Q3 2020 SB Financial Group Inc Earnings Call
Good morning, everyone and welcome to the SB financial third quarter, 2020 conference call and webcast.
I would like to inform you that this conference call is being recorded and that all participants are currently in a listen only mode.
We will begin with remarks by management and then open the conference up to the investment community for questions and answers.
I would now like to turn the conference call over to Sarah Amicus with SB financial. Please go ahead.
Good morning, everyone I would like to remind you that this conference call is being broadcast live over the Internet and will be archived and available on our web site at <unk> are that Youre State Bank Dot com.
Joining us today, joining me today are Mark Klein, Chairman, President and CEO, Tony CASM, Tino Chief Financial Officer.
And that's still gotten chief technology innovation and operations Officer and Joe.
Jon Gathman senior lending officer.
This call may contain forward looking statements regarding SB financial performance anticipated plant operational results and objectives forward.
Forward looking statements are based on managements expectations and are subject to a number of risks and uncertainties.
That could cause actual results to differ materially from those expressed or implied on our call today.
We have identified a number of different factors within the forward looking statements at the end of our earnings release, which you are encouraged to review.
SB financial undertakes no obligation to update any forward looking statement, except as required by law. After the date of this call.
In addition to the financial results presented in accordance with GAAP. This call will also contain certain non-GAAP financial measures.
A reconciliation a reconciliation of GAAP to non-GAAP measures is included in our earnings release.
I'll now turn the call over to Mr. Cline.
Thank you Sir good morning, everyone welcome to our third quarter 2020 conference call and webcast agreed to help you out with us we.
We continued to recovery.
This.
Order in many areas of our operation we saw our loan pipeline rebuild client liquidity stabilize forbearances dissipate and they eat and operations integrated.
The state bank, all the while the flat yield curve and low long term rates continue to drive our mortgage volume leading to record net income.
Highlights for this quarter, including $325000 pretax mortgage servicing rights recapture include net income of 5.3 million up 1.5 million or 40% increase over the prior year quarter and when adjusted for those non-GAAP impairment issues net income was 5 million up 33%.
Adjusted return on average assets of 164 basis points from the prior year quarter of 144 pre.
Pre tax pre provision our away for the quarter was 2.74% up 89 basis points or 45% from the prior year.
Net interest income of 9.3 million up 2.2% from the prior year as our 6% reduction in interest income was more than offset.
Why the 37% reduction in interest expense.
Coupled with controlled non interest expense delivered positive operating leverage in the quarter of 1.9 times.
Loan balances from the linked quarter declined 16 million, which reduced our year over year growth to over 62 million or 7.6% included in that were PPP balances of 82 million and eating acquisition loan balances of 16 million, excluding those items year over year loan balances were down.
35 million.
Deposits increased 166 million or approximately 20% year over year again, he'd and balances of 54 million and retention of PPP funding and our business D D. A's.
Have increased well beyond our core levels.
Expenses were up $1.8 million due to higher mortgage commissions.
The increase in our title insurance business and a full quarter of operational expense from the Eaton acquisition.
Mortgage origination volume increased to 200 million.
Up over 42 million or 27% year over year.
Asset quality metrics were a bit elevated from the prior year, although our level of 60 basis points of non performing assets remained strong.
We set aside this quarter $1.8 million in provisions all of which were related to COVID-19 future reserves and finally client alone deferrals.
Were down substantially from the linked quarter with the number and dollar of loans in forbearance status down 60%.
As you recall, our five key initiatives Weve touched on every quarter remain revenue diversity more scale for efficiency more scale and.
And more scope as well as operational efficiency and asset quality.
First revenue diversity.
This quarter mortgage volume and loan sale gains were up from the prior year, 27% on volume and 224% on gains.
Non interest income increased to 10.4 million from the prior year quarter of just $5.4 million, which includes a mortgage servicing impairment recovery as you mentioned 325000.
Adjusting for that impact non interest income was up from the prior year by 4.7 million or 88%.
Non interest income to total revenue increased to 53% well above our traditional average of 35% to 40%.
Our current mortgage pipeline continues to be near capacity with currently 325 loans in process for over $78 million.
We are on pace to deliver our largest mortgage production year ever with total volume likely now to exceed $650 million.
Peak title had another strong quarter with revenue up 29% from the prior year quarter and for the year up 91%.
