Q3 2020 WesBanco Inc Earnings Call
Good afternoon, and welcome to the West Bank go third quarter 2020 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after two.
After todays presentation, there will be an opportunity to ask questions to ask a question. You May proceed star then one on your Touchtone phone to withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to turn the conference over to John I know senior Vice President of Investor Relations.
Please go ahead.
Thank you Carrie good afternoon, and welcome to watch Banco Inc.'s third quarter 2020, <unk> earnings Conference call.
During the call today are Todd Clossin, President and Chief Executive Officer.
Bob Young senior Executive Vice President and Chief Financial Officer.
Today's call an archive of which will be available on our website for one year contains forward looking information.
Cautionary statements about this information and reconciliation of non-GAAP measures.
Are included in our earnings related materials issued yesterday afternoon, as well as our other SEC filings and investor materials. These.
These materials are available on the Investor Relations section of our website Wesbanco Dot com.
All statements speak only as of October 22nd 2020.
The West Bank <unk> undertakes no obligation to update them.
I would now like turn the call over to Todd Todd.
Thank you John good afternoon, everyone.
On today's call, we're going to review our results for the third quarter of 2020 and provide an update on our operations.
Key takeaways from the call today are that we remain a well capitalized financial institution with solid liquidity strong balance sheet solid credit quality we.
We delivered strong pre tax pre provision earnings driven by our diversified growth engines and company wide commitment to expense management and we.
And we remain focused on the continued successful execution of our long term strategies, which have positioned us well for both the current operating environment as well as future opportunities.
We are pleased with our performance during the third quarter as we reported net income of $44.2 million and pre tax pre provision income of 68.9 million when excluding merger and restructuring charges.
P. TPP income grew 33.8% year over year, and 3% quarter over quarter, driven by strong fee income growth and disciplined cost control.
On the same basis, we reported pre tax pre provision returns on average assets and average tangible equity of 1.64% and 19% respectively.
Reflecting our strong legacy of credit and risk management, our key credit quality ratios remained at low levels and our regulatory capital ratios remain well above the applicable well capitalized standards.
Furthermore, as can be seen on slides 11, and 13 of our earnings presentation. Our key ratios also remain favorable to peer bank averages.
During the third quarter, we announced a couple of significant events that we believe were very well received by the investment community.
On August 4th we raised a $150 million of non cumulative preferred petrol preferred stock the cash.
The capital raise essentially replaces the movement of our trust preferred securities from tier one tier two risk based capital late last year as required for banks with total assets greater than 15 billion.
Further it provides is very strong and peer leading capital ratios. We initially viewed this as a more defensive measure due to the economic uncertainty earlier in the year. However, while we have no immediate plans the improved environment provides us more flexibility on the potential uses of this capital to maximize the benefit of our shareholders.
Then on August 27th we announced the acceleration of our financial center optimization plan in order to better align our operations with the needs and preferences of our customers.
As we indicated last quarter, reflecting the current operating environment increased utilization of digital services by our customers and transitions with our communities were playing to consolidated a total of 25 locations and convert to others to drive up only across the state of Indiana, Kentucky, Ohio, Pennsylvania.
And West Virginia.
The significant majority of these consolidations will occur during January with the anticipated gross cost savings of six to six and a half million dollars phased in during the first half of 2021.
Importantly staff at the locations being consolidated will be given the opportunity to fill certain open positions at other nearby financial centers.
I continue to be extremely proud of our employees they have gone above and beyond to serve our customers and communities during the last six months.
In addition to our company donated more than half a million dollars for pandemic related efforts our employees continue to provide their time and effort supporting local charitable organizations.
They have assisted more than 7200 appreciative businesses secure payroll protection program loans from the small business administration as well as helped another 3600 grateful customers worry about one less thing during the pandemic by ensuring they had appropriate cash reserves through our loan payment deferral program as.
You know West Bank. It was what are the first banks to launch a number of initiatives to help mitigate the impact of the unprecedented COVID-19 virus outbreak and.
Including offering mainly 90 day payment relief options to affected borrowers.
Through our efforts will help nearly 2300 small businesses.
550 residential mortgage 490, consumer loan and 230 home equity loan customers during the early stages of the pandemic.
Since most of these deferrals were made from mid March through early May our loan deferrals peaked at 21% of total loans.
Since that time, we've seen a continued decline in these balances as approximately 95%.
Those initial deferrals are not requesting a seconds.
In fact total loan different deferral balances are down 75% since the May peak and are now just 4.9% of total loans.
These customer and community centric actions speak loudly to our community bank routes.
Our long term success remains dependent upon continued execution of our well defined operational and growth plans as.
As a reminder, our.
Our long term growth strategy is focused on several key pillars.
Building, a diversified loan portfolio with an emphasis on commercial and industrial and home equity lending.
Increasing fee income as a percentage of total net revenues overtime.
Maintaining a high quality retail banking franchise and franchise enhancing acquisitions and these pillars would not be possible. They were not built upon our two strong legacies of our franchise. The unwavering focus on delivering positive operating leverage while making the necessary growth oriented and risk prevention investments and maintaining our strong.
Credit quality risk management and compliance principles on which our company was founded 150 years ago.
Furthermore, the inherent strength of our diversification and growth strategy is how the components complement each other to support each other and ensure success and profitability regardless of the operating environment.
Our strategies are enhanced by unique differentiators, including our core deposit funding advantage there.
The majority of our organization resigning that major metropolitan markets with positive demographics ISP.
Essentially build trust and wealth management business.
And back office functions that are consolidated in lower cost markets.
