Q3 2020 Reliant Bancorp Inc Earnings Call
[music].
Good morning, and welcome to relax Bancorp third quarter 2020 earnings Conference call. This morning's call is being recorded hosting.
Hosting the call today from Atlanta Bancorp, if the ban or junior Chairman and CEO. He is joined by Jerry Cooksey Reliant Bancorp's, Chief Financial Officer, John Wilson, Reliant Bancorp's, President and Alan Ma'am, Chief Credit Officer Upper Alliant Bank.
Please note reliant Bancorp's press release and this morning's presentation slides are available on the Investor Relations page of the company's website at Www Dot reliant bank Dot com.
At this time all participants all participants have been placed in a listen only mode. The call will be opened for questions. After the presentation.
During this call members of reliant Bancorp's management may make comments, which constitute forward looking statements within the meaning of and subject to the protections afforded by the federal Securities laws. All forward looking statements are subject to risk and uncertainties and other factors that may cause actual results and the performance or cheap.
Reliant Bank Corp to differ material materially any results performance or achievements expressed or implied by such forward looking statements. Many.
Many of such risk uncertainties and other factors are beyond <unk> bancorp's ability to control or predict and listeners are cautioned not to place undue reliance on such forward looking statements.
Because such statements speak only as of the day. They are made a more detailed description of these and other risks uncertainties and other factors contained in the Alliant Bancorp's public filings with the Securities and Exchange Commission.
Including in its most recent annual report on form 10-Q 10-K, its quarterly reports on form 10-Q, and its current reports on form 8-K.
Except as otherwise required by applicable law reliant Bank Corp, disclaims any obligation to update or revise any forward looking statements made during this call whether as a result of new information future events or otherwise.
I would also refer you to page one of the presentation sites for a disclaimer regarding forward looking statements non-GAAP financial measures and other information I would now like to turn the presentation over to Mr. art reliant Bancorps chairman and CEO.
Good morning, and thanks for joining us for our third quarter earnings call, but.
To begin let's say just a minute to remember all those who have been impacted by the code with my team and determine which.
The challenges our society and economy, there been cool fail.
We're seeing encouraging signs of recovery, particularly in middle, Tennessee and Chattanooga.
Our company remains strong and our dedicated and talented team is working hard to do what we can to contribute to the recovery efforts.
National has again shown with resiliency and continuing to be one of the more robust economies in the nation.
Important strength is evident in the steady employment afforded by Fort Campbell, Austin for University and others.
Right, but to be a part of the economic story for each of our markets.
Given the challenges we just mentioned is particularly rewarding to announce that our team produced another outstanding quarter.
Results of the third quarter summarized on page five of our presentation.
Substantial synergies, we anticipated them through mergers completed earlier this year are being proven out.
Revenue enhancements and cost savings realized as expected.
Net interest income for the company in the third quarter was $30.5 million.
The 1.9% increase over the second quarter this year.
In a 117% increase over the third quarter 2019.
The improvement versus the prior quarter attributable to lower interest expense and funding costs.
Great improvements in our deposit mix and higher interest income.
Offset slightly by some modest compression in our loan yields.
Our loan yield included $3.9 million of purchase accounting accretion during third quarter.
I'm from $5.2 million in the second quarter, principally due to fewer loan pay offs.
It was all for these changes was a four basis point decline in our net interest margin.
Voting purchase accounting accretion our core net interest margin increased by 17 basis points to 3.98% in the third quarter driven by attractive loan yields on new production lower deposit costs and an improved funding mix.
Loan demand rebounded in the third quarter with $260.3 million in new loan commitments closed during the quarter at a weighted average rate of 4.38%.
Deposit growth also continued to remain strong with significant increases in money market and checking accounts.
Non interest bearing deposits as a percent of total deposits grew to 21% at the end of the third quarter.
Cost of deposits declined 17 basis points inventories border.
We did see additional opportunities to lower costs in the fourth quarter and beyond.
Finally asset quality remains sound once again, we had no net charge offs in the quarter and non.
Nonperforming assets decreased 16% from the linked quarter.
Our allowance for loan losses provided the 292% coverage of nonperforming loans at quarter end.
No $1.5 million loan loss provision reflects what we believe is stabilization of the loan portfolio. The uncertainties surrounding risk factors related to the COVID-19 pandemic start to wane.
