Q2 2021 Heritage Financial Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Heritage Financial Earnings Conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions given at that time.
If you should require assistance during the call. Please press Star then zero.
As a reminder, the conference is being recorded.
I'd like to turn our conference over to our host CEO, Jeff. Please go ahead.
Thank you William.
Welcome and good morning to everyone who called in.
Or those who may listen later this is Jeff tool.
Heritage attending with me are Don Hinson, Chief Financial Officer.
Brian Macdonald, Chief operating officer, and Tony <unk>, Chief Credit Officer.
Our earnings release went out this morning pre market and hopefully you've had an opportunity to review it prior to the call. We have also posted an updated second quarter investor presentation on the Investor Relations portion of our website, which can be found at heritage Bank and W. Dot com.
We will reference the presentation during the call.
I'd like to point out that we have a new a new format for the investor presentation that includes more granular detail on a variety of topics.
Hope you find it useful and we welcome feedback on it.
Please refer to the forward looking statements in the press release.
We're very pleased with our financial performance for the second quarter.
We continued our focus on carefully managing expenses with good success, including lower non interest expense and improving expense ratios.
Additionally, our long standing focus on credit quality and managing loan concentrations continues to play out well for us as the pandemic recedes.
On that discipline has enabled us to report more favorable credit trends and recapture some of our reserve build from last year.
Combination of these factors has allowed us to report EPS of <unk> 90 per.
For Q2, as well as an ROA of 185%.
While overall loan volume was soft in the second quarter. Our team is fully focused on developing new business opportunities and we continue to bring in new customers, including many prospects, we help with P. P. P round 1.
With the recent elimination of Covid restrictions in our region.
Our teams have been focused on more traditional outreach to customers and prospects. We are already seeing the results in a rapidly expanding number of opportunities where deposits and loans, which positions us well for the balance of the year and into 2022.
I also want to add that we've continued to focus on completing important technology initiatives during the past year, which we have highlighted on page 6 of the investor deck on.
Our C. O 360 initiative provides us with a fully automated commercial underwriting platform and heritage 360 day provides us with a fully automated customer relationship management platform.
All of which will be fully functional as we roll into 2022.
These undertakings together with future enhancements will enable us to be more efficient.
On enhanced capacity on the team and allow us to provide a more seamless customer experience.
It's very exciting for our team to have the initiatives fully deployed across the banks out.
Well move on to Don Hinson, who will take a few minutes to cover our financial results.
Thank you Jeff.
As Jeff mentioned overall profitability was very positive in Q2 I'll be reviewing some of the main drivers of our performance.
As I walk through our financial results.
Otherwise noted all the prior period comparisons will be with the first quarter of 2021.
Starting with net interest income there was an increase of $2 million due mostly to an increase in income from PPP loans.
And the recovery of interest from pay offs of non accrual loans.
Another factor affecting this line item was an increase of $121 million in average investment balances.
The net interest margin decreased due mostly to lower core loan yields.
And a higher percentage of excess liquidity.
Alright, and interest bearing deposits increased to 15, 2% of average earning assets compared to 11, 8% on the prior quarter.
This increase in the percentage of overnight cash was offset by a similar decrease.
And the percentage of loans to average earning assets.
Trends in the composition of average earning assets as shown on page 26 on the Investor presentation.
Removing the impact of.
Discount accretion and PPP loans.
The yield on loans increased 9 basis points.
This increase was due mostly to an 18 basis point positive impact from the pay off from non accrual loans. During Q2 Q2 compared to a 5 basis point impact in Q1.
Brian will discuss loan production imbalances, including PPP lending in a few minutes.
We continue to work down the cost of our deposits with interest bearing deposits decreased 3 basis points.
Our cost of total deposits decreased to 10 basis points in Q2 down 2 basis points from Q1 levels.
More information regarding deposit growth in cost deposits can be found on page 24 on the investor presentation.
Yeah.
All of our regulatory capital ratios remained strongly above well capitalized thresholds and our risk based capital ratios grew strongly in Q2.
The combination of strong liquidity and capital gives us tremendous flexibility as we can continue to grow the bank and.
And you can see page 28 of the Investor presentation for more information on capital and liquidity.
Non interest income saw a slight increase per.
<unk> due to higher fee income being partially offset by lower mortgage loan sale gains.
Fee income increased mostly due to higher interchange income.
As activity has increased with our economies in the Pacific northwest opening up.
We expect our quarterly mortgage loan sale gains will continue to decrease in the near term.
Due to lower volumes and margins.
We continue to see nice improvement on our overhead ratio.
