Q3 2020 Heartland Financial USA Inc Earnings Call
This afternoon.
My industry, but its third quarter press release, and hopefully you have had a chance to read reviews older adult.
If there is anyone on this call who did not receive a copy you may access it at Heartlands website at H. T. L. L dotcom.
With us today from management are Lynn Fuller executive cooperating chairman.
Lee President and CEO.
Bryan Mckeag Executive Vice President and Chief Financial Officer.
Management will be brought a brief summary of the quarter and then we will open the call to your questions.
Before we begin the presentation I would like to remind everyone that some of the information management will be providing today fall under the guidelines of <unk> looking statements as defined by the Securities and Exchange Commission.
As part of these guidelines.
Just point out that any statements made during this presentation concerning the company's hopes beliefs expectations and predictions of the future of forward looking statements and actual results could differ materially from those projected.
Additionally, information on these factors is included from time to time in the Companys 10-K, and 10-Q filings, which may be obtained and the company's web site all the Fccs website.
At this time I would now like to turn the call over to Mr. Lynn Fuller at Heartland. Sir. Please go ahead.
Thank you Towanda and good afternoon, welcome to Arlington's third quarter 2020 earnings Conference call. We appreciate everyone. Joining us today as we discuss the company's performance for the third quarter of 2020.
For the next few minutes I will touch on the highlights for the quarter I will then turn the call over to Heartlands, President and CEO Bruce Lee will.
Rubber business performance.
Our cold at 19 response, and then Bryan Mckeag our.
BP and CFO will provide additional color around heartlands results also joining us today 'cause Nathan Jones.
He and Chief credit officer will be available to answer questions regarding credit.
Well during these very challenging times, our priority has been the safety of our employees.
And the ongoing support.
Our customers our shareholders and our communities, we continue to differentiate ourselves through our strong capital.
Liquidity credit and financial performance metrics, Bruce Lee and Bryan Mckeag will provide more detail on the many things that we're doing to support protect and care for our employees customers shareholders and communities.
So now onto the financial highlights for the third quarter of 2020.
I'm very pleased to report that we had an excellent third quarter.
That it was a record quarter the best in our history with net income available to common shareholders of 45.5 million compared to 30.1 million for the linked quarter.
Net income before our series E preferred dividends totaling 2.437 million was nearly 48 million.
Earnings per diluted common share was $1.23.
Paired to 82 cents for the linked quarter. This was our second best quarter for EEP, Yes, second only to Q2 2019 at $1.26, which included 18 million after tax income from the gain on sale of our mortgage servicing portfolio, what Dubuque Bank and trust.
And gains from several branch sales.
Annualized return on average Kim common equity was 16.11%.
Which exceeded the prior four quarters.
Additionally, annualized return on average assets at 1.19% also surpassed the prior four quarters.
The net interest margin on a fully tax equivalent basis was strong at 3.55% for the quarter.
3.74% year to date.
Book value and tangible book value this quarter, we're at $46, an 11 cents and $32.91, respectively, an increase over Q3 of 2019.
Right and 11% respectively.
Well with respect to the balance sheet assets reached a new record high at 15.6 billion and we achieved substantial growth across all categories over the last four quarters.
Assets were up an amazing 3 billion.
<unk> loans were up 1.1 billion.
Investments were up 1.9 billion.
Non maturity deposits, which is our focus up 2.4 billion and equity was up 248 million.
With the substantial growth in our balance sheet, we still remain very liquid and all of our capital ratios, including our regulatory capital ratios remain strong.
Tangible common equity ratio improved to 8.03% at quarter end up from 7.89% last quarter.
[noise] belonged to M&A.
As we discussed last quarter, we are on target to close the game Bank transaction in West Texas in early December.
The conversion set for mid February 2021.
Aim bank will be merged with and into Heartlands Lubbock, Texas based subsidiary first Bank and trust.
Attributing over 1.8 billion in assets and will substantially contribute to net income for 2021.
With this acquisition first bank and trust will be Heartlands largest bank with approximately 3 billion in assets. They will become the fifth largest bank headquartered in West, Texas, and the third largest deposit market share bank in Lubbock.
Well also in early December our Arizona Bank and Trust Bank in Phoenix, Arizona will complete its purchase and assumption of the four Johnson Bank Phoenix branches.
This will be a simultaneous close and conversion, adding approximately $392 million in deposits and 184 million in loans and will contribute nicely to net income for 2021.
This transaction will take Arizona Bank and trust assets to nearly 1.3 billion.
