Q3 2020 Enterprise Financial Services Corp Earnings Call
Good day and welcome to the E. S. C earnings Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to Jim Lally, President and CEO. Please go ahead.
Well, Thank you Ryan and thank you all very much for joining us this morning, and welcome to our Twentytwenty third quarter earnings call.
Joining me this morning is Keene Turner yeah.
He sees chief financial and Chief operating Officer.
Scott Goodman, President of Enterprise Bank and trust.
Bobby our company's Chief Credit Officer.
Before we begin I would like to remind everybody on the call.
Oh, the release and accompanying presentation can be found on our website.
The presentation and earnings release were furnished on form 8-K yesterday.
Please refer to slide two of the presentation titled forward looking statements.
Most recent 10-K and 10-Q for reasons why actual results may vary from any forward looking statements we make today.
Overall, the third quarter represented another solid quarter for our company.
On a fully diluted basis, yes, I see earned 68 cents per share and reported a net income for the quarter of $18 million on a pretax pre provision basis.
Net income was $38 million, yielding pretax using our way of 1.81%.
Which is relatively consistent with what we reported in the second quarter.
These strong earnings allowed us to continue to build our capital position.
Even with the elevated provision for credit losses 930, the ratio of tangible common equity to tangible assets stood at 7.99%.
I wanted to just Super Triple Pete this increased to 8.89%.
He will get into the details around margins in our rationale for the provision expense.
Just wanted to comment that we are preparing the company for a pro.
Prolonged low and flat interest rate environment.
Ill and maximizing our returns on invested in people and technology will be key.
Furthermore, we believe that we are still in the early stages of this current credit cycle.
And we will use our strong earnings profile to what we built our allowance for credit losses in light of this.
This does not mean that growth is not a focus for us because it is.
More than ever we have to be consistent in our credit process and.
Well to take advantage of others, who will not be.
We ended the quarter with three primary focus is first we wanted to continue working diligently on the loan portfolio to ensure that we focused on the high risk industries.
Customers to mitigate the impact of further deterioration while identifying other potential issues on specific credits not within these industries.
As you will hear from dogs, and evidenced by our asset quality statistics and feel very good about the current state of the portfolio.
Secondly, when she would change the needs of our clients worked Friday and make sure that they have all the tools and capital to maximize the opportunities that lie ahead of that.
This includes working closely with the several hundred new clients acquired through Triple B.
I was going to spend some time in his comments on our process and successes.
Okay.
And finally went to heighten our focus on growing and reloading the loan pipeline.
Obviously, the balance between credit quality and pricing needs to be strong with.
The desire to grow.
This is something we've been we've managed well and our company over the years. So I feel very confident in our efforts and you will hear some encouraging trends.
From Scott regarding this.
In addition to all of this we announced the acquisition of sequels Commerce Bank Holdings back in early August.
As we discussed back then this combination considerably improves both sides of our balance sheet.
Other than 10% accretive to earnings in 2022, and further de risk our company in a myriad of ways we have.
We have received FDIC approval, a waiver from the federal reserve and anticipate other necessary approval shortly and plans to proceed towards the close later in the fourth quarter.
Having now worked more more closely with the chico's team over the last month and a half preparing for integration I can tell you that the quality of the business and the upside of this combination is exactly what we thought it was when we last spoke to you about this.
Before I hand, the call off to Scott I would like to call your attention to our areas of focus on slide four.
Looks a little bit like more of the same flawless execution of these areas will put us on solid footing to accomplish both our near and long term goals. Furthermore, all of these areas play to the strengths of our company, which gives me further confidence in our ability to succeed.
I would now like to call the turnovers I'd like to now turn the call over to Scott Goodwin Scott.
Thank you Jim and good morning, everybody.
The loan portfolio, which is highlighted on slide number six was relatively stable in Q3.
With balances posting a minor decline of less than 1% from the prior quarter.
In general relatively solid production was offset by continued declines in line of credit usage and some commercial real estate related pay offs.
While loan demand from private business is somewhat soft given economic uncertainties. Our team continues to drive consistent organic activity through stable demand in our specialized businesses.
Proactive calling on new relationships.
Production in Q3 was roughly 85% of historical averages.
With an upward trend, which saw September production above monthly averages.
Hey offs in general are at levels below historical norms and are mainly concentrated in the CRT category.
Relating to refinancing into long term secondary market fixed rate structures.
Behavior, we witnessed during Q2, which resulted in a steep production to line of credit usage continued into Q3 with.
With pay downs outpacing advances.
As businesses continue to de leverage and build cash balances.
Looking at the loan categories, which are outlined on slide seven and eight.
