Q4 2020 Great Western Bancorp Inc Earnings Call
[music].
Good day and welcome to the Great Western Bancorp fourth quarter and full fiscal year 2020 earnings announcement and call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing star sincere out.
Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would.
I'd like now to turn the conference over to Seth Arts head of Investor Relations. Please go ahead.
[music], Thank you and good morning.
Taken us through our presentation. This morning, we have mark for Echo President and Chief Executive Officer, Peter Chapman, Chief Financial Officer, and Steve Yose, Chief Credit Officer also here with us to support our Q and a session. After our prepared remarks, we have Doug Bastard, Chief operating officer and Carlin Canaria.
Our chief risk officer.
As usual we ever prepared a presentation for today's earnings review.
Which is available for webcast on our website and on our web site at great Western Bank Dot com.
Before getting started we would like to remind you that today's presentation may contain forward looking statements.
That are subject to certain risks and uncertainties that could cause the company's actual future results to materially differ from those discussed.
It is especially true in the current environment with continued uncertainty stemming from the COVID-19 pandemic.
Please refer to the forward looking statement disclosures contained in the earnings materials on the website, along with periodic SEC filings for a full line of the company's risk factors.
Additionally, any non-GAAP financial measures discussed in the conference call are only provided to assist you in understanding great westerns results and performance trends and should not be relied upon as a financial measure of actual results.
Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation.
I would now like to turn the conference over to Great Western Bancorps, President and Chief Executive Officer, Mark WRECO Mark. Please go ahead.
Good morning, Thank you and thank you everyone for joining us I hope that you your family your coworkers are doing well.
And are staying healthy.
Before we discuss results for the quarter.
I would like to take a moment and acknowledge that this will be our last call with Doug bass, our Chief operating officer, who recently announced he will be retiring at the end of December.
We are grateful for dogs 11 years with the bank and his many contributions.
Also appreciate his support as I transition into the company over the past seven months.
Thank you for all that you have done for great Western and we wish you all the best in your retirement.
A quick update on our markets and operating environment.
All of our branches are essentially reopened and we are following CDC guidelines and internal protocol, including temporary closure in cleaning for branches when we become aware they close contact.
We remain cautiously optimistic about our footprint well.
Well covered cases are on the rise are tracking continues to indicate market activity is still faring better than the majority of other U.S. markets.
Now for an update on our key initiatives and developments from the quarter on slide two.
We've talked about both screen our credit risk management.
Our external loan review completed by Protiviti resulted in minimal nonmaterial findings.
As a reminder, the scope for this review included 99% of loans over 5 million in our high risk segments along.
Along with other smaller credits to ensure that they are accurately risk rated and underwritten to appropriate standards.
I'm very pleased with the outcome, Steve will provide additional comments later in the presentation, but for me. The key takeaways are less than 1% of the loans reviewed how did downgrade from past to criticized.
We now have a level of assurance that our credit team along with our first line bankers are appropriately leveraging our new risk rating system.
In addition, we have been diligently managing our Colgate related deferrals.
The peak loan deferrals for great Western Bank were just over 17.7% of total loans excluding P. P. P.
October 22nd to 2020, our loans on deferral has declined to 1.98% of total loans excluding P. P. P.
To improve ongoing credit monitoring we have decided to outsource our loan review function to a third party.
This new relationship will elevate the level of independent review and improve our ability to have early detection of any material credit issues.
Conservative in measured actions.
Our previous conservative decisions have contributed to our improving capital ratios, which Pete Pete will discuss later on.
Loan loss reserves provide a healthy coverage of 2.02% of total loans, excluding P. P and Pete will share our day, one estimates for our see still adoption later on.
We did not fill positions that we reduce the F.T., resulting in an ongoing cost savings of $4 million a year.
NIM contracted only seven basis points for the quarter.
In addition, we paid off 205 million of our FHLB borrowings to improve our balance sheet and earnings profile moving forward.
Organizationally, we continued to fill a number of important senior roles.
We announced last quarter, the importance of improving our treasury management client experience and performance.
We are delighted to have hired Amy Johnson to lead this enhance function.
When it comes to great Western with over 20 years of experience with a large financial institution in the Midwest, where she led multi region Treasury management and sales teams.
We implemented a centralized facilities function and hired a new head of facilities.
We are currently doing a thorough review of all of our branch in office locations.
