the substantial majority of the company's PTP bars with forgiveness request in the fourth quarter of 2020 and throughout 2021.
The eligibility of the borrowers forgiveness requested the Sps ability to provide loan forgiveness in a timely manner is uncertain at this time for these reasons that is uncertain as to the timing, which the company through remaining $11.3 million in net deferred pcps.
We recognized through the income statement.
Loan demand may also be impaired by weak economic conditions were also uncertain as to whether or not the high levels of deposit liabilities will be maintained spent down or increased by further.
Additional stimulus.
Since the ultimate effect of the COVID-19 pandemic will have on the company's credit losses remains uncertain. The decrease in the provision for credit losses.
Third quarter should not be interpreted that trend or utilize to forecast provision in future quarters.
Although the credit metrics that management historically utilized its term and expected loan losses remained subdued in the third quarter. The company anticipates increases in delinquency nonperforming loan balances in future quarters that it is unlikely that off over it affected borrowers will resume full payment contractual amounts upon the expiration of the forbearance agreements.
Although we have begun to deploy portions of our cash equivalent balances into investment securities increased interest income on a going forward basis and provide a hedge against the sustained low interest rate environment.
And to anticipate recognizing the substantial majority of deferred Pts over the next several quarters. We also expect net interest margin pressures to persist and remain well below our historical levels.
Fortunately the company's diversified noninterest revenue streams, which represent approximately 30% of the Companys total year to date revenues remain strong and our anticipate to mitigate some of the margin progression.
In addition, the Companys management team is actively developing and implementing various earnings improvement initiatives, including potential revenue enhancements and cost reduction measures intended to favorably impact future earnings the company's dividend capacity remains strong accordingly, the company expects to continue to pay a quarterly dividend consistent with past practice on data.
The the COVID-19 crisis has changed and near term outlook for society in general as well as expectations around economic conditions with this said, we will continue to support our stakeholders thoughtful discipline and compassion men and believe the company is well prepared to towards impacts. Thanks.
Thank you I will now turn it over to Jason open the line for questions.
Thank you.
Ask a question you May proceed Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
The first question comes from Alex Twerdahl from Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
First off I, just wanted to sort of continue some of the last comments that you're talking about Joe with respect to the NIM and Eni, obviously, a pretty challenging environment from an interest rate standpoint, and I was wondering if you can maybe talk a little bit through some of the levers that you guys have over the next couple of quarters.
Two.
Keith and I am moving in the right direction I know, there's going be some noise with PPP, but if we sort of back out the accelerated.
Accrual of the fee income as it comes in.
What do you what do you have out there to actually keep that number going higher.
Well, Alex It I think you touched on it.
Pretty pretty accurately I mean, there is a challenge clearly.
You know what three that the interest rate environment is not kind to banks right now with a very flat yield curve. So that that persist for an extended period of time it wont be a challenges for us it will be a challenge for the for the entire industry. I think is already being recognized in the last couple of quarters.
With that said we.
We do we have the balance sheet in the earning asset balances have grown significantly we expect that some of that money will stick around so.
So we will begin to deploy.
Some of that into longer term securities to effectively throw an anchor out there from a from a net interest income perspective.
For a longer term period.
Just to sort of protect us from continued.
Down downward pressure on the margins. So I think you know moving some of those funds from a from a 10 basis point yield up to something.
Likely north of one will be will at least be helpful.
Also where loan demand has not been very strong given the.
The challenges, we had with with economic conditions, but.
Loan yields have kind of hung in there in the quarter on a blended basis.
We averaged a little over 4% for for new loans, new loan generation.
So that's that's obviously, we still have a pretty good credit spread in that piece, but but overall it will be challenged.
If rate if the rate environment stays where it is we don't get slope in the yield curve and we don't have a significant increase in.
Loan demand you mentioned the PPP factors.
It will.
Create some volatility in reported net interest margin net interest income I think through most of 2021.