The change in the books net of Triple T represents loan activity most prevalent in the Cnine investors theory and tax credit distances. However.
However, the aforementioned pay off activity cycle not growth in CRT for the quarter.
As we discussed last quarter our sales.
Our sales activities and 2020 have been focused on leveraging our outstanding results with the Triple play programs, which is illustrated on slide number nine.
Through an internally let process, we were able to find over 3800 companies across all of our markets, including all of our existing clients, who fully applied as well.
As well as over 709 clients.
Contributing to our success and see Eni this quarter, we have since developed a robust sales and marketing campaign, which has.
Which has to date converted two thirds of these new businesses to clients, including.
Including new loans operating accounts and six figures of new Annuitized fee income.
This same process also places higher focus on deepening relationships with existing clients.
Value added areas, such as Treasury management card programs private banking and wealth.
And as we now progress into the forgiveness sales for Triple Pete We continue to take an advisory based approach to these conversations arming our sales teams with continually updated program information which is.
Which enabled them to build trust and provide value added consultation to our clients.
Doug will touch further on the forgiveness process in his comments.
The loan portfolio is further broken out by business unit industry and product type on slides 10 and 11.
And generally reflects my prior comments.
The decline in specialized lending follows from seasonally slower activity in easy L. originations and life insurance premium finance.
As well some additional line pay downs in L. sector.
Arizona portfolio posted a strong quarter rising by 5%.
In reflecting higher levels of economic activity in this market, including new C.R. redevelop that an acquisition.
This market has also been responsible for adding the most triple P based new relationships to the company.
Looking ahead. The current loan pipeline is encouraging and provide some reason for optimism that barring further deterioration of external headwinds growth is possible near term.
Hi level, the current pipeline shows opportunities, which could provide net growth in nearly all of our major business units.
The largest known around this outlook. However is tightening as we have seen loan requests and planned investment taking longer to close or being pushed out.
Our approach to credit will continue to be consistent and supporting existing clients.
Opportunistic for new relationships, but disciplined relative to credit structure, despite growing competitive pressures.
Our portfolio is performing well today and you'll hear more on this from dog in his comments.
Overall deposits remain in a healthy position.
And our focus continues to be on building core relationship based accounts and reducing cost.
Portfolio changes are highlighted on slide number 12.
And show a slight dip in the quarter.
Mainly reflecting continued proactive management to reduce higher cost brokered and non relationship based balances as we discussed in detail last quarter.
The reduction also reflects the deployment by our client base of some of their triple P. related funds.
Sales efforts around Triple P and the ongoing focus on new relationships is resulting in new average account balances that are trending larger hand at a lower cost than those that are close.
And now I'd like to turn it over to our Chief Credit Officer, Doug bulky for further color on credit studs.
Right.
Third quarter asset quality results were solid.
Nonperforming loans declined modestly to 39.6 million.
Classified assets were reduced to $85 million.
Net charge offs totaled just over $1 million for the quarter now 2.5 million year to date and 30, plus day delinquencies were approximately 5 million or nine basis points on total loans excluding PPP.
Furthermore, as shown on slide 13 loans in deferral or payment modification due to cold at 19 declined substantially to $139 million or 3% of total loans, excluding p. Beattie.
This includes 40 loans totaling 86 million that are still in a deferral status.
The granting of a second round of 90 day principal and or for contractual payment release.
The hospitality sector represents approximately 58 million or 68% of loans with multiple deferrals that are still in a deferral status.
I would note that while we are pleased with the results. We continue to monitor the portfolio very closely and I meet weekly with our senior credit management team to evaluate and implement strategies to remedy our largest troubled credits.
We turned to payment performance alone is not an indication that the borrowers out of the woods, we are taking prudent steps to downgrade credit where appropriate bill.
Build reserves in light of continued uncertainty and stress.
And to work with our borrowers in a manner that both protecting capital and maintain our reputation as one of the best relationship lenders in the market.
Slide 14 provides detail on loan accommodations by loan type.
Changes in risk ratings assigned to loans granted pain modifications and the scheduled expiration.
Payment deferrals between now and January 2021.
Slide 15 reflects the allocation of our $123 million allowance by loan type.
And further highlights the factors contributing to the building the reserve from the prior quarter.
Higher levels of reserve or held against the construction real estate portfolio approximately 3.99% due.
Due to lower risk ratings and.
Inclusion of some hospitality related construction exposure and prior loss history during the prior financial crisis.
During our Q1 and Q2 earnings call I provided in depth commentary I'm certain portions of our loan portfolio that we're viewed as most susceptible to the changing economic environment.