We've seen a significant drop off in request for loan modifications as you'll hear later from our Chief Credit Officer, Alan Ma'am.
These temporary panda any relief efforts largely ended in the third quarter, while the extent of perpetual credit losses absent things relief efforts remain somewhat uncertain and likely will until the first half of 2021.
We believe the allowance for loan losses adequately reflects our loss exposure.
I'd now like to turn the call over to Gerry Cooksey, Our Chief Financial Officer for a detailed look at our financial results Gary. Thank you, Dan and good morning, everyone.
Van said, we had another another very solid quarter it you'll see as I take you through the numbers.
Moving to the financial results table on page five of the earnings presentation third quarter 2014, net income was $11.5 million or 69 cents per diluted common share.
Net income included three large non core items that had a material effect on an overall excellent third quarter.
First purchase accounting accretion was $3.9 million for the quarter with 995000 of that attributable to early payoffs of acquired loans you may.
You may know the purchase accounting accretion from payoffs was well below the $2.5 million earned in the second quarter. As we noted in our second quarter earnings call. We had anticipated the payoff will slow down in the third quarter.
Contribution to earnings per share net of taxes was approximately 18 cents.
Second.
<unk> expenses were only $78000 for the quarter as compared to $2.6 million in the second quarter.
Third provision expense was 1.5 million for the third quarter substantially lower than the second quarter as the uncertainty around the risk factors related to the COVID-19 endemic began to come in to into clear focus.
Pretax pre provision third quarter fee income for the bank segment was $15.9 million.
Our calculation of pretax pre provision income for the bank segment and a comparison to prior periods is provided on page six of the earnings presentation.
Let's move to page seven and look at the performance of our Bank segment is now.
As noted in the opening comments the third quarter adjusted net interest margin was 3.98% an increase of 17 basis points from the linked quarter.
The margin expansion is the result of continued improvement in our deposit rate, which declined 17 basis points for the quarter offset slightly by a decrease in the earning asset yield principally in the loan portfolio, where yields fell 34 basis points, mainly due to lower purchase accounting accretion from paid off one.
Our noninterest bearing deposits continue to expand in the third quarter, reaching 21% of all deposits at September 32020.
Turning to page eight our deposit portfolio continued to trend upward in the third quarter. Following the mergers in the first and second quarter.
Our deposit portfolio total total $2.6 billion at September 32020.
And it's growing at a CAGR of 38.1% since 2016.
As shown on the right side of the page.
Yeah. We have also had continued success at reducing our use of wholesale deposit although.
Although they take higher at September 32020, wholesale deposits [laughter] very modest levels overall.
Let's move to page nine and look at our loan portfolio.
<unk> totaled $2.4 billion at September 32020, an increase of $40.5 million over the linked quarter or 7% annualized growth rate, which is a reflection of the rebounding economies in our markets.
Given the difficult environment, because then it back over 19, we are encouraged by the continued growth.
Our robust pipeline in over $450 million and prove lines of credit sets. The stage for further expansion of our market share in this in the coming quarters.
Moving to the right size the page the yield on loans held for investment decreased 25 basis points to 5.73% for the third quarter. The decrease is due almost entirely to lower purchase accounting accretion from paid off loans.
Core loan yield declining by only four basis points from the linked quarter.
Turning to page 10 capital ratios continued to meet the definition of a well capitalized financial institution in a bit.
And available liquidity remains adequate to fund our company our capital.
Our capital ratios continued to improve despite the economic uncertainty caused by the pandemic and we remain very comfortable with our capital liquidity and reserve levels.
Finally on page 11, we present several measures of shareholder value.
As mentioned earlier in my comments tangible book value per share improved in the third quarter. Following our two transactions earlier in 2020.
We ended the third quarter at $14 and 65, and a 4.9% increase from the linked quarter due to strong net income and a linked quarter AOCI a increase of $1.4 million.
We believe we can continue driving shareholder value through earnings answer building tangible book value.
I will now turn the presentation over to Alan Ma'am, Chief Credit officer for his perspective on our loan portfolio and credit metrics.
Thanks, Gerry and good morning, I'll begin my comments on page 12 of the presentation. We continue to report strong credit metrics nonperforming assets declined 15.9% during the quarter and pass to use continues to be minimal and well control similar to the second quarter. We further strengthened our allowance position through.
Our normal provisioning process and with an eye to continuing concerns arising from Mcos 19 pandemic, we reported another.