We remain focused on expanding the scope of peaks business not only what state bank.
But our outside client banks throughout our tristate region as well in the coming quarters, we intend to improve our percentage of higher revenue commercial title insurance policy business versus lower revenue higher volume title opinions to drive performance higher.
Our Indianapolis mortgage loan operation and office continue to gain market share during the quarter as we originated over $12 million of volume.
Thus far in 2020, we have originated now 35 million compared to just $4 million.
We produced over the same period last year.
Our servicing portfolio in this newer market.
Now reflects a 143 households.
For over 28 million.
Wealth management assets under our care continued to rebound over the prior year end with overall market improvement of 6 million new sales of $20 million.
The new contributions of over 11 million, leading to 522 million and total assets under management or a net increase of 22 million.
Pandemic has certainly revealed unique challenges in this business line.
But as we mentioned last quarter, we are committed to engaging each of our new 700, PPP clients in the coming months with potential wealth solutions.
Secondly.
More scale.
Loan growth continued to be under pressure in the quarter as our market slowly reopened from the.
Current of Irish shutdown.
Our 62.5 million and growth from the prior year is elevated due to our PPP loans and the loans, we acquired from the Eden acquisition.
As we adjust growth for these items year over year, our loan balances would fall on a core basis as I mentioned by $35 million.
Interesting to note over 19 million would be related to loan pay offs due to several companies selling their company.
That said our expectations to grow loan balances organically in the fourth quarter and on into 2021 remains strong.
In fact, our current commercial loan pipeline today rest at approximately $31 million.
Our deposit base expanded to $1.01 billion up $166 million or 20% increase.
Included in that growth is $54 million in need and deposits and our estimate now that 50% of the PPP loan funding remains in our clients' operating accounts.
We expect these funds to gradually dissipate through the final quarter of the year and on into 2021.
And finally, we continue to express interest in strategic partnerships Opportunistically that can add scale and improve returns.
As of October we have successfully integrated the Eden transaction and the state bank with positive impact to our client base.
Third is our strategy to develop deeper relationships more scope.
We continue to monitor and assist all of these 700 clients that we extended PPP loans due in the second quarter.
One of the key initiatives from our PPP client acquisition strategy was and is to expand these relationships and develop long term partnerships the date.
We have added over 100, new deposit accounts from these clients new clients and we continue to call on each of them for additional banking services.
In fact be on PPP Cross sales, we have identified now over 1000 referrals to our business partners through the third quarter that have led to over $71 million in additional business across all business lines and our entire company.
Expanding our reach into the household to increase our share of wallet remains a critical ingredient to our growth strategy.
We are excited to now include the opportunities to expand our presence in each of Eaton's 1400 households.
While the pandemic has made in person outreach certainly more difficult. We are contacting our clients every day via phone text emails discover new opportunities to expand relationships, we embrace customized communication channels with each of our clients.
Additionally, we are in the midst of converting our CRM system to one that will provide a more dynamic view of not only the entire client relationship, but more importantly, one that will identify potential new opportunities as well.
Fourth is.
This operational excellence.
The transition to a more normal residential purchase market continued in the third quarter, we originated 49% of our volume from purchase transactions or approximately $99 million compared to 35% or 79 million in the prior quarter.
With this trend expected to continue we.
We have focused our efforts on improving closing times and ensuring that our pipelines remain at or very near our capacity.
In other words, optimizing our underwriting process and closing and loan sale capacity.
As a result of our success our servicing portfolio now stands at over 8500 loans with principal balances of approximately 1.29 billion.
Expense levels were up from the prior year quarter, but we improved our operating leverage to 1.9 times as I mentioned due to our revenue growth.
For the full year expenses and revenues were impacted by the servicing rights impairment and the Eaton merger costs.
When we adjust for these non-GAAP items going forward, our operating leverage for the year.
Improves from a reported 1.3 to the 1.9 times as I mentioned.
We continue to examine all of the expense control initiatives that we put in place earlier this year.
And finally fifth and final key initiative as asset quality at quarter end, we had 204 loans in forbearance for a total dollar amount of approximately $81 million, which was down by 306 loans and $114 million from the linked quarter or 59%.