We as I mentioned, we still have a little over $11 million.
For fees to recognize next year.
Okay, and then I think you talked about or you mentioned that.
Investing in some securities bring some of that cash to work I wasn't sure if you've done some of that already in the fourth quarter and kind of how much we could expect.
Of that 10 basis points to north of 1%, it's something that we could do on our model for the fourth quarter, if there's any way to get a handle on the magnitude of that.
Yes, we have started the we have started the process of investing some of that cash.
No.
Net combination of we had some that we have some maturities in the fourth quarter and we also are investing some of that excess cash.
So on.
Kind of on a net basis, we expect to round up five or $600 million.
In in the quarter in terms of.
The cash deployment, so basically taking about that amount in cash equivalents and having it deployed into something thats higher there's still going to be some likely some cash on the balance sheet on the.
The permanence of that is a bit uncertain. We also don't know if there's another round the stimulus coming too so we need to monitor those.
Those items as we move into 2021, but the expectation is that will at least have three or $400 million more.
Net for me I'm, sorry, I said.
Five to 600 more net securities.
Balances at the end of the fourth quarter.
Okay, Great and then what about on the liability side and in terms of borrowing to solve a small amount of borrowings on the balance sheet and is there any.
Are any of those coming due are repayable in the near term.
We do have some trust preferred securities about $75 million we have.
During the window to redeem so we'll be evaluating that in in 2021 that is one item we're looking at.
And the other the other borrowings I think that probably you're referring to our repurchase agreements which are.
Repurchase agreements with customers largely are.
Public funds customers and.
And our Vermont markets, and we kind of look at those even though theyre, they're technically borrowings we look at those as generally.
Customer relationships and more deposit like so no anticipated reductions in those.
Those relationships in those borrowings.
Okay and then just finally from me just looking at that fee income we haven't had a I guess, we have had one full quarter was too bad now, but just kind of thinking about the right level for deposit service other banking fees.
Still seems a little bit depressed in the third quarter versus a year ago, and obviously with the acquisition should be a little bit higher should we get full rebound in the fourth quarter in that line item and then kind of what how are you thinking about mortgage banking on a go forward basis is this 3.9, maybe not sustainable into 2021, but is the pipeline.
So pretty fall and do you expect to sell an equivalent amount in the fourth quarter.
Yeah. So I'll I'll take the first question first which is just in our general fee line items, particularly in the banking fee line items I would not expect to rebound in the fourth quarter a lot of our consumers are still.
A little reticent to spend we have seen some pickup in transaction activities, we've seen less less overdraft occurrences and we have in prior quarters. So I wouldn't anticipate that that will rebound fully.
In the in the fourth fourth quarter I would expect maybe by the middle of next year, we'll see some of those non interest.
Deposit service fees rebounding, a bit, but I wouldnt expect that immediately but.
Respect to the mortgage banking revenues.
We saw very attractive premiums in pricing in the mortgage banking market in over the last couple of quarters.
And chose to sell off.
Some of our originations into the secondary market.
We do need earning asset yields are to be earning assets at good yields.
Over the coming quarters, So we would expect to.
Wind down a bit some of the mortgage banking activities in looking potentially to portfolio.
Some of those originations in future quarters.
Thank you for taking my questions.
You're welcome Alex.
The next question comes from Russell Gunther from D.A. Davidson. Please go ahead.
Good morning, guys.
Hi, Russell, one or two hey, thanks, I wanted to start with a.
My questions are on expenses.
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First a little more acute in terms of the drivers of the increase in the data processing line.
What.
What's the rationale for that this quarter, how do you expect that that trend and then bigger picture follow up in terms of.
Comments it taking a look at the expense space and any opportunities score.
To take some expenses out of the run rate and and help support.
Positive operating leverage.
Yes.
Russ I would say with respect to the data processing and communications line I don't think there's anything in particular that would.