We reported no net charge offs for the quarter and $40 million or 1.75% and loan growth. Therefore, nearly the entire provision of 1.5 million was attributable to COVID-19 concerns, notably we continue to compute our allowance level based on the incurred loss methodology as we're not required to adopt.
Cecil until 2023.
While we have seen some improvement in another in national and local economic conditions concerns remain muted reopening plans and continued increases in bars cases reported right.
We actively monitor market conditions and will respond in our allowance methodology as appropriate with.
With this quarters provision level.
Allowance reached 84 basis points of total loans held for investment it's important to note that purchase accounting rules require the acquired loan portfolios be valued at their fair value, which makes the allowance to loans ratio peer low.
However, when an accretive purchase discounts are considered total reserve for credit wells becomes 1.64% and 1.72% excluding PPP loans at quarter end, we feel that we have adequately provided for possible losses.
For informational purposes. We've included slides 14, and 15 for segments, we view as having increased risk during the COVID-19 pandemic. We included details of our hospitality and retail CRT portfolios to highlight the strength included in age I would.
I would also like to update our continuing efforts to provide much needed assistance to our customers. During this unprecedented time.
As you will note on page 16 of the presentation. We provided initial payment relieved to over 20% of our portfolio either in principle deferment or full payment deferrals for up to a 90 day period those approvals were granted liberally per.
For regulatory guidance for a second modification requests we performed a much more detailed level of due diligence to confirm abella business need for those requests as shown in the second column. Aside 16, we granted far fewer second modification requests and generally generally with less concessions such as allowing the customer to.
So the interest payments rather than pull deferrals are granting deferrals for only a month rather than full 90 day period first.
Third the second round of modification request in particular, we've also been glut paying close attention to assess there's not been a mere material decline in borrowers financial condition Importantly for September Thirtyth will have only one bar were downgraded as a result of those enhanced reviews at quarter end modified loans.
That's only 93 basis points of all loans finally, I'd like to update our PBP loan program throughout both rounds of funding for the program. We were able to serve 894 small businesses in our market was $83.3 million in fundings.
We've begun submission of select forgiveness request to the us be a better.
But as with other banks, we have not yet been given decisions on those loans today. The Treasury Department recently recently granted relief for some of our small business customers through streamlined or automatic forgiveness of loans or $50000 or less which covers 63% of our PBP loan customers. We remain hopeful that Congress will increase.
That relief to apply to all PPP loans of 150000 or less if passed 86% of our PBP customers would qualify.
Thank you I'll now turn the presentation over to demand for his final closing comments.
Thanks, Alan I want to conclude my comments. This morning by reviewing our 2020 strategy, which was found on page 17 of our presentation.
And as with most companies it's been adapted to manage through the challenges presented by the Coca 19 pandemic.
First our board of directors and management team firmly committed to making the right decisions.
Next our employees customers communities and shareholders.
It also includes supporting our customers with loans based on sound underwriting but.
Protecting our capital and being proactive in reducing discretionary spending.
Second we believe current economic conditions will create opportunity for strategic acquisitions, although due diligence will be even more comprehensive and credit focused we do.
We demonstrated our ability to identify execute and successfully integrate value enhancing acquisitions, we remain on the lookout for potential partners.
With our size in emerging geographies, we've targeted which we think we can be a great partner for banks.
Permanent it's time to pursue a sale as a way of creating value for their shareholders.
Third maintaining our track record of consistent organic earning asset growth is critical to our long term success and that.
And that comes from building lasting relationships with customers in our markets.
Buying loans are participating in syndicated credits we excel.
We expect loan growth to be slower in 2020 than our prior forecast.
I believe the relationships our bankers have built will continue to result in high quality balance sheet growth and 2021.
Our recent acquisitions of community Bank and trust in first advantage bank.
Open new markets for us, including the attractive Clarksville in essay and those markets have performed well through this challenging period.
Our legacy markets have also started to rebound and we're seeing an increase in loan demand outside the PPP loan program.
We expect that that demand to accelerate as the national economy continues to recover.
As we look for additional growth opportunities talent acquisition and retention remain top priorities.
In June we remained a top workplace by the Tennessean newspaper one of them.
One of only two local banks on the list, which we believe is a testament to the strong culture at our company.
I'm very proud of how our employees have pulled together during the pandemic they've risen to the challenge of servicing our customers and building relationships and.