Last year, we continued our methodical growth and diversification plan as we expanded into the mid Atlantic region through our merger with ally Bank, which we closed and converted just prior to the early stages of the pandemic.
This merger allowed us to attain our internal goal of reaching $16 billion and total assets, which we believe was the appropriate size to leverage the infrastructure built associated with crossing the $10 billion asset threshold.
As we said previously our plan after closing of the merger was to focus internally for the next couple of years to ensure the successful integration of old line Bank.
Introduced our suite of products and services into the mid Atlantic region.
Focus on our organic growth opportunities can.
We continue to manage expenses and for.
And prepare for our own core systems conversion and the pending the pandemic has not changed these plans at all.
Our organization has adapted well to the pandemic to ensure long term success, we folks.
We focused on our core strengths assisted our customers and communities, while maintaining our strong credit standards, we stay.
We have strengthened our reserves to levels that protect on the downside and provide upside in a better operating environment.
Significantly enhanced our capital structure that allows long term flexibility to drive shareholder value.
Maintained a diligent focus on operating expenses to sustain our mid fiftys efficiency ratio. Despite the very low interest rate environment, that's offsetting that revenues.
And delivering strong core profitability as demonstrated by a pre tax pre provision return on average assets of 1.64%, excluding restructuring and merger related charges.
Lastly, I'm also pleased to mention that West Banco Bank continues to receive national accolades. In addition to being recognized as a top workplace in a couple of large markets and being named both a best Bank in America and the world's Best Bank by Forbes Magazine earlier. This year, we were just named America's Best Bank by.
Newsweek and their inaugural ranking.
I'd like to personally thank our employees for their hard work dedication and congratulate them for a job well done.
I'd now like to turn the call over to Bob Young our Chief Financial Officer for an update on our third quarter results Bob.
Thanks, Todd and good afternoon, everyone during the.
During the third quarter, we experienced the continuation of the low interest rate environment and concerns about the pace of rebounding economic growth across the country.
As COVID-19 case counts first decreased and then increased.
In our case these issues were mitigated somewhat by record residential mortgage origination volumes strong expense control and an improvement in the macroeconomic forecasts utilized under the current expected credit losses, otherwise known as Cecil accounting standard.
Primarily reflecting seasonal impact on the provision for credit losses as compared to the prior year we were.
We reported GAAP net income of 41.3 million and earnings per diluted share of 61 cents for the three months ended September Thirtyth 2020.
Non-GAAP net income of 69.2 million and earnings per diluted share of one dollar and three cents for the nine month period.
Results, excluding restructuring and merger related charges were 66 cents per share for the quarter as compared to 71 cents last year.
On a dollar and 14 cents per share year to date versus $2.31 for first nine months of last year.
As a result returns on average assets and tangible common equity on a similar basis for the quarter improved to 1.05% and 13% respectively.
In order to provide better comparability to prior year periods and to demonstrate the strength of our underlying financial results. We believe it is important to also evaluate pretax pre provision income ex.
Excluding restructuring and merger related costs.
For the third quarter of 2020, we reported 16.9 million and pre tax pre provision income, excluding restructuring and merger related costs, which increased 33.8% and 3% compared to the third quarter of 2019, and the second quarter of 2020, respectively.
In addition on a similar basis, we reported strong pre tax pre provision returns on average assets an average tangible equity.
Of 1.64% and 19% for the third quarter, and 1.61% and 18.74% on a year to date basis, respectively.
We do believe our strong balance sheet is well positioned for the near term operating environment as we continue to address our various lending portfolios in order to more properly balanced risks and rewards.
When excluding the old line Bank acquisition, which primarily drove the year over year increase in total assets and total loans total organic loan growth year over year was 10%.
Blocking both loans funded through the SBH payroll protection program as well as organic growth in our commercial real estate book of 4.9%.
Furthermore, reflecting strong demand deposit growth and.
And resulting excess liquidity, we continue to strengthen our balance sheet by reducing higher cost certificates of deposit and federal home loan bank borrowings, which declined 5.6% and 29.7% quarter over quarter respectively.
Total organic deposit growth, excluding certificates of deposit was 20.9% year over year, reflecting the cares act and PPP loan proceeds deposits as.
As well as stronger personal savings rates with nearly 80% of the deposit increase in demand deposit accounts.
Turning now to our credit quality measures on slide 13.
Key metrics, such as nonperforming assets past due loans and net loan charge offs as percentages of total portfolio loans remained at low levels and favorable to peer big beer bank averages for those with total assets between 10 and 25 billion.
For the prior four quarters and consistent with prior years.
In addition, reflecting our strong loan underwriting and credit process annualized net loan charge offs to average loans remain very low for both the quarter and year to date periods.
Add zero in the third quarter and eight basis points for the year to date period.
We believe criticized and classified loans as a percent of total loans remain favorable as compared to peer bank averages.
Although they did increase to 3.25% during the third quarter due primarily to the downgrade of $72 million of hotel loans, resulting from reduced occupancy due to the pandemic.
Regarding a downgraded hotel loans, they have an average loan to value of 60% and strong guarantor support as well as satisfying the cares act loan deferral guidelines, excluding them from TDR classification.
Further we remain in constant contact with our hospitality industry customers to receive monthly updates and ensure they have the appropriate cash reserves to sustain themselves until next spring.
Additional deferrals may be offered through year end in select situations and with appropriate credit review and approval in order to assist in their recovery until travel increases in various markets next spring.
The provision for credit losses of $16.3 million for the quarter decreased significantly from the second quarter due to improved macroeconomic forecasts.