Overall, our portfolio mix remains largely unchanged from the prior quarters.
The details of these core volumes will be included in our investor deck that will be filed in the next couple of weeks and I'll provide an update on some of the highlights.
While many of the portions of the portfolio have seen revenues return and operating performance somewhat stabilize the hospitality sector has continued to suffer due to the extended impact it's cold at 19.
Our 375 million dollar hospitality portfolio consist of approximately 230 million in hotel and lodging loans.
The top five hotel borrowing relationships represent nearly $100 million or 45% of the lodging exposure.
We remain highly confident in their ability to withstand the downturn due to strong balance sheets.
Did he personal sponsorships and low loan to values.
We have however applied to additional qualitative reserves against the hospitality portfolio instead.
In special reserves against individual credits that have defaulted or remain and payment deferral status.
As noted in the release and $8.7 million in market Hotel loan was put on non accrual in the third quarter.
This specific lodging loan had been watch rated prior to the impact of COVID-19, and it is not representative of the trend in the overall portfolio.
Other industries previously highlighted including aircraft.
<unk> and life insurance premium finance have demonstrated stable performance that is consistent with our overall strong asset quality results for the third quarter.
As a reminder, we had engaged an independent.
Third party consultants to conduct a thorough review of our easy out exposure.
And to stress test the portfolio under various economic recovery scenarios.
That reports exam, which achieved 78% penetration was completed in July.
The findings of the exam supported and confirmed our risk assessment stress losses that were well within our internally identified stressed ranges.
Before turning it over to Keene Turner I'd like to comment on our PPP loan portfolio as you.
As you saw back on slide nine we have 3849, PPP loans totaling roughly $819 million that we originated and that we are servicing today.
We did not purchase nor have we sold and PPP loans.
We are making final preparations to begin accepting forgiveness applications from our clients and we are pleased to report that 50% of our PBP loans are less than $50000 and therefore qualified for the streamlined 35, a late fast application and provide.
It provides significant administrative and financially to both small business owners and lenders and like.
And with that I'll turn it over to Keene Turner.
Thanks, Doug My comments reflect like 16 of the presentation.
Our operating fundamentals continue to produce organic earnings that further supported our capital and reserve levels.
In the third quarter, we generated $76 million of operating revenue net income of $18 million in earnings per share of 68 cents.
The combined effect of operating revenue on EPS in the quarter was essentially flat with the.
With the changes in fee income and net interest income offsetting one another.
While we continue to build our reserves during the third quarter the provision for credit losses of $14 million decreased from $19.6 million in the second quarter and reflects an improvement in the macroeconomic forecasts.
We also recognized 1.6 million of merger related expenses that impacted EPS by five cents per share.
On slide 17, net interest income was $63.4 million in the third quarter, a decrease of $2.4 million from the linked second quarter.
Net interest margin was 3.29% a decrease of 24 basis points from the second quarter just.
Just a note and Doug hinted at this the PPP forgiveness process was not kicked off in the third quarter and we did not realize any acceleration of PDP long Pete.
We do expect the fourth quarter to.
Resume P.P.P. forgiveness, and just didn't know loans under $50000 that will qualify for the simplified forget in this process, we have about 2000 loans totaling $39 million with $1.6 million of unamortized fees at the.
Fees at the end of September.
What we expected in the third quarter were full quarter impact from continued erosion of loan yields from the early 2020 decline in LIBOR, which was around 15 basis 0.4 quarter average of PPV balance and the sub debt at five basis points combined.
But we didn't anticipate was the additional liquidity, which pulled five basis points from net interest margin and accelerated investment premium amortization, which was another 3.3 basis points.
Based on the initial comments on the quarter, apparently the margin trend was unexpected and so I'll try to crosswalk My second quarter comments and give you some perspective as to what transpired.
Average loan balances declined approximately $100 million in the quarter.
And while yields on those loans declined 21 basis points compared to the second quarter.
In the quarter, we realize the full impact of decreases in the short term LIBOR rates, which occurred in the first and second quarter the impact on the third quarter with approximately 15 basis points of net interest margin outlook.
As expected point full portfolio loan yields were basically flat during the month with it within the quarter consistent with our expectations at the end of the second quarter. We believe this trend will continue and limit further margin compression of coming quarters absent material shifts in the balance sheet composition.
Investment yields also declined 16 basis points in the linked quarter as cash flows were reinvested at slightly lower coupons and premium amortization increased as a result on higher prepayment speed and a mortgage backed security. It was noted that it's around five basis points.
Also of note the remaining unamortized premium on mortgage backed securities around $8 million.