Very tough environment.
Our team has shown strong adaptability and endurance.
So not just two mergers in the span of three months, but also in adopting new ways of doing business to respond to the challenges of COVID-19, there was.
The results show and the strong earnings asset quality capital and liquidity levels reported in this presentation.
Operator that concludes my remarks, this morning, and we are ready to take questions.
Thank you Sir we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Graham deck with Piper Sandler. Please go ahead.
Hey, guys good morning.
Morning Graham.
So I was just wanting to get some more color on the core NIM trends going forward.
Specifically on the deposit side of things.
You guys have a level you'd like to work.
Total deposit cost down to you.
What do you think would be the driving forces of that maybe CD repricing or or continue to work on customer accounts.
Yeah, Graham I think it was they would certainly be a combination of the two we do have.
Additional opportunities to cut deposit costs and in the fourth quarter, we've got.
Still got some old promotional Cds that are rolling over not nearly what we saw in the last couple of quarters we've been.
We've been kind of.
Kind of slow I guess, a measured as well in reducing money market.
Rates.
I think we got a little room to lower those again, especially with what's going on in the market.
Wholesale funding right now for us or in the 15 to 20 basis point range. So there's there's definitely some room for a little bit more.
Okay squeeze out of deposit costs as we go forward you know I'd, probably look at anything less than about 50 basis points in the interest bearing deposit category as being up you know.
Good place for us to be so no OEM with some stable stabilization in loan yields. So we think Weve got room for you know another five basis points or so in our net interest margin in the fourth quarter.
Great that's super helpful.
And I guess moving on to credit spreads.
Great story has been really solid lately two straight quarters of net recoveries I'm in a fair amount of loss protection. When you include that 19 million remaining remarks.
Just just want to know maybe how you're thinking about the timing of any charge offs that might come as a result of kobin.
Does it seem like a mid 21 event and how do you factor in the level of government stimulus into that assumption.
Alan you want to take that now.
We don't have anything that has really done a rhythm to the level of I guess overly.
Starting as far as any of the loans.
Especially in any of our higher risk segments, just due to coated.
I believe that there's going to be any kind of charge offs or or or any kind of modifications to those loans from a principal standpoint, it would be sometime in 2021. If you know cases consist continue.
Reopening plans or you know the.
You know the real reopening that we've seen even continues to slow or backpedaled from here. So.
I think it would be that it would be out of some.
Some good time in 2021, I also think that.
You know should should there continue to see these increasing cases that actually causes a pullback in the economy. I think there is going to have to be some additional stimulus and I believe the stimulus would then.
Support where our businesses.
Businesses have been just over the first round and I think what we would continue to say our losses pushed out or possibly not happened because of the you know the additional funding that has been granted especially through.
Programs, such as the PPP loan program.
Great. That's really helpful. That's all from me I'll hop back into queue and congrats on a great quarter. Thanks.
Thanks Graham.
The next question comes from Omar Samalot with Raymond James. Please go ahead.
Hi, Good morning, Omar Hey, Hocol.
Yes.
But can you talk a little bit about the manufactured housing business I think last time, we spoke the business seems to be holding up relatively well earlier on in the pandemic.
You know what are you hearing from your clients in these communities and have you seen any signs of stress.
I'm like John Wilson take that one since manufactured housing reports up to him, but we continue to be very pleased with the performance of that whole group.
There you know the real close at what they do we're continuing to see some good production up there with.
Frankly with credit costs that are.
I'm pretty much in line with what we're looking at the rest of the bank with John can probably expand a little bit on what we're hearing from customers in some of the different markets that we're in Ah, yes, or how are you today.
Great. Thank you.
So in talking with our manufactured housing group. The band comments are spot on and I continue to see a very strong application process coming in from their dealers Oh.
This pull through rate has continued to be strong loan yields have had some downward pressure, but not in the same ranges that we're seeing in the commercial banking side of it and the addition.
Addition, or growth in the portfolio has been considered a month over month basis. There. So outlook for the remainder years were going into a quarter that generally they see some slowing down.
Whether it's weather or holidays, but their application pipeline. It feels very solid and they are encouraged that going into 2021. It will continue to be a really viable option for individuals in the markets that are serving to you know.
I guess acquired their family homes.
But very affordable and their credit history.
Great a history for the MH group that is then what we view is below industry standards, they've had a real strong.