Small business center of excellence as we discussed previously historically, we have originated and decision to all commercial credits regardless of size using the same process.
To support our key initiative to reinvent our small business segment, we have selected foundation as our third party loan origination provider.
We expect to launch our pilot by March one of 2021.
I'm appreciated about how the team has come together to support our modified agenda. I'm also pleased about our ability to attract high caliber new employees. During this period of volatility, we're clearly making progress on the credit front and I'm excited about what lies ahead for us in 2021.
Now for a review of our financial results I will turn the call over to our Chief Financial Officer, Pete Chapman, Pete Thanks, Mark and good morning, everybody I'm looking at slide three you'll see we had a number of significant items included within net income. This quarter net income was $11 million, an increase from $5.5 million in the prior quarter and earnings before taxes preview.
I shouldn't say value credit charges that do not flow through the provision were $52 million for the quarter.
During the quarter. The payoff is shld borrowings, which had a cost of two point.
Seven 5% resulted in a $7.6 million prepayment costs through expenses, which was offset with a $7.9 million realized gain from the sell securities Your noninterest income.
As forecasted pick up $2 million in pretax earnings in fiscal 2021.
Also within non interest income you can see we realize certain credit related charges related to the loan portfolio, what kind of fair value, which totaled $31 million.
Including an 8 million dollar charge from the sale of a qualified health care line, a $4.2 million charge for credit Mark and a break fee for credit moved to substandard and also a $12.5 million.
Loss history adjustment to increase the credit Mark on the state of L. U line portfolio.
Finally, other expense items realized in the quarter included a 2.2 million dollar expense related to the completion of an FDIC loss sharing agreement we entered into in 2010.
Additionally, we recognized a write down of $4 million on Oreo assets and also could approximately $1.8 million in costs related to severance and consulting costs.
Also on slide three you can see were provided a comparative this year's results as there were some unique and significant items through the credit related charges, including $71 million.
Cost related to the impact from coated nominated in the March quarter and certain other as a bottoms noninterest expenses included measured actions taken in the past record is which further improved the bank's position and despite low interest rates for much of the fiscal year net revenue generation showed resilience through the fiscal year.
Now looking closer at revenue on slide four net interest income was $108 million, which was flat with the prior quarter and adjusted NIM as Mike has mentioned the only contracted seven basis points to 3.4%.
Interest expense decreased $2.7 million, including a nine basis point decrease in deposit yields to 28 basis points as a very successful in further reducing hi.
Hi cost deposits interest income also decreased by $3 million due to a decrease in securities and loan yields given the environment.
Looking at slide five L. One portfolio yield continues to be supported by $4.6 billion of fixed rate loans, yielding 4.4% 2 billion of loans that have reached their floors, averaging 4.45% and a billion dollars in variable lines at right price beyond 90 days currently yielding 4.5 Lumpsum together these.
Adams make up more than 80% of L. loan balance excluding the PPP lines.
Also within net interest income was a combination of triple a payment protection program interest and fee income for the quarter of $6.2 million remaining P.P.P. fee income to be recognized just over $60 million over the life of the program.
Now looking at slide six total non interest income, resulting in a net loss of $4 million for the quarter, excluding unique items related to the fair value line accounting and securities gains underlying noninterest income was $17.2 million for the quarter up from $40.1 million in the prior quarter.
We saw a rebound in deposit transaction activity, which contributed to a $1.7 million increase in service charges more mortgage revenue was very strong at $3.8 million up 56% from the prior quarter as our origination activity and processing teams are really effective in supporting the strong demand integration in originations bull by the low interest rate environment.
And also seasonal demand in the mid west well.
Both management revenue was $2.9 million up slightly from the prior quarter and full year income for that business increased 32.8% or $2.9 million from the prior which was a great result.
Noninterest expenses were elevated this quarter at $75 million and adjusting for the nonrecurring items I outlined earlier on slide three underlying expenses were approximately $62 million for the quarter.
This compares to $67 million a total expenses in the prior quarter, which also included about $6 million and nonrecurring items.
Loan loss provision expense was $16.9 million, a decrease of $4.8 million and pride quota [noise] the.
The provision this quarter was largely a net result of new specific provisions on newly classified loans identified during the quarter, which Steve will touch on later along with the portion related to current period charge offs, which increased our loss history.
Moving to slide eight we can see that our one loss reserves, excluding PPP loans increased to 1.6% from 1.54% from the prior quarter.