Lead us to believe that that is going to be an elevated.
Run rate draws it think it's just a timing issue relative to this the same quarter last year and I can give you a little bit.
More more specific answer but a lot of it is in the communications area, just we have more and more data lines to maintain with additional branches and centers and so some of that is there some higher payment processing costs as things, but I don't think there's any.
Concern trend that I would be concerned with and the data processing and communications line other than sort of normal.
Growth activity that sort of simulates the beef.
Generic rates with respect to the.
Overall core operating expenses I think.
I mentioned last quarter.
Including Steuben on a more normalized level the expectations were somewhere between 90 $596 million as a run rate for the balance of.
2020, with some of the initiatives, we have going on just to to minimize growth and expenses next year.
I think thats, a fair run rate for the 2021 year.
We all in including Steuben.
So I think thats, a that 90 $596 million.
Operating expense run rate is is not unreasonable.
Okay now that's very helpful. Joe. Thank you and then just switching gears a bit you guys touched on.
Challenges with the organic growth balances and the macro uncertainty.
But as you as you think about the trajectory of.
Loan growth into the fourth quarter and 21.
Are there are pockets of strength that could help support drive positive growth in into next year or how are you. How are you thinking about loan balances going forward.
Hey, Russell, Joe serve and good morning.
I'll take a shot at that so.
Just to give you a little but to give you a little perspective, the the current pipelines.
In the residential mortgage.
Line of business is running about $265 million, which is.
A pretty good number for us.
The commercial pipeline, that's running about 250 300 million, that's a little light.
Quite candidly.
On the indirect side and the indirect business quite frankly as much as you want if you want to buy deepened by low we don't have any intentions of buying people buying low so.
We probably won't see much growth in the portfolio the commercial portfolio. It's got some some.
Pockets of your word pockets of.
Opportunity primarily in the in the.
Multifamily.
Sectors in primarily in some of our bigger markets more more.
Larger markets like the Syracuse Buffalo Rochester through that.
Or or the capital discipline opening I.
I don't expect it to be overly robust at all I think that.
We're going to be happening here with that pipeline its going to hang in around the 250 300 range, we were historically closer to 450 $500 million.
Obviously dropped off specifically as a result of cold.
Okay, great. Thank you that's a really great color guys and that's it from me on the question. Thank you.
You're welcome.
The next question comes from Erik Zwick from Boenning and Scattergood. Please go ahead.
Good morning, guys.
Good morning, Eric.
First just wanted to I guess talk about the employee benefits business. It has and continues to be a great source of revenue for the back especially today.
Interest income headwinds I'm curious if you could provide an update on the growth strategy for that business and also curious about that the typical term of of a customer contract and whether the sales cycle for.
For that business alliance with the traditional kind of end of year benefit cycle or is it more of an ongoing full year effort.
It's mark good morning.
Yes, I think strategically it's the same strategy, we've always employed continue to.
Disciplined about growing that business, both organically and through high value.
Opportunities will continue to pursue that as a growth strategy.
In terms of the markets were in we are in.
That business the revenue run rates.
Hundred million pretty.
Pretty close to it.
But theres, there's there's some bigger pieces to it so we've got a.
Collective trusts piece, we have a formula K platform fees, there's a.
VEBA piece, we have.
Actuarial consulting fee. So there's a lot there's a lot of pieces to it and they all integrate really well together and so there is that we really have to particularly on the organic side over the last few years really refine the cross selling capacity.
All of those businesses to support each other so the organic piece is not just kind of pursuing market opportunities, but it's also.
Pursuing internal cross sale opportunities to existing customers and.
I don't know what the answer to this question is so I know I'm supposed to give answers not ask questions. I think a good question, yes would be how much of our organic growth is outside the current customer base and how much is inside metal and all that and I'll find out because I think it's a fair question, but.
So a lot of our effort is really kind of neutral cross selling of all those different pieces to the customer base, which is usually.