Lower past due ratio 30 day past dues and most of their peers.
So I'm all I'll just add you know real quick two week John mentioned the yields are are down a little bit. We obviously had to adjust pricing as a you know the.
Rental rate scenario has moved down still with the production. We've got so far this quarter were running a little bit north of 8% on a weighted average basis. So.
You know very very strong yield low losses low pass throughs.
I mean, that's that's a that's a business model that we really like and we're giving them all the support we can.
Okay, No that's really encouraging commentary thank you.
Demand, maybe bigger picture as we begin to hopefully exit this crisis and you touched on this in your remarks a bit.
You know what is the appetite for M&A and have you been actively having conversations with partners and if so how those conversations evolved over the last few months.
I have had some.
You know fairly regular conversations M or it's been.
No really it's been kind of more of a check in right. Now how are you doing share in earnings release is just making sure that you know the lines in the right place in the water and.
You know.
I would say it isn't if you want to define active is something that is progressing.
Progressing towards getting a deal done probably none of that is going on there has been going on for us.
I do think there is still a good bit of.
Internal focus a lot of small banks and making sure that they're taking care of their customers that they're not getting into trouble with loan losses themselves. So.
I would expect that to probably turn sometime in the fourth quarter first quarter next year I don't know that you would see a deal announced out of us before the end of the first quarter.
We still have if you if you think about what we said is desirable for us in terms of geography and size and we still have a couple of dozen.
Good prospects in that geographic territory and a win win.
You know when when some of the dynamics that are causing all banks to kind of look at their business model start playing out we expect to see more interest in terms of.
Potential partners for us So I would say first quarter wait maybe early second quarter due diligence is going to be it's going to be a real challenge unless we can get in and do it the way we've done it in the past, but remote due diligence or you know doing it when you're not face to face and can't talk to the people is certainly going to be a challenge.
No that makes sense.
It will stay tuned there thanks.
Thanks for taking my question guys. That's it from me congrats on what was a strong quarter.
Thanks Omar.
The next question will be from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Good morning, Kevin.
Hey, Dan how are you I hope everyone is doing well this morning.
Absolutely, but how about you.
I'm exhausted, but try try to get through its Friday I'm so that.
So that we're working through first week of earnings.
So I just want to clarify on the on the margin commentary so.
In terms of Ah when you mentioned.
Possibly five basis points or sub expansion, you're talking about the core margin I assume the 398, and then curious how we should view the purchase accounting.
Adjustments I know it came down from the very elevated level last quarter, but it's still quite elevated from where it's been historically so how should we how should we look at the core margin and the P.A. separately. Thanks, Yes. So Kevin I mean, you have what I focus on is the core margin the gap.
Margin is going to be it's probably going to bounce around for a little bit as you saw we had.
A good bit lower accretion in this third quarter than we did in the second quarter.
But with our.
With our core net interest margin, which is the one that's going to last you know through the through the cycle. We had a nice increase in the in the third quarter 398 is kind of what I look at is our real margin.
I'm, a little bit difficult to say, what the accretion number will be for the four quarter. My guess is we saw a.
The decline in the third quarter, probably see some in the fourth quarter, but even if you strip out the.
You know the impact of the loan payoffs will have what Jerry what would our kind of our core accretion number be for 500000.
I mean, assuming we didn't get any pay offs. It's a good it's a good bit lower Kevin.
No that that's in the right range, so still in kind of the core number for us in terms of accretion care of them to be in that four to $500000 range, if we don't get paydowns or payoffs or anything like that.
Okay. So that was so so these past two quarters, we've really had a very accelerated pace of these pay downs and it's it's a tough thing to forecast model, what that's going to be but maybe it's reasonable to laddered that down and start working toward the scheduled based on the 500000.
Or so okay.
Well actually I know, but but but but when I when I talk about when our team talks about our net interest margin.
Well again, the only thing that matters to me is the core net interest margin. If we can improve that by another five or six basis points and you know have another good quarter in terms of loan growth you know you'll.
We'll see that in our results.
Got it got it okay and.
Just wanted to clarify on loan growth and loan pipelines. It sounded like it was fairly positive upbeat commentary on the pipelines at the rebounding.
But I, but at the same time.
Good day, and I thought you mentioned about growth was going to slow I don't I don't know if that was just seasonal related the fourth quarter or if that was going into 2021, what you meant there.
