Q3 2020 First Commonwealth Financial Corp Earnings Call
Good day and welcome to the first Commonwealth Financial Corporation third quarter Twenty-twenty earnings call, Oh participants will be and listen only mode should you need assistance. Please signal Crawford specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note.
This event is being recorded and I'd like to turn the conference over to Brian Thomas. Please go ahead.
Thank you Jason Good afternoon, everyone. Thank you for joining us today to discuss first Commonwealth financial corporations third quarter financial results.
Participating on today's call will be Mike price, President and CEO, Jim rescued Chief Financial Officer, Brian Kara keep credit officer, and Genger beds or bank, President and Chief revenue Officer.
As a reminder, a copy of today's earnings release can be accessed by logging onto Epsom banking dot com and select little Investor Relations link at the top of the page.
I've also included and slide presentation on our Investor Relations website with supplemental financial information that will be referenced throughout today's call.
Before we begin need the costume listeners that this call will contain forward looking statements. Please refer to our forward looking statements disclaimer on page two of the slide presentation for a list of descriptions and Ah risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking.
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Today's call will also include non-GAAP financial measures non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP Ah.
Reconciliation of these measures can be filmed in the appendix of today slide presentation.
That that will turn the call over to Mike.
Hey, Thanks, Ryan the team and I are pleased with the quarter and we're enjoying playing some offense in our consumer lending businesses over the last several years, we've made significant investments in our digital capacity a regional business model to spur growth, our businesses and a stronger consumer.
Lending platform.
<unk> of these investments or a parent and a third quarter results with several recent efforts like project thrive. We have made these investments while maintaining positive operating leverage and improving our efficiency.
Third quarter earnings per share of 24 cents was consistent with last quarter, even as we further increased loan loss reserves. The core efficiency ratio improved to a record low of 50, 445% and the core pretax preproduction rollei strengthen one.
Seven 4%.
Poor pretax pretty provision net income was 41.1 million up some 14% over the second quarter. The company achieved record quarterly fee income of $26.7 million, an increase of $4.9 million from the previous quarter.
This is more than offset a 4.4 million dollar increase in provision expense to $11.2 million.
Several important themes continue to unfold, namely first and the third quarter credit with solid and we continued to build one loss reserves to recognize the impact of the pandemic. Excluding P. P. P balance is the allowance for lung losses as a percentage of total loans increased 10 basis points.
213, 8%, including previously disclosed day, one seasonal adjustment the coverage ratio excluding P. P. P loans would increase the 1.59% as seen on page 10 of the earnings supplement.
The reserve build was driven by several qualitative factors and are incurred lost model, which Brian will cover during his remarks are nonperforming loans fell from $56 million at the end of the second quarter to $49.7 million at the end of the third quarter.
On page 13 of the earnings supplement COVID-19, referrals totaled 2.68% as of July 24th those deferrals fell 217 basis points as of October 23rd or last Friday.
Similarly on page 12, that'd be earning supplement deferrals on the commercial portfolios most impacted by Covid declined again from 3.4% on July 20th for it cause 14 basis points as of last Friday I believe we are well positioned at this stage of depend demick with a strong.
Balance sheet that can weather uncertainty next third quarter fee income as a percentage of revenue was 28.8%. We were particularly proud of this number is it reflects years, okay and investment as we have diversified our revenue stream or third quarter fee income was driven by strength.
Ross multiple business lives first interchange income with six 4 million up roughly 500000 over the second quarter. The teams retention of households in execution through through is five smaller acquisitions has really important through here.
Mortgage gain on sale income was $6.4 million with a record quarter of $240 million and production.
As an aside 40% of these loans were not sold and remain on our balance sheet again, we didn't know about our way into this business just over five years ago.
Despite a lack ah lackluster industrywide small business the men SBA gain on sale income was $1.4 million, which also contributed the fee income the spot spider smaller size and some of our larger metropolitan markets in which we compete or 2020 SBA origination perform.
Since now ranks us number two in western Pennsylvania, and number four in northern Ohio also wanted to fee income front trust revenue totaled a record $2.6 million as well.
The third three theme as loans loans grew $33 million or 2% on a link quarter basis as the consumer lending business led the way and commercial lending however utilization of lines credit sell some 55 million from 38% at the end of June to 34%.
The end of September as businesses investment and working capital U utilization Ah has stalled our mortgage branch based consumer an indirect lending businesses have been robust even as underwriting standards have been tightened.
For the net interest margin contracted about 18 basis points, the 3.11% in the third quarter, despite respectable lung growth and resilient loan spreads, particularly on the consumer side net interest income however was virtually unchanged, calling the only 300000 to sing.
66, $7 million excess liquidity negative replacement yields Ah loans with a primary drivers of the decrease in them Jim will provide more colored here fifth Corps.
Just expenses were down $63000 for the quarter to $52.3 million, even $52.3 million, even as we continued to invest in our digital platform and tools for our clients importantly, the team launched a new digital platform at mid September called Bell.
Which we placed both our online banking and mobile banking platforms. The team also completed the conversion of our larger businesses business customers to our new Treasury management system, We also and the person to person payment option a zelle.
These launches impacted well over 200000, sewers and small businesses and by all accounts went smoothly and with that I'll turn it over to Jim.
