Q3 2020 Bank Ozk Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the bank owes Dk.
Third quarter 2020 earnings conference call at this time, all participants are in listen only mode. In a moment, we will have a question and answer session to ask a key.
To ask a question during the session you will need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero. It is now my pleasure to introduce Tim Hicks.
Good morning, I'm, Tim Hicks, Chief administrative officer, and executive Director of Investor Relations for Bank goes UK. Thank.
Thank you for joining our call this morning and participating in our question and answer session.
Today's Q and a session. We may make forward looking statements about our expectations estimates and outlook for the future.
Please refer to our earnings release management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward looking statements.
Joining me on the call to take your questions or George Gleason, Chairman and CEO, Greg Mckinney, Chief Financial Officer, and branded Hamblin, President and COO of our real estate specialties group.
To make the most efficient use of the time, we have for this call. We'd ask that you. Please limit your questions to one or two at a time and then reenter the queue for any follow up questions if needed.
We will now open up the lines for your questions. Let me ask our operator, Andrew to remind our listeners how to queue in for questions.
Certainly.
A reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
And our first question comes from the line of Ken Zerbe with Morgan Stanley.
Hey, good morning, everyone.
You guys do such a great job of underwriting and they are SG portfolio I was actually hoping you could talk instead about the credit trends in the non Ari SG portfolio do you think that they are going to follow the same path of credit losses to most other banks are talking about which is peaking in the middle of 20, Taiwan or should they performed.
Thanks.
And Ken what I would Miss Georgia place and what else.
What I would tell you is that are already USG portfolio is.
He is our best underwritten best documented bass collateral sponsorship best structured loans there.
Because of their size and complexity that again, an extraordinary level of attention and care in all aspects of.
The processes related to those loans.
I would tell you that our community bank lending in its various forms and our indirect lending as well.
We believe our underwritten.
Underwritten to standards relative to the way most banks underwrite them that are are favorable.
So while they're not quite as low leverage or quite as thoroughly documented and harvest as our RMBS GE loans, we think they are.
Much better than average so.
You know the secret to our.
24 years now of having outperformed the industry on net charge offs every year.
And having the averaged about.
A third of the Industrys net charge off ratio over that last 23 year period of time as a public company.
It is a result of the fact that not just our Rts GE loans, but all of our portfolios were underwritten and service to a very conservative standards. So we think these portfolios will perform well in the downturn.
Our aggregate portfolio was really underwritten and designed to withstand.
The riggers and challenges of a very adverse economic environment. So we've.
So we feel like we're very well prepared for this environment.
You know I don't know that we have a specific expectation.
When.
Net charge offs will peak or exactly how much they will rise because that is going to be very dependent upon.
Government policy action.
Additional stimulus coal bed cases, and so forth.
Clearly our deferred loans that they received a pandemic modification.
Dropped.
From.
Hi, six I believe percentage of our portfolio at June 32.
2.8% I believe it was at September Thirtyth, Tam or those numbers correct. Yeah. The 6.9 was actually our highest peak was actually occurred and in in July but that was the highest speak down to the two to 2.8 at the end of the quarter. So you know loans are coming off of a deferral and.
Obviously, the vast majority of those loans are just picked right back up and and continued to pay him perform as we expected they would and we.
We would expect that the vast majority of the 2.8% remaining in deferral will continue to do so so at this time, we're not saying.
Any significant.
Emergence of charge offs, we I'm sure we'll have some loans that will break in this.
This economic environment, but our.
Our our low leverage gives us a lot of confidence that our losses will continue to be very modest when we.
When we do encounter assets that have a problem. So I don't know if.
Second quarter or third quarter or first quarter I don't know exactly what the high point is going to be but I think the more important overriding bottom line as the portfolio has been designed an underwritten and booked with.
With the idea that it would be extremely resilient and perform very well and I a difficult environment and.
Through the first couple of quarters three quarters of the pandemic situation. It is performed exactly like we thought it would.
Alright, great Thats very helpful. And then just the other question I had tore.
George I know you said that the our USG portfolio or sorry, our equity loan repayments are likely to increase in fourth quarter and 21 could remain elevated as well.