In addition, we have.
$30.5 million credit Mark that is 4.66% L $655 million portfolio of long term loans accounted to fair value and we also have an 11.6 million dollar mark provided on our $350 million of acquired loans collectively these represent total credit coverage of two point.
Oh, 2% excluding out pay pay once.
Importantly, we moved from the incurred loss method to the adoption of Cecil as a one October.
At the beginning of any fiscal year end 2021, we're finalizing our day one impact as it stands we estimate of 70% to 90% increase in Arizona with a total coverage ratio estimate that somewhere between 3.1 and 3.5% on the adoption I see so this is an increase from our prior estimate and generally reflects an overlay of expected losses some.
Listens only exposures, we have two industries, such as accommodation that maybe more impacted by quite a bit just pandemic continues.
On slide nine we see current capital ratios are well in excess of incentive thresholds, which her about regulatory levels also.
Capital increased four basis points to 13.3% tier one capital increased five basis points to 11, eight and common equity tier one increased to 11%.
Tangible common equity ratio also improved to 9.2% and is it 9.7% excluding the impact of the PPP lines tangible book value per share also improved $21.03 up from $20.52 in the prior year.
We continue to believe it's prudent to preserve capital in the current environment and consequently, we quit quite a dividend of one cents per share for the quarter ended September 32020.
Now looking at deposits deposits decreased slightly to $11 billion, well average balances are actually up $206 million in the prior quarter balances from TPP proceeds and consumer stimulus receipts and the pride quota.
Roger remain intact as customers are showing a tendency to preserve liquidity we've been successful in improving it makes with the reduction in the average time deposits of $60 million and also an increase in noninterest bearing deposits at a $158 million during the quarter.
Looking at loans loans at the end of the period with $10.1 billion, which includes 727, new triple play ones.
End of period balances were down $240 million, while the average balances were relatively flat with the prior quarter.
Decline in the line balance were driven by an exit of a large commercial non real estate facility and also some progress in de leveraging number said sectors within agriculture, and an acceleration of pay downs in commercial and also consume a halo balances.
During the quarter.
With that I'll now hand over to Ed Chief Credit Officer, Steve Yose to provide an update on cricket initiatives asset quality metrics and key segments of that portfolio. So I wouldn't use that.
Thank you.
As Mark has repeatedly said improving our asset quality is the primary focus I would like to give you an update on the progress made in the quarter along with reviewing key asset quality results looking at slide 12, Weve outlined key initiatives sticking within the framework of timely and accurate risk ratings.
Focused risk based credit Decisioning and more specialized credit administration.
As Mark noted earlier last quarter. We said we were proceeding with an independent review conducted by a third party of critical areas within our own portfolio and I'm pleased to share that it was completed by the September target.
As previously noted less than 1% of loans reviewed required a downgrade from past to criticized those have been corrected and at this stage. The exercise helps provide a level of assurance on the state of our portfolio as we take steps to improve asset quality.
We have been discussing our new risk rating system for a few quarters now, but it is now fully integrated as of October 1st following what was a thorough development and training exercise.
They had added granularity of the scale and the addition of a special mention and between watch and substandard combined with Moody's analytics modeling, it's helping us identify more effective early warning indicators. So we can better prioritize our actions and manage the portfolio.
As an example, we used a model to reschedule the hotel portfolio cobot conditions, which allowed us to risk rate with greater objectivity what.
We continue taking steps to help us become more risk focused and create a more unified credit risk culture as an organization.
Our new and enhanced credit policy went into effect August 1st as and is providing a risk focused approval process that requires further approval elevation for higher risk or specialized industries, a risk based hold limit the leverages to do risk rating system and a focused a more acute.
Accountable credit Decisioning process, the key to driving the culture is having the right leadership and I'm very happy to now have my senior team fully in place.
Hired an experienced real estate appraisal manager Tom Moeller in September and Travis Rodak joined Us in a critical role as senior credit officer to support our modified AG business line.
While these key strategies have given us loved them focus I am even more pleased as a new chief credit officer, we have made significant steps in improving the credit risk culture of the organization.
Most management experts will say, including the like Peter Drucker culture, almost always Trump strategy I.
I've been very pleased at how our front line. Another employees have embraced our changes our strategy is to provide a significant cultural shift.