Due to a combination of expense management measures and asset growth our overhead ratio decreased to 2.06 per cent compared to 2.22% on the prior quarter and down from 236% in Q2.2020.
Non interest expense decreased in the prior quarter due mostly to elevated costs in Q1 relating to the January branch consolidations and professional expenses related to PPP round to originations.
The most significant impact to our earnings in Q2 was a reversal of provision for credit losses in the amount of $14 million.
Of this amount $12.8 million was related to the allowance for loans and $1.2 million was related to the allowance for unfunded commitment.
Although partly due to lower loan balances and a net recovery in Q2, the most significant factors to the provision reversal was due to improved economic outlook.
In addition, we are seeing improvements in many of our credit quality metrics.
I will now pass the call on to Tony who will have an update on these credit quality metrics.
Thank you Don in the second quarter, we continued to see improving credit quality across our loan portfolio. The ending of many COVID-19 related restrictions in both Washington, and Oregon has allowed many of our borrowers to move back towards a more normalized level of operations.
For the second quarter, non accrual loans declined by $17.5 million or 33% from the prior quarter end.
As of June 30th non accrual loans totaled $35.3 million or <unk>, 84% of total loans.
$10.7 million of the decline was the result of a full payoff of an agricultural lending relationship that was originally placed on non accrual status in the third quarter of 2019.
The remainder of the decrease was due to various paydowns and payoffs of multiple loans that have been subject to long term workout strategies and we're not pandemic related.
The addition of new loans to non accrual status in the second quarter was $401000, which is consistent with the low level that we experienced in the first quarter of 2021.
Other than non accrual loans the bank has no other nonperforming assets.
Criticized loans those risk rated special mention and sub standard declined by 12, 5% or approximately $34 million from the total at the end of the first quarter and 19% from December 31.2020.
While improving criticized loans remain elevated when compared to pre pandemic levels at $235.7 million criticized loans or approximately $93 million higher than December 31, 2019, which we consider to be representative of our pre pandemic our normal levels.
It is important to note that criticized loans on the hotel and restaurant industries are most heavily COVID-19 impacted industries currently totaled $89 million. This seems to indicate that absent. The COVID-19 impact on our loan portfolio credit risk has remained relatively stable when compared to pre pandemic levels.
For more information on loans in the industry categories. Most impacted by COVID-19, please refer to page 21 of our investor presentation.
We ended the quarter with net recoveries of $158000 through the 6 months ending June 30th the bank is in a net recovery position of $333000 along with a very low commercial loan charge offs were continuing to see declining levels of consumer loan losses, as we wind down our indirect lending activities.
Our success in achieving pay offs in several long time problem loans resulted in the recovery of approximately $2 million on interest and fee.
During the quarter.
We are continuing to see declining levels of loans that were modified for a COVID-19 impacted borrowers under the cares Act.
As of June 30th there were 57 loans totaling $41 million that remain in our payment deferral modification status.
This is down from 67 loans totaling $47 million at the end of the first quarter.
It is important to note there are 3 relationships that totaled $31.7 million that accounts for 77% of the total remaining modified loans.
These 3 customers are in the hospitality or travel industries and their individual financial performance continues to trend in a positive direction.
The modifications were done in 2020, and all are currently making some level of monthly payments.
Under their respective modification plans, they just won't be back to pre pandemic payment levels until later in 2021.
It is our expectation that we will not compile this modification data in future quarters as they continue to decline and become less meaningful.
In summary, we're pleased with the improvement on our credit quality metrics and we're also pleased to see the strength of the recovery in the Washington, and Oregon economies barring.
Barring any new economic setbacks, we expect to see a continuation of this positive trend in future quarters.
Brian Macdonald will now have an update on loan production and our SBA PPP activity.
Thanks, Tony I'm going to provide detail on our second quarter production results, starting with our commercial lending growth for.
For the quarter, our commercial teams closed $152 million in new loan commitments down from $226 million last quarter and down from $212 million closed in the second quarter of 2020.
The commercial loan pipeline ended the second quarter at $492 million down from $540 million last quarter and up from $421 million at the end of the second quarter of 2020.
We are continuing to see an elevated level of new loan requests from customers and prospects similar to the first quarter and remain optimistic this will continue to grow with most restrictions in Washington, and Oregon being lifted by the governors at the end of June.
And our bankers out actively meeting with customers in person and in some cases for the first time in over a year.
Loans, excluding SBA PPP balances decreased $46 million during the second quarter due to an elevated $168 million of prepayments and payoffs. This.
This included $16 million of non accrual loans and is in addition to the continued runoff of the indirect consumer loan portfolio, which declined $24 million during the quarter.