As I've said in the past our priority has been to expand our current footprint and work toward our goal of 1 billion in assets in each state, where we operate and I'm pleased to report that 10 of our 11 banks have reached our goal of 1 billion or more in assets this past quarter.
Well as the industry continues to consolidate market share and market position become more and more important.
We are top 10 deposit market share in 26 of our 38, M. essays and top five deposit market share in 13 of our 38 and assays.
In closing last week Heartlands Board of directors approved a 20 cents per common share dividend payable November Thirtyth 2020 to shareholders of record on November 13, 2020. The board also approved a preferred dividend of a $175 payable on January.
15, 2021 to shareholders of record on December 30, Onest 2020.
I'll now turn the call over to Bruce Lee Heartlands, President and CEO will provide an overview of the company's operating performance called at 19 response and credit Bruce.
Thank you Lynn.
Good afternoon, everyone.
I want to start by expressing my gratitude and admiration for the teams across Heartland.
Each of our member banks.
Have demonstrated a common commitment to our company.
Customers and communities.
I'm humbled by their dedication resiliency and creativity as we navigate the challenges and uncertainty caused by the COVID-19 pandemic.
Heartlands record third quarter earnings highlight our continued focus on our customers.
Our core business.
And our expense discipline, while operating in a low interest rate environment.
In the third quarter, we delivered.
Pre provision net revenue of 65.1 million, an increase of 35% from a year ago and flat from the linked quarter.
Earnings per diluted common share of $1.23 compared to 94 cents a year ago and increase.
29 cents or 31%.
Net income available to common shareholders of 45.5 million that's the most ever.
A 32% increase from a year ago, and a 51% increase from the linked quarter.
Our lowest ever efficiency ratio.
54.67% for the quarter 618 basis points lower than a year ago, and 108 basis points lower than the linked quarter.
Year to date, our efficiency ratio is 57.3%.
After third quarter last year, our year to date efficiency ratio was 63.3%.
I'm proud of how we're operating during a pandemic our banks are open for business, we're delivering the high level of service our customers expect.
Heartland continues to invest for growth.
Employee and customer safety remains our top priority.
We continue to operate under our pandemic management plan protecting our employees and customers, while effectively running our business.
Employees, who can work from home do so.
Well, those who come into bank locations and offices run rotating teams to limit exposure.
Heartlands diverse geographic footprint continues to be a strength during the pandemic.
Only two of our 113 banking centers are closed and we are operating in 82 communities.
We're serving customers in lobbies drive-thrus or both as well as digitally.
We've demonstrated our flexibility closing and reopening bank lobbies as appropriate.
A quarter of our banking centers are fully open and operating as normal.
Three quarters currently operate drive through only with restricted lobby access.
We will continue to adapt to local conditions and are comfortable and confident.
In our ability to operate in this environment for the foreseeable future.
Consumer behavior has changed as a result of the pandemic.
Digital transactions continue to increase and branch transactions of decrease.
Similarly, 32% year to date.
Given the ongoing consumer shift to digital we continue to rationalize our branch footprint.
In the third quarter, we approved six branch consolidations.
And an additional 10% of branches are under review.
Turning to deposits.
We delivered another strong quarter of deposit growth.
Total deposits ended the quarter at 12.8 billion in non time deposits totaled 11.8 billion.
Increasing 123 million or 1% during the quarter.
Seven of our 11 banks delivered non time deposit growth led by Dubuque Bank and trust with a 5% increase in Rocky Mountain Bank with a 4% increase.
Our deposit mix remains enviable.
With 39% in noninterest bearing accounts and 92% in non time account balances.
We've also been diligent in executing our deposit pricing strategy.
We have reduced total deposit cost 16 basis points for the quarter.
Down from 20 basis points in the second quarter, and 70 basis points from the third quarter of last year.
Turning to loan.
Our total commercial lending portfolio decreased slightly by 1% were 78 million from the linked quarter.
In our remaining portfolios agriculture decreased 12 million from the linked quarter.
Residential mortgage decreased 34 million and consumer loans decreased 23 million.
Earlier this month.
Yes, BA began to process PPP forgiveness application.
To date, 24% of our borrowers have submitted forgiveness application representing.
297 million of our 1.2 billion in PPP loans.
On October eight yes.
US be a released a simplified forgiveness application for PPP loans under $50000.
Approximately 40% of our clients borrowers.
[noise] balances representing less than 4% of our PPP loan portfolio are eligible.
Many PPP borrowers are still waiting to begin the forgiveness process in anticipation of additional rule changes and clarification of tax implications.
Turning to key credit metrics.
Our nonperforming loans decreased 12 basis points from the end of the second quarter rather.