Included in the totals were 42 million of sold mortgage loans with reduces our on balance sheet exposure to just $38 million, which was down 115 million or 75% from the linked quarter.
These trends are encouraging however, we still have concerns regarding certain segments of our portfolio as we still see some weakness in our hotel restaurant and elder care exposures.
We feel strongly that our prudent underwriting process over the past decade.
We will continue to deliver a stable loan portfolio, however should anil.
Unexpected stressed surface, we have made provisions to bolster our loan loss allocation and provision this quarter.
We increased our provision expense to 1.8 million and for the year now $3.7 million.
Our loan loss reserve is now nearly $12 million and the reserve ratio is up 30 basis points from the prior year to 1.33% if.
If you adjust the pp balances out our reserve would increase to 1.47%.
Coverage of nonperforming loans now stands at 164% and remains above median of our peer group charge.
Charge offs for the quarter were just 21000 and year to date, our loan charge off ratio was slightly above historical levels at 10 basis points or 662000.
We feel our approach to build our reserve and.
Stay ahead of market stress, if you will will bode well for future quarters and operating performance.
Before I turn the call over to Tony I do want to make note of our dividend announcement. This past week up to 10, and a half cents per share, which is up 11% from the prior year and up 5% from the linked quarter.
We do continue to assess our capital strategies to fund balance sheet growth as we prudently returning capital to our stockholders via our common stock buyback currently in place and will be in place throughout 2020.
Now I'd like to have Tony give us a few more details on our quarterly performance Tony.
Thanks, Mark and good morning, everyone.
For the quarter, we had net income of 5.3 million or 69 cents per diluted share.
As Mark noted earnings were impacted by a.
300000 recapture over our prior mortgage servicing rights impairment.
And absent that item net income would have been 5 million up $1.2 million, which is a 32.7% increase.
Quarterly highlights include total operating revenue up 36.4% from the prior year and up 34.2% when we adjust for the illness or recapture.
Operating expense was up 19.3% from the prior year.
Loan sales delivered gains of $8.2 million from mortgage small business and agriculture.
Which are up 5.2 million from the prior year.
Margin revenue up 2.2% as our reductions in funding costs from eating and some other activities offset the 6% reduction in interest income we experienced.
As we break down further the third quarter income statement.
Starting with margin.
As I said net interest income was up 2.2% from the prior year and up 4.4% of the linked quarter.
Average loan yield for the quarter of 4.51 decreased by 64 basis points from the prior year.
Overall, earning asset yield was down 102 basis points to the prior year.
Clearly the PPP loans depressing loan yield as well as the higher levels of cash balances, we continue to experience in the quarter.
As our clients PPP fundings are utilized in the coming quarter.
And beyond cash levels will naturally decrease and were starting to see some improvement on our loan pipelines.
On the funding side is expected, we again reduced the cost of our interest bearing liabilities from the prior year for the quarter the rate on our interest bearing liabilities was 75 basis points, which is down from the prior year by 58 basis points and down from the linked quarter by 14 basis points.
Net interest margin of 3.41 was down 52 basis points for the prior year, the impact of PPP excess cash and eat and we're.
Headwinds to our margin.
Total interest expense cost are down by 38% for the prior year.
And down 10% from the linked quarter we.
We continue to look for opportunities to improve margin in the coming quarters with an expanded loan pipeline.
Further declines in funding costs and higher loan origination fees.
Total noninterest income of 10.4 million was up 5.1 million or 94% from the prior year, reflecting the higher mortgage origination volume.
As we said we did have a $3 million.
The servicing rights recapture.
And adjusting for that recapture noninterest income would've been up 4.7 million or 88%.
Our title agency had a very strong quarter closing, a large number of transactions and delivering revenue of 500000, which was up 29% from the third quarter of 2019.
Third quarter mortgage production was strong at 200 million in gain on sale yields continued at a record pace.
The shift to purchase volume from refinance continued in the third quarter.
In total gains on sale came in at 8.9 million, which was 4.9% on our sold volume of $166 million.
The focus and change we made several years ago to hedge our pipeline and become more aggressive in secondary paved the way for these higher than expected gain numbers, our servicing portfolio of 1.29 billion provided revenue for the quarter of 814000 and is on pace to deliver $3.2 million in total revenue in 2020.