Our commercial workout team continued to build momentum in the quarter, we've added resources and skill set to bolster that team, which is starting to drive the deleveraging another tangible workout resolutions with customers. We completed the sale of a large non accrual loan and a clean and efficient manager manner, which helped us get perspective on.
In the market and the viability going forward.
We're being deliberate and strategic in our actions with credit risk management. Some improvements you will see immediately and some will evolve over time.
What we are doing fits with the overall strategy Mark touched on earlier and I'm looking forward to the impact they will have on this organization and on asset quality.
As we turn to slide 13, I have some further details on the third party loan review the total Regal loans reviewed this quarter were $5.4 billion, which included 4 billion. The one through the external review.
The reviews covered 10 different segments, including the hotel portfolio.
As I noted earlier, just five relationships were $42 million in commitments were downgraded from past to criticise representing less than 1% of the launch reviewed.
No non accrual or charge off recommendations came from the reviews March Mark touched on deferrals earlier, and you will see our levels of subsided to just under 2% of total loans, excluding PPP looking.
Looking at the top segments deferrals linked or hotels were $167 million, which was 14% of the hotel portfolio loans Arts entertainment and recreation reduced to $12 billion or make up 10% about portfolio.
Our balances in a good spot and we're going to remain diligent on the suffer as progress through the coming months with cobot uncertainty.
On slide 14, we have our asset quality metrics.
Net charge offs for the year were <unk>, 0.40%.
Average total loans or $39 million, which includes $15 million for this recent quarter.
Loans graded substandard or worse increased to $770 million and non accruing loans increased to 325 million.
Substandard increase was largely related to two larger AG relationships that have not been able to rebound and the number of hotel relationships for approximately $60 million that were downgraded through our risk rating assessment.
Offset with the sale of a health care facility on a charged off dairy relationship.
The increase the Nonaccruals relates to two large AG relationships associated with the dairy industry, who have not been able to improve their financial position.
Watch loans were $983 million for the quarter, an increase of 506 million as a result of $230 million in the hotel and resort space 109 million on healthcare and $75 million another CR relationships moving to watch in the ongoing rating system.
The outgoing rating system, reflecting the current operating environment.
The watch category will be changed for the December 2020 quarter as the lowest level of past category was the remainder replaced with the special mentioned category to better align to peers.
You see on slide 14, we have a summary, showing the rating of our loan portfolio under the new risk rating system, which formerly began October onest out.
Out of our current legacy watch portfolio, we have 503 million rated a special mentioned on the new system, along with $770 million as sub standard worse.
Well the metrics moved unfavorably again this quarter I'm actually encouraged at how diligent we have been using our new credit policy to identify early indicators and conclude accurate and timely risk ratings looking.
Looking closer at the loan portfolio I am generally comfortable with the diversification we have however.
However, there are few key segments that I want to make sure we are managing effectively.
On slide 15, we have key information about our hotel portfolio, which is obviously being impacted by the code the pandemic.
The concentration while within our footprint most of the non prepared projects are linked to end footprint customers, who are seasoned developing projects the concentration as well diversified across 130 different cities with most of the small to mid size locations, 86% carry a franchise flag.
The biggest change this quarter is reflected in our risk rating migration.
Following substantial reviews and re scoring in the quarter substandard loans in this sector rose from 26 million to $88 million Special mentioned rose to 175 million as we adopted the new risk rating system, a 910 million remained as pass rated.
The diversity in our AG portfolio remains a key characteristic of the book.
From a grade perspective, the USA today reported harvest is progressing very well and the national average of 60% and our main footprint, South Dakota, and Iowa are tracking better at 64%, 65%, respectively, and Nebraska is very close to 58%.
Soybean harvest is also progressing well with the national average of 75%.
South Dakota, Iowa, and Nebraska are all far ahead of this space ranging from 90% to 92%.
Milk prices have subsided somewhat from very high levels in the summer as the sub Tempur class three milk price averaged $16.43 with Ford levels at or above this level.
We continue to monitor the health care portfolio as there are mixed signals as to what is happening from an industry perspective.
The few problem loans, we have had with health care related loans have been situational and not linked to any broad cobot issues there.
There is a balance of the portfolio across senior care assisted living and retirement communities skilled nursing hospitals and other healthcare services and social assistance, we have about 45 relationships and senior housing 45, and skilled nursing and 32 on hospitals, which make a more manageable to engage with customers and ideal by early indicators.
That wraps up my comment.