Thanks, Mike.
This is a very solid quarter for us.
Core earnings per share match last quarter's results, even with $6.9 million a reserve build.
And we hit consensus estimates, even without any P. P P forgiveness.
This is a significant point that's easy to overlook.
While our provision expensive 11.2 million came remarkably close to the consensus expectation of 11.1 million.
Are spreading come came in roughly $3.5 billion lower than consensus expectations and yet we still hit consensus.
To be completely fair.
This differential and spread income is likely the result of our own previous guidance. The P. P. P forgiveness would take place in the third and fourth quarter of this year and as such it would've been perfectly reasonable to expect third quarter net interest income to benefit from the acceleration a P. P T premium amortization.
In reality, we had no such P. T P forgiveness and come in the third quarter. Instead strong fee income made up for the lack of P. P. P forgiveness income.
At this point, we do not expect any significant P. P. P forgiveness until the first and second quarter of next year.
Our core earnings figures excluded too non-recurring expense items from my results $3.3 million of expenses associated with a voluntary early retirement program and $2.5 million of expense associated with the branch consolidation effort, both of which had been previously disclosed.
These efforts combined with other expenses initiatives are expected to help keep noninterest expense flat in 2021, not only by allowing us to continue the reduction in total salary expense that we have benefited from in 2020 due to a hiring freeze.
But also by absorbing increases and other expenses as we returned to a more normal operating environment.
Brian will provide commentary in a moment I'm credit, but I'd like to provide a little more color on a few things before turning it over to Brian.
First are stated NIM was 3.11%, but was affected by negative replacement yields have shifted mixed toward consumer loans and most importantly, an average excess cash position during the quarter of approximately $343.3 million or about 4% of average run.
Assets.
Consistent with prior disclosure, we calculate a cordon him excluding the impact of P. P. P loans, it excess liquidity of 3.28% in Q3.
The name should benefit in the near term from time deposit and other depository pricing as well as some balance sheet management efforts designed to move access customer funds off balance sheet, thereby reducing excess cash.
These efforts are expected to help offset negative replacement yields and keep the corn him relatively stable in the near term.
Over the course of next year. However, we currently expect the corn M X P. P. P to continue a path of modest contraction and the 320 to 330 range.
Second Mike mentioned that are fee income of $26.9 million was very strong in Q3 up by nearly $5 million from last quarter.
Because much of this was driven by mortgage fee income is expected to seasonally adjust to approximately $24 million to $25 million in the fourth quarter.
And finally, I know Mike already mentioned this but if you look at page 10 of the supplement you'll see graphically what we have verbally explained in prior quarters that even though we delayed the adoption of Cecil. The addition of our day, one Cecil number to our current incurred a triple L results in a reserve of 101 point.
$2 million and a reserve coverage ratio of 1.59%.
I can add that reserve figure is not materially different from our internal parallel Cecil runs as of September 30th.
So even though facts.
Facts and circumstances may change before we adopt Cecil next quarter not the least of which is the economic forecast are cumulative reserve building in 2020 under the incurred model has left us in a very good position ahead of Cecil adoption next quarter.
And with that I'll turn it over to Brian.
Thank you Jim I'm. Good afternoon, it's good to be with you again.
As outlined in our Bachelor that credit quality with solid for the third quarter in spite of the uncertain economic environment.
As expected delinquencies picked up modestly due to the run off the stimulus and the reduction in payment really.
Cautiously optimistic by the improvement in unemployment and the reopening of the economy's, you know western Pennsylvania and Ohio.
We continue to be watchful of our deferral rohloff reports to evaluate our borrowers as they resumed full payment status.
That charge us for Q3 or $4.3 million.
Which includes approximately $1.2 million and consumer charge offs.
Net charge offs annualized 0.27%.
R. N P. L has improved approximately $6.3 million to 47 $49.7 million, improving 2.78% from 0.88% of total loans excluding P. P. P allowance.
This is the second consecutive quarter for us to report an improvement in N P. LS.
Reserve coverage of Npls rose to 177% from 145% again, excluding ppb wells.
Similarly R N P. A has improved six $7 million.
Eight oh per cent of total owing assets some 0.91%.
We conducted yet another loan by loan review, the higher risk portfolios and adjusted risk ratings as appropriate.
Proactive approach to risk ratings resulted in criticized loans, increasing approximately $60 million Wow classified loans increased modestly.
These trends form the backdrop of our approach for a loan loss reserve in the third quarter.
It's shown is a slight.
The provision for the quarter totaled $11.2 million, which resulted in a reserve build a $6.9 million under our incurred lost model.
The allowance for loan loss as of September 30th totaled $88.3 million as compared to 81.4 million at June 30th.
The reserve balance grew to 1.38% excluding P. P. P. P P Lois from 1.28%.
Let me offer some color related to the reserve Bill for the court.
That charge offs with $4.3 million.
We had a slight increase in specific reserves approximately $500000.
Our standard qualitative reserves increased approximately.
$900000 quarter over quarter, reflecting a mix of economic conditions.
Our covid qualitative overlying reserve increased by $4.7 million for two $314.6 million.
They released approximately $1.9 million consumer reserves due to improving Earl experience as well as improved economic conditions.