Why don't you think that this pandemic has caused more of a change in the behavior of the capital markets or other competitors, they're taking out. These these loans.
There's a lot of capital out there can and the.
Federal Reserve's very aggressive action in March and April to ensure adequate liquidity in the financial system and.
To buyout.
Tremendous.
Quantities of.
You know investment grade rated securities on the short end is a created a lot of liquidity in the system and created an environment where people are having to.
To get yield.
In many situations having to go out and take on more risk to do that.
And you know I think that's the beauty of our business model.
We have created a business model, particularly in our industry group, but elsewhere that where we get and.
And as has historically gotten much better than average yields.
While taking lower than average risk than our competitors, which is why.
For.
The last decade during two or three decades really our net charge off ratio has been always less than our competitors and.
And our margins have.
Typically been much higher than our competitors and you you see that now with our nine basis point charge off ratio on both purchased and non purchase loans in the quarter just ended mean much.
Being much lower than than other banks. Many other banks are reporting.
And yet our AR.
Margin in Q2 actually widened.
Versus our.
Competitor banks or the industry and.
Is that a bias comparable guidance for Q2, I think we were 93 basis points.
Wider than the industry margins. So our our business plan has been very thoughtfully and very carefully designed and curated over the years the truly let us get better than average yields with lower than average risk and.
People, who are investing who don't have that sort of well developed business model.
To get yield in this environment are finding it necessary to push farther and farther out the.
The credit risk spectrum.
To get spread.
So we we've always locked our business model, we think the current environment is really proving the.
The quality and durability of our business model very well.
Thank you Ken.
Hi, Thank you.
Thank you next question comes from the line of Tomorrow, because earlier Miller with Wells Fargo.
Hi, good morning, Thanks for the questions in mortgage.
Maybe just starting on the appraisal commentary excellent color in the release around updated appraisals, maybe looking specifically at the five hotel.
And two office appraisals that were done and the most recent quarter.
Which geographies are those and are those geographies coming back online maybe quicker than a new York is and I guess more broadly can you just talk through the appraisal process I think last quarter. You mentioned that you work with a third party to get values kind of 12 to 18 months out how sensitive are those values.
And is that a process, that's not going to be ongoing on a quarterly basis, essentially as we get updated cash flow information. Thanks.
Brian and you want to take that sure.
Sure sure. Thanks for the question.
As Weve said in the past as it relates to our appraisal process.
You know it it continues as it has been and even before Covis we.
We're.
Re underwriting and we re rating every loan in the Argus II portfolio at least once annually and in the process of doing that if we had really much.
Really material.
Degradation in circumstances, something changed around leasing or.
Delays this that or the other we would we would get an appraisal at that point, obviously was with the advent of Covance. There's there have been.
Numerous.
Negative impacts in markets and property types and so.
The volume of new appraisals. This year is is up as a result of that but it's still normal course and we've.
With respect to where appraisals are being done you know it it tends to.
Reflect where we do business.
The the most.
The appraisals that have been done that are.
Our comments.
Reflected on him to have been in our New York market.
By property type and probably most in multifamily. So you know the results are are going to be mixed.
Depending on you know any quarter, where it is and what it is but.
You know the results are are pretty similar I think we do a good job of.
Explaining that our loan to value is in terms of news there is staying within a pretty tight range and some are up some are down.
And honestly.
Honestly, some or some of the Ltvs as we noted are affected by.
Principal paydowns that we collect in conjunction with.
Loan extensions many of these appraisals are coming.
As a result of loan maturities and extensions, obviously 2017 was a big origination year for us. So 2020 is in is going to be a lot of loans coming up for extension and so a lot of appraisals occurring at that point in time, but as we've noted in past quarters that.
Those extensions free.
Frequently come with with principal Paydowns that.
Offset any any decrease in appraised values that may occur in those situations. So.
That will continue.
You'll continue to see a lot of appraisals.
As we move forward in the future quarters for all those same reasons.
And Kimberly let me add a couple of comments to brandon's excellent color on that first I do want to clarify that we're using mainstream appraisal farms that are ex parte leaders in the industry all over the country.
With a.