Perhaps up my credit commentary and I'll now turn it back to Mark Thanks, Steve improving.
Improving our asset quality remains a major focus for us and with Steve support and guidance and with a thorough third party review of our loan portfolio complete we continue to make progress on addressing our credit quality issues and de risking the balance sheet. Our NIM continues to hold up well in this low rate environment and as we begin our new fiscal year I am excited about how are you.
Small business and other initiatives will accelerate our performance going forward.
Operator with that let's now move to the question and answer section.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if.
At anytime your question that's been addressed and he would like to withdraw. Your question. Please press Star then two please limit yourself to one question. So everyone has a chance to ask a question that would like to at this time, we will pause momentarily to assemble our roster.
Our first question comes from Jeff Rulis with the A. Davidson. Please go ahead.
Thanks, Good morning.
All right.
First.
Question on the expenses Peter it's in terms of the.
Okay, I guess it starts with the what would you deem as the core balance.
In the quarter, given all the puts and takes as well as kind of projecting what you think that path is with if we bake in some of these.
HM.
Severance and I think that kind of the cost savings the lpos that reduction and employees.
What does that drive that going forward.
Yes, my in my comments, Jeff said about $62 million was which what I would peg underlying sort of run rate expenses that is for the quarter I.
I think Dan with the slight uptick from there it is pretty good for the next quarter. We've got some cost saves that was baked in.
Obviously, but we'll use that to fund some garth not mentioned the initiatives. We've got around the small business piece, which will be a good one for us and some other infrastructure, we want to invest in.
But we should be able to maintain sort of around their response, just up a little bit from the edge.
Okay. So the just to clarify the the expected.
Annual cost savings.
On the FTD reduction that's already baked into that 62.
Where that takes place over the course of.
The next quarter I apologize sorry about that yes. It is yes. So we're talking about 62 to 63 $64 million for next quarter sort of with full cost is Jeff for next quarter.
Got it okay. Thank you.
No problem.
Our next question comes from Terry Mcevoy with Stephens. Please go ahead.
Hi, Thanks, Good morning, I guess, just my first question the commentary on the external loan review.
Minimal nonmaterial findings. This is kind of the bullet point right on the first slide there.
And I guess, just as an outsider I just look at substandard loans up and some of the noise within the M.
The the hedging or the fair value marks and in some of the other credit metrics moving in the in the kind of in the wrong direction to be blunt I'm, just trying to get a sense of what's behind the nonmaterial kind of pleased with the findings versus maybe some of the trends again as an outside of that that we are looking at this morning.
Well I guess from my perspective.
We as I mentioned are talking about our focus on accurate risk ratings. So as a credit in front line, we focused very closely on looking at the portfolio. So loud Cibers review was really to confirm as if we're looking at those correctly and if we are.
Really to look under the Hood to make sure we're comfortable with our risk ratings, which had indicated that we are but the increase in risk ratings is driven primarily from us as I mentioned re scoring our portfolio. If you look at the bulk of the impact at risk rating changes.
Especially on the watch list special mentioned that two degree in sub standard it was really driven by our hospitality section which is very.
Natural when you consider the size of our hospitality portfolio. So what really drove our asset quality changes of really what I mentioned, the cultural change as well as the way we're looking at trying to be very conservative in how we're reviewing the hospitality sector.
Got driven and that's why we emphasize that play any third party review the third Party review confirmed I believe that we are doing the right things, but it did not drive.
Our quality changes.
Thanks.
I appreciate that and then Marc maybe as a follow up.
From a just a strategic perspective, you close the.
Loan production office hired some individuals rolled out kind of SP, a where are you in kind of the structure of the bank and making making changes do you think thats largely behind the company or are there more to more to come.
I would say that most of it is behind the company I would say that the one area.
As I mentioned at the beginning of the call with the dogs announcement of his retirement, the one area that I'm going to get much closer to is really our first line our commercial retail treasury wealth mortgage.
AG business lines and so for the next six months those business lines will report directly to me and I will give me a chance to better acquaint myself with those individuals understand our market opportunities and then decide what is the appropriate organizational structure for the bank moving forward. So I think in other areas. We're in a really good spot one area.
That will continue to focus on will be that first line or our business lines.
As Doug retires, and then not businesses are those businesses report to me for the roughly six months for me to better understand.
That's great. Thank you both I appreciate it.