At September 32020, the allowance for credit losses specific to total portfolio loans was 185.1 million or 1.68% of total loans or when excluding ESB loans, 1.83% of total portfolio loans.
These metrics are up from the second quarter's 1.52% and 1.65% respectively.
Excluded from the allowance for credit losses and related coverage ratio, our fair market value adjustments on previously acquired loans, representing 43 basis points of total loans.
Key information and measures affecting this quarters provision.
Can be viewed in a waterfall slide on slide 12 of the earnings presentation.
Switching now to noninterest income in the margin as we are seeing across our industry net interest margins are being negatively impacted by the cumulative 225 basis points of cuts to the federal reserve boards target federal funds rate since July of 2019 as well as.
Excuse me.
The relatively flat yield curve refer.
Reflecting the significantly lower interest rate environment, we have aggressively reduced our deposit rates and overall funding costs in particular higher price Cds and short maturities and lowered rates on our borrowings, partially offsetting lower earning asset yields which reflect materially lower yields on new or reprice.
As to commercial loans.
We have also recently implemented a new lender guidance for certain commercial loan originations relative to floor rates.
Our reported net interest margin for the third quarter was 3.31%.
A decrease of just one basis point sequentially from the second quarter, reflecting our interest rate management efforts as well as a two basis point benefit from ESB loans.
In addition, when excluding the purchase accounting accretion benefit of 18 basis points experienced this quarter, our core net interest margin was 3.13% so.
Essentially flat to the second quarter.
I will turn out of fee revenue noninterest income for the quarter ended September 30 was 34.6 million, an increase of 28.4% year over year and 5.3% quarter over quarter.
The primary drivers of fee income growth, where mortgage banking fees and commercial loan swap income, partially offset by lower service charges on deposits due to higher consumer deposits from higher personal savings and lower general consumer spending.
Reflecting the current low interest rate environment and organic growth mortgage banking income was a record 8.5 million during the third quarter due to a 100% increase year over year or 7% quarter over quarter increase in one to four family residential mortgage origination volume.
Approximately 50% of which were related to either home purchase for construction.
Third quarter origination volume was a record 394 million.
75% of which was sold into the secondary market on a dollars basis as compared to a historical range of 40% to 50%.
Briefly on operating expenses total brings as remained well controlled through companywide efforts to effectively manage discretionary costs open positions and marketing expenses as evidenced by our year to date efficiency ratio of just 56.15%, which is up only six basis point.
It's from the prior year period.
While the third quarter was down 234 basis points to 55.23%.
Well, we saw higher year over year due to the old line bank merger in the fourth quarter of 2019 total operating expenses, excluding merger related costs for the third quarter of $86.3 million increased only 1.5% from the second quarter, reflecting mid year annual salary increases.
Partially offset by strong discretionary cost controls in the current operating environment.
Turning to capital for 150 years, the Wesbancos management has focused on being a strong and sound financial institution for our shareholders. We have regulatory capital ratios that are significantly above well capitalized standards.
Which were further enhanced by the issuance of $150 million of preferred stock this quarter in August.
As of September 32020, we reported a consolidated tier one risk based capital ratio of 14.29% tier one leverage of 10.18%.
And a total tangible equity to tangible asset ratio of 10.27%.
Due to the higher earnings and smaller balance sheet size. These ratios improved nicely as compare to the pro forma estimates at the time, we completed our preferred stock offering in early August providing a significant capital strength, both during the pandemic and for potential capital maximization opportunities in the future.
With an operating environment that continues to be unprecedented it remains difficult to provide meaningful earnings expectations for the rest of the year.
Having said that I would now like to provide some limited thoughts on our current outlook for the fourth quarter.
I was just somewhat asset sensitive back we are subject to factors expected to affect industry wide net interest margins in the near term, including a relatively flat spread between the three month and 10 year treasuries 150 basis points of federal funds rate costs experienced in March and continued overall long term rate environment.
For at least the next couple of years, our GAAP net interest margin may decrease by a couple of basis points per quarter due to lower purchase accounting accretion from the 18 basis points that we recorded during the third quarter.
Declining asset yields should be partially offset by the aggressive pricing actions, we have taken on our deposit and borrowing costs as well as the introduction of floors in to new commercial loans as we anticipate our overall fourth quarter net interest margin, excluding accretion from both purchase accounting and PPP loans.
To be down a few basis points from 3.13% we experienced during the third quarter on lower total earning assets.
We anticipate slight overall margin accretion however in the next few quarters from PPP loan forgiveness as net deferred fees are accreted into income with the majority of the forgiveness now expected to occur during the first half of 2021.
In noninterest revenue it is anticipated that typical seasonal slowdowns in residential mortgage generation may somewhat reduced gain on sale income we were.
We will maintain our focus on delivery diligent expense management and delivering positive operating leverage and currently believe that fourth quarter noninterest expenses, excluding any restructuring or merger related charges will continue to be in a similar to slightly higher range as compared to the third quarter.
As Todd mentioned regarding our financial center optimization plan, the anticipated gross cost savings of $6 million to $6.5 million are expected to be phased in during the first half of 2021, which excludes the potential impact of any displaced staff that applied for in fill certain open positions.
In addition, we anticipate further restructuring charges of a half to 1 million associated primarily with the employee component of the optimization plan.
Relative to our provisions for credit losses under Cecil.
So it will depend upon changes to the macroeconomic forecast as well as various credit quality metrics, including potential charge offs criticized and classified loan increases and other portfolio changes.
In General However, continued economic recovery should bode well for the direction of future provisioning.