Representing 89 basis points of total loans at the end of the third quarter.
As a percentage of total assets nonperforming assets declined 11 basis points from 66 to.
To 55 basis points over the same period.
Other real estate also decrease.
To 5.1 million at the end of the third quarter.
From 5.5 million at the end of the second quarter.
The delinquency ratio continues to improve decreasing to 70 basis points from 22 basis points.
Over the prior period.
Due to the pandemic.
Anticipated be downward shift in risk rating.
This is started but not to the extent expected.
Non pass rated loans increased from 8.1% in the second quarter to 8.7%.
In the third quarter.
Ratio remain at a relatively low level.
Substandard loans comprised 47% of total non past loan compared to 44% in the previous quarter.
Lastly, net loan charge offs for the third quarter were reported at $21.3 million or 92 basis points.
Compared to 2.4 million or 11 basis points in the second quarter.
This increase was driven by two commercial credits first.
First the previously identified and reserved for charge off of 11.6 million on a fracking sand companies that operate in an industry that's been negatively impacted by the pandemic.
We do not have additional exposure to the fracking sand industry.
The second large charge off was a newly identified $5.9 million alone in the wholesale wine industry in California.
Excluding charge off for these two large commercial borrowers charge offs would have remained close to flat from last quarter.
And we are encouraged with the overall improvement in our credit metrics.
During the pandemic.
As of September Thirtyth.
Of the approximately 1.1 billion of loans modified under coded relief program.
860 million have returned to original payment terms.
And $133 million remain in their original deferrals status.
And only 122 million or 1.3% of total loans have received additional.
For second modification.
69% of these second modifications.
Principal and interest deferment for 90 days.
The remainder primarily interest only payments for 90 days.
More information about Heartlands loan exposure to customer segments. We believe are more heavily impacted by COVID-19 is available in the table on page three of our news release.
The ultimate impact of.
The COVID-19 pandemic on Heartlands financial performance.
Will depend on the severity and duration of the pandemic.
Related restrictions on business and consumer activity.
And the availability of government programs to alleviate economic stress.
Turning to strategic investments.
We are investing for growth and to enrich the customer experience.
Sure Companywide initiative operation customer Compass.
All while achieving an all time low efficiency ratio.
We completed the upgrade of our ATM network.
Drawing more than 100, new ATM across our footprint.
The new ATM sort of state of the art and offer significantly more convenience in fraud protection.
New features such as image deposits will benefit our small business customers, allowing them to make bulk deposits 24 seven.
Without visiting a banking center.
We're already seeing the benefits of this upgrade.
In the third quarter deposits or ATM increased 17% from the previous quarter.
We've also implemented enhanced authentication measures across our digital channels to protect our customers from fraud.
Just last week, we began offering video banking at Wisconsin Bank and trust. This.
This innovative video banking platform allows consumer customers to transact business open accounts and apply for loans with a live banker.
By a video.
We will evaluate expanding the pilot program across our footprint.
Based on customer feedback and acceptance.
We know more customers are preferring to bank virtually.
And we're committed to transforming the banking experience ticking a customer for.
Innovation oriented approach.
We reached another significant milestone in September with the final transition onto the best in class Salesforce CRM.
Encino loan origination platform.
These tools enable commercial teams at each of our banks to better serve and meet the needs of our clients, while supporting business development efforts.
We are achieving our goal of delivering efficiency speed and an improved internal and external customer experience habits.
Evidence.
25% decrease.
In the time from loan application to funding.
We've introduced solutions to design designed to make banking easier and more accessible for our commercial clients.
They modify their business operations in this current environment.
In the third quarter, we began rolling out our improved E deposit products.
Software solution that remotely captures and manages deposits.
Giving clients greater security and compatibility from almost any device.
We launched integrated payables enhancing our electronic accounts payable products, we giving commercial clients a single solution.
Oh payment types.
We are advancing our lockbox capabilities to help business clients, including medical company automate the process of securely collecting checks payments, while decreasing the potential for air for fraud.
On the M&A front, we are scheduled to close a bank.
In December and complete system integration in February 2021.
Aim banks combined with first bank and trust will create Heartlands largest bank with over 3 billion in assets.
Aim banks third quarter performance was within our expectations.
In December Arizona Bank and trust is scheduled to complete its acquisition of Johnson bags four banking centers in the Phoenix market.
The close and simultaneous conversion is expected to raise Arizona Bank and trust assets to 1.3 billion.
Part of Heartlands mission is to enrich lives in our communities.
On October 5th we announced a donation of more than $260000 to high needs schools.