We increased our high risk portfolio reserves by approximately $6.6 million.
Largely due to increases in yoga lay reserves for hospitality and retail portfolios.
Thank you and now let me turn it over to Mike.
Hey, Thanks, Brian and Jim an operator will now take questions.
Thank you and you begin to question and answer session.
To ask a question you May press stars in one on your Touchtone phone.
You're using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
First question comes from Steve Moss from Bureau Securities. Please go ahead.
Yeah, good afternoon guys.
Hey, Steve.
Just starting off with the.
<unk> just on credit here, obviously must decline on the deferrals. Just wondering you know with the addition, additional resource Ross town in retail I believe is as well you know what are the possible read it throws or kind of how are you thinking that you know possible kind of for me <unk> and those books.
Brian.
Well, if if I understand your question a as the deferral. This is playing out how we thought it would play out as these forbearance is for deferrals or modifications rolled favor. We are spending the time to evaluate each credit and their name by.
Name basis, and often times it really starts with management, if we understand our borrowers their commitment to the properties, we understand what they'll do with it we can do a thorough analysis and take a look at whether the credit needs to migrate from a past right it to a special mention.
Alright do with substandard.
And so as you roll off the deferrals often times that does necessitate a real meeting and understanding of liquidity of recourse and how we address each credit and a name by name basics did I answer your question.
Yes, and I guess, just as you think about you know where where things are progressing.
What have you seen for you know your customer performance when it comes to hospitality and in restaurants.
Okay. That's a good question. So we dissected the portfolio a number of different ways, we sliced it into a business at college campus.
<unk> and resorts style properties for our hotel book.
We keep coming back to recurring themes, which is we are seeing continued improvement in that portfolio, although it is uneven and slow.
We come back to the right people are supporting their properties. Let me give you some anecdotal evidence I think it'll help.
Occupancy average occupancy from 13 of our properties.
August with 51%.
That range from below 35 to a high of 79, when we compared to save properties back to June it was 29%.
And now we're up to 51% we are seeing increasing occupancy. Similarly, we are seeing an increase in a D. R and so as we think about these hotel properties 80 hours up done $111, an increase from roughly $90 <unk>.
So anecdotally, we're seeing improvement our portfolio is getting an awful lot of internal scrutiny. When we went into this pandemic, we were about 63% L. T V and we covered 154 basis points.
And so it it's worthy ongoing monitoring and management the credit risk.
Hey, Steve This is Mike just to add a little bit more color. When we we honored and we really had a combinations quickly upfront and then in the first deferral period, we made a credit decision we made a commitment not to pick a kick the can down the road irrespective of what might.
What happened with the government or other types of programs and I think Brian and his team do a really good job.
Calling balls and strikes and getting into the credit into the appropriate category of classified or watch and that's why you see a little movement in those categories. This this quarter does that helpful.
Yes, that's that's helpful.
For sure and then.
In terms of your business activity and loan growth you had <unk> modest positive <unk>.
Some you have a consumer side of the business just kind of curious <unk>. It sounds like that would probably continue into this quarter kind of curious what you see on the commercial side in terms of pipelines in business activity there.
Yeah, the the pipelines on the commercial side or a little shallow I mean, the things that we're getting are really just through a lot of effort and better execution that being said I'm in small business. For example, and I think this is more execution in just our ground game is getting better and better.
About 33 per cent and approved small business loans from the third through the third quarter of last year to this year and we also are seeing that kind of peek through our S. B a lending a lot of that is triage for doing on credits that just might have some kind of systemic credit weakness and adding an S. B a guarantee.
But I just think as I said in my opening remarks, we're seeing lower utilization because of of working capital lines of credit and just not the same level of investment yet on the commercial side on the consumer side, we're seeing good activity I mentioned mortgage where to record and a mortgage.
Originations <unk> Bank President just shared with me before the call. The only 46% of ours are refis, because we still have a mortgage business that's growing organically when the consumer lending side year over year through our branches or applications are up 25%.
On online real estate applications are up 89% I mentioned small business lending up thirty-three an indirect thought it was up 20, 29% year over year. So there's enough there on the consumer side that carry the day for us in the third quarter and on the small business side and this is just the way it is in recessions in my <unk>.
Lifetime, you know that volume or that those pipelines will be dampened for a season.
Okay. That's that's helpful and then.
I guess the last question for you and it'll step back in terms of you know you can plead the repurchases and the and the and the texture of the kind of curious how are you thinking about the possibly repurchases forward or you know other cancel an appointment.
Yeah Jim.
Yeah, we have no further share purchase authorization right now uhm, we are very pleased with the execution of the remaining portion of our previous authorization. We started that the last week of September when the all all the bank stocks were down we're able to retire though shares right around book values, which was very creative.
And so we're very pleased with how they came out but right now there's no further authorization plan will watch it closely though because the bank is still quite profitable and we're still generating capital and it will depend on our projections for loan growth and how much capital internal capital to generation, we need to capitalize that for the loan growth and if there's excess capital that it was presented opportunity for further repurchases.
<unk>.
So we were very like I said, we're very pleased about how that program took place and we you know we hope it was perceived as our confidence in our future prospects really taking shape.
Alright. Thank you very much an example.