Rather than funding, particularly non interest bearing balances resulted in $120 million of additional interest bearing cash balances with further eroded net interest margin by five basis points.
Our profit liabilities was relatively unchanged declining one basis point in the linked quarter. The total cost of interest bearing deposits declined six basis points due to lower balances and rates on brokered Cds and customer time deposits.
It was offset by additional expenses from the full period of our most recent sub debt issuance and reset on some hedges, we do control borrowing costs.
As noted by Scott.
We remain focused on growing the earnings power of the company and we do have some elevated expectations regarding loan growth in the upcoming quarters. That's it help us to slow the sequential decrease in net interest income dollars ultimately all of that is our focus.
It remains growth for growth in the upcoming quarters.
Turning to slide 18, let's review, our credit metrics and asset quality changes during the quarter.
Net charge offs in the quarter remained relatively low at seven basis points of average loans were approximately $1 million.
These credit losses were mainly attributable to one email relationship that had been previously identified and reserved in the prior period.
We also incurred a charge off on this loan in the second quarter and we believe that we have now worked through this particular credit we have remaining book balance on this loan at $3.7 million, a specific reserve of $2.4 million.
Overall asset quality metrics improve with both nonperforming loans and classified assets declining, but we have experienced a slight uptick in our watch category.
Looking at Slide 19, we provided some additional color on the changes in the allowance this quarter as there were a number of moving pieces we incur.
We increased our allowance for credit losses to $123 million at the end of September this.
This was the result of an increase to specific reserves qualitative reserves allocated to certain loan categories and the previously mentioned increase in watch loans.
The qualitative reserve allocation was based on a review of certain loan portfolio, primarily those that have received multiple oral including hospitality loans that make up a large portion of loans most multiple deferral.
The increase in specific reserves was mainly from the addition of the noted hotel loan that we placed on non accrual status. This quarter. It's important to note that while we put this loan on non accrual we have not seen a trend in this industry segment. It's also worth noting that as long could have received the deferral. However, our relationship with this borrower was already Strauss.
These increased reserves were offset by an improvement in the macroeconomic forecasts variables that are significant drivers in the allowance on diesel model the primary variables driving the forecast our unemployment and changes in GDP.
The combination of these factors resulted in a provision for credit losses of $14 million down from nearly $20 million in the second quarter.
Excluding TPP the allowance to total loans increased to 2.32% from 2.01% at the end of June.
We believe it's prudent to build and maintain a reserve that reflects the uncertainty in the economy and the risk that poses to our customers and the potential for a lifetime credit losses within the portfolio.
With that said I will move on to fee income, which is outlined on slide 20, and I came in at $12.6 million for the third quarter, which was an increase in $10 million, we saw in the second quarter.
Deal flow returned and the tax credit states during the third quarter and we experienced positive impact on card services cash management service charges, and well, which we experienced rebounding activity in revenue from second quarter levels.
Mortgages expanded again in the third quarter as volumes increase than the prior quarter as the interest rate and real estate environment can seem to support refinance and purchase activity.
We strategically sold from lower yielding securities in the investment portfolio during the quarter and posted about a half a million dollar gain as a result.
Expenses on slide 21 continued to be well controlled coming in at $38 million for merger charges.
The third quarter saw a $1.6 million and merger related expenses, primarily consisting of legal and professional costs as we work toward closing ecost.
As we have in previous quarters, we continue to support the community and employee families affected by current economic conditions and social unrest.
We continue to work hard to ensure that we're spending prudently in this environment and we're extremely pleased that we have kept expenses in check despite challenging revenue.
Edwin.
We also continue to experience to operate effectively across all of our markets.
A large part of our workforce work working remotely with her.
Regard to the seacoast acquisition or internal integration team has been working hard with Cecos partner and using our established playbook and procedures to make progress along our expected timeline.
I'll conclude my remarks, with our final slide number 22.
Our strong organic earnings profile continued to drive our capital level with tangible common equity to tangible assets ratio at 8.89% an increase of 22 basis points in the quarter when excluding PPP, though.
Our tangible book value per common share increased to $24.80, an 8% increase over the prior year on year, while building the allowance for credit losses by 151 basis points.
We maintained our dividend at 18 cents per share in the fourth quarter to provide an ongoing returned to shareholders, while providing flexibility in our capital structure.
I want to conclude by saying that we're pleased with our financial results in the quarter. In particular, we believe we have been proactive in bolstering capital and reserves, which will allow us to focus more intently on business development, and maintaining and expanding urban and over the coming quarters.
We're also excited about the pending acquisition of Cecos and the addition of there has to be a loan generation and low cost deposits specialties.