This donation will provide teachers with money to purchase the supplies and materials they need.
Students learn in a safe and healthy environment.
I'm grateful that heartland is providing the support to our schools.
In addition to the $1.2 billion, we contributed in April to non profit organization responding to challenges created by COVID-19.
These donations and our employees volunteer hours make a meaningful difference in the communities, where we live and work.
I will now turn the call over to Brian Mccaig, Portland, Chief Financial Officer for more details on our record performance and financials Brian.
Brian.
Thanks, Bruce and good afternoon.
I'll begin today by referencing the press release, which shows reported earnings per share of $1.23 cents this quarter.
This includes provisions for credit losses of 1.7 million and acquisition and integration costs of 1.1 million six.
Excluding these items current ones.
After tax pre provision acquisition integration costs, earning per share.
It was $1.29 cents.
I would also point you to our updated third quarter Investor presentation, which is in the IR site on our website.
Again this quarter core earnings and results were solid with financial trends and metrics also positive in almost all aspects.
As I mentioned, the total provision for credit losses. This quarter was 1.7 million driven.
Driven by $5.9 million provision on a new problem credits.
That was identified and fully charged off during the quarter.
And to $45 million increase sub rated loans.
Were largely offset by $447 million decline in loan balances and an 80.
$5 million decline in non funded.
The updated consensus economic forecasts showed improvement.
However, the economic outlook factors in components, we used to develop the allowance would not change.
Texting Heartlands assessment that a significant level of economic uncertainty remains.
Net charge offs this quarter totaled $21.3 million with $13.9 million attributed to loans that had already been fully reserved in the second quarter of 2020.
And then the new $5.9 million charge off of the previously mentioned.
In total $1.7 million quarterly provision.
The 21.3 million and net charge offs resulted in the decrease in the total allowance for lending related credit losses of $19.6 million.
At the ended the quarter.
Alex for credit losses on loans was 103.4 million 1.14%.
The allowance for credit losses on unfunded commitments was one was 14.3 million or 15 basis points of total loans.
Together. These two allowances results total loans for lending related credit losses $117 million.
0.29% total loss.
When PPP loans are excluded the total allowance for lending related credit losses increased 90 basis points to 1.48% of loans.
Moving on to the rest of the balance sheet total assets grew 600 million ending the quarter at just over 615.6 billion.
With a loan to deposit deposit ratio of 71%.
The tangible common equity ratio increased 40 basis points, 2.03%.
7.9% last quarter as increases from retained earnings and the fair value marks on Bob on the bond portfolio.
Were partially offset by the impact of the $600 million increase in assets.
Heartlands regulatory ratios also remained strong.
With the common equity tier one ratio at 11.29% total.
Total risk based capital ratio at 15.47%.
Investments grew 823 million this quarter as we invested some of our excess liquidity and pre invested some of the expected cash flow from the PPP forgiveness.
Vestments now comprise 33% of assets with the tax equivalent yield of 2.54% duration of just under six years.
Generates approximately 50 million cash flow on a monthly basis.
Borrowings increased 436 million due to the pre investing strategy.
Totaled 831 million or 5.3% of assets at quarter end.
At September Thirtyth, our banking network had approximately $4.1 billion of unused borrowing commitments.
Yeah.
So heartlands balance sheet continues to be very strong with solid capital base healthy loss reserves ample liquidity and low leverage.
Moving on to the income statement net interest income totaled 122.5 million this quarter were 1.6 million lower than the prior quarter.
The net interest margin on a tax equivalent basis this quarter was 3.55%.
Were 30 basis points lower than last quarter.
Flexing declines in loan and investment yields of 25, and 37 basis points respectively.
Were slightly offset by a seven basis point drop cost interest cost on borrowings and deposits compared to last quarter.
This quarter the net interest margin improved 10 basis points of purchase accounting accretion compared to 16 basis points in the prior quarter.
Non interest income totaled $31.2 million for the quarter.
600000 from last quarter as the gain on sale of loans was up $1 million on higher mortgage loan activity.
Total security gains decreased $1.2 million compared to last quarter.
In addition service charges loan servicing fees and trust fees were all higher this quarter.
Moving to non interest expense.
Noninterest expenses remained well.
Totaling 90.4 million this quarter.
Compared to last quarter.
Core run rate costs, which excludes acquisition integration and restructuring costs also excludes tax credit costs asset gains or losses.
Decreased 1.7 billion.
6.6 million compared to 80.3 million last quarter.
More specifically salary and benefits were up slightly at approximately 51 million.
You can see furniture and equipment costs combined totaled 9.2 million down slightly this quarter.