The next question comes from Russell Gunther from D. A Davidson. Please go ahead.
Hi, good afternoon guys.
Good afternoon.
On the expense side of things you know wanted to circle back to the targeted extend saves from the branch reduction.
Believe it's 8 million on an annual basis.
How much of that considering other franchise investment do you guys expect to to be able to drop to the bottom line.
Jimmy you might have those numbers, but I know, it's not all of it with our digital investment.
No no. That's it thanks for asking that's why I will be Russell will even trying to be clear about is what our expectation is for the net of that kind of expense reduction what the implications are for our total noninterest expense.
In part because as I mentioned in my prepared remarks, we've already gotten the benefit of some of the expense reduction because of the hiring freeze that we've done already this year, which is saved us in salary expense one byproducts of that by the way is that even though we're consolidated 20% of our branches, we expect actually very little job loss at the time of consolidation.
Because we were able to move people into open position so from a community perspective, that's very positive.
But like I said that means we're actually I'm experiencing some of that uhm benefit right now in our in our earning street. So I think the total amount. We said last time was about $8 million and have that amount about $2 million is going to be reinvested. Another in investments I think at about $4 million has already been <unk>.
Saved from the hiring freeze in terms of current the headcount reduction we managed so far this year and that will leave $2 million leftover, but there's so many moving pieces right. Now we are trying to stay very consistent on this message and say all of this goes together into the mix and allows us to keep our expense space in 2021.
Flat 2020.
It's very helpful gym, and very clear. So thank you for that I guess, just the one follow up would be you know as a part of project thrive are there. Other you know measures being considered beyond this the salary for you then branch reduction that we might.
Talked about either today or in the near future.
Yeah, we're looking at everything from some of our benefits and health care Uhm. We're looking at everything is on the table and just trying to dial it in appropriately given the specter of.
This pandemic and interest rates and what it means for.
The longterm financial path, we have it's.
We've been really good over the years about operating leverage and we think about that and all of our budgets from quarter to quarter and from month to month, and that's where we have to live in how we have to think and I think all businesses are quite frankly, they're like that Jim anything you want to add.
I do yeah. So we added some disclosure right in the text of our earnings release on operating leverage and I don't know how calm and as soon as I can tell you that internally to start at the pandemic when the fed cut rates 150 basis points it'll be like every other bank.
Uh-huh salvia impact on our margin immediately thoughts of positive operating leverage started to go away and we thought well, it's gonna be very difficult to hear to achieve positive operating leverage.
But we were very pleased to have these results. We publish this in it like I said, it's on page two of our our earnings release about how our core revenue increase $4.6 million for the previous quarter.
And 6.4 miles from the previous year well court.
Lunch expensive increased $39000 and 2.99, even the previous year. So we're extremely proud of the fact that we've been able to generate positive operating leverage in in this environment.
The question.
Thank you guys I appreciate the answers there switching gears to loan growth a bit you know I've.
I heard you loud and clear on the commercial pipeline growth. This quarter was consumer driven just want to get a sense for how that would translate going forward should that dynamic continue and what are you thinking overall on an organic growth.
We think it will all three and do you have a cot there <unk>.
You'd like to share.
Thanks, Mike I expected Fourthquarter will continue with muted commercial gross the pipelines you like.
But I think the small business and the consumer businesses will continue to be strong.
To the fourth quarter.
Oh, thank you so.
And then last question for me you know you guys mentioned the kind of <unk>. How are you thinking about the core margin going forward. The 320th at 330 range. You know it looked like core alone year olds were down in the high single digit this corridor I guess, if we if we.
Think about the moving pieces.
You know what needs to come together to to be at the higher end of that range. What are the what are the bigger drivers is it getting the excess liquidity off the balance sheet and continuing to reduce funding costs do you have the ability to you know.
Mitigate further core alone yield compression I'd just curious.
Curious as your faxes to the bigger driver 323 30.
Yeah, we have a few irons in the fire here Jim.
Yeah sure. Thanks. Thanks for the question there are a few things that go into that overall guidance of keeping them relatively stable and I can maybe give you a little more color that hopefully be helpful. I mean, you have to keep in mind that the whole P. P. P program.
In which we are fairly large participant among the exercise was the effect of that was adding a layer of fairly thin margin assets on top of the balance sheet.
So while that produced and net interest income and which fell to the bottom line, which were for which we're very thankful. It did have the effective suppressing the overload yielding problem feel real low yield down.
And the other thing that has a large effect and actually mathematically an even larger effect has all the excess cash on the balance sheet as I mentioned in the remarks 343 million average 4% of average earning assets. So there are a couple of things that we're doing I mentioned, we're working with clients to move some of those excess funds. It just sweep accounts that can sleep some of those.
Access funds off balance sheet that will improve the name just by getting that ultra thin layer of Nottingham cash off the balance sheet.
And then on the deposit side, there's also some room for improvement.
If you look in the back of the press.
Press release financials, you'll see we have $700 million and time deposits at 1.28% and well about 200 million of that mature in the fourth quarter and so those will reprice downward at at least 100 basis points, if it a little actually a little more than 100 basis points down and then there are another $100 million of deposits uhm.
That or money market deposits that have guaranteed interest rates for a time and that's those are priced actually at 1.39%. So those will also come down to lower rates of.