Particular focus on their expertise in particular markets or particular property types to all the major appraisal firms probably that would come to mind as main top national topline appraisal farm.
We use those we have a separate appraisal services unit within our company that.
When we want an appraiser.
To a price of property, we engage that through that independent firm that is independent of our lending arm. So our lenders have no influence your interaction in the appraisal process. So we've created our own.
Separate structure within the company to make sure that we've got professional price or expertise in house that is engaging reviewing and.
Making sure those appraisals meet our quality standards as well as all regulatory standards and we are using top quality Barbie.
Brandon mentioned that one of the reasons were not seeing the kind of degradation in appraised values that you would expect given the economic condition is that well.
With a lot of our modifications extensions.
Of loans, we're getting significant curtailments paydowns on the loans. So that that is a lot of time driven by sizing parameters that are on our loan documents.
Our standards for the loan that it was going to be less than such such and such a price value. The property comes up for renewal its 3 million over what that are 5 million over what that number would be and we require curtailment as part of a renewal to keep us within the.
A price loan to value standards.
What we originally.
We originally expected and the other comment and this is addressed in our time and our.
And our management comments, but you know.
If you're dealing with a loan to value that was calculated at June 30, but it was based off an appraisal that was three years old.
The property probably appreciated substantially in the first two and a half years of that time frame up to the co bad.
Pandemic hitting that was not captured because we knew values were up and we weren't repricing. It on an interim basis, because we knew market conditions were healthy and improving.
Then you have the Calfed pandemic hit values come down because of that urea price. It based on that you are not as far from the value three years ago. As you work from what would have been evaluated your price to one or two quarters.
Before the pandemic pet so that as those factors are resulting in our loan to values being.
Much closer to in line with previously reported loan to values then what.
Matt.
Naturally be expected.
Okay. Thank you that's that's great color.
And then my second question, maybe shifting gears to expenses.
You talk about how the new stay at home environment is making you adjust your thinking on branch operation staffing technology et cetera. As we look ahead, what does that do to the expense growth rate.
I grew.
Greg you want to take a take a shot at that obviously there are a lot of pluses and minuses when.
Where we're taking staff out in various places and adding but Tammy Greg do you want to talk about our expectations regarding.
Interest expense in the aggregate.
Yes, I can I can certainly do that.
I think that.
Our expense run rate in Q3 is a pretty good indication of where where we think that looks like at least in the near term.
We as as we've talked about over the last with recall, we have done a lot of work trying to me.
Make our operations more efficient more effective make sure we've got.
The right people in the right places doing the right jobs and you don't have people that are that are.
That are not fully productive.
As part of the team so we have made some.
Some enhancements and improvements there as we you over the last three or four quarters, two or three quarters like yes.
Our new headquarters came online during the second quarter. So we've talked about that that's a full quarter in run right. Now so that's fully baked into your you to what you're seeing in Q3, so I really think that.
As we look at our overhead and our thoughts around the next two or three quarters.
I think Q3 is a very good.
Starting point for that and I would I would expect at least based on what I know at this point for Q3 and are skewed. The Q4 in the first part of next year to look.
Very similar to what you see in our results here in the in Q3.
Great. Thank you.
Thank you.
Next question comes from the line of Catherine Mealor with KBW.
Thanks, Good morning.
Good morning.
[noise], we talked before about how different are less relevant for you. All just given the dynamic of interest rates are they can you quantify kind of the level of loan modification.
You've seen over the past couple of quarters and when tenant then the restructure since the pandemic and maybe what has been considered at Kiaka will present the cares.
Uh huh.
Okay.
Catherine we are we're very reluctant to ever do PD ours and.
We we just are.
Our strongly resistant to that so as you noted from our our queues and.
Call reports and so forth, we have very few loans that qualified as a TD ours and if it's going to be a TDR in the.
Sponsorship borrower can't.
Modify the loan and why that's not a TDR, we're pretty much inclined to blow that loan up and move it out because I don't want to deal with it long term is to.
TDR on our books so the.
The cares Act creep.
Created these it.
Extensions 90 day to 90 days or a six month.
Modification.
For deferral of payments that were not by definition TV ours and.
A lot of banks.