We discuss the financial merits of the transaction when we announced the deal in August, but it's worth repeating that we expect double digit EPS accretion in 2022, and then unbanked earn back under three years and I are are around 20%.
I appreciate those who have taken the time to listen today and we'll now open the line for analysts questions.
Thank you.
If youd like to ask a question. Please signal by pressing star one on your telephone keypad.
You are using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Good for any questions that is star one now.
We will take our first question today and that is from Andrew Liesch with Piper Sandler. Please go ahead with your question.
Good morning, everyone.
Hi, Andrew just hi, just wanted to kind of circle back to the provision here right and Oh, and then you referenced some sinbo hotel loans setting aside specific reserves I'm just curious on the hotel when they did go to non accrual can you tell us what the with the L.P.B. on that.
And that property is.
Hey, Andrew Good morning, it's stuck Bell Pete. So you know we have ltvs prior to of course, the impact of co badge and the L. TV would have been around 75% to 80% prior to the impact of Cobiz as I'd mentioned this was a particular credit acquired.
It was on our watch list and real it relatively.
Considering the higher risk credits due to the higher loan to value and nonrecourse nature of the law.
And the fact that a scheme pointed out our relationship with the borrowers already stressed.
We've taken the loan into a non accrual status and establish some special reserves.
Okay.
And then just overall in the hospitality book to reference so low ltvs or did you just have the that the blended average of that entire portfolio.
So I enjoy edge on mute there yeah, the hot weren't the only.
Yeah, the hospitality portfolio on average was around 60% to 65% loan to value well sponsored by the.
By the owner developers of those hotels thats, good liquidity and again I mentioned the top five relationships have multiple hotel properties.
Total about $100 million the balance of that lodging portfolio. It's really represented through about 20, various and independent relationships.
Okay.
And that that LTV seems pretty reasonable and I understand the wanning wanting to add to the allowance and build the reserve, but maybe these ltbs do seem pretty manageable just given what's what's currently going on I mean, if you look at that portfolio, but where do you see loss content coming out it seems like that would that would those.
With that underwriting it should be.
Pretty modest and really just trying to get to provisioning going forward. It seems like you've already.
Built a lot of the allowance that you'll need to.
But with a with the Ltvs here and with some of the higher these being some of the higher was clones.
The provisioning may not need to be as high as it has been in recent quarters.
Yeah, Andrew I would say under the CECO model you know at any given point in time, I think we need to make sure that we've got what we think is a life of loan result, I think the first two quarters you had the economic forecast you know.
Driving a lot of that reserve and we had some time as Doug noted to gather a lot of information about what the potential for losses could be and so to your point I think that we feel like sitting here today.
Barring any material changes in information deterioration or underlying.
Trend, but I think you're probably right. We're probably you know pretty well reserved and I think you know our posture is to.
[noise] reflect more of the uncertainty you know then then less of it and we just you know we want to be proactive and get that reserve, where it needs to be I would say when you think about what we did on the qualitative maybe think more about the second round for old is the starting point, which typically included.
Some loans in some categories that were maybe more stressed in the hospitality space that were referring to and I think there are some some breakouts on the flight as well as select easy alone. So.
From that perspective, I think that you know, we that's more qualitative in terms of the deal and the hotel piece, but more quantitative in terms of you know loans I had a second round of for all I think we're looking at that and saying overall those are probably higher.
Loss given default you know given the commercial nature of the portfolio and some of those chunks out there. So that's that's the way we're thinking about it but again I think you know absent further deterioration I think you know we would expect certainly that that we've gotten the reserve to a point, where you know we can feel comfortable and weve.
Got a really strong balance sheet to move forward.
Okay.
Thanks for taking my questions on that I'll step back now.
Thank you Andrew.
Thank you we'll move on to our next question that is from Jeff Rulis with da Davidson.
Thanks, Good morning.
Good morning, Jeff.
On the Sea coast. One is you kind of get a bit I think Jim you mentioned expecting Oh later Q4, close how does that impact or integration tiny I mean I think this was initially.
They are.
24 early 21 close so they got about integration and then thinking about will ultimately.
Cost savings tightening possible to get all of that by the end of next year.
Yeah, I was keen Jeff I was.
<unk>.
I would say the integration is pretty well set for you know middle of first quarter in less something you know materially goes away from us at this point or even as we were planning I think that that's fairly well that.
You know from a closing perspective, I think we're on we set an aggressive timeline and I think we're we're hitting it I think you can see that based on you know some of the dates that are out there. So I think we feel good about it and then I think that you know you might see a queen fourth quarter next year, maybe third quarter depending on.