These categories account for two thirds of our core costs. They have been at this level for the past 10 quarters.
In addition, our ftn.
Thousand 827 also remained relatively flat this quarter and over the last 10 quarters has declined by 380, 918% from peak of 2216 ft.
Quarter two 2013.
During that same time period assets have increased 4.3 billion or 38%.
These results demonstrate the leverage and increase productivity, we've achieved as we work to restructure the company term our branch network.
Moments of many customer compass productivity improvements, we've identified over the past two and a half years.
All while continuing the companys significant growth.
One other expense item I would mention is losses and write downs on assets, which totaled 1.8 million this quarter.
You did $1.2 million of write down on branches.
As part of her ongoing branch optimization program.
As this program continues to progress we expect additional branch write downs to occur over the next one or two quarters.
So going forward, excluding new acquisitions, we would expect the phone trends to continue over the next one or two quarters.
Including muted loan growth excluding PPP.
And modest deposit growth.
PPP forgiveness timing remains uncertain, but it's likely to be slower than we had been estimating with more of the forgiveness moving into 2021.
The net interest margin remained under pressure, however declines should be much less than we saw in the third quarter.
In mortgage activity will seasonally decline, but we will be much higher than it has been in prior years during the same period.
Core expenses should remain stable.
$67 million.
With regard to the closing of our two upcoming.
Many transactions.
That are both scheduled to close in early December.
On a high level and on a combined.
Combined basis. These transactions will add 1.3 to 1.4 billion in loans and 1.9 to 2 billion in deposits.
Approximately 96 million and goodwill.
70 million deposit intangibles.
And should provide an approximate 10% to 11% lift to our core EPS after.
After cost saves are realized.
After having almost 5.1 million of additional shares.
For the transaction.
Transaction.
And lastly, M&A and conversion related costs.
$4.5 million to $5 million.
Should be.
Should come in the next two quarters with 1.5 million next quarter.
Meaning in Q1 2021.
In the interest of time I would also direct you to my comments from last quarter for additional details on these transactions.
And with that.
I will turn the call back over to watch for.
Questions.
Good.
Thank you very much.
We'll now open up the phone lines for your questions.
Thank you.
Ladies and gentlemen to ask the question you would need to press Star then one on your telephone.
To withdraw your question press the pound key.
Again, Thats star one to ask a question.
Please stand by while we compile the culinary roster.
Our first question comes from the line of Jeff Lewis with D.A. Davidson. Your line is open.
Thanks, Good afternoon.
Hi, Jeff.
A question on the on the net charge offs you detailed.
60 minutes and then the two loans did remaining.
Call It 5 million.
Were those in categories that also hope it at risk score that you'd have to pay.
Hey, guys.
Any more detail on the remaining bucket, even though it was just smaller.
Mahler balances just.
Any detail on that.
Yeah. This is Bruce Bruce and I'll, let Dave can also chime in but I would say there is nothing.
And the remaining balances after you get past those two large charge offs.
That would.
I guess lead us in any direction, just sort of normal activity for our portfolio size Nathan any other comments there.
No first you said it well, it's mostly across the usual suspect you'd see.
Its diverse across.
Numerous credits on everything from development bags to others.
Okay and the.
The commentary about.
Expected to remain elevated.
Bruce I think you mentioned that its absent that the two the fracking them.
Wholesale wine credits.
You would have had charge offs similar to the prior quarters, just trying to gauge that elevated comment is it are we in that.
10 to 15 basis points or we somewhere north of that just trying to gauge and what is maybe driving that elevated thought just I guess heading into as as modification sort of roll off here.
Yeah I'll jump in and then they can you can you can add but.
I think you are picking that comment up from our our earnings release.
And I think it just reflects the fact that theres uncertainty going forward.
Knock on knocking on wood here.
As we went through.
This quarter.
We really took the charges that we saw there and there was I don't think any really big ones.
Coming down the pipe that we knew of at that point, but things change fast I mean, that's the the $5.9 million charge that we did take this quarter showed up quick and had to be dealt with so in this environment I think we're always concerned.
That could.
We can get a surprise, but I think we're in pretty good shape I think the other comment I might make is that while we are very pleased with the credit metrics, both the NPD numbers the delinquency numbers.
Our less than 2% of our loan portfolio remaining with some sort of deferral.
We are seeing elevated increases in our non pass credits.
There's a lot of uncertainty around co bid, there's there's spikes happening in about half of the states that we operate in so there has been sort of a little bit of a pullback from recent reopening.
And there's a tremendous amount of uncertainty around.