Three liberally.
Granted those because.
Because it was a good feeling thing to do I guess, and we were pretty well.
Resistant about doing it our approach was if we think.
A customer has not been affected by the pandemic, then they're not going to qualify for a.
An extension.
Under the cares fact, I've got to be impacted to do it and then secondly, if we thought that they were impacted but that.
They were.
30, or 90, or 180 day expansion of payments was not going to be construed.
They constructive and help them work through it and I manner that would be successful if we thought they were just going to default that.
180 days out then we just Didnt grant the extension and went ahead and proactively addressed it.
That way so we've been very I think.
I think appropriate and the way we've addressed these we've not done.
Cares Act extensions, where we thought they would not be successful in helping the customer work through what truly was a short term.
Such weissman.
And we tried to not grant them excessively to people who are.
I have not been impacted now the.
Truth of the matter is probably the vast majority of them that we granted were to people who would.
Would have paid even had we not granted it and would not have become past those are problematic, but they were impacted.
Probably not to the point of defaulting.
But impacted by the pandemic so.
You know I think.
Our portfolio quality again as is evident in the fact that that are low.
Our loans rolling off from the cares Act modifications are largely just resuming in picking up.
Payments.
Where they where they were in or are continuing to pay.
Hi, and perform so.
So we hope that will continue and our.
We're pretty cautiously optimistic that that that will continue.
On the.
Oh, I don't know dozen or so ari as GE loans, where we did.
Pandemic modifications, we required on those loans for the if we were extending two months or three months or six months, we require the customer to.
Two.
Simply to put up an equal number of months of future payments.
In a reserve and to also rebalance any.
Tax insurance and op loss reserves associated with that because.
We added customers said.
I don't want to go back to my equity and raise additional equity for this but I'm going to be delayed six months and I need to.
I need some help we said will will.
Do three months of extensions, but you're going to have to put up the other three months and rebalance the reserves. So that it's not a problem and that very.
Thoughtful approach to the why would panel modifications in that portfolio is has meant that our customers.
We have more skin in the game and then putting more skin in the game is certainly demonstrated that.
But they have a commitment to continued projects I think we've been very.
Constructive and careful in the way we've done this and we're not going to.
Do.
Meaning if any loans or certainly no material loans that are gonna qualifies a TDR.
Great. That's really helpful. Pete do you have the balance says to us that doesn't.
So Dan Arias key that you mentioned you've done a modification for like as you described.
Tim as I disclosed yeah, its Catherine George Burns bigger 49 is actually 10, one of them has expired. So theres nine that are.
On on deferral now sorry, overstated, yeah correct.
[laughter].
Tim This is now that's not too far off [laughter] and then maybe one follow up on yet.
And how did it so good for you all right now and I guess the main market that were not worried about in New York and so is there any color or any color you can give us some does your larger projects in that market and what you're seeing there one when supply that I was encouraged to balance your office bubble chart that shows some of your larger.
New York projects had it earlier vintage and very low LTV, but any kind of other anecdotes about that and just the health of this portfolio.
Mark It would be helpful. Thank you know a as the bubble charts on pages 20.
28, and 30 show we've got the five hotel properties in New York and for office properties in the New York Amas site and those are.
Low leverage loans as reflected almost charts and.
We expect that our sponsorship is very capable almost properties on their high.
High quality properties and.
That they will continue to stand behind those properties until more normal market conditions return.
New York is certainly a.
Hello, probably our most challenged market in the sense that it was hit hard.
Early in the smartest probably of any market in the country by cope at 19 and the.
Response, whether you agree with that or not was a very vigorous response to really shut down the city at.
And.
You know.
That that is going to.
Calls New York to be so.
Slow to rebound and tie.
Take longer than cities that had a less aggressive response to shelter in place and shutting down economic activity.
Are going to incur you know we've got a lot of other markets that are really coming back really strong and.
Largely recovered.
You know the vast majority are a majority of the job losses and are really resuming normal activities.
Much faster than New York and.
We realize new York's more dependent upon mass transportation and a lot of other markets too and that's a legitimate factor, but I think New York will recover and we're pretty optimistic on the long term.