Yeah. So you know typically for us.
Kevin the fourth quarter, and the first quarter, a little bit slow and in terms of loan growth.
Loan growth and new loan production you know, we we are a significant player.
A significant player in the one to four family closed.
Residential construction business here in Middle Tennessee that is actually stayed very strong even as we moved into the fourth quarter, but construction typically slows down in the you know the fourth quarter and then the first quarter is really kind of a weather related.
But having said that.
You look at what we produced in the third quarter.
$260 million, a good bit of that did not.
Actually fund at the time it was close and so we expect to see some you know some funding out of that going forward same left over from the you know the second quarter, we got a significant amount of kind of clothes dam construction loans that will be funding up over the next two to three quarters.
The pipeline in our pipeline is probably about as good as it's been the challenge, we see and you know I could kind of take you back through the third quarter as well, there's there's some significant projects in that pipeline that I think our customers our borrowers are still trying.
Still trying to decide that we want to go ahead, you know may have a deal that's already approved it just didnt closed or do we want to wait until after the election or we get into the first quarter and see what the economy's doing so [laughter] pandemic is made managing on our our pipeline and forecasting what loans are going to be a little bit.
More of a challenge, but we still feel like based on everything I. Just mentioned were you know kind of in the 5% to 10% annualized range in the fourth quarter.
And next year little early to tell but you know we have been able to grow loans, 15% plus in a in a in a.
In a very healthy economy, if we get back to that point, I'd say, a little bit better loan growth I'm just not expecting.
That level in 2021.
Hope that helps.
Okay.
Yes.
Dan that's very helpful.
Just.
Perhaps one just clarifying question or a couple of clarifying questions. The slide 16 the point.
0.93% of loans that there's been second modification requests I just want to clarify that.
That's the remaining total of total modifications at this point or are there still first first period modifications that happened expired yet.
<unk>.
Oh, let Alan take that once again like Kevin now they have the.
The 0.93 is what is active right now all of the first rail modifications you know we kept them short.
So they were all that at 90 days or less and all of those have rolled off the majority of that of the fairly substantial number has returned to the normal payment stream.
We've had you know a few of those even post no.
930, we had a one of the large hotel properties have rolled off from its extension or as modification that was a $13 million alone. So you know they continue to roll off and expire we have some of those that will go through a mid to late November and then.
All of this like at round.
Modifications will have played out as well.
So if I could just ask so.
How are you all treating these former or current modification loans in terms of your internal classification. So have you. Some banks have talked about taking a lot of choice.
Think of hotels and credits and putting them to at least watch.
Category and some have moved into [noise] special mention and just wondering how much as we start we start going deeper into the cycle I would expect to see more.
Movement or migration into that traditional classification chain and just wondering how you guys are treating that now.
From our first then and really our second modification request the second more so than first.
We look really hard at the financials that were presented so from a first round, we didn't do any any downgrades.
Have any of those credits in the second round, we've looked at financially and the projects at owners and guarantors sponsors et cetera to.
To really to determine a business made for a secondary modification and if we approve those if the business still look like it was about.
It was viable they had strong a strong operating metrics going in and they saved some improvement, but it might not have gotten back to the level, where they were able to say to go back to a full payment schedule.
Schedule.
Even with the say hotels, we move those into interest only but we didn't downgrade those but we looked at the ones that as we were considering them. If those were really weaker financially going into it than we might have a downgrade on that but we we looked at those from a credit standpoint.
Not really just because we did a modification you know just due to the nature of the circumstances surrounding the pandemic.
We we don't I don't believe that that's necessarily a kohl's for a downgrade.
I think if we see these coming out and we continue to see that.
Deteriorated performance and challenges, where they're not going to be able to meet that.
Debt service requirements, and then I think that's when we have to make those decisions and those downgrades and we're watching those.
For the most part all the time, we were especially with our hotel customers were staying in pretty high.
And pretty close contact with them getting updated star reports earnings reports from them.
And.
If you look at our separate slides for hospitality, you'll see that we've got a fairly low leverage overall.
Good debt service coverage as we went into the pandemic.
And a lot of those are getting back to.
60% occupancy levels and in our discussions with them right now we're actually hearing that they're able to show you know some limited profitability, but profitability Nonetheless, even at the levels, where they are operating now and I think that's you know indicative of our strong.