The government stimulus programs. So I think we're just trying to be cautious with that statement more than anything specific that showing up in our numbers.
Got it okay that.
Address that pretty well thanks, maybe one last one just on the loan run off and we got.
Brian get your comments on expectations for muted loan growth, but in terms of absolute run off in the quarter.
And what May continue to be a headwind is that.
Im going to guess, it's a combination, but we see that lower demand and door youre.
Sort of tightening credit appetite.
I'm just trying to get a sense for what is the force maybe that which is greater as youre.
Hesitation on.
On new loans or demand is drying up.
Yeah. So.
It's a couple of things lets first take the the residential mortgage portfolio in consumer that really is as you know we other than in Texas, we've pretty much exited the residential mortgage business. We did have a portfolio with rates remaining very very low those loans are being refinanced away from us we.
Generally are able to to maintain the deposit relationship, but the loan itself is being refined out.
As home values have been.
Continued to be steady or increasing so that's that's the story there the consumer book is a little bit.
The same way most of our consumer loans our home.
Home equity loans, which in this low rate environment. If people have balances there in home values continue to appreciate their refining those balances into longer term 15 year fixed rate low interest rate mortgages. So as long as rates continue to be low we would expect to see some run off for those reasons and those port.
Folios rack.
We're actually feeling fairly confident in our commercial book.
And the new activity with our renewed focus on on C. and I operating companies, where we're seeing a decrease there is we are seeing our.
Construction portfolio pay off as you anticipated many of the loans that we funded during the construction phase we're going into the secondary market.
And there is some of the investment real estate that we've had on our books is being refinanced out.
Not necessarily for credit reasons, we'd like to keep them, but more for pricing reasons a lot of the coming.
Community Bank smaller community banks are taking those.
234 million dollar investment real estate deals.
Booking those in the mid to mid Threes, and we just don't think that's a good trade off and so there is some of that financing refinancing away from us happening.
Okay.
Okay.
Got it thank you.
Thank you.
Our next question comes from the line of Angeles type of Sandler Your line is open.
Hi, good afternoon, everyone.
Hi.
Brian I appreciate your comments on the margin, but just curious kind of with this.
The strategy of take it on kind of pre funding some securities with expected pass a PPP, where where do you think that the margin sort of flattens out.
How much pressure you think remains low in the coming quarters.
Yes, obviously I got to couch this with a lot of it yes because.
Sure Yes.
I think we probably have another five to maybe 10 basis points of it the dropping just given the mix change that we've seen with investments being a higher percentage that wasn't there for the whole quarter.
So, there's probably a little bit of that.
You know I mean.
The PPP forgiveness, we'll see what the timing is of that that could change things just a little bit, but how much excess liquidity then shows up again this quarter with deposits.
How much will loans grow.
Certainly long growth would help we can get that.
You can switch out the cash flow.
The loan portfolio would be great.
So I think before Johnson, even come in I would say you probably got another five.
Maybe 10, if things get a lot of liquidity and everything but the size of the balance sheet is bigger so I would say Andrew even though you might see that margin go down I think non net interest income is going to remain relatively flat to where it was this quarter.
So I think we can hold.
Hi, there.
Johnson is going to come in and having both have excess liquidity.
The good news is aims portfolio.
The.
They've been having a net interest margin that's north of four.
Okay, almost one half so that will help that will help the margin that comes in.
Even though we'll get some excess liquidity. So there's there's really a lot of moving parts.
Okay, and obviously, yes.
That's how we bring in those pieces that could also cloud what.
The fourth quarter.
Right right.
And then on the loans that have gotten a second deferral.
What is there any sort of commonality.
And then I guess, what's the tone out of there all of those borrowers men.
Eventually if they still need more deferrals after that like what's the process of resolving.
Some of these relationships.
We're still struggling at the time of that deferral payment ending.
Nathan you want to take that one.
Yeah, the overwhelming majority as probably being experienced by most other banks in industry as well as really located within the lodging portfolio.
Really seeing the most stress there and needing additional supportive.
Additional deferrals we.
We are seeing some positive movement, where we're saying.
Capital raises as well as a pretty significant austerity measures being put in place, giving us confidence in those customers. We will have to continue to address some as we move forward but.
But with so much still not at this point, it's really hard to give a determination of kind of where it's going to resolve itself, but we do feel good about those customers where they are at as of today.
First anything you'd like to add to that.
I think the only thing and this is getting a little in the weeds and maybe Brian will want to jump in but if we have to continue to provide ongoing support then I think you're going to see us turn some of those loans into TDR.
In fact, we had a couple this quarter if you look at our AR.