The the timing and the environment, a little bit, but yeah I think.
I think everything is essentially on track as we had communicated and and again on a fairly aggressive timeline.
Got it sounds on track or maybe you did better than that kind of the.
Delayed or worst case outcome dark age, but just that started okay. That's fair.
I guess on the margin.
Can you you alluded to kind of leaning further pressure here just to follow up on that and thinking about the core.
X D. It sounds like what kind of nearing across here and some of the things you've done.
On the deposit side, just from up that outlook that that's kind of what you had indicated that this is sort of settling in at on a go forward basis.
Yeah, I I would say I think we're entering the fourth quarter here and I think the big wildcard is that we typically have strong growth in the fourth quarter, both in deposits and loans and so I think you're going to probably just see some margin drift.
Given I think theres going to be some liquidity coming in I don't know how much that is because.
You know weve seen so much being.
Being so much liquidity build already and so we're really trying to get some insight into that so I think just mathematically excess deposits coming in are gonna erode margin, but I think from where we sit today same balance sheet were worst we've seen loan pricing repricing stabilized from the June through September time frame in it.
You know.
Shifting down a little bit a basis point or two here and there, but I think we feel like that should be.
That has firmed up and really we should have I think been more articulate about what the impact of you know May you know April may and June versus July August and September was going to be on margin. So you know I think we probably set a higher expectation then we should have given what we knew at the time.
And because my comments were we're not as as clear, but I think we feel like it's going to firm up might be a few basis points of drift down from here, but I think you know we feel like this is probably a pretty good baseline you know X some of the noise on liquidity and PPP and ideally, we'll get some loan growth that will help drive.
Growth in net interest income dollars you know on a core basis for you know end of <unk>.
End of 2020 and 2021.
Yes, it certainly not alone on the liquidity front I think as an industry.
And.
Maybe a surprising number.
Last one just a housekeeping the.
On the miscellaneous income.
That line item up a little over a million linked quarter did you mentioned that was a gain generic <unk> what a explained a sequential lift.
And the miscellaneous yeah, but so I think that some of the private equity activity that we have you know that that happened sort of periodically.
You know as part of what we do in the E V. L space, we have a small you know investment in certain funds and so I I think there was a.
An exit there that you know is really driving that and then there's just you know kind of some sort.
Im little thing that you know that.
That nickel and dime, you know into that line item.
You know international fees and just some things like that that you know we're <unk>.
Depressed kind of going into the second quarter based on activity and you just have a couple of things. Additionally hit there. So you know probably not exactly repeatable to that level in the fourth quarter.
But we do expect you know the tax credit line to continue to gain strength moving forward. There. So you know something that probably had two out of four quarters. A year you know from that perspective in a one to two cents a share.
Okay. Thank you.
Thank you Jeff.
Thank you we'll take our next question and that is from Michael Schiavone with KBW. Please go ahead with your question.
Hi, Good morning, everyone. Thanks for taking my question [noise] Yeah.
Yeah, Good morning, Michael.
Morning, I'm no tell loan that was moved to non accrual that is there a large balance of acquired hotel loans remaining and then also can you just provide how much of the total hotel bucket is on deferrals still.
Yeah. So there's not a large acquired portfolio Michaels I can tell you that hotel loans that have received second round, the frozen but still be on deferral.
A second round of pros were $58 million as reported.
And there are a few others that are scheduled to roll off or deferral status in October and November.
So I would tell you this that a big.
The exact number of acquired portfolio and the lodging sector one of the $220 million is probably less than 20% of the overall portfolio.
Okay. Thank you.
Just to clarify when you say acquired assets acquired through acquisition as opposed to acquired through acquisitions correct. That's right.
Understood I understand okay. Thank you.
And then on fee income you had a good quarter grew about 3% linked quarter and mortgage income was a big contributor can you just talk about the mortgage pipeline and the outlook for overall fee income growth from here.
Yeah. This is Kent I think you know mortgage has been.
A bright spot for us this year you know prior to to Trinity, we didn't really have a meaningful.
Contribution from mortgage I think it was something that post acquisition late last year. We made an investment in you have to really take advantage of the the producers that that Trinity had and improve the the processing shopping or and or in the organization. So I expect that mortgage will continue to be.
On a regular contributor I, you know fourth quarter activity of hard to predict I think typically you know activity falls off you know 60, or so percent from the third quarter, but I also think we're not necessarily at our limit in terms of of market share certainly about the high watermark. So I would say that you know.
It's going to continue to be you know one to.
Three cents a quarter you know moving forward given you know continued low rates and you know a lot of housing activity and in our markets.