Long term prognosis of New York, that's just kind of come back slower.
Now interestingly enough you know, we do a lot of condo financing a lot of our projects in New York have continued to have sales volume even for the pandemic continuing to sign contracts.
We've got several projects.
It should.
Get their certificate of occupancy issue this quarter and have large numbers of sales that should start closing as soon as a certificate of occupancy or are issued to sales or under contract. So one of the reasons were expecting.
Elevated pay downs really kind of resume in Q4 and continue through next year is the timing of completion of a lot of our New York projects that that.
Have significant.
Sales contracts in place, which are going to result in pretty quick pay downs once those.
Properties CEO so yes.
You know it's a it is a challenged market we understand that we acknowledge that Uh huh.
Our quality of asset sponsorship and the.
Continued activity at a slower pace that we're saying on those is pretty pretty encouraging.
Great helpful. Thank you great quarter. Thanks.
Thank you.
Thank you.
Your next question comes from a lot of Michael Rose with Raymond James.
Hey, good morning, guys. Thanks for taking my questions.
First I wanted to get an update on the top of the property it looks like the LTV moved below a 100% this quarter.
Seems like there's been some sales activity.
Is there any optimism.
Optimism that that credit.
Could you just kind of be resolved or.
Come off of a non accrual status or whatever it may are off the west coast I mean.
On point over the next couple of quarters as these trends continue and then just generally speaking about.
Any other.
Property types that you might be concerned about thanks.
Well you know Michael that property was up almost special mention last until I think January or December 31 of last year is that right.
Sometime during last year account and I think it was I think it was in the fourth quarter last year that based on the fact that we had very.
Few lots sales going into the new year, and we were concerned about that sales velocity, we took it from special mention.
Two.
Substandard accrual and it has continued to be on accrual and.
This has a property who that has had its fortunes dramatically improve.
As a result of the.
Changes in customer behavior, and expectations, resulting from the pandemic gets a golf course.
Property and.
The edge of the mountains layer on a river.
It's wide open spaces big lots lots of trees lots of sky lots of open higher and.
It as similar properties all over the United States have experienced a tremendous upsurge in demand in.
In the course of the pandemic. So that has resulted in a lot of lot sales and each quarter of this year.
And you know the.
You know the a lot prices have been easing up I think they just had a record high sales.
Sales price on a lot if I'm if I were if I got the story correct and.
All of the vertical product that they.
Have built is essentially sold under contract and.
They are moving to build new vertical.
Products, so the increase in sales velocities.
And the.
Improvement in pricing have resulted in the loan to value on that as.
As of the end of this last quarter dropping below a 100%.
It it continues to be substandard accrual on our books, but I would tell you that.
Use a phrase from the rating agencies, it substandard accrual with a positive outlook.
At this point, we if we continue to see the sort of improving conditions buyer and continued lot sales and demand for their vertical product.
And that translates into sales than.
Where we are.
Optimistic hopeful that that will Uh huh.
Move from substandard cruel to special mention and then to pass Watson into a pass over time. So we could if trends continue we would expect to see a steady positive progression in the writing of this project.
The Big Prize there is enough if the trends continue and they certainly appear to be in place and a continuing now but.
We need to see those continue longer term before we're willing to upgrade it but.
Positive outlook for that based on current situations and in the footnote there on figure 39.
We gave you what the.
Sales.
<unk> contracts were in place on lots and town homes at.
In the last quarter and what's happened since the end of the quarter and you can see that at least for the moment is all.
Going in a very positive direction.
Got it and just as my follow up on the management comments, if you talk about some of the restructuring and pricing and terms that you've done in the RV and marine.
But can you give us a little bit more color. There you talk about balances inflecting, perhaps in the in the second quarter I believe it was.
What's what's changed and I know that the target is to keep it between 10% to 15% I mean is the expectation in that and the changes that you know.
You expect these trends to continue into the foreseeable future and therefore, you don't want to lose market share just just any sort of color there would be helpful. Thanks, Yeah.
Yeah, you know I'd tell you our guidance we have.
Absolutely marvelous team running that business unit for us and they have my great respect.
And.