Tables in the back of the.
Press release, I think we had.
$9 million of doing soft headed on it that right in front of you I think there were $9 million of additional TBR tires.
And I believe if I'm not right.
Thank you that those were couple of lodging credits that did come up for their second renewal based on the two and the credit.
Being TDR so yes.
If that continues in the next 130.
That have yet to come through their deferral period, we do second there could be some additional TBR tires.
The other comment that I might make Andrew is.
When this when the pandemic started.
We like almost all banks were fairly liberal in providing that first payment.
Payment modification.
The second go round, it's a complete re underwriting and it goes it goes through our complete process. So we've had a lot of eyes on it.
The second go round and if there is anything beyond that.
It probably will even be moved into our workout group.
Which we've beefed up and ready to.
Right some more of these credits.
Okay. Thank you very much.
I appreciate that I will step back thanks.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line up Terry Mcevoy with Stephens. Your line is open.
Hi, good afternoon, everyone.
Terry.
Hey, maybe first question on the branch optimization.
The six branches what are your thoughts on the cost savings and maybe how much of that will be reinvested into like you said the ATM upgrade and some other investment you have on the Tech side and then Bruce you kind of said 10% of branches are under review.
I guess I understand the meaning of that but how did those 10% do you think a fair share them will not pass to review and will be consolidated.
Let me take that can that that question first here and then Brian can talk about the cost save I I think.
What we're doing right now and those those 10% there's definitely probably half of those that that we will either sell or consolidate I think the remaining 5% it's really.
How long do we.
How long do we want to give those because they might be in a growth market but.
But we just over the last couple of years have been able to grow our bank into them.
So it's really not so its during a good market, but for whatever reason, we haven't been able to make them grow the way that we want to.
And we don't have another branch close or it doesn't make sense for us to sell that one I think the question is in this environment going so digital will they continue to grow do you need that to growing those some of those markets wells.
And we really want to you know part of our strategy as you know we're much more commercially oriented small business oriented in historically small businesses made decision based upon how close branches, where we really want to give it a little more time than just three or four months is during this pandemic to see whether that behavior changes.
And Terry the other part of your question the six branches had a cost base.
Daniel base close to three and a half million dollars people.
Promises people and real estate costs.
I think we'll probably get somewhere between 60 and 70% of that cost to go away. We will have to keep some of the people as we consolidate because we'll have a.
A little bit more activity, presumably go into the branch so thats yet to be.
Figured out to see how that happens in this digital environment, but I would estimate probably conservatively, 65% or so right now.
I see a lot of that for sure.
Im curious as you know as we started to consolidate improving our branch system.
Lower a year ago, we have some pretty good.
Historical numbers on when we consolidate branches worse, we've been maintaining over 90% of those deposits, we modeled a much lower than that but we've been able to maintain right around 90%.
Right.
Then just as a follow up question. Thanks for providing that the non pass rate that went from 8.1 to 8.7 I am just curious that cove, it kind of sensitive portfolio.
I don't know if you have the details in front of you, but what does the non pass rated loans look like in say lodging or retail properties. Some of those that you that you've called out now for a couple a couple of quarters, how much higher are those specific portfolios than the than the portfolio average.
Nathan you want to take that one.
Yes, I don't have a big.
Days and he's not in the room with us.
No problem.
Yes. Thank you.
And why don't have specific percentages as far as where they are individually for each one as far as their non past percentages.
Again, the larger the more impacted industries are the ones that are driving most of the decrease is from a cold start watching big one of the largest ones. The ball. So because you noted it through the.
One experiencing struggle are struggling.
From an industry as well that's something we'll continue to monitor.
One of the things we are doing proactively as we actually have a monthly meetings, where we go through and look at all the individual credits anything over of any size really over million and really going into mid and depth. Both would take individual our ams as all senior management just to make sure we're really understanding.
Both three going get on pass and post just to make sure we understand where theyre at and that we're taking all the necessary measures. So we changed.
Bruce anything you'd like to add to that.
No I think it was fine Brian did you want him to the page out well and I was just going to say Terry as you recall, we've always had kind of an outsized component relative to its portfolio size.
AG loans that sit in the sub sub rated.
So I think that's continued to be one of the trends that drives that a little bit.
That's great. Thanks for pointing that out and thanks, everybody is help have a good night.
Thanks, Terry as Terry Thanks.
Thank you.
Next question comes from the line of Damon Delmonte with KBW. Your line is open.
Good afternoon, guys hows it going today.
David.
So first question just wanted to kind of circle back on the on the provision and kind of the outlook there, but before that you know.