Strong underwriting of those on the front end and so that kind of is how can they form a opinion of whether we needed the downgrade just on the wholesale basis.
A lot of those just because.
The earnings challenges as they've seen thus far I think if we can.
If we continue to see that as as we move forward them certainly will begin the process of downgrading in assessing our overall.
Our overall risk the one that we did downgrade to smaller loan we downgraded because.
All of the the store report that we got on that when you indicated that all of its peer group head.
Had really return to.
Somewhat normal levels of occupancy and our customer was about half that level and so we.
So we think it was more of an operator issue than it was just the the industry itself or that peer group.
So we made that downgrade and.
We're still making their payments right now by the way but.
We we you know we think there's some additional risk in that when the rest of them. At this time, we don't think its its worthy of of a wholesale downgrade. So you know long answer to say, we've we've really not done that to this point.
Okay. Thanks, very much guys appreciate it.
Hi, Kevin.
The next question will come from setting strictly with Janney Montgomery Scott. Please go ahead.
Hi, good morning, guys.
Let's just one day, so it's great to see the mortgage company reach profitability this quarter.
Do you expect that to continue with the strong mortgage market and then what are you seeing in the mortgage pipeline going forward.
Oh, Yeah. It was it was gratifying to me to see the profitability in the third quarter.
You know profitability for us in the third quarter driven by a couple of different things Dave One is Ah. This retail production you know we are in a.
Kind of a boom period, I guess for the mortgage business with rates, where they are so re fi activity has been ER has been really strong I think in the third quarter about 60%, though of of our retail production was.
Was where you find the other 40% was was new purchase or purchase money type mortgages and that's the reason I think that's key is because nashville's residential construction market has stayed very very strong all year. So we would expect the re fi activity to slow down as you know as we continue.
Given the current rate environment, but what you really want to do is you want to be able to put a mortgage loans on the books that are.
You know that our purchase money that you know real.
Reflect really more of what's going on in the local economy. So that was a big plus big increase in the third quarter in terms of.
Both closings and sales out of the retail part of the portfolio, probably the bigger story, though in the third quarter for US was the correspondent channel, we had kind of gotten or the <unk>. The sales it had slowed down and backed up in the capital markets froze up earlier in the year and as people with.
And institutions have gone out looking for yield.
Those markets open back up and we had some big sales out of the correspondent portfolio in the third.
In the third quarter I do think that we will continue in the fourth quarter I think retail will continue as well I would expect another profit.
In the fourth quarter all but.
Albeit it might be a little bit slower in terms of Ah you know new volume are going up.
Going much further out after that so that's a little bit hard to say it looks like our correspondent channel is doing well and will last well into the first second quarters next year, but it was.
But you know as everybody knows the the mortgage business has got some cyclicality to it and depending on what the economy does depending on what comes out of the election. You know, we'll just have to see what impact that has on the on our mortgage business, but at this point I'd say very positive on correspondent and positive.
On new business or purchase money mortgage lending into the first and second quarter next year.
[laughter] got it thanks to the end.
And then I guess just one other question. So it sounds like you guys haven't necessarily seen forgiveness, yet on the PPP loans, but.
Any idea what what are you all's expectations going forward kind of into the fourth quarter and 2021, I'm just kind of percentage forgiveness I know, it's hard to tell Wes you know stuff bouncing up and been bouncing around Congress for a couple of months now on kind of a blanket forgiveness, but absent that what are you guys thinking.
HM take down yeah.
We you have we've been kind of a slow steady and really kind of rolling that out we've gone to our larger customers at this point I'll sit links.
Sit links and we've had I think 12 forgiveness applications have been completed said two S. B, a and we've not gotten a decision on any of those yet.
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We are going to start moving more of that forget this piece into the.
Really the 50000 to 50000 up we still don't kind of hold on to the under Fiftys or right now the under 50 and really start letting those move pretty quickly.
But I think all of our forgiveness will start really kind of taken place and you know sometime in next year, probably second or third quarter. When we see the numbers really start appreciably moving.
And you know how all of that if we were to get some additional.
Simplification for $150000 and below I think he would say that that level run pretty quick enough a lot of our customer base not quite as much of our dollar amount, but oh, we still wait own some additional rules as.
And you know that seems to be a moving target with this program. Overall, so we're hopeful that we're hopeful that they'll they'll do what we think is the right thing which is.
First the 150000 below so that those people didn't really work.