We currently anticipate our effective full year tax rate this year to be approximately 14% to 14.5% subject to changes in certain taxable income strategies.
Lastly, beginning in the fourth quarter, we will declare our first preferred stock dividend, which will be a little less than four cents dilutive to earnings per share available to common shareholders.
We are not ready to take your questions.
Gary would you please review the instructions.
Certainly we will now begin the question and answer session to ask.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys to it.
Withdraw your question. Please press Star then tail.
At this time, we will pause momentarily to assemble our roster.
The first question will be from Casey Whitman of hyper Sandler.
Hey, good afternoon.
Hi, Casey.
Just first one housekeeping question on PPP can you just remind us like what the total fees you expect to record from some participation how much.
How much you've recorded thus far in the second and third quarters.
Bobby on good cover that.
Yes, it's.
I was thinking that was in the press release the fee portion underneath the net interest margin table it will be.
In the 10-Q and.
Yeah.
The total amount originally Casey was some $30 million.
And I believe the amount left.
Is some 22 million 21, and a half to 22 million.
Experiencing about.
2 million per month.
Two two and a half million dollars per month total income, including the 1%.
Now that will be.
Obviously.
Dribble away if that's the right term before.
Before increasing here in the first quarter as forgiveness.
Would result in higher deferred net deferred fee.
Accretion in the month of forgiveness.
Got it understood. Thank you and then Bob you look kind of quickly to the margin guide, but I know, we all appreciate but I guess, Chris pressing altogether.
It sounds like you expect some just modest compression from accretion income and coming down coming down, but otherwise your core margin should.
It should continue to hold up is that kind of what you're saying.
That's right.
Yeah, there is a little bit of an increase if you assume forgiveness, there's little bit of a decrease if you assume no no forgiveness.
And then as PPP rolls off next year.
We're the beneficiaries, maybe as compare to some peers of adding a larger portfolio of fixed rate loans.
As well as UBS.
Adjustable loans that reprice after anywhere between three and five years.
And we inherited a fair amount of that from the old line acquisition as well that helped us there.
This year.
So that's one reason why you didn't see as much.
Further diminution in margin in the third quarter as compared to the second though.
Those loans that were going to reprice immediately did so in the second quarter, but having said that we'll continue to see those loans reprice as it's time for them to reprice and depending upon what they are.
What their spread is over LIBOR and so you'll see a little bit more of that as we proceed through 2021 and get beyond.
Pp.
Okay understood.
I guess I just ask one more so.
Switching gears for the bucket of.
So tell loans that were downgraded during the quarter, maybe was there any geographic concentration within that bucket and then are you expecting I know you mentioned you could see more deferrals as we head into the winter, but do you expect more downgrades due to year end or do you think we've kind of seen the movement.
Yes, we took a really have continued to take a real hard look at the portfolio into the we went through and really regretted the entire hotel portfolio. So.
$72 million of which ended up going down into the.
The criticized category and what we did Casey was you we did.
That analysis based one third on the cash flow and one third on like location and what's their flag and what's their loan to that value and then a third based upon what the borrower liquidity is and that's really kind of how that how we created that.
Continue to do that as we as we go forward. So I think we've got a pretty good read on it and where we're at.
Our view is that.
When we really when you look at that that portfolio. The plan is to get them to next spring to next summer that's really going to be the key I mean, they're the vaccine assuming the therapeutics continue to improve and continue to get back to maybe a little closer to normal next summer.
Bill do is get them there. So what we did is we've looked at each one of those and looked at what their current cash position is and their ability how many months can they support their fixed payments.
And between that and a lot of cases, we have 10, 12, 15, 20 months, where the fixed payments that they can they can cover with regard to cash Theyve got in our bank.
But we also then looked at which ones might need some additional support in terms of additional deferrals that would get them through the spring time period. So thats the process that we're going through right now I don't know how many of them will need that additional deferral period to get them into the spring months only do it before the end of the year.
Which we would its falls into the cares act so its non TDR and I think by next summer what you'd be able to do is really get a better sense of which which types of hotels, maybe a little more permanently disrupted because of maybe that maybe there's just a permanent shift in business and how many of them just kind of bounce back to.
They operated before you don't have a lot of clarity on that on that yet but.
But that's where we're trying to get to is to get to that point. So we'll continue to evaluate the portfolio. We think we did that.
The Big step you know and as I've seen a few other banks to that have the hotel portfolio. It looks like well kind of did about the same thing about the about 10% of the portfolio, which in our case is around $72 million.
And that sooner now in that in that in that.
Criticized bucket.
But I feel good about where we're positioned we're in a lot of contact with them. We get monthly financials, we get monthly Star reports, we get monthly occupancy monthly Revpar, we get all this information with them and Fortunately, we are dealing with some pretty decent size operators that have a lot of resources in a lot of abilities to maneuver a little bit and then also some very solid loan to value. So.
If we do get to next summer and we have a few that.
You don't need to develop a little a little deeper plan because maybe the more longer term impaired we will have the ability to do that with them, but I do.
But I do think the cash reserves that theyve got to take some comfort in that and then also the.
Potential to do additional deferrals as long as we get them done by the by the end of the year.
Understood. Thanks to the color expanses sure.
The next question will be from will Curtiss with poverty group.
Hi, good afternoon.
Well.
Todd Im curious to what you're seeing in your markets from a business activity loan demand perspective, and sort of what your near term expectations are for loan growth.
Yes, when I look at our our pipeline and I just reviewed this last last day or two could have a board meeting today and weve talked quite a bit about it.