They were originating a lot of volume last year and it was it was good volume and good quality and relative to what some of our competitors in the space, we're getting a good yields but.
You know I looked at it relative to some of our other lines of business and and frankly, we just said this is not as profitable as some of our other lines of business we will we.
I have great confidence and you guys. We thank you can play a really important part in our future, but we got to.
Figure out how to get our premiums that were paying the dealers down.
And our margins up while maintaining or even improving our credit quality and as.
And as part of our AD.
Analytics and risk ratings and so you saw around this.
We built a.
Pretty.
Rigorous model.
For evaluating risk on on these credits and we use tens of millions of can.
Consumer credit scores that were specifically down on customers, who had recreational equipment loans as opposed to looking at hey, locks or unsecured consumer loans or credit cards, we were really now and then.
On the.
Uh huh.
Customers, who had this space and that experience and we built the model and.
Have back tested that model against Flacco scores and what Weve concluded after doing a lot of study in analytics on it is our our our model. We built is more predictive of.
Consumer behavior and performance and bomb characteristics than pack of scores are at.
And there.
There there.
A lot of things going on with Fokko scores anyway that that's another subject.
But.
We concluded that we can be more.
Focused and print and predictive of credit quality and and get volume and get.
Better spreads and actually take equal or lower risk in doing that so we we've took enough time and sort of step back from the market to really test this and compare the performance of our portfolio and with all that done now we're ready to re engage now.
Where we are looking for better spreads and.
Lower premiums and May.
Maintaining equal or improving credit quality.
And we think that will help the performance of future originations in this portfolio quite a bit.
We we were out of the space for you know a couple of quarters.
We are reengaging in this space it takes time to get your dealer network.
Kind of all Reengaged in going forward, but we do have positive momentum its going to take a while to build back our volume.
But we think we're going to be producing even better quality stuff going forward than we were in and what we were doing was good but what we're going to do we think is going to perform better and yeah.
Im going to Miss the fact that we're you know we have we'll have basically a year with the.
No growth or negative volume in this space, but.
Thank you and longer term. The key is if we can build a better mouse trap, which we think we have and benefit from that for years to come taking on.
912 month hiatus from the market and then.
Implementing this better improved business strategy, we think is the right thing today.
So thats, where we are that's more detail, probably then I should have given him probably more detail. There my guys wish I'd given but that's that's the.
Bottom line.
Appreciate the color thanks for taking my questions. Thank you.
Thank you. Your next question comes from the line of Stephen Scouten with.
Sandler.
Hey, good morning, everyone.
George you referenced your you do have some condo exposure there in New York City I'm wondering if you have any numbers around how much of that $3.6 billion.
When commitment how much of that is in New York City in it.
You have any data on that the loan to cost in that market versus the 52% for the right mix.
Exposure overall.
Stephen I don't I don't have.
I don't have that died in that we've got it but I don't have it at my fingertips and branding.
Brandon could probably call it up there, but but I'm not going to we don't want to give.
Right on the goal that is not the vetted before he.
Gives that out there, but you know I would tell you our New York condo exposure is very similar loan to value to our condo exposure in other markets and we've got.
Condo exposure.
In markets all over the country, New York is the biggest in Miami has historically been.
Then the second business, although we almost everything except a couple of deals in Miami is paid off were trying to reload that portfolio.
So yes, New York is the biggest part of it loan to value is loan to cost. They are very similar to what they are and in other markets around the country. Okay. Great. Great and then just the only other question is really just around loan growth trends. I know you noted pay downs are expected to be maybe a little higher than 2019.
Probably someone to $6 billion range give or take.
So kind of wondering within our BSG, what sort of production you think might offset that and also if there is any kind of larger scale opportunities that you guys think you can capitalize on with the.
The ample capital that you got the available to you today.
Save and what I would tell you is yes, we we we hope to use.
Use the ample capital, we've got to grow our portfolio and capitalize on that opportunity.
I will tell you that.
We do expect.
Payoffs and prepayments too.
The quite a bit larger.
In Q4, and we do think Twentytwenty, one will be I.
Likely be right.
Record payoff here so.
So the the Rds GI guys are keenly aware that the payoff treadmill is running.
Full speed again, and they have got to pick.