Worry about running their businesses rather than trying to gather the reams of paper that SP, a treasury or looking for right now.
Got it thanks sound. So if we if we model maybe five or 10% in the fourth quarter that would be conservative enough that you know it.
Might be somewhere in the ballpark is is that right.
That would.
Probably so if we can give them decisions, but does have been sitting out there for a while and weve gotten.
Really no decisions from those as of yet so I wouldn't I wouldn't expect that the SB eight number.
Ramp it up and really start.
Doing a lot of stuff quickly based on what we've seen thus far.
Got it thanks, so much for taking my questions guys.
Thanks, Dave.
Once again, if you have a question. Please press Star then one.
The next question will come from Stuart lots with KBW. Please go ahead.
Well I'm still learning.
Well go on to that.
Good good.
So here.
I guess most of my questions have been asked but if we if we can turn to expenses pretty quickly.
Gary.
It looks like the cost saves from the deals. The recent deals really came through this quarter.
At the bank level.
Thinking about a run rate.
Going into fourth quarter, I'm calculating about $16.1 million.
That.
Is there anything that is going to drive that a little bit higher in terms of.
In terms of seasonality around comp.
Set up a good way to think about the expenses.
Yeah, I think you're pretty well on track.
We do have.
We got some seasonality is just like everybody does where we're trying to true up certain expenses for year end.
But we're tracking.
We're tracking non interest expense.
Maybe up.
2% for the quarter fourth quarter versus third quarter. So it's going to be relatively flat just a little bit of an uptick perhaps based on our internal forecasts.
Okay.
Okay.
So you know with the system conversion most of the expenses are the cost saves are already in that run rate board.
Spirit any additional.
Synergies in the fourth quarter.
Yeah, we've got a few contracts that were trying to unwind that like data processing circuitry a contract.
Uh huh.
There are a couple of smaller.
Smaller vendors that.
You know that he just couldn't cut them off until the fourth quarter. So we'll have a few additional savings on the contract side, but Uh huh.
The vast majority of those have been cut off at this point.
Got it.
Hey, Hey, Ah Stewart.
Yes.
And just real quick add on you know in our earnings release, we always show Uh Huh.
Segment report so you can look at the NIH, both from the bank and from the mortgage company separately.
And I think we'll probably come in fairly flat, Jerry mentioned, 2% somewhere between zero and 2% at the bank level.
The mortgage and I was a little bit harder to project goes a lot of it's based on conditions that are on and.
And those are going to.
Those are going to be you know high when we.
When we were getting a lot of production and lower <unk>. When we're not so just just kind of keep that in mind, we look at both ways. Both at the at the bank level and at the mortgage level.
Okay. Yeah, sorry, My question was around just around the bank level Yep.
Great answer and then.
No one has kind of a crystal ball.
The political landscape is going to look like but.
But as you guys go through your budget process and thinking about next year and the possibility of higher taxes, given your book of tax credits on it.
Are you guys kind of how are you thinking.
How are you thinking about the possible.
Possibility of a higher tax rate next year affecting that book of business. Given your you know your tax rates already pretty well.
Well below peers.
Yeah. So we are we have forecast just to see what the impact would be for a tax rate increase.
Really I I've modeled two different scenarios, one would be 28%, which I think would be a rather.
A dramatic increase and honestly I don't.
Necessarily believe that we're going to see this implemented in 2021, but you know that that are going to be prepared should it happen but.
You know in a scenario of a 28% increase.
Or 28% right, rather Oh, we see our income drop about 8.7%.
[noise], if it's the more likely right at least in my.
At least in my opinion a 25%.
That would be about a 4.97%.
A drop in net income.
That taking account like.
I guess from you know from a tax rate standpoint would you pursue more strategies around.
Around tax credits or is that just kind of static.
You plug it in and that's it.
That's a static maybe you get when you get into the strategy I think we've always been open to looking at different activities that might generate tax credits.
Exactly add one relatively recently that we were taking a serious look at so it's definitely on the table at all times.
That's super helpful that does it for me thanks, guys.
Ladies and gentlemen, this concludes our question and answer session.
I'd like to turn the conference back over to Japan hard for any closing remarks.
Okay, Yeah, I don't have any more remarks appreciate everybody joining us today and.
Look forward to seeing you again in the first quarter I'm feel free to call us. If we can do anything for a green bites online appreciate what well call the meeting adjourned.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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