Market value of our servicing rights improved slightly this past quarters, our calculated fair value of 66 basis points was down 25 from the prior year, but up one basis point from the linked quarter and did result in a 300000 recapture.
At September Thirtyth, our mortgage servicing rights were $8.5 million, which is down 18% for the third quarter of 2019, but up 4% from the linked quarter.
Our total impairment that remains is currently $4.2 million.
Operating expenses this quarter were $11.3 million, which is up $1.8 million or 19% from the prior year, but down 3% compared to the linked quarter the.
The higher level of mortgage volume drove compensation higher.
As we look at the year operating expenses up 5.2 million or 19%. However, if we normalize for similar mortgage volume.
Peak title in the merger costs the year to date growth is $2.7 million or 10%.
As we turn to the balance sheet loan Outstandings at September Thirtyth stood at 886 million, which was 72.7% of the total assets of the company.
We had loan growth of $62 million in asset growth of 175 million for the prior year.
TPP loans of $82 million at Eton loans of $15 million of inflated our year over year growth levels.
Adjusting for these two factors loan volume loan balances declined from the prior year by $35 million.
As our loan pipelines contracted due to the pandemic.
Deposit levels are up to 166 million or 19.6% from the prior year as clients are maintaining higher levels of liquidity.
In addition, a large percentage of our disperse PPP loans have been retained in our clients operating accounts.
Eden acquisition as we've discussed added $54 million in deposits.
Looking at capital, we finished the quarter at $141.3 million, which is up 7.1 million or 5.3% from the prior year on their equity to asset ratio stands at 11.6%.
Were 12.4% when we exclude the PPP balances.
On a per share basis tangible book value is up 0.74 per share from the third quarter of 2019 or 4.9%.
We continue to buy back our shares under our new buyback authorization, we repurchased nearly a 100000 shares to date with pricing, averaging 90% of tangible book value.
Total nonperforming assets of 7.3 million or 60 basis points or up 2.7 million from the prior year, but down 400000 to linked quarter included in our numbers are.
800000 in accruing restructured credits these restructured credits elevate their nonperforming levels by seven basis points.
And absent these rigs accruing restructured credits or total nonperforming asset ratio would reduce to 53 basis points.
We continue to monitor the at risk segments of our loan portfolio in the improvement in for parents volume as a positive trend in our asset quality.
As Mark previously mentioned provision expense for the quarter was $1.8 million up from both the prior year and linked quarter.
Our absolute level of loan loss allowance $11.8 million up from the prior year by 39%.
And our allowance to total loans percentage has increased from 1.03% at September 30 up 19% to 1.33% currently and when we exclude the PPP loans the allowance percentage rises to 1.47%.
On a year to date basis, net income of $9.6 million up $1 million or 11.3% from the prior year with adjusted net income of $12.9 million up $3.2 million or 33%.
On a pre tax pre provision comparison year to date GAAP earnings were up 4.4 million or 40% and when we adjust for the illness are and merger costs. These earnings are up $7.2 million or 58%.
Now I'd like to turn the call back over to Mark.
Thank you Tony clearly a very good quarter financially as we continue to manage the complexities of the pandemic, while assisting our current clients and prospects being in new ways for new ones. In addition to our solid financial results, we achieved several additional milestones in the quarter.
Our first and foremost we completed the operational and system integration as we've discussed.
With our Eaton operation and those Eden clients.
It was a tremendous team effort that enabled us to add nearly 4000 loan and deposit accounts was 73 million and combined balances to our existing infrastructure deal.
The team has done a great job in ensuring a smooth transition for our new clients and offering new products to those clients. As a result, we have increased deposits by now over $4 million since the merger announcement back in February.
Our two 120 plus year old brands are and will remain client centric as we focus on client needs and community care to improve performance.
Also we recently relocated to our office in Washington to a more visible central business District. This improved exposure will enhance our ability to remain relevant in one of our key AG markets and finally, we are pleased to report the recent opening of our newest location in the heart of downtown Findlay.
A market, we know well we.
We intend to leverage our new office in one of Ohio's best regions to drive and grow private client group and our wealth management business line.
Now I will turn the call back over to Sara for questions.
Thank you we are now ready for our first question.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one.
To withdraw your question you May press Star and two.
If you are using a speakerphone, we do ask you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
Once again that is star and then one to ask a question.