Yeah, I generally five or 10 basis points by the end of the fourth quarter. So that's $300 million of deposits that will save all over 100 basis points on the quarter that and moving some of the excess runs off balance you should all helping them definitely all set to that and we're very honest about this are continued negative replacement deals on loans and so we see those.
Two factors upsetting each other and and keeping them bouncing around and this kind of stable range corn in India over the next quarter.
Nope that'll be all thank you Jim Yeah, It does quite a bit and that's it for me. Thank you all for taking my question.
Thanks Russell.
The next question comes from calling Gilbert from K V. W. Please go ahead.
Thanks, Good afternoon gentlemen.
Maybe maybe my first I'll just put me on the S. P. A outlook you know, Mike you'd given kind of where your strength lies there in your positioning in your region. So.
It seems pretty positive.
Should we be thinking about kind of a fee contribution of F. B, a going forward and it's been a little bit lumpy, a but do you think it can be you know kind of a meaningful contribution as we look out and then of course and beginning of next year.
We do first of all we think it's important part of our mission within our respective communities and to find ways to thoughtfully get deals done and protect the bank, but also and through the damn endemic P. P. P with such a big part of that we really have the talent Jane is hired a gentleman who.
Is running a consumer lending function.
That is built big S b a lending platforms.
Part of project thrive, it's not just expense, but it's also revenue and we will make a big play to grow that business over the next few years Jane why don't you add some color there to call into question.
Thanks, Mike and thanks for calling for the question.
Really credit water column in the S. P a business <unk>.
A full three or four months as we were working two P. P. P S.
And although the pipeline child's bit light now, we expect 2021 to be a good S. B a year for a couple of reasons. The first is.
The the gain on stay on P. P. P. M. S. B a loans has been very strong a plate and the pipelines are starting to fill up and the regional business model is creating very good partnerships with the S. P E D E OS as well as the.
The middle market and small business lenders in in region. So I I think I'm bullish on the business.
Okay. Okay. That's great. That's helpful. And then just last question.
I'm just on the on the buyback you know I. Appreciate your comments about just kind of keeping an eye on on Capitol build or you know, where you know you might need the capital to grow loans, but I guess just <unk>.
Hold you got a little bit tighter in terms of.
You know near term catalyst or what what you need to see in the near term to kind of that would cause you may need to re engage more aggressively in the buyback.
Yeah, it's not much more complicated that I hope I hope Ya [laughter], thanks for asking calling in and just one thing I may I hope your maiden name notice, we're trying to present, a tangible comedy shows and you have the ratios both with P. P and without him in the press release. So are tangible camry, she was down to 8.4%, but some of that is this.
They need to capitalize those P. P P assets and that's there's no risk waiting the tangible commentary issue, obviously and so we're presenting it both with and without <unk> without P. P. P. The tangible Commons at 9%.
And what we have said in the past is that while we have no formal.
Target for tangible common equity.
Below 8%, it's your little thinly capitalized and above 9% you're running with excess capital now we argued in the middle of a global pandemic, we're watching as as we go along just like everybody else and so obviously no one wants to be sent on capital, but we need to make sure. We're mindful of using that capital thoughtfully and being good stewards of that capital if it gets much higher than that.
Then we need to put it to work somehow if we can't put it to work by leveraging it alone girlfriend, Yeah. We will look at further buybacks, but it's hard to give you any definitive trigger to say if it's at 9.1% will get re engaged buyback program. It. It doesn't work that way, we'll look at all no multiple factors credit capital economic outlook, all those things and.
Make a decision at the time.
Okay. Okay. That's helpful I will leave it there thanks guys.
Thank you.
The next question comes from Stevens wrong from our a P. C capital markets. Please go ahead.
Hi, Good afternoon, you guys.
Uhm just back on the margin you're grown yields X P. P. P was 397, that's down 17 basis points.
I guess going through next year do you see that tapering off so I guess you know by the fourth quarter of next year, where would you see expect to see the the core alone meal.
Yep, Steve It's a good question. It's a nice technical question I don't have an exact answer for you because we don't have a projection on that that exact protection I will tell you that in general right now the commercial loans, even now that the fence cut rates.
Your service flat, but 10 years in the seventies or eighties and were heavy slow lower for longer expectations. The commercial loans, they're still coming on to the mid three's. The consumer loans are coming on the low threes that will probably continue.
For the foreseeable future and so if that continues you'll see the loan overload, you'll come down a bit but it it won't it probably won't global a three per cent and so if we can keep the lone yields coming on in the mid to low threes and we can get our deposit cause training towards zero that allows us to maintain a reasonable Martin.
<unk> and Bill capital, that's kind of a big picture I was looking at it sorry, I don't have a more direct question like an exact projection for you on fourthquarter 2021 won't portfolio no [laughter] I'm glad I understand that.
It's perfect that's exactly kind of a color that is interested in and then just you know another one on P. P. P. The the fees how much does that in my interest income this quarter I'm, sorry, if I missed it and how much do you have remaining going forward.
You know, we didn't mentioned it but I can pull it up for you. If you give me one second.
There are.
Hang on I'll get it for you in a moment here.
Think it's about.
$570 million a P. P. P were average balances.