Is that the pipeline is down just a little bit over each of the last two months, but it's still up over where we were at this time last year. Now. This time last year, we didnt have old line right. So we're 30% bigger bank now than we were this time last year see kind of take that into consideration, but our pipeline today is bigger than it was.
Was it this time last year, so that tends to bode pretty pretty well.
No we're seeing opportunities that are out there, but you kind of in that environment right now where you know there is still a fair amount of uncertainty what's the next six months nine months going to look like so we're being very very careful on that particularly with regard to anything that has any type of we're not doing hotel loan summits, that's that's given but other types of.
A real estate things like that we're kind of looking at what could go wrong in the next six months with regard to the path of the virus and everything else and I can't tell you how many times I've I've talked to customers and said why why are you doing this now once you do in six months.
In pretty much every case, they've so yeah. That's a good that's a good question, let maybe we will wait till next spring.
So I told them. It makes it a lot easier for us to underwrite I think I think next second third quarter than it does right now.
So a number of those types of transactions have moved up to move delayed to later in the year them going away. It. We just moved later in the year. So I would tend to think that the next couple of quarters that just be my my expectation.
A lot of puts and takes but flat not a lot of growth but.
But I do think coming out of this there's going to be some pent up demand.
And I do think that returning to mid single digit loan growth longer term is definitely there it's definitely in the cards and it we've worked hard over the last 910 years to position our bank. So that we've got more of our bank in higher growth markets globally.
Global Lexington, some of the mid Atlantic markets that tend to have.
Upper single digit lower double digit loan growth prior to the pandemic and I believe when we get back to more normal those growth rates will will tend to bounce back to those levels and then.
And then we'll continue to have the low to mid single digit growth rate in our in our legacy markets and that should sort itself out to the mid mid single digits, but I don't think you're going to necessarily see that for the next couple of quarters I think it's more around the phone.
Focusing on taking here your customers keeping them safe given your employees safe protecting your balance sheet protecting your shareholders using capital appropriately driving down expenses.
Work on your digital acceleration and things like that all those things that were doing to really position yourselves to come out of this.
Were really strong and my expectation is the second half of next year and into 2022.
I'm expecting us to be.
Bank with a lot of capital a lot of liquidity good PTP pretax pre provision earnings momentum a good handle on controls in the right markets.
And.
A new core that allows us to have the products and services necessary to compete long term with some of the bigger banks.
That's 12 15 months away, that's kind of what I see and that's when I think you'll start to see a little more opportunities on the loan growth side to if not before then.
Great. Thank you very much of that.
Let's see I know that I think last quarter, you mentioned delaying.
Delaying some of the marketing expenses till next year is that still the case and then kind of maybe higher level as you've gone through some of the efficiency initiatives lately are there other things or opportunities that you've identified that.
You may be considering is heading into next year.
Yes. It is on the marketing side, we did we knew we were going to spend some additional money on on branding I'm not you know a new low.
Not no new logo or color is there anything major like that but just some additional focus on on on brand because we're in some newer markets that we weren't in 678 years ago, but we did hold back on that.
Right now that is.
Delayed that into next year, we may delay that you into the second half of next year, we're not going to go out and do anything on the discretionary side until we get a lot of clarity with regard to the pandemic in the virus in vaccines and all of that so you're not going to see us embarking on any major expense initiatives.
You know until you get to the other side of this and I think we'll be there in a year. So the delaying of some of those expenses I think would continue.
You know, we're being very selective with new hires we basically aren't expanded staff were replacing where needed and then.
And then also with our own efforts with regard to our core Theres a lot of manual work that is going away quite frankly, and becoming automated in that that helps us on the cost side as well to plus the branch optimization plan that we announced and we're moving forward with so there's a lot of things out there I think that are going to allow us to to kind of keep our belts.
Right.
And we're pretty frugal company to be to begin with but we are spending where we need to on the digital side and continue to support risk management infrastructure cyber and there's a lot of cyber activity out there right now with the pandemic and working remote and things like that so we're continuing to invest where we need to our our plan always was going up in over 10 billion.
And it still is today.
To make sure we blend in any any expenses. So that we maintain a mid fiftys efficiency ratio and I'm proud to say that we've been able to do that and that would be our plan would be to try to continue to manage to a mid fiftys efficiency ratio by making the necessary investments, but we're going to be very careful we're pretty cautious company and.
We just don't see much in the way of discretionary spending until.
You get through if there is any type of losses that come out of this pandemic you want to.
You want to get to the other side of that you want to see reserves coming down all that kind of stuff and then I think you start to feel like you can spend more on some of those discretionary items.
Got it thanks, Todd Thank you sure.
The next question will be from Russell Gunther of D.A. Davidson.
Hey, good afternoon guys.
Yes.
Hey, just a follow up on the expense conversation I appreciate the thoughts card.
Based on what you just said it seems like the majority of the cost savings from the branch rationalization would drop to the bottom line is that your expectation.
Well I think I think some of them will but as I mentioned on the technology side as well too we're making some spends.
Nothing huge but but you know a few hundred thousand here or there to.
To really position us better was protect some of our fee based businesses.
They are going to allow us to generate more revenue. So it's not going to come anywhere close to.
Six six and a half million dollar so some of that will fall to the bottom line, but not all of it and we will have some employees that end up in other positions in the company, although we're watching that very carefully.
The plan isn't to to go through this exercise and at the end of the day not end up with Ics with expense saves that that's not what we're doing here.
But it's hard to put an actual number on it right now, we'll we'll manage it month by month quarter by quarter.