And our first question today comes from Brian Martin from Janney Montgomery. Please go ahead with your question.
Hey, good morning, everyone.
Good morning, Brian Hey, Brian Hey.
Hey could you guys just start maybe just a little bit obviously, two really strong quarters here on the mortgage side.
Yes, sure outlook on the fourth quarter and kind of Big picture next year I mean, obviously the Tony the gain on sale was really strong this quarter. So just.
Based on what you guys did on the pricing side and hedging side, just kind of curious how you're thinking about that in the production next year and in the coming quarters here.
Just a couple of comments, Brian Tony can kind of clean it up but at a high level. We're committed to the business line that we brought to one of our executives into the business line to give some more depth and bench strength, David homily as a regional president in Columbus, I was now overseeing that business line and he certainly has a clear vision for.
Sure.
Driving that volume on up above that six and 700 million annual range.
And so with that in addition to.
Attracting a and lifting out a team and northeast, Indiana. We're looking at and then also doing the same thing in the Indian market, where we are now gaining a little bit of traction.
So I would hope that we've set a bar now higher than where we've been before and with our.
New management in that business line.
As well as the additional focus on northeast, Indiana and Central Indiana.
We can continue to do a volume that we've seen here in this year and fourth quarter appears to be very strong as well as a mentioned pretty strong pipeline.
And again optimizing all those operational pieces that.
That enables us to price and keep that pipeline fall. So that we're using our talent, 100% plus so Tony I know you've got some thoughts on some numbers fourth quarter.
Brian You know I think you know we saw kind of Q3 be down.
Fortyish million from Q2 in terms of maybe an 80% level and you know I think as we look at the pipeline today, we're probably on that same kind of 70% to 80% pace of Q3, so somewhere in that 150 to 160 million range is what the pipeline looks like as Q4 as we see some seasonality.
I think were not.
Naive that.
You know 2020 has been a very unique year and competition has.
Kind of allowed pricing to be at a premium level throughout this year and we certainly feel like we've taken extreme advantage of that pricing.
We think pricing will probably get a little bit more competitive we already see some some more players getting into the market and competition for.
And willows in underwriters is getting higher and more competitive.
But we're still as Mark indicated very engaged in the business and you know I don't know that we've come to a realization yet of what our expectation is for 2021.
Do I think we can do 650, we certainly have the capacity is the marketplace, there who knows that I think we'll know more about that soon well final comment Brian as we've talked with our staff. The variable is not the number I mean, the way. We plan is that we choose a number of what we think we are capable of and then we go build the plan around the number so it's not a.
Matter of saying here is all we can do we say here is what we need to do and then build the plan around that just like we've done for the last 10 years. So that's going to require some more producers and northeast, Indiana Central Indiana as well as Columbus is going to be where that's going to happen. So my expectation would be that we continue to shove the business line on up the curve too.
Higher numbers, all while the economy recovers in the yield curve Steepens and commercial then takes over with now.
Gotcha, Okay. No that's helpful hearing about the new the northeast.
At the end and a little bit more adept in India will certainly help certainly help.
In the in the production next year. So okay, how about just Tony you mentioned or Mark the loan pipeline.
As looks like it's picked up a little bit, but just this I guess relative to pay offs and whatnot.
How you're thinking about the loan the commercial loan book as you go forward here and just with what your what demand looks like with some cautiousness surrounding the pandemic here.
Yes, Brian This is Jon Gathman, just quickly to address that I, yeah, we've seen a the pipeline build considerably here last couple of months.
As you pointed out and as we talked in the.
Transcript that we took some payoffs on some businesses is sold to large conglomerate. So there really wasn't much we can do about that.
And probably an unforeseen event and the pandemic as some of those business owners.
Decided to sell their businesses and there wasn't going to be a whole lot better time given.
Where the market was for them to sell a given everything else going on in the world and just eliminate some of those other concerns that said our pipeline remain strong notwithstanding the second quarter, largely because of the PPP and the pandemic our pipeline remains strong in the third quarter in the fourth quarter, we've seen a nice uptick.
In a variety of businesses in a variety of regions, it's pretty it's pretty diverse in terms of where it's coming from and geographically and in loan type. So pretty pleased that 31 million, it's probably a conservative number we're optimistic that we'll do a little bit better than that here in the remainder of 2020 and heading into 2021.