N D.
Third quarter.
And the here. It is 507 to 72.4 that was the average P. P P balance.
In the third quarter the yield on those loans I think we did disclose that somewhere that's about 2.7%. That's the 1% state of deal plus the amortization of the premium overtime, it's about 2.7%. The total earnings on those loans with the all all of that together was about 3.8 $3.8 million of net inter.
<unk>.
Okay great.
The gym.
Don't think any of that was from fees was it.
No that that would be the quarter's worth of interest income and fee amortization that we're taking over the to your life with the P. P P loans.
Alright, so the three eight and includes the interests and the amortization is that correct. Yes, yes, yes, yeah, Okay, no accelerated amortization, so what we got it right and this is your <unk> yeah. Yeah. Yeah. We did we thought by now we'd have a whole bunch of P. B forgiveness, and we'd be rushing all that amortization forward and take any into income we didn't have any of that in the third quarter and how we don't expect any until the first half of next year.
<unk>.
Okay. So we just have to back it out of the the 2.7% yield on your average.
Your balance gonna get the again and see.
Yeah, and actually what Youre doing if we do if you do that and you can also take out the average cash balance we had a 344 million which are next to nothing that gets you a new Ernie average hurting us figure and that's how we did our coordinate come calculation.
So that's helpful.
It is and then <unk> Your C. D book you gave some good color.
Next quarter are you looking to replace that or are you looking to just let it run often going forward into 2021, given that you have all this excess liquidity.
You know, we're not looking to replace it so what we found in this environment that there's not much right seeking behavior left. He for example are 12 months C. D. Rack rate is 10 basis points right now and when D. C. DS roll off a lot of them are 12 O C. D is not all of them, but when they roll off about 60 per cent tend to roll into the rack rate.
That's probably a pretty close to the industry experience, but that's what we're seeing right now and and to be honest a lot of the ones that don't will just move into one of our savings accounts or checking account. They won't go to a C. D. They'll take it out and the deposits will stay with US just in some other form.
So our strategy for now has been to not to pursue those with higher rates and let them all over we obviously don't need the funds and and so we've been letting us rollover it rack rates and seeing quite a bit of like I said I've done that 60 per cent rollover figure.
Yeah.
Most of them yeah yeah.
Yeah, Hi. This is Mike just a reminder, we probably had a much lower percentage of C. DS heading into this pandemic then most of our peers. We had between are non interest bearing checking accounts at 25% plus and or money market rates, we had a very low cost of funds and so.
We're not chasing C DS for funding and that's another factor at play as we think about that's in those are predominantly small business deposits and middle market deposits as well. So I don't think we will have the pressure there that perhaps others might to keep the households.
Right, Yeah, if I could build on that.
Could just be able to because that Mike's comment gives me a chance to make another point going into this crisis, we had a very finely tuned balance sheet, we had because of the recent Santander branch acquisition pay down our borrowings and so the the the the balance sheet was funded really with core deposits without any borrowings that was a really good thing in a great position to be in and it was intentional we wanted to.
And you know quote unquote pay off our debts and that put us in a great position going into crisis, but what that means is we did not have high cost borrowings that we could pay that one rates fell.
And so that's been reflected in our margin actually gone forward. So that doesn't mean, we were left empty has it and we are thinking about a strategy is like I said some of the sweep accounts to move excess cash off balance sheet. We're doing all those things we can but it's important understand the nature of our balance sheet going into this crisis and what that means for us.
And and does basically most of your C. D. Both mature by the end of next year.
I think that's right I don't know if I have the exact number on that but most of this if there's 700 million left and 200 million was returning the fourth quarter most of we call within 12 months.
Or mature and 12.
Alright rollover.
And Uhm is there it's on your your security bank deposit that the extra liquidity what is there a target percentage of earning assets that you ultimately we'd like to get through once we're on the other side of this pandemic.
There isn't an official target. So the answer the answer is direct answers no. There's no official target I could tell you our general philosophy over the last five years has been to keep the.
Securities portfolio relatively stable by reinvest in cash flow and let the rest of the balance sheet grow around it such that the percentage of the balance you represented by security cell, So say five or six years ago. It would've been a a mid twenties and then here that's fallen into the mid teens and that it's actually fallen further with the addition of over half a billion a P. P. P S.
So that's been the general philosophy, so we are.
Looked like like with any other bank. So we're looking at the types of opportunities and securities and it's very difficult to get to get healed unless you reach for very long duration I will tell you that we have seen some of the larger banks that reported earnings so far in this cycle has said that there.
Purposely not investing any cash they're gonna stay in cash and they're not gonna take on that risk. We don't have that philosophy, we want to move excess cash off the balance sheet if possible, but if there's some portion of remaining excess cash we will judiciously put some of that to work we don't want to extend duration had heard ours.
Sounds too much but we <unk>. We were you have an obligation to get some mornings on that and I'll leave it on the sidelines forever.
Got it and then like this last one for me just coming out of the out of this pandemic is this profitability target that you're spiering too if we're in this lower for longer right environment.
Not an absolute put a relative part of our theme for project thrive was to come out of this is stronger institution and a top decile profitability and we've really moved our efficiency will continue to do that and really bill we have a lot more oars in the water.