Just to explain a little bit why the.
Reserved for the unfunded commitments was down 3.1 million. This quarter is that just because of the lower balances. So you really some of that reserve.
Yes, it's two things.
The loans coming down.
Obviously had some effect on that.
Commitments, we also as Bruce mentioned had quite a few.
Instruction loans that moved out for that moved up into their permanent owner occupied or CRT category and those tend to have a little bit low once they move and have a little bit lower reserve, we have a higher reserve rate.
On our own.
Construction loans.
And so that mix combination and the lower cause that to go down.
Got it Okay, and then as we try to think about the provision going forward just kind of given the commentary about.
Ill.
Potential for elevated.
Net charge offs in the coming quarters and kind of an ongoing.
Economic uncertainties.
I mean, it's probably fair to assume we're not going to see a provision as there's always this quarter, but do you think we kind of go back somewhere closer to what we saw the first half of the year.
I don't think it's as high as the first half.
If you if you step back and assume that we don't get the $3 million or so last on the investment around the unfunded, we have close to $5 million provision.
For the.
Just a regular loans on the books I.
I would suspect somewhere between there and 10 million or 10000 10 million.
Several points right 10 somewhere between that five and 10 million is probably.
What were looking after the next couple of quarters.
And then once you get past that and we do get to more normal times, and it's really just loan growth changes and hopefully not a lot and charge offs.
Or changes in credit quality.
Got it and I think you said that the reserve or the Hcl I should say.
X. TPP loans. It was like 148 this quarter. So that's that's the level you're comfortable with this kind of getting some of the weaknesses and you know across the footprint and just the rising spikes of.
Of the virus.
Well I mean, it's you never know right.
One of the things I did as I look back what was the worst year that we had during the.
Great recession, we never had a year of more than 1.4% of loans for charge offs.
And it doesn't feel like we're at this and as bad as spot right now so going in I think we're in pretty good shape.
But obviously, if we don't put a lot of this.
Things continue to just.
Trudge, along businesses can't keep going and there is no stimulus.
Could change that's part of the reason why we Didnt do Damon was we probably would have just done the math on Cecil with the forecast.
Looking a little bit better than they did last quarter, we probably could have.
Just taking more space.
Smaller provision.
I think that was prudent given all the uncertainties, we wanted to leave that.
Those factors, where they were which was on the high side.
Just to make sure that we didn't get a false positive here and that this does.
Get worse instead of really good pattern and that gives us more room to take some additional charge offs if that were to happen. So.
It's kind of a long winded answer but.
I really do think in the next quarter to unless something changes I don't see we should be I think somewhere in that $5 million to $10 million range.
Okay.
Then on the margin you know that I may have missed this but can you kind of just walk me down to the 30 basis point quarter over quarter decline I.
I know you said you added liquidity, but it was that entirely liquidity was there a drag from TPP.
Were there any other factors in there.
Yes, I think you had both.
Just looking for.
Another sheet paper.
So.
PPP loans.
Next accounting was the 10 basis points again, PPP loans was about nine basis points. It was 10 basis points last quarter. So it was about the same.
But that yield is 265, so it does pull down our net interest margin.
You know you had loans, both the volume and rates were down in loans.
Ex PGP and purchase accounting.
Investments you have volume up.
But rates down and.
And then there was.
On the liabilities with rates down.
Volume up so.
Combination of a lot of things I would say, it's mostly liquidity and the fact that we.
We have had.
Shift towards a lower earning assets the assets.
That being investments.
Okay.
I guess that.
Yes, but that is everything that I had so thank you very much appreciate it.
Thanks, David.
Thank you.
I'm showing no further questions at this time I would now like to turn the floor back over to Mr. Fuller for closing comments.
Thank you to Wanda in closing again, we were very pleased with our financial performance for the third quarter and we set a number of new records first and foremost net income available to common shareholders of $45.5 million was the best quarter in our history earnings per diluted.
Good common share of one dollar and 23 cents was our second best quarter for earnings per share are.
A record efficiency ratio was 54.67% for the quarter and 57.28% year to date was the lowest in our history. Our assets reached a new record high of $15.6 billion with 3 billion in growth over the last four quarters our.
Our balance sheet remains extremely liquid all capital ratios remained strong and credit issues remain relatively benign.
One of our 11 charters achieved our goal of 1 billion or more and assets. This last quarter and last were excited to welcome our new merger partners in bank of West, Texas, and the four Johnson bank branches in Phoenix, Arizona like.
I'd like to thank everyone for joining us today and hope you can join US again for our next quarterly conference call in late January 2021.
Good evening everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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