A lifetime's CFO or HR directors or others.
Pieces that go to kind of investment managers.
So I think the growth strategy you are going to be.
Through our internal cross selling market organic growth as well as high value.
Okay.
On the business model side, we like the mix of business is we're in.
I think the four one k. business is probably more mature than some of the others. So.
So we have.
Spread our wings, but in the last few years and invested in some kind of other lines of businesses that are startup. They are actually growing more rapidly than that core business. So we'll continue to look for those opportunities in the market to pursue that.
The sectors and the opposite spots there that are actually growing.
So I think that's that's a kind of a quick summary of what the growth strategy and business model is.
And that business driven are really having a terrific year.
To date through profit.
Seven.
8% in earnings.
Year to date, so they're really having an extremely good year. We're also seeing a bit more activity in terms of M&A.
In that space for whatever reason, it's been more active the last.
The quarters than it has in some period of time, so thats that.
Good news as well for us in that business.
That's great I appreciate the detailed answer there mark.
And then just looking at slide 15 in the supplemental deck that one on the healthcare and social assistance portfolio.
Looking at that I guess about 10% of the portfolio still had some forbearance at the end of the quarter seems a little bit higher than some of the other portfolios.
You did mention just overall for the total loan portfolio. It sounds like forbearance continue to come down over the past few weeks has that continued here in this portfolio and then just looking at the breakdown.
The update kind of individual pieces of that portfolio are there any better or that kind of more stressed today are there. Some that are covering better I'm. Just curious is the trends that you're seeing.
Fair.
Yes, so so Eric this is Joe.
I will take you through 10 October the 22nd.
In the healthcare social services.
Seven.
Our deferrals for a total of $15 million.
Yes.
Yes, so it sounds like you guys look at US go ahead.
As you look at if you look at the Brett you talked about page 15, as you look at the breakout.
Page 15, the really really the only one is the only the only one that's concerning would.
Would be nursing facilities nursing home facilities, just because the cobi.
Any restrictions placed upon them everybody else.
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Our are performing just fine for us it I'm not suggesting that the that the.
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Sure facilities are performing fine, it's just a higher higher Roe.
Hi are concerned just again because of the population of the people in and.
No restrictions placed upon them as a result of cool good.
Understood. Thanks, that's all my questions. Thanks, guys.
Sure.
The next question comes from Chris O'connell from KBW. Please go ahead.
Good morning, this is Chris filling in for Collyn.
I just wanted to start out with.
The strong you guys are obviously very strong capital and liquidity good liquidity position.
As you guys think about that and I guess for those stock prices are you considering the buyback at all or if you are considering the buyback at this time.
Why not and I guess, what would get you are involved.
Chris Thats a this is Joe sit here is that it's a good question.
Our challenge with that with buying in shares is obviously that it's given our valuation our prices that it is done.
Dilutive to tangible book value, but the other part of that too is we've we've been an active acquirer over a very long period of time and we like to have.
Some of that.
Capital resource available for M&A purposes, I think we'd rather use it for accretive M&A transactions than we would for Fourq.
For stock repurchases.
At least at this time.
Got it and then I guess going along that line.
I mean, you said you've seen a pickup in M&A conversations and opportunities on the fee side of the business.
And then how are those conversations and kind of opportunity has been popping up.
In terms of frequency on the bank side of the business.
It's clearly been slower on the bank side of the business I think.
Boards and management teams are.
Continuing to grapple with kind of the.
The new environment.
No the colt with related.
Impacts to the business and the economic environment and the credit concerns and.
Interest rate.
Yield curve. So I think I think everybody's kind of busy with all that in addition for the most part across the industry, particularly the smaller banks in kind of the mark the small cap or less kind of banks that we would look to partner with the multiples are way down so.
I think the idea of thinking about us.
Strategic partnership in that environment is just less likely if your stock selling at 20 now and.