Consumer production the majority of which are home equity lines of credit was 23 million from the second quarter up from $16 million last quarter on up from $19 million from the second quarter of 2020.
Moving to interest rates, our average second quarter interest rate per new commercial loans, excluding PPP loans was 347%, which is down 6 basis points from 3.53% last quarter.
In addition, the average second quarter rate for all new loans, excluding PPP loans was $3.4 5% down 21 basis points from 366% last quarter.
The mortgage team closed $49 million of new loans in the second quarter of 2021 compared to $43 million closed in the first quarter of 2021 and $53 million closed from the second quarter of 2020, the mortgage pipeline ended the quarter at 41 million versus $36 million in Q1.
And $51 million in the second quarter of 2020.
Refinances made up 63% on the pipeline at quarter end.
Moving on to SBA PPP forgiveness, the SBA PPV forgiveness process continues to progress smoothly as of last week, all but 275 of our 4642 round 1 PPP customers have submitted an application for forgiveness.
We also opened for forgiveness for round 2 PPP customers in May and as of Monday had received 469 applications out of 2542 total round 2 of PPP customers.
Please go to page 20 in the Investor presentation for more detail on PPP loans I'll now turn the call back to Jeff.
Thank you Brian as I mentioned earlier, we're very pleased with our performance to date, we're also delighted to be pivoting back away.
Away from our defensive posture over the last 15 months in June we began bringing back remote employees and we expect most of our remote employees will return to the office over the summer with substantially all of our employees' settled into their go forward working environment by Labor day as.
As Brian mentioned earlier, we're seeing a nice upswing in activity across the bank with deals coming from existing customers and new high quality prospects.
We remain cautiously optimistic that we will see medium to high single digit growth as the year progresses.
We also expect to continue our focus on expenses with the consolidation of 4 more branches in October which together with the 9 branches consolidated in earlier. This year is at 21% reduction in our branch footprint.
As Don mentioned earlier, our capital levels.
And our robust liquidity provides us with a strong foundation to address challenges and to take advantage of opportunities. Our focus is on growth supported by efficient operations that will allow us to continue to deliver consistent long term performance.
That is the conclusion of our prepared comments Williams. So we're ready to open up the call to any questions. Our callers may have.
Ladies and gentlemen, if you wish to ask a question. Please press London zero on your touch on phone.
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You're using a speaker phone please pick up the handset before you press the numbers.
And we'll go to our first question from the line of Jackie Bohlen. Please go ahead.
Hi, good morning, everyone.
Morning.
Okay.
Dial into loan growth, just a little bit more on it.
If there were any factors in the quarter that was all tied in.
Like fewer commitments this quarter than last.
Yeah, I think Brian you want to jump in on this too, but I think theres a couple of things Jackie This last quarter, we saw.
We saw the pipeline kind of stretch.
Stretch out we tend to focus on our pipeline of what we can see coming at us in 90 days.
So that that was a factor and I think part of that may have been.
The slowness of our region to open up people were putting things off and moving it forward.
Brian you want to join with some comments.
Yes, just to pick up on Jeff's first point, we did see the closing percentages a little lower than normal on the pipeline and then.
The night the over 90 day pipeline, which we don't report on it.
It's actually.
Up to close to $120 million so.
Some of the opportunities event.
Building on there, but not reported in the.
Within the 90 day pipeline.
The with the reopening at at the end of June.
Jeff and I have been out more and.
And our bankers have been out on a number of call center, it's only been 3 weeks, but.
It appears there on there has a number of new opportunities coming out of.
To start our bankers.
Meeting.
Once again in person with our customers and prospects on it.
Watching that activity.
We're you know we continue to think theres reasonable loan demand out there and as the summer progresses.
Hoping to see it translate into a bigger pipeline on higher closings as we get later in the year share.
Jackie.
Brian has reminded me a couple of times on the last couple of weeks that or the last couple of days that he'll say what he just said.
It's only been 3 weeks.
Where we've had so far.
<unk> full range of activities for us and for our team.
We have mentioned a couple of times, how we're still seeing the benefits of our hard work around PPP round to continue to come to us and anecdotally.
I was on a call last week with a prospective customer.
And the notion of what we did for them with PPP when they're large bank couldn't get it for them is still very fresh in their minds.
And they are anxious to do business with us.
And we're happy to know that that.
That line of thinking is still very fresh in the minds of many of our.
PPP prospects that came across which youll recall there were something like 900 that we brought across that were not customers and are new to the bank.
We individually, Brian and I have talked about it a number of times.
Is the bloom off the rose with regard to PPP.