And then I think from an overall perspective, I think you're starting to see you know some return to activity in charges in areas that are.
Areas that are that her behavior dependent and so you know if the second quarter was below in terms of.
Volumes and activity you know I think we're we're building off of there and Ah you know I think we're holding our own in a lot of categories versus you know last year, and then I do expect that fourth quarter will provide some good you know tax credit income.
You know as it does just as it has historically for you know to round out the year.
Okay, Great and final question, just you know your reserving capital the levels are looking pretty healthy at this point, how much economic improvement or continued capital build would it take for the board to resume share buyback.
Well. So we still have are we talking about a 100000 shares under our existing buyback. So we just we stopped buying shares in the first quarter.
And you know I think posts Ficos closing and you know looking at out at the future I think.
You know, we need to replenish that as as ordinary course, but.
I think given the reserve build that we've done I think <unk> I think it's pretty clear that we believe that we haven't really even entered the credit cycle. Yet we have one loan that we're talking about that's gone bad or more had some stress we haven't taken a charge off on it yet and so I I think we're just trying to be really cautious about.
You know, making sure that the balance sheet is.
It is as strong as it can possibly be and from my perspective, you know.
You know as much as it's it's a.
Attractive at these prices with the debt markets and the stock market for banks, where it is I still think it's it's a little bit too early.
And I think our provision this quarter and allowance build reflects that pasco.
Okay, great. Thank you for taking my questions have a great day.
Thank you Mike.
Thank you as a reminder that is star one for any questions. We'll move on to our next question and that is from Brian Martin with Janney Montgomery. Please go ahead with your question.
Good morning, guys.
Good morning, Brian.
I think I think Scott maybe you touched on just are keen to both of you guys just a little bit on the outlook for loan growth going forward coming can you just give a little color on where you are optimistic you know I'm kind of it most of the new P.P.P. relationships. I know you said the things makes you know continue to take longer to.
Finalized, but just some peak some outlook on you know on the loan growth outlook would be helpful. Just demand among your current customers.
Yeah, Brian This is Scott I'll I'll start and certainly keen can add.
What we saw in Q3 was just continually.
Liquidity building by clients and some pay downs, but also it's Kent.
As Kent had mentioned, there's some seasonality to the specialty businesses. So we saw a typical seasonal lags and L.I.P.F., maybe a little bit and easy L.
So I think you know looking forward to Q4, we do expect the seasonal part of this the specialty businesses to perform.
Perform so you're going to see a seasonal uptick there as well as just continued growth and a tax credits alone because of how the tax credit businesses.
I think you know maybe at a high level with existing clients across the market and in general there's optimism I would care.
I would characterize it as optimism.
And then if you look at Pike <unk> pipelines, there's a lot of near term planning for opportunistic investment.
M&A so.
Some recapitalization relating to either succession or just repositioning of the balance sheet.
And so they'll all those deals are developing but but slowly right, they're staying in the pipeline a little longer. So I think the judicial activity is really a result of ramping up our proactive calling.
Lilly as you mentioned to leverage Triple P.
And if you look at that.
You know each market, maybe a little different but in Arizona, you've got some good industrial development.
Clients that are in the storage business.
Owner occupied or real.
Real estate, that's being acquired Opportunistically.
And then we're getting some new looks because there's disruption in that market some competition, Kansas City, a little bit of the same some disruption from you know the changes that have occurred over the last couple of years.
Expanding existing Cnine and then.
And then the Saint Louis we've got good activity in the pipeline from existing clients that are in the tax credit business that we do fund leverage fun financing for some new CRP relationships.
So you know that that all to me is encouraging but I think it's a live.
It's a little bit of the the wait and see I think if you talk to clients. They know they're going to do it but what the stimulus look like.
Maybe looking a little bit at seasonal cold the trends you know how much is that going to impact that certainly as we hit the winter you know.
You know maybe some political.
So just you know that uncertainty I think is just affecting timing, but I think what top reports optimistic as all that stuff is staying on the pipeline.
And even looking out further opportunities for new business those discussions are developing as well so.
Hopefully that that's the color it looks for yeah. No. That's helpful. I appreciate it's gotten how about just last couple easy ones for me the PPP forgiveness any thought as far as how you guys are thinking about timing is that a one Q2 Q event I know you talked about the you know the smaller size credits. It you know get streamline but just big picture how are you.
Thinking about that today versus you know what was out there last quarter.
Yeah, that's a lot and then Ryan.
God that game.
I was just going to say what I think will we continue to get the wave here and you know if you look back first quarter look back last quarter. It continues to delay. So you know we we know those fees are sort of embedded gains and tangible book value and you know I'm not sure.