Got him in the payoffs John I guess is there any change in what you're seeing on that I know they are hard to tell but just any change in that task.
Hey, guys you if the next couple of quarters.
Brian I think we saw most of that happened here in the late second early third quarter, and we haven't really seen much of anything happened. Since then I think most those businesses again.
Kolowich, well, but I think the pandemic hastened some of those decisions and as a.
That is now sort of ceded in a lot of the businesses that we're going to sell have already sold and some of our other customers that may may have considered that have moved on and moved into a growth mode. So I think we have seen that slow here as we've entered the fourth quarter and I'd not say, we won't see any but I think we will return to our normal pace here.
In the fourth quarter and beyond 2021, and John I think we would also agree that.
Several of the businesses that we finance we've been on the other side of the coin they've been they've sold and we were the bank, they're ready to help the people that bought the company. So what's good on one side of it is not so good on the other side, but we've been the benefactor and Simos acquisition, Yeah, absolutely and that's a fair amount of our current pipeline as we speak.
It's a great point.
And Brian I might add just one other thing that Conversely helped us a little bit on NIM is that several of those companies that sold were fairly large PPP borrowers and when those were paid off as part of the transaction. Then we were able to accelerate those fees that we were holding so that actually boost a little bit of our.
Our margin this quarter.
Got it got it was going to ask Tony or whomever, Johnny the PPP, what where does that stand today as far as forgiveness and just if you can remind me the the remaining the remaining hundred fees that you expect to collect.
Today, how much is left to be booked into the piano.
Tony can help me with the exact number but in terms of where we are with PPP. We just started accepting applications Monday formally we had accepted some before that but formally we've put a number of communications out to our clients about how that process will work as you are aware, Brian Congress passed some guys are espeed rather.
Some guidance on how that will work on 50000 hours and last which is a little right around half of our total TPP portfolio in terms of numbers not dollars. It's a very small dollar amount but.
Since we have just started and the Sps finally started moving on some of them.
My anticipation would be we'll see very little of that some but very little of that in the fourth quarter here of 2020, and probably the vast majority if not 100% of it will hit in 2021, just because we have 60 days to work through those and then SPS has another 90 days decision them. So I think the timeline will prove out to be more of a fact of 20.
21 in our total number Tony was right around.
Yes, we had initial booking a 3.1 million we've taken about 600000 through the first call. It four or five months of that so we have 2.5 million unamortized left on our books.
And as John said, we'll probably.
It'll be very similar to Q3 and Q4 as we have the normal amortization and we might have a few payoffs and you know if all things go where we think that the bulk of that will probably be realized by April 15th of 21 I would suspect.
Okay, and the amount that was in that the.
The third quarter, Tony was about how much just whether it be either the unearned fee or just the total total benefit too and I have from PPP, including the beating the loan interest.
Yeah. So Q Q2 was about 400000 and that boosted by 50% in Q3 to about 600000. So we've taken a million dollars between the fee amortization in the 1% interest through got kind of September.
Perfect. Thank you.
A couple of just the you talked about using the obviously the credit quality still really strong and the mortgage guarantee of taking some of that and putting it into reserves for the potential risk of the pandemic I guess is your expectation or.
And the fact that the deferrals are down that you can still build the reserve a bit more as you go to the final quarter of the year here is to do.
Typically said, even further or I guess is your sense that the reserve build is largely done now from.
From the pandemic given kind of the trends you're seeing in credit.
Just a couple of high level comments, John can opine on this one but just at a high level Brian.
I've always been a vocal proponent of building reserve when you're making the money and for some of our models don't allow us to put money away. If you don't have any losses well. This year is taking care of a little bit of that.
But that said, we think we've got a pretty strong portfolio and short of John one of our larger losses. If you take one of our one credit out of the last piece I think we'd be like normal like one basis point or something but.
We want to continue to build it and I think we're getting it up to where we need to have it and I think it all as I mentioned in the <unk> and the webcast Brent I think it will bode well for subsequent quarters as.
As we see this pandemic play out on the asset quality, we think we have actually emerging but John I know you got some thoughts and all that well I would just say I mean, there's no accounting for what a prolonged.
Pandemic end or more closures would do and that's probably not probably that is exactly why we are building our reserve that said our current situation I agree with mark that.