Pick up their game with without in anyway, degrading, our credit quality or the performance of our portfolio too.
Continue to try to grow their book of business.
In light of a.
You know.
Rigorous payoff environment.
Weve run on the treadmill.
In the past and.
And you know weve.
Continued to maintain or grow the yardi SG portfolio.
We would like to grow it certainly.
Certainly the next five quarters, because we've had a bunch of payoff push from the <unk>.
The first three quarters of this year into the next three or four quarters.
And Uh huh.
We've got payoffs that would normally be occurring on that cycle, we're going to have payoff headwinds for.
Four or five quarters here and.
And the guys are going to have to play there and again to.
Put on law.
Lots of high quality volume.
In an environment, where there are fewer.
Transactions probably being.
Being executed for new construction and development, but Weve also historically in the past been able to and.
In times of economic turbulence you know.
Participate in a lot of restructuring and repositioning of assets that other line.
Lenders and other sponsors are getting out of and our sponsors have been very opportunistic so I think.
I think capitalizing on some of those opportunities is going to be a impact.
Important to us achieving our growth goals you know no guarantees here, but is we.
Said in management comments, we feel pretty good about the top.
Top line that we've got it already SG now that we're working on for Q4 and early 2021.
You guys are getting a coach.
Regularly by brand and Mike Moran leadership down in our industry on the need to get out hot hard find good opportunities on good projects that make sense, even in this economy with quality sponsors.
They are working hard to do that we've got a great origination team so well.
We'll see how they execute but we we are.
I'm cautiously optimistic about that but.
Your question is spot on point that that's that's the Big challenge now is being able to generate a.
Quality growth that meets our standards and.
And I assure you we won't generate if it doesn't meet our standards.
But quality growth that meets our standards to overcome.
Overcome the payoffs that are coming and generate some decent growth and average earning assets. So that's that's the new focus for us.
Perfect perfect Great helpful. George glad to see you guys proving out the strong credit quality once again.
Thank you Stephen.
Thank you and our next question comes from the line of Brian Marckx with Janney Montgomery.
Hey, Good morning, Hey, just the I wanted to follow up on that last question just on area. She pipeline I guess, George given the pandemic and conditions the that that originations have been down each quarter. This year. My guess is your IX expectation given kind of what you just talked about you know the kind of refocus there that maybe we get to it.
Flexion point me you start to see that trend higher.
You know, we're we're working hard to make that happen, Brian you know.
Originations at our SGN Q1 as shown in figure nine on page nine of our management comments were 1.76 billion.
Went down to 1.67 billion in Q3 was 1.4 billion now one.
1.4, I was not a terrible.
Terribly bad number, but we would definitely glad for that trend to be Oh.
Upward instead of downward and again and again just because we've got.
You know a lot of payoffs coming so.
We're we're going to work hard and we hope we can improve on that number and.
And it's just you just got to go execute every day.
Every week every month every quarter to do that and the guys have demonstrated the ability to.
To achieve those goals in the past and they're working hard and highly motivated to do it again so apps.
I'm, absolutely confident in brand and then Mike Moran.
Their leadership team and a half so.
Absolutely confident in the capabilities of the originators weve gotten our five origination offices for our U.S.G. around the country.
And if it can be done I think our guidance, we'll do it.
Gotcha, Okay, and then just you talked in that the comments about changing some adding some positions recently and.
Yeah, I guess just wondering if you can give any color on where we're maybe staffing was beefed up a little bit just as you look forward here.
You know there is.
Too numerous to mention all the changes and adjustments that we're making and the company probably but.
From.
The fourth quarter of 2018 through the third quarter of 2019.
Uh huh.
I have visited every office in the company with a great.
Group of officers, so it took us almost a.
10 months to visit every office in the company and spoke with every employee that was present in the offices that we ran that day. So.
You know interacted with 19%.
Percent or so of the total employees and our company at.
And the goal.
The goal of that was really just to get a absolute grassroots ground level understanding of how we were interacting with customers and how.
Our team was failing about all that we were doing and we came away with hundreds and hundreds and hundreds.
Of the recommendations.
For improvement that we thought made sense and we.