On the revenue side that we did four or five years ago, I mean, Jane and the team to build a mortgage out from scratch S. P. A consumer lending we're getting traction that's such a nice counterbalance to we already have a pretty good commercial franchise. The team is doing a nice job of building a small business.
Lending in banking as an an S. B a indirect business. It's really the spreads there are growing up even though they are probably hurting or margin a little bit. They still are a creator uhm and profitable. So just the nature of the companies changed and.
And then our job geography has changed too and our business model and how we go to market line of business now regional is really creating good teamwork cross functionally uhm, which leads the deeper households, more a better cross sales are better customer satisfaction.
Our brand playing bigger in those respective communities great communities like Cincinnati, Columbus, Northern Ohio.
A rural markets Pittsburgh, So just feel like strategically you know we're moving in the right direction and I think it's important that are trends on the profitability side continue up and may have over the course of the last three or four years and although the absolute number might be lower.
Then it was prepared stomach and with the new reality would be interest rate environment relative relatively speaking, we think will farewell there.
Understood thank you'd like.
[laughter].
Thanks, Steve.
The next question comes from Frank <unk>, So I'm quite for Sandler. Please go ahead.
Hey, good morning, guys, it's actually Justin Crowley on for Frank This afternoon.
Hi, Justin.
So you know just a couple last one to hear from me. So, but you know clearly strengthen the Reggie consumer lending side, which you know we've talked about at length. At this point not something that's totally new I was wondering if you know sorta from a high level you could characterize your approach and Wayne <unk> commercial even sort of looking.
[noise] out over the immediate term not necessarily just over the next quarter, obviously as we head into your and you mentioned the shallow commercial pipeline. So I'm not sure if you.
Would put out there targeted percentage it but you've got red that you'd get to as a percentage of the whole book or how that could change as you start to see commercial day, ma'am take up over the coming quarters.
Yeah, our our philosophy has been pretty simple and that was just to have more balance between our consumer and our commercial businesses and we've achieved that and we really started that journey several years ago and we also started a journey to go for more variable to more fixed rate and more balance there as well and Fortunately we had pretty good.
Packed on that before we got cause this pandemic I mean, ideally you know.
Love to get the 50 50, I think the economy will snap snap back in our commercial will be off to the races with higher spreads.
And you know then we might have the same challenge three or four years from now, but I mean whenever the opportunity we'd like having.
A strong commercial consumer businesses and commercial our commercial was strong demand. This week. We're thankful we invested in consumer here. The last few years cause it does tend to be a bit counter cyclical and so I think it's good to have both in terms of the specific specific carpets for Reds. The mortgage uhm, we have some caps I probably won't share those with.
You're on this call, but we were pretty disciplined on the credit side in terms of the complexion of everything from a commercial real estate towards ZIP codes, and we have hard caps in terms of the amount of loans that will make 50 50 balance would be ideal and I think right now we're just.
Ooh.
Okay, great that that's really helpful. I appreciate the colored there and then sort of just bouncing off of that you know looking at fees and the mortgage banking mine item I guess as we get through this this wave of Refis you know how much will depend on.
You know that breakdown between Razee or you know the consumer and rosy versus commercial and what you decided to portfolio or or sell off so I guess, what I'm really asking is how much investment and focus would be going into the fee income side of that going forward. When you know there's not as much of an emphasis on.
Uhm holding more ready just given the lack of commercial grows within the portfolio.
Okay, I'm gonna put into the expert on this one Jane.
If I and thank you very much if if I understand the question I.
I don't think system.
Mutually exclusive we've always targeted somewhere around 60% to the balance sheet and about 40% that we sell and that's about what we're doing right now.
At any given time however.
Can we can pivot pivot quickly because we under right for sale.
So we we give ourselves a fair amount of all flexibility at the deal level.
Did I get that.
<unk>.
Yeah, No no no I appreciate that that that's helpful. And then just one last one here for me you know we've talked about at length at this point, but just on the expense side you know I appreciate the guidance or you know the helpful color looking into next year in terms of where you think things could shake out and you discuss some of these strong digital adoption metrics. So you know taking that.
You know project thrive the branch consolidation I'm looking at the consolidation you know.
From what I can tell you know when you were one of the first movers on that back in July and we've seen a number of these as of late so even from you know three months ago have you seen you know a meaningful change that would cause you to maybe take another look at the branch count or take another look at it.
Digital starter.
[noise] [noise] [noise] [noise] [noise] [noise].
[noise] [noise] [noise] [noise] [noise] Wow is frankly, they're still out [laughter].
Did I I don't know if you're caught any of that I just had a quite a bit of feedback on my line.
We we did and it was probably for about 30 to 40 seconds. So we apologize I don't know where that came from but I I figure.
I hate to ask you to repeat the question no that was all I thought it was just the <unk>.
Do you have a thought I think we cut the front end of it though.
Like I think I understood the question.
What's the what's the gist of the question on whether we've got a next wave potentially of branch consolidations on the horizon.
Yeah, I mean, I'm not like trying to pin you down and say you know when you're going to know your next branch consolidation plan, but again you were one of the first banks to proactively uhm announce one of these plans. So I was just wondering if you know as we've gone through this this pandemic and we've seen uhm consumer preferences and adoption methods of online options change you know.