I mean, we believe strongly that we've prepared or borrowers in terms of barring structures and the types of bars were brought in that can survive some of these issues.
That they're currently in and you look at our hotel portfolio. For example, we have some pretty well healed borrowers and there was a fair amount of cash. So we think that will help them in the in the short run.
So.
Absent something else happening in the pandemic World, which again is why we're putting money aside we think our asset quality is going to hold in there about current levels and maybe slight elevation with some credits, but a lot of those borrowers have already entered into the repayment structure operating and putting presumably well.
And Brian just a just a follow up on that just participated in a federal Reserve conference call and there was a fair amount of latitude that theres, certainly, giving everyone, particularly as it comes to hotels.
Because we've got operators as John said, the very liquid, but if you're willing to offer a forbearance mean, they've generally willing to take it.
But we could have stood firm and said, we're not going to do it anymore and I think we would be fine, which would have decreased our loans under forbearance. If we would have done that.
But we did and we've accommodated that they've given us the federal reserve given us the latitude in that arena and so we've kind of taken it up but we could have decreased our balances even more if we just stood said no. This is that two of them as yet, but I do know that Dave proclaimed the federal reserve that going even up to a full year.
In that industry has been a witness and merited, we're not there yet, but we're still probably pretty bullish on liquidity and the clients that we have in those the hospitality arenas.
Gotcha, Okay and then the last two for me was just be was there any change it doesn't sound as though but when you look at the criticized and classified so kind of any change in trends in the special mention and classified this quarter I know you talked about.
Some of the hotels and.
Elder care, it's just not sure how they're performing if you're seeing any migration on those or.
Any any trends of note.
Uh huh.
In the well for 2021 Holistically, we saw one credit migrate earlier this year that had nothing to do with the pandemic, that's right around $1.8 million.
We did see an elder care facility that probably has been severely impacted by the pandemic.
But that's a fairly small balance net where carry you SD guaranteeing that loan and and we feel pretty good about the prospects of that again, not a huge balance, but really no. Most of our increase in the second and third quarter has been been brought on by non pandemic related issues that we feel like we have a.
Separately addressed in every case.
Okay. So there was a bit of it was some increase in the special mention and classified from Twoq to Threeq you nothing significant as what it sounds like then.
Yeah, It really comes down to three credits Brian.
And two of them non pandemic related one pandemic related but three large commercial credits probably drove the number as much as anything.
Got you Okay and then just the last one for me was just on.
Your outlook for just kind of the the margin in liquidity and just how you're thinking about that it sounded as though you are pretty optimistic Tony with with regard to bring on the deposits down a bit more and maybe holding the.
Cool holding.
The asset side with maybe a few more loan pays but just any more commentary would be appreciated.
Yeah, I think that that summarizes it very well I mean, you know I think we've all been you know so.
Surprise blown away by the amount of liquidity by our consumer clients I mean, the amount of liquidity and cash out there and what the majority of customers are doing is leaving it in the bank, they're not spending money on boats.
Boats or cars or those kinds of things now that may change, we don't know, but we've seen the bulk of our CD maturities I'm, you know and customers looking at that and just happy to roll it over and put it into money market or a savings account and just.
Sitting on the sidelines and waiting and needle art. Our decision tree has been you know how how comfortable are we that the loan pipelines are going to improve enough that we can sit on cash for a little bit longer or should we go into the bond market and make some long term investments we've taken a little bit of that off the table, but we still are fairly convinced.
That our loan pipelines are real and we've got confidence that they're going to come back to us and in in fourth quarter and into 21. So if we have to take a temporary blip on a little bit more cash we're happy to do that in the interim.
Got you okay.
I appreciate all the color and nice quarter guys.
Thanks, Brian debt reduction.
Once again, if you would like to ask a question. Please press star and then one to withdraw your cell phone. The question you May Press Star and two again that is star and then one task a question.
And ladies and gentlemen at this time Im showing no additional questions.
I'd like to turn the conference call back over to the management team for any closing remarks.
Thanks, Jamie I once again, thanks for joining us and we certainly look forward to talking with you again in January as we report our fourth quarter of 2020 as well as the overall year end results. Thanks for joining good-bye take care.
And ladies and gentlemen, with that we'll conclude today's conference. We do thank you for attending you may now disconnect your lines.