Our next question comes from Andrew Liesch with Piper Sandler. Please go ahead.
Good morning, everyone.
Good morning.
Just want to focus on the margin here.
Would be a benefit from the FHLB pre pays.
And still some opportunities on the funding side as well.
And I guess also kind of ties in with.
Is there a level that you expect the size of the balance sheet to be going forward and the size of the securities book overall.
I guess I'd kind of like the size of that and then.
What are you seeing with prospective lower rate for us is the ability to lower funding costs further I mean, how should the margin and and I shake out from there.
3.51% margin and 106 million okay.
Yes look it will be interesting couple of quotas.
Around the balance sheet, I'll say comments I'll make it just excluding PPP, obviously, depending on the timing of when a relief comes three that could change the shape of the balance sheet pretty significantly.
But certainly he was saying good funding in this environment certainly were not not seeing as many line opportunities. So if anything from a mix perspective, we may move more into securities and loans.
Over the course of the period, but certainly the focus for US is number one just any more high cost deposits that we have will continue to run those down to help with the funding costs that we've still got a little bit of room to move there maybe moving to a little bit more in security. So from a mix perspective, we may see margin drift down a little bit more from where we are now.
But we think it's manageable just given where the life portfolio.
Okay. That's already just are there any other higher across the board.
Borrowings that you could prepay our this though the last bit of it.
No that was the main one from a borrowing perspective. So now it's just really just working through that obviously as time deposits roll through and we'll continue to reprice those down with lots of money market that we can move down a little bit as well so more on the deposit side and the funding side now.
Okay. Thank you so much.
Okay.
Our next question comes from Jon Arfstrom with RBC capital. Please go ahead.
Hey, Thanks, good morning, everyone.
Good morning.
Just back to credit what's the message you're trying to send to us on credit.
I understand the loan grading and all the changes that you've made and I think you probably feel better prospectively in terms of.
You look at things, but what do you see things is better or worse stable what's.
What's the message you want to send off on credit.
So I would say our core portfolio outside of hospitality I would say stable to improving as far as the outlook as you.
Look in agribusiness all the indicators are positive if you look at all of the commodity pricing over the next six months most of the U.S.D. and other reports show positive. So I would see hopeful improvement in our agribusiness space.
From the Chief Credit Officer perspective, I do see uncertainty in our hospitality portfolio. That's just an area. We're trying to focus look at closely reviewing constantly we're trying to make sure that we have our arms around it we're trying to see what we can do to to carefully reduce that portfolio. So strategically going forward.
Our hope is to continue to be a strong community bank within our markets as Mark emphasizes small business, we want to grow there we want to grow and be open for business in the commercial space. We are going to continue to focus on how we can do you de risk our portfolio in the hospitality and to a smaller degree in assisted care space.
And that is really our focus so I am overly on the long term optimistic about us from an asset quality perspective, but in the short term, we have significant asset quality challenges within a hospitality space and we're just watching that I would say daily to see how we can continue to work through those.
Challenged part of our portfolio.
Okay, Okay, and then the other the other thing that kind of.
I think chronically is an issue in your numbers is the increase in nonperforming.
Loans each quarter.
And I guess, the <unk>, probably an impossible question, but do you have a gut feel on when you think the nonperforming loans.
Start coming down some but you move some this quarter and backfill, but any thoughts you have on that would be very helpful.
Well once again the uncertainty I talked about gives me a little bit of a pause. However, this month, we see some positive.
Movement in non accruals. So we'll have to see how this quarter goes but.
I am hopeful that were at a stable place, but we're just watch that closely we just I just can't say, which way we're going to go but I'm hopeful at the moment okay.
Okay.
Then if I can squeeze in one more on C.. So maybe it's for you Peter you, Steve, but the messages they one step up.
In the low 3% range, you phase and the regulatory impact that essentially captures it all is the message that the provision can.
Start to come down because of that because you've captured everything or is there a different message you want to send them on the provision outlook. Thank you.
So look at it obviously depends on the timing of Steve's comments around nonperforming assets, John but based on where we are now obviously at least what gives you the sort of the full look over the life of the portfolio. So.
If the environment stays as is an doesn't listen you know that's what we would hope, but obviously, we will need to roll that forward 90 days to see what happens here over the next 90 days.
Okay, all right. Thanks for the help.
Thanks.
Our next question comes from Damon Delmonte with KBW. Please go ahead.