Kind of looking at the puts and puts and takes there, but you know a good.
A good portion of that six six and a half million should drop to the bottom line and then we've got other things that we're kicking around internally as most banks are at this point with rig.
With regard to how can you do things more efficiently and more and more effectively.
Remotely with fewer people things like that and.
And that's those are still very much in formula of stages.
Yes, I mean is it fair to say.
Thinking about at least 50% of that six six and a half falling to the bottom line or could it be could it be north of that.
Yes, I think as I guess I kind of look at expenses out there, it's not that I don't want to answer your question. It's just that.
I don't I don't see anything out there thats going to cost us five $6 million.
But I do think that.
I'd be disappointed if we don't end up with half of that or so fall into the bottom line.
But we do we do have some some additional things obviously got merit increases and things like that that will become.
That will be coming onboard next year.
So we have to have some of those expenses. They are just kind of the normal run rate.
You know, we don't give guidance on what we think our quarterly expenses are going to be but as we look at the kind of the guidance thats out there so to speak but I've talked about we don't we don't see any reason to argue argue against what we see thats out there, but it would be my expectation that that would be an upper upper bound.
Okay I appreciate that follow up and then on the criticized classified migration and the deep dive that was done in the Port hotel portfolio.
First part of this is the majority of the increase in criticized classified was due to just the hotel movement were or were there any other discernible trends from.
Other loan exposures that may be at risk there and if it was just primarily hotel are there.
Pockets of the portfolio that you remain concerned about whether investments CRT for example that have.
Have yet to undergo a deep dive that may be forthcoming.
Yes, yes, just from I think I think maybe Casey had part of that question too I didn't I didn't answer geographically Theres no one geography that.
That that's impacted by the $72 million.
In the movement down and the hotel portfolio.
It's it's spread throughout the throughout the franchise.
No we really don't know.
C and stresses and other other aspects of the portfolio, leaving on the real estate side multi.
Multifamily office.
Office, even even assume.
Assisted living type things, we don't have a big portfolio, there, but all seem to be holding up okay watch them close because those are the kind of things it will be you know hotelzon.
Hotels and are front and center for everybody right now because of the pandemic in the virus, but longer term.
Longer term some of these businesses are going to have to you know may.
We operate a little bit differently in the whole industry is going to have to deal with that.
But I don't I don't see anything that's a real big concern for US we don't have we don't have.
We're not that lead into big office projects in major metropolitan areas. So we don't have to deal with that.
Don't have a lot of situations, where people got to get on mass transit in order to get to a property that we financed whether that be a restaurant or whether that be an office building. We just don't have those are.
Our markets are I'd hate to come second tier market because that second tier in terms of size right. So when you look at our markets that we're in.
We just don't have mass transportation issues people getting their car and they drive 10 minutes in their in their office. So I think we'll be somewhat protected by that so.
So I really don't I really don't see any of that right now in in the consumer side, we almost have virtually no no second around deferrals on any of those.
So I don't I don't see anything popping up there either but again I would see it being in some of these industries. It's also how you're positioned in the industry is right I think Thats will show up over the next couple of quarters.
As you can you can be in an industry and being there at an 80 80, 85% loan to value or you can be in there was a 55 or 60% loan to value with good operators and then you've got a lot of flexibility and I think you can say that across our entire portfolio.
Whether its office or assisted living or whatever the case is we didnt stretch on anything you can see that when we had low to mid single digit loan growth for the last seven or eight years, we weren't putting on double digit loan growth. So I think you guys know what's.
What's in our portfolio to be pretty pretty careful with pretty cautious terms of how we underwrote it.
Because we werent, reaching for loan growth when we were.
We were criticized a little bit because our loan growth was kind of below industry averages and part of the explanation was we're pruning the portfolio. We're pruning indirect we're pruning some of the hotels and shale related areas. We're pruning some of the multifamily.
Boy, that's coming back to to give us some big dividends going forward because it positions us really well.
In the in this pandemic. So I just just not sure how many losses are going to fall out of some of these portfolios, partly because I think some of the portfolios perform really well, but we're also positioned really well even in portfolios that are cobot impacted.
We're still positioned really well and that's that's kind of my comfort level now, we're we're reserving and everything else.
As if there could be more.
More and more challenges, but that just because we're conservative it's not because we expected which were just more conservative.
I appreciate all of the thoughts on that and then Todd last question for me would be thoughts around resuming the buyback and what you'd look for.
Either from a macro perspective, or just general West Banco Guide post you could point us to win.
When that might be an option for you again.
Yeah, and I'll, let Bob chime in here, a little bit as well too we think with the capital position that we've got and the capital position that we would hopefully expect to have coming out of the pandemic that we're going to have.
But we're going to we're going to a lot of capital and we want to manage to the right return on average tangible common equity. So we understand that there are.
Downside securing a lot of capital you know in in good economic times, you want to be well capitalized, but well capitalized doesn't mean overcapitalized. So we do think coming out of this that we will have opportunities to.
Move back into a buyback mode. We were we were slow.
To start doing buybacks during the expansionary time period, we just started maybe six months or a year before the pandemic hit the limit.
We only bought back about one 1.5% of our our stock.
The peers were about 6.5% so peers bought back about 5% more than we did I would expect us to be more in line with others in terms of buyback activity.
But we would get I want to get to the other side of this first and that and I think you'll see reserves coming down and all those types of things but.
But before we would get really serious about about a buyback.
Buyback activity you know when you look at the larger banks really large banks, obviously, they've got rules around buybacks and things that they can't do right now we don't have those kind of rules.
But I do think Thats, it's prudent.