Beginning of the year was 40.
Yes, it's hard to sell for 25, so thats.
Thats, what I think the simple dynamics I do think.
The environment is going to get more challenging for all of us for lot of reasons.
So maybe less related to credit certainly for us in more related to the interest rate environment.
Potentially.
So I think the the yield curve challenge is going to make it more difficult for banks across the spectrum, particularly if there is low credit demand I mean.
A lot of banks that they have.
Essentially one lever to pull which is other than opex, which everybody at that level, but it's basically.
Gross and net leverage at all and for US we don't rely on as much we have other levers to pull.
And.
So I think.
Over the course of the next 18 months the discussions around strategic partnerships will probably grow.
Well okay.
Over time, but I would say.
The current time a lot of teams are just kind of looking at what they have and how they manage it and how they get through the rest of this year and into next year with the new challenges of the new environment, which.
Could change it again, if you have a change in administrative administrative change the administration.
Change in kind of the regulatory regime. So.
I think Theres I.
I think there is some precipitating factors that.
Might create more opportunity in the bed space in 2021.
Got it.
Makes sense and if the deal were to come due.
And the next three or four months do you think that you would.
You don't have the the tools and the resources and the proper information to to be able to evaluate that deal and execute on it.
Given the.
The current state of the credit environment or would you be more comfortable kind of waiting another quarter or two before.
Taking.
A real hard look at a deal.
No I'd be fine at taking a look at something if the right opportunity I think.
When times are more difficult when you have greater long term opportunity in the trees on the sky. There is more risk in my view I would certainly look at look.
Look at.
Anything to kind of met our general criteria that has to be.
Higher quality franchise.
What has to be a good fit for us as to be able to create sustainable economic value for our shareholders.
Certainly I think if they have the kind of information about their portfolio that we have we would have enough information to get our arms around it.
So I think a lot of it depends on what level of granularity they have around.
Data collection data analysis data summary reported as it relates to their their portfolio, but we would certainly take a look at.
Yes, something if the opportunity arose.
Great. Thank you.
And then just one last one on.
The credit and deferrals.
You guys had made really good progress on the Faro bucket I think you said it might have dropped down to 1.5 million or so.
Obviously, what's left in the deferral bucket.
[noise] credits.
Fairly highly impacted sectors.
Have you guys made any loss assumptions that you can share.
On some of those higher impact deferrals or how do you see that.
Or do you see those translate into actual losses.
As you move through the credits.
Okay. So you know as the and I'll, let Joe serve and kind of look a little further this is Joe sit here as you know as we head into.
Some of those into potentially round three with some of those borrowers were going to have to evaluate them for.
Nonperforming status nonaccrual status and we'll be taking those on a case by case.
Basis.
We're hopeful that some of the some of the borrowers will see some light at the end of the tunnel and clear resuming.
Some of them are pretty koeppen levels in terms of.
Cash flow although.
The reality is is that in our markets.
We're headed into the winter season, which is not always a great season for a lot of our.
Hospitality borrowers so.
That will be a challenge as we move through the next next round of round of deferrals, Chris Let me just add if I if I might.
And you're right. We've made some progress so back in the second quarter, we were 700 round number $700 million deferrals.
9.4% of the total portfolio.
Third quarter 192 million, 2.6% as we sit here as of Friday last week.
We were down to.
1.6% or $120 million so.
We've made some great strides.
Clearly some of these these themes.
Counts that are on deferral.
Expectations.
Not all going to make it some will end up.
Following delinquent and we'll we'll apply our standard loss mitigation.
Processes, but as Joe mentioned, we are working through it we'll continue to work through each one of these on an individual basis to determine exactly.
What we should call them in what are what our approach will be to minimize any any potential loss that we might experience.
Great. That's helpful. Thank you.
The next question comes from Matthew Breese from Stephens incorporated please go ahead.
Good morning, everybody.