That is that at least you know planted the seeds and maybe you know take another looking to ask yourself you know how useful is are all of these branches could be slimmed down.
Yeah. So so not at this time.
<unk>.
Also I think numerically went a little bit deeper and some of the other. Thanks. You know we were 25 per cent of our network.
And we think that's just about where we Wanna be was still like branches were bullish on branches lots of that consumer loan growth is coming from branches.
And so we feel really good about where we are right now and we've got a very very efficient branch network.
Got it. Thank you that was it for me I appreciate the.
Yeah, just one adjunct to James comment is you know our branches have been open.
Lobbies have been by appointment and that's been an opportunity culturally for us to do a lot of outbound, calling which is really spurred our loan growth and it's just a little paradox of cool, but we've had a lot more outreach to customers from her lobbies than ever before so I'd love Wood, that's doing in terms of building better.
<unk> sales culture, and the branch people who've been terrific anyway other questions operator.
Yes, we have a question from Joe <unk> from boating and Scattergood. Please go ahead.
Good afternoon. My question. Two first one is do you expect to generate a positive operating leverage next year given some of the challenges on the NII and been fine.
<unk>.
We do but I'll, let Jim answer that question too. She is currently putting together the budget for next year yeah.
Yeah. So some of that is still in a state of flux, but it looked at it still our goal, okay and I think that that's been our our long term plan for a long time and if we're able to hold operating costs flat and then <unk> maintain some reasonable margin and continue the trajectory in fee income that I don't have exact numbers for your next year, but that is to our long term goal.
And then another question is what do you think the best use of capital will be for next year would it be continue with buybacks or or possibly think about something more strategic on the human a front.
So we generally I think the best use of capital as organic growth.
Organic balanced growth is mic was laying out before balance between consumer and commercial lending and and then if if we have a opportunity to do the M&A that is both strategic and financial accretive that generally is preferable over buybacks, but if you're still generating excess capital and you don't have those opportunities and buybacks.
Or a viable option.
Okay.
The next question is a follow up from Steven's long from our a B C capital markets. Please go ahead.
Hey, guys just two quick follow ups just on the branch reduction.
Sorry, if I missed it have you guys Uhm what are your expectations on just the impact the deposits from that.
Ooh, Yeah, we we expect.
I think the the the branches that were consolidated uhm the deposits at risk, we thought would be less than 5% of the deposits of the company, that's mattikalli or arithmetically and we.
We feel like we can hang on to most of those in those households, most importantly, and just given the proximity of the consolidated offices.
God I appreciate that and then just Alaska, one uhm I noticed that you have 40% of your employees working from home currently at least how much do you think this would be permanent for you and to the extent that it is would that potentially just your real estate.
Trashy further.
It absolutely could we have we're really wrestling with this woodworking.
And also.
Facilities that we might sell and just getting a little leaner, we expect that 40% number perhaps to go down a bit but anybody else would it take a shot at this when we talk about it a lot I don't know that we have definitive critical path forward, but as part of our project thrive is our work for.
I'm home and a longterm real estate needs and one of the reasons. We go after branches. This year and we actually started in March even though we announced in July and so we could get the branches consolidated December before the end of the year and go into 2021 clean and that will allow us to take a look at.
Office buildings, and other things that we might clothes and consolidate and the other facilities and we do have plans for a building or two.
And do you want to add anything to that or gym.
The only thing I would add Mike is that you know I think.
I've been first of all I've been really pleased with the progress that our facilities group his made with.
Exposing real estate answered resolved branch consolidations, so that's a big win.
And because our consolidations I think we're announced earlier than some other competitors that we've got those branches to market faster. So.
That was terrific.
With respect to the you know the multi use buildings, where we've got groups of employees I think that'll be a little bit more at the edges and the reason I think that is the humans missed the other humans and.
They like working with each other at least part of the time, so we'll need to to figure out exactly how to make this work long term, but I I don't I don't think they're all going to be at home all the time.
They're getting fatigue.
Understood I appreciate that and if so it just sounds like you know down the road maybe you know the you know the end of next year. When we're through this on the other side there could be another look back at you know your real estate and.
And maybe some possible slightly at least some possible trimming down going forward Oh, absolutely, we don't let our lease redo.
Without being ruthless about it.
Alright, I appreciate that thank you I mean, I I mean, I was real estate footprint looks dramatically different today than it did five years ago six years ago seven years ago.
It's just that it was not.
I mean, it just couldn't be done all at once.
Slow and steady.
You know, we like to think we get better every year and where do we started a decade ago in terms of.
Our fee income as a percentage of our revenue our efficiency ratio of return on assets was quite different and we've had dozens of initiatives to just to get where we're at and and we're constantly changing and moving her feet and that will continue certainly Randy expenses I mean, we.
Have to produce operating leverage and earnings per share growth.
[laughter].
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Mike price for any closing remarks.
Just thank you I always say that I appreciate the partnership I appreciate when you get us in front of a prospective investors <unk>.
And and your investment in us and the feedback that we get from you both direct and indirect so thank you so much and look forward to being with a number of you over the course of the next quarter of virtually I I think thank you.
The conference has now concluded. Thank you for attending today's presentation, you may know disconnects.
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