Again, it goes back to our conservative roots.
To be entering into buyback activity to me anytime in the next quarter or two bit premature, but that's just our view.
But we could see ourselves being pretty significant.
In that in that area once we get to the other side of this.
All right I appreciate it thank you Todd Thats it for me.
The next question is from Catherine Mealor of KBW.
Thanks, Good afternoon I gather.
Oh, just one follow up on the margin Bob.
Bob You mentioned that you benefited from a larger percentage of fixed rate loans can you remind us what percentage of your portfolio is fixed versus variable.
Yeah, It's about 60 40.
On the commercial side.
On the business side were you thinking of it in terms of the totality of the.
Ken.
Well this is fine, yes that helps them, so you're saying 60% SEC.
Hi, 40 variable got it now.
Yes, I mean, if you think about it that way Bob try. This this is John catheter, it's about 50% variable to 4% fixed in the commercial portfolio I'm, sorry, guys. I mean on that variable pay some of that reprices overtime as opposed to immediately thanks, John correct.
Great and then of the fixed part.
Can you.
Can you kind of give us.
Sense as to the maturity schedule to how you are kind of the pace at which you see those loans repricing downward.
Yes that as well.
A little bit longer portfolio, but generally you should assume that that's got about a three to three and a half year duration.
Yes.
Great.
And then another follow up just on credit I mean, you fill your reserve significantly I would say given your relative level of kind of lower credit risk. So you've got to really take reserve now feels like this quarter more most of their reserve till came from the change in the classic the classified asset movement.
As we look into next quarter, assuming the economic environment doesn't change.
What's your sense as to what kind of level of provisioning both fee and.
Maybe more Directionally, then you know a number and where and when do you feel like you said, we're nearing the peak and in reserves.
Bob spends a lot of time working with with credit.
With credit and seasonal thing so I'll, let him.
I'll, let him answer a big part of but we thought this is playing out very much the way we had expected.
At the start of the pandemic and that was the you know the Cecil adoption of first quarter first and second quarters, we're going to be the the quarters for a second it to some degree third.
The kind of the Big reserve build quarters, and then you kind of in a period of time for maybe a quarter or two where you're kind of seeing how everything is kind of playing out.
And then you're in a situation, where you're where you're bringing reserves back down in you know.
In 21 part.
Part part of 21, maybe mid to later part of 21.
That's always kind of been the expectation, but cecil's very definitive around what you can do and can't do with regard to based off of macroeconomic factors and and unemployment is a big part of that and then we put the overlays on it but you know we document the heck out of the overlays to make sure that you know that even those are quantitative.
So theres a lot that goes goes to it so theres a lot. We don't know 90 days from now that will go into that because it has to transpire yet so it's hard to really.
Estimate a number but I think Bob and I think directionally.
That the expectation would be similar to what we had at the beginning of the pandemic and that is you are building reserves through the first two or three quarters and then you start releasing reserves once you get clarity.
Around.
Or would any kind of loss potential that might be in any of the portfolios.
I know a lot of the banks are doing different things in that but you know that's that's just kind of.
You on it Bob what would you add.
I think that's consistent with what we are thinking currently I think by the back half of 2021, you will see.
You will see more.
More industry wide releases, if the pace. The pandemic is the way it seems to be playing out.
There certainly have been some reserve releases announced whether you want to look at negative provisions is one version of that or just less than than net charge offs in the case of some other banks.
I would envision that that's where you go first as an industry that you use.
Have charge offs that youre, not replacing but you might still have some provision in that particular quarter for qualitative factors again, depending upon the macroeconomic forecast before you would see true negative provisions below zero recoveries.
So that is a later.
I think.
Path.
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Just in terms of the near term.
We did.
I'll add to our reserve this quarter for the hotel bulk and for the uncertainty around the pace of the pandemic are those the two George Meng.
Judgmental factors that we added.
As macroeconomic forecast, primarily the national unemployment rate came down.
We also did a study with a third party that showed us that our region.
It is less sensitive to our unemployment and related charge offs than the national unemployment rate and.
And so that was an offsetting positive factor.
But from here absent charge offs until say the middle of next year.
And and the pandemic not taking a turn for the worse.
You would think.
Provisions would would directionally be be lower for for the industry.
In the short run.
Great very very very helpful. Thanks, so much.
The next question is from Joe level edge of Boenning and Scattergood.
Good afternoon.
Joe.
My question.
The game plan was to the headset the old online and then possibly think about M&A a couple years down the road or whatnot, but valuations are down you got a lot of excess capital and just trying to gauge your appetite for M&A is it doesn't really strategic in law.
Here.
I think in this and the answer is no not not not interested and looking looking at things kind of our plan initially going into the pandemic is still the same as it is now its 2000 twentys.
The year of integrating old line, and that's gone very well aligned bank.
In 2020 ones, just did either year of our own our own core conversion so.
So the pandemic really didn't change our strategy at all from from that perspective.
I think it's really difficult to get price discovery I mean, we just spent.
Five or 10 minutes kind of talking about our own portfolio and getting real granular with it and kind of making sure we understand it.
And then I don't know how you do that with somebody else's.
It's just to me, it's kind of a bit of a guess and just don't like to do that in a in this in this business.
So I would tend to say that we would need to get to the other side of this for our own timing purposes, but also even if we were ready to go now you can't get price discovery to me and to the extent that we would want to have it as a company.
And.
Not knowing what type of portfolio, you're buying and no. Other times, it's not just your you're not just buying the portfolio of the bank you're buying you're buying the portfolio of every bank that they bought in the last 10 years.