We've been working you know the ensuing.
12 months since the conclusion of that tour that we referred to as the back to the future tour.
And you know work really throughout the 10 months that it was going on to implement a lot of those improvements and.
That has led to a.
A change in all of the titles and our total kind of reorganization of the staffing of our community Bank gets resulted in a lot of leadership changes in a real division of the the kind of retail side of the business from the lending side of the business and.
This is a process that our lending leadership band our retail banking leadership have been unanimously in agreement on and I joined late functioned.
This reorganization and.
A redesign of our branch interactions with customers, both deposit and loan customers and.
And I think we are building and half sales, we've really kind of completed the last phase of that staffing reorganization just literally.
Few weeks ago.
And.
I think we are building a much more efficient much more.
Customer focused by.
Bank.
On the retail side than we've ever had before and we've created.
Hone used synergy and alignment between all of our delivery channels, whether its mobile or online or.
Customer care centers call centers as many people would call them.
And our retail branches in our ATM networks all of the alignment of those different channels has been a synchronized as part of this process.
And I think we are real.
Really in the process.
Of achieving a greatly enhanced customer experience and we just kind of have a little.
Oblique reference and the management comments to the fact that our deposit base.
The quality of it has improved tremendously and you know brokered deposits at the end of the last quarter or seven for 7.4% of deposits and you know that was down from mid teens and our largest 10 customers used to be.
16, 18% of our total deposits and there you know mid single digits now and we only have one customer that we've done business with for 40 plus.
Plus years that you know is even 2% of our total deposits and they're just barely over 2%. So the and you see it in our cost of funds coming down so.
Significantly so.
We think that is a huge improvement and I'm, so proud of Sandy Wolf and Carmen Clinton and Alan Jessup. They.
Teams, who are making all those improvements and our our retail bank and our our community bank lending commercial lending too in our community bank customer footprint, they're making all that a reality and they're doing a great job and we're having to re staff board.
Of that and we got a lot of people that were in the whole model that can perform in the new model and then we've had.
Eliminate those positions and our people.
Our people with our new model skill sets and that's much more technology and much more.
On line and mobile and much more sales oriented and.
You know I, just think we're down to doing a really good piece of work for our shareholders for the future here and we're very excited about it. So hopefully we'll continue to see that.
Increase our.
Availability of funds and our cost of funds going forward and create more durable long standing customer relationships and.
You know that.
But that's a big part of it and then obviously, we continue to develop our technology areas are our risk and model and analytics areas, we're doing a ton of stuff.
Because we are.
Gathering so much more data and it put so much governance from process around data and we're using that some much more effectively and.
The sky's the limit on the potential for that so we're spending a lot of money on those resources.
And I think thats going to generate some really good returns for us and I could go on and on but where.
We are working really hard to.
Make sure that every aspect of our company is as world class as our real estate specialties group and our indirect lending group and some of the things were most known for.
That really have world class top of the industry standards were trying to make sure that every part of the company rises to that level.
Gotcha, Okay no. Thanks for that color and just last one last one for me was just was there any change in special mention credits. This quarter of note I think you already tight you talked about the classified the sub standards already but just anything any.
Standard that was notable fully Tammy you want to take that.
Yeah, I will Brian where you mentioned were you asking about substandard special mention yeah, I guess it looks like you gave some color on the sub standard in that comment and say, it's I don't know if that just either way just classified and criticized if you can give any color on that just a.
Relative to last quarter to be perfect.
Yes, absolutely, yes, as you mentioned, we do have a trend on the sub standard chart in our in our comments.
That was that was an improvement quarter over quarter. Similarly.
Similarly, the special mentioned trend was actually positive trend.
Positive trend quarter over quarter, So we had a.
A decent decrease quarter over quarter. When you look at our total loan portfolio some of that.
Some of that was in our.
See not book So we were pleased to see those those trends go the right way as well.
Okay perfect. Thanks, a lot guys.
Thanks, Brian.
Okay.
Thank you and I'm showing no further questions.
All right guys. Thank you. So much we appreciate you all being on the call today. There are no further questions. So that concludes our call. We look forward to talking with you again about 90 days have a great quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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