Quint is going away, even if you get forgiveness. So you know from our perspective, we'll just we'll just see where it falls, but you know Doug or Scott might have more comments on specific borrowers, but from a from an organizational perspective, we're looking at the results you know.
You know without it knowing that that you know on unrecognized gain could come in at some point in time, but you know to be between now and the end of next year.
Okay.
Right I think that's helpful. It at least gives me an idea of how you're thinking about a king so how about I guess, maybe Doug I guess, you guys mentioned that the special mention loans or the watch list credits were up a touch I guess what was driving that was there any certain I mean, how much of an increase is it pretty minor or was it was it more material.
Yeah, No bright I tell you what you know we effectively manage the portfolio closely and leave you for any additional credit deterioration or stress and you know well, we're very pleased with classified levels remaining flat to actually somewhat improved we have seen.
You know a migration all but we'll consider average five rated credits to the monitor status, which is risk rated six or to watch with great at seven.
I believe that you know the preponderance of those changes we've seen already occur in the second and third quarter and now the portfolio it looks to be quite stable, but again, we're just gonna have to continue to monitor performance art.
Operating results as we head into the fourth quarter and fiscal year end.
And we'll evaluate changes in risk ratings as need be but I think right now we feel pretty solid about the about the performance of the portfolio.
Okay, and just to be clear the watch list was up a touch this quarter just nothing nothing significant thats, what I was trying to get at it was it was up yeah. It's classified that were down right.
That's correct.
Okay, and then just going back came just for the one question on the margin just kinda liquidity outlook and then just cut if you remind us I mean, the loans that are at their floors today, and just and I know that you look at the variable rate portfolio and kind of what's going on with the loan book how much of the loans today are protected after floors versus you know I guess or not.
Matt.
Yeah. So we've got about 3 billion of variable rate one point, a little over 1.3 of those have a floor and 1.2 of that is on the floor and then.
Now, they're pretty evenly distributed of you know the zero to quarter basis.
The 25 basis point 25 to 50 et cetera, I know the increments you know to where the floor is so not a whole lot more battle that can step down on the floor. So that'll help and has helped to keep the loan yield a fairly stable here in the third quarter from where they were at the end of the second quarter.
Okay, and then the liquidity I guess your sense is that fair.
That there was a level that we see out there right now is probably sticks around for a little bit is that.
Kind of how you're thinking yeah, we haven't we haven't seen it deploying I mean I think what we've seen is there are businesses who've gotten P.P. loans that are deploying it but there's other businesses that are accumulate are doing well and accumulating cash.
And typically we'll see that accumulation be more aggressive toward the end of the year. So I don't know if that it's been more steady throughout 2020, and I don't know if that'll affect.
You know what would ordinarily be a several hundred million dollar swing of liquidity accumulation at that you know gets cut by a fraction. We typically don't have that information until yeah.
Yeah After October and into November So I think the way I think about it is it doesn't impact net interest income it just impacts margin and I, you know and I think that the underlying earnings of sort of where you are here at the end of September regardless of what happens with that coming in.
We'll we'll pretty much be able to be fairly reasonably estimate and then really the only other deltas. If we decide we want to do anything with you know some of the lock in funding that we have which would come at a cost, but if we think that liquidity is going to stick around that may be a good trade to trade down, especially if some of that comes in a low interest bearing and non interest there.
Deposit so to me those are really the only big levers you get from it.
Gotcha, Okay, all right and just one last thing just on the hotel the occupancy is within the hotel book today, how are the occupancy is trending.
In that book I mean have they gotten better or they just kind of flat line now.
Yes, I think we'd reported before right occupancy rates were starting to trend up and then more really impacted again by some regional shut downs and travel restrictions and I think as we look at it today, we're seeing those occupancy rate slowly start to tick.
Back up.
We might be getting back up into the mid 40, percents, maybe low 50% range, but of course there was some some.
Some room for improvement there yet as we head into 2021, but yeah, maybe that 55% range is kind of the necessary occupancy rate to start.
Ah breakeven breaking even from a cash flow perspective.
And I think we would still see you know the preponderance of that portfolio still falling short of that.
Yeah Okay.
I appreciate you taking the questions. Thanks, guys.
Thanks, Brian.
As a reminder, that is star one for any questions.
And at this time there are no further questions I will turn the call back over to Jim Lally for closing remarks.
Right. Thank you.
Thank all of you for joining us. This morning appreciate your interest in our company.
We look forward to speaking with you at the end of the next quarter.
Not soon have a great day.
Thank you ladies and gentlemen. This concludes today's conference all participants may now disconnect.
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