So those are also things to to really think about as well too.
And were pretty conservative in our underwriting.
And to go out and expand really rapidly in.
In in a time like this through acquisition.
You know at any price how do you know what what's the right price. So we're not interested in doing anything right now, but we do think you know once you get into through through 2021, and you get into 2022 in later years.
With our capital level that I expect us to have in our earnings our earnings strength and earnings potential and the management team that we have in the infrastructure. We have built in the Nucor I think it could be a pretty exciting time for the bank.
In that four or five year time period. Once you get past 2021, but again, we're opportunistic and if everybody is out there looking to do something we're not going to overpay. So it's hard to know, but we're not really entertained anything this year next year.
Thank you.
The next question will be from Steve Moss of B. Riley FBR.
What.
Just one.
With regard to just be a term loan and and reserving or.
Criticizing classified just wondering what's the sensitivity to increases or.
Decreases in criticizing classified we think led as a percentage.
Moving one way or the other like 10 or 15% in terms of just a general reserve.
Any color there would be helpful.
Sure Bob Herlin about cutting into the capital that you highlighted.
Right.
So generally speaking Steve.
There we have tiers that result in additional reserves at.
As C. and C. loans increase.
Currently as I recall, we about 27 million associated with CMC of.
Of the total 180 million.
100.
168 million sorry.
It's 180, when you add in the commitments.
So that if you if you had a $70 million increase in a quarter that that could be a couple of million dollars more a $3 million more for that particular factor, but thats one of.
A dozen different factors, both quantitative and qualitative and the main model is determined based upon macroeconomic forecast blue.
Blended between the federal reserve and Moodys baseline scenario.
And and we use.
Model to integrate all that on a probability of default and loss given default basis Grand.
Granular to our portfolio. So it's not just criticized classified there's a number of other qualitative factors that.
That go into the.
The model as well.
But this particular quarter, that's what happened with CN sees.
And then as I said, we used some third party assistance the try to anticipate.
What the additional.
Effect would be of the pandemic when you have the modifications that.
That you do that aren't yet criticized and classified for the most part aren't nonaccruals aren't delinquent.
How does that factor in.
We've done that charge mentally in the past this quarter.
We used a third party to assist us.
With a mathematical infusion into the model for that.
Sorry that was a lot of work a lot of work.
Thank you very much I appreciate that color Mark.
The next question will be from Brody Preston of Stephens, Inc.
Hey, good afternoon, everyone Liberty.
He said that a couple of quick questions. Just sorry, if you touched on this but this liquidity is strong as it is the plan just to let Cvs keep running off until you feel like you need them for for growth reasons or I guess, another deposits run off post PPP.
That's correct.
In addition, our customers.
As occurred 10 years ago are staying relatively short as Cds mature.
Industry wide CD rates are very low and so most people don't want to go out the curve.
And do a three year CD at less than 1%.
Less than 1%.
Okay. So we're going to continue to see those run off about 36% of our Cds are single service customers.
We're not trying to be as rate shopper a rate competitive on the CD front.
We also have purchase accounting on the Cds from old line, which were higher cost and so that factors in as those run off and and then the more important factor I think is our ability to use the excess liquidity to pay down federal home loan bank borrowings and so that cost is coming down very rapidly we basically.
Paid off about half of what we had.
Here at at the end of the first quarter recall, we took down some extra borrowings that time to provide for additional liquidity for our customer needs, including line advances, which.
Except for the large banks, we generally did not experience that and shortly thereafter, but he was getting their PPP or cares act deposit so banks were awash in liquidity and and so we began paying down the federal home loan bank borrowings Weve got another couple of hundred million that mature each quarter over the next four.
Four or five quarters and while we'll replace some of those early next year mid next year at all.
At least in the next three to six months, we'll be paying them, often generally they're coming off of 2% to 2.25%.
Okay, great. Thank you for that additional color Bob very helpful and.
And then just one last one the hotel deferrals or are those all second deferrals at this point I guess would you consider I mean, maybe extending those further I guess when do those modification periods and.
Yeah. I mean, you can you can extend them further as long as you do it before the end of the year. So if you wanted to provide you know interestingly or interest with some principal or whatever and run that through the middle of next year for those that need. It. That's that's obvious that's an option that's available I mean, that's part of the.
Yeah, The cares Act and.
Auditors regulators everybody you're comfortable with that so if you needed to do that you can you can do it that's why I feel really comfortable about.
Kind of where we're at and watching this over the next six months nine months or so is.
Is because you've got a lot of opportunities to get to get those customers to next summer and even beyond that quite frankly, and not have them be be treated as TDR, you got a great them appropriately and all that but.
You there are options to get them. There. So we don't know what that will be at this point there will be any that would need kind of an extension of that of that second deferral.
We will know that more over the next month or two.
But get that that option is there if needed.
Okay, great. Thank you very much everyone.
Sure.
This concludes our question and answer session I would now like to turn the conference back over to Todd Clossin for any closing remarks.
Thanks, Yeah, just real quickly this as we've talked about our long term strategy is still very much in intact. Despite the pandemic.
We are really prepared I think to operate at any kind of environment that we're well positioned for that and we talked about that for the pandemic and and I think thats, helping us a lot right now as well too we continue to be conservative, but we also want to be viewed as a growth organization and one that is.
As a as a good good stock to own in any type of environment and that is we work hard to hard towards so.
I really look forward to hopefully get a chance to see everybody.
Future meeting sounds like might be a few more months yet.
But hoping everybody stay safe and thank you for your time this afternoon.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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