Hi, a couple of follow up question. It just just on that last credit discussion you know curious, especially in the lodging.
The lodging book, if you've seen any transactions nearby that they give you either confidence or make a little little bit concerned about the the underlying collateral value of.
What's behind these loans.
Sure so.
Coupled with a couple of data.
Good points, I guess with respect lodging portfolio, our current weighted average loan to value.
Since its 15% less than 50 less than 55% excuse me less than 55%.
Just in talking with some.
Industry.
Specialists, specifically some appraisers.
I would I would tell you that we probably lost 20%, maybe maybe a little bit more.
As a result of the current cobot situation.
Our.
So we can restart portfolio our occupancy just to give you a few other data points, our occupancy 2020 year to date occupancy 42%.
And you had clearly benefited from a strong.
June July.
Oh biggest in September what I'd say strong of.
The month of September had a had a.
Occupancy rate running at 52% so.
Yes, there was activity.
Picked up during the seasons that you would expect it to pick up with it as long as society stays open I think that that these hospitality.
Operators.
I have a strong opportunity to make their way through.
The majority of our portfolio before.
Before cope with the majority of our portfolio was with no.
Existing strong.
Strong.
Management capabilities liquidity lower leveraged relationships that that we expect will will see us through third Alabama, Inc.
But I think that the lion's share has got a real shot at the.
Seeing it through to the end.
Right. Yeah, I was more just just wanted to get a sense for do you think those ltvs of less than 55% provide the bank kind of protection. If there is a sale.
You know to to not take any charge offs and it sounds like so far.
Plus or minus you feel okay about that yes.
Yes, correct.
Next question just real quick.
Oh go ahead, no I'm sorry, you go ahead.
I was just going to say in we like for the most part we like the location location location, we'd like the locations of many of our properties.
There is a reason that there was a reason they were built they were built.
I mean is that should that should benefit us in benefits the operator in the long haul.
Understood and then what was the all in PPP income for the quarter.
Hi.
$3 million that includes the interest and the recognition of the deferred for okay.
And then just my last one Mark I know you talked about M&A.
Expect anything near term, but just curious as we remain in this environment for longer.
And perhaps.
Perhaps your currency advantage.
You know.
Remains intact and.
Would you consider taking advantage of that to the point, where maybe you consider a larger deal I know part of that part of the recipe for success here is to make sure. The CBU DNA survives would you consider a larger transaction even in them are we to take.
Take advantage of the current situation if it presents itself.
Unlikely.
I think the.
The risk reward profile of an MLP or larger transaction I don't think is.
Due to our view of value creation overtime.
Certainly.
Lots of things.
I am always.
And.
They certainly can be additive to EPS, but are they sufficiently additive to get us over time to that double digit.
Annualized return to shareholders and I think the answer to that is probably know that smaller transactions are generally much more.
Profitable and high value in lower risk.
So I would rather do for small transactions and one big one.
Because the risk reward is very different.
Yes, it's a lot more work doing it that way, but I think we have a pretty good.
A team and a pretty good system.
And a lot of experience and expertise in terms of.
Integration and.
Well conversions and the like so I think we'd be unlikely.
Do something that was really large there's there was a probably a couple of opportunities where.
No one institution, maybe 4 billion would be something that.
It is really to be meets our kind of risk reward expectations around transactions, but it's a it's a.
Pretty small number of those so I think for the most part will continue to look for.
Good things in the.
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F billions, a couple billion range, and we think theres a lot of opportunity in that range as well as well.
Within our footprint as well as kind of a contiguous to our footprint in different directions.
Understood.
Great. That's all I had thanks for taking my questions.
Hey, Internet.
There are no more questions in the queue. This concludes our question and answer session I'd like to turn the conference back over to Mr. Tryniski for any closing remarks.
No closing remarks other than thank you all for joining we will talk to you in Jan.
January and I hope you.
Oh, well over the winter time, thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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