Hey, good morning, guys up everybody is doing well today. So just kind of follow up on credit I think you guys had mentioned that you had sold a larger loan in the secondary market in and it worked out favorably.
What are your thoughts on you know trying to take a big step forward to de risk the portfolio with the hospitality around that that are giving you guys. Some issues is there any thought about trying to do a bulk sale.
We are looking at every opportunity on our hospitality portfolio.
This is the other thing we've learned is you know.
With the uncertainty with hotel you can also maximize your losses, if you're not careful if you do a bulk sale.
You look at our hospitality space, we do not have a large level of nonaccrual or nonperforming loans, we do not have a large level of specific allocations. So.
We are definitely looking at all options within our hospitality space.
And we have looked at.
Places here and there, but we have not seen a bulk sale to be in our best interest at the moment from the just the view of the market.
Got it okay. Thanks, and if I could just squeeze in one more I I'm just kind of the outlook for loan growth you know it was down nine 9% this quarter.
Do you expect it to kind of <unk> yeah.
It's affected the kind of trend lower but but what kind of case of a of a quarterly decline could we think about for the loans. Thank you.
Oh looked a lot depends on how we go with the de risking that Steve just talked about diamond. So soon.
Certainly if that works through a I would still expect to see a slight contraction here. So.
For the next quarter, just based on sort of current outlook.
Okay. Thank you very much.
Thanks.
Our next question comes from Janet Leigh with JP Morgan. Please go ahead.
Good morning.
My first question just just following up on hospitality annuity suite scored besides service, creating a just and then by the third party units Christine any teaching changes on that.
On that portfolio on a fundamental level versus what you saw in the second quarter.
Well, if you notice our big increases and that was driven by the third party was driven by internally by our own front line and second line review it wasn't really driven by the third party, we have the workout it to confirm but.
We did have a higher level taken prudent measures on special mention and watch category and it really just and we feel good about our footprint in the hospitality space compared to probably peers and other markets you could be in.
On the other hand, just the cobot uncertainty makes that difficult for me to answer I would anticipate higher levels of classified loans over time to a degree and we recognize that in our seasonal calculations and the way we look at the.
The allowance for loan losses are and our Hcl going forward, but we are I would say taking measured steps, but there is uncertainty as I said earlier in the hospitality space.
So we don't see any significant changes from what we what we focused on that's why we moved those to special mention and to watch, but we are like I said earlier, we're just looking at that.
I would say everyday monitoring it monthly monitoring a daily it's just one of those things we'll have to work through and really cobot impacts our portfolio more than anything else.
Okay.
And last quarter, you pointed to the expected improvement in asset quality metrics in the act.
It's still the case and the migration we saw in the Darien.
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All right or would you describe this as like one.
I would say yeah, what you saw in the AG space was one off that was a couple of relationships that had already been recognized EPS classified or substandard loans that ended up moving to non accrual that renewed cases, we have been careful on how quickly we upgrade that portfolios. We want to recognize that weve had two or three quarters of consist.
Cash flows so our hope is that as if those stay consistent we'll see improvement there, but were just taking prudent steps on how we're looking at that but yeah, we don't see any.
Like I say deterioration in that portfolio to a significant degree going into this quarter in the next quarter.
Okay.
If you don't mind, if I can squeeze in just one more the fair value Mark on loans, obviously that line item.
Volunteers.
Correct.
Order that included about 12 million charge for credit risk on the portfolio based on the updated dig deep on risk assumptions is this fair to assume that.
That's right it will be increased losses coming from the line item just like provision except that it flows through the noninterest.
Income on the piano the other side of the piano.
How should I didn't give out the job.
Right.
Yeah. Good question. So there's a couple of couple of things that impacted that this quarter. One was about an 8 million dollar charge on the disposal of that health care portfolio. Janet So yeah, we'd hope unless we get we're exiting other outlines is at a significant discount that's elevated and then also that credit charge, we mentioned in relation to sort of loss history.
I'd see that is a significant step up for this quarter that I wouldn't expect to see next quarter as well. So that was a significant adjustment that we made this quarter, but I wouldn't expect something of that magnitude next quarter for example.
Okay all right. Thank you.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Mark Baraka CEO for any closing remarks.
Great. Thank you operator, thank you all for joining US today again, if you have any follow up questions. Please feel free to reach out to make sure you stay safe and have a great day. Thank you so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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