And the goodwill that we created and it is not so I think we've got that tailwind.
Tailwind for the balance of the year as as well as the fact that the open mis in our region is only 3 weeks old. So there's a lot of room for for things to happen.
Hi.
On like maybe there's some timing at play here correct me if I'm wrong on.
On that.
Yeah.
Maybe ask a little more pushed out from.
I would have on protocol.
Thank you.
Sorry, well I think we feel the same way it is somewhat about the timing well we would have been delighted to have and we did have our relationship managers doing outreach as best they could when they couldnt be in person using the phone and zoom.
Zoom and Webex et cetera.
It really is way more meaningful when you're sitting in front of the customer and I think that while we were.
In locked down there was a lot of economic activity around us and and things were getting done but it was hard to.
Convinced a lot of these prospective customers to make the move in that environment and I think they are feeling more embolden uncomfortable.
Now starting to think in terms of moving their accounts.
So I think theres a lot to work with there.
Yes.
Any effect because you had such a strong cyclical pulse on on the PPP program, but on that.
Yeah on your customers.
Potential customers based outside of P. P pool, we're kind of taking care of with the program and just with the economy reopening it's going to increase our demand without it play at all.
Well, we clearly helped many of our customers because we were able to accommodate anyone who wanted PPP from us as well as the prospects.
And I think it.
It played out in the report that Tony did it helped many of our customers.
Survive and live to fight another day and many of them also did quite well and have Oh.
A pretty nice cushion to move forward with and I think that that cushion, which you see embedded on our balance sheet in the form of deposits is is there for now but as we talk with people who are.
Actively thinking of how theyre going to grow or develop their business.
A customer that we met with a few weeks ago made the comment I'm going to wait for forgiveness and as soon as I have it I'm going to start shopping for our headquarters building and I want to buy another company to add on to the footprint on the 1 I already have so I.
I think I think it would help the people that were impacted and most negatively and I think it also has has.
Has helped the customers who got through it just fine.
Okay.
Just 1 quick follow up on an earlier comment you made and then also Mark you mentioned that the closing percentage was a little bit lower than normal on it.
On to the extent, you're able to quantify that and does that reflect customer preference on interest rate or credit.
I think it's just timing Jackie.
It wasn't a wildly off its just looking on what the pipeline is and then what the closing dollars are on.
It was just a little lower than what you might think and some of that is just more.
More of a timing issue I'd still think that the deals will close it'll just be maybe a month later than what they might have previously just with everything else going on.
And Jackie as you can see in the slide in our deck.
So that talks through.
Loan production quarter quarter, and a quarter and we were impacted by a higher than then.
Pay offs or Prepays that we've seen.
And along in several quarters.
So that was a little bit of a new phenomenon and I think it was some.
Some of it was pay downs coming from proceeds of PPP.
People, having flush with cash and just paying off buildings.
That kind of thing and you recall, you would've heard us, saying that back in 18 and in the.
Middle of 19 too.
Okay, great. Thank you everyone.
Thank you.
Next we'll go to the line of Matthew Clark. Please go ahead.
Hey, good morning, guys.
Hum.
Maybe just first on the on the 4 additional branch closures.
I think in discussions we've had in the past that.
Savings you can generate from closing of branches roughly $500000 annually is that about right I'm just trying to get a sense for the overall cost save opportunity here.
Yeah. Good morning, Matt Don I think you need to answer that because I think that number's, a little high yes, it's more like $2.50.
We didn't in the ones.
At the beginning of the year, we did 8 in January we received about $2 million.
So we run overall fairly inexpensive branches, but still there are there are some savings there to be had so it might be a little over $1 million for these 4 but.
I would go with that about $2.50 per branch overall.
Okay.
And in terms of timing.
Timing as Q4.
So we'll have some exit costs.
Related to that probably about we're guessing about 300000 is our current estimate.
But we also have these are ones that we're only 1 of the 4 leased and so we have some buildings is from gains in them. So at some point, we expect to more than offset those exit costs and gains on sale of buildings going forward, but it would be more from.
From what happened in Q4 plants on next year.
Okay.
And then just shifting gears to the NIM.
And he had a little bit of a benefit from a recovery I think this quarter.
And you gave your new money yields.
Curves kind of gone against you, though on the securities portfolio Im just trying to get a sense for.
The inflection point in the margin you know when you think that might be in.
And knowing you guys have excess liquidity to help dependent.
No I think we're look still looking as I mentioned last quarter I don't think it's changed I think it was to look at the end of the year is kind of the inflection point as far as when will bottom out on on NIM.
Okay got it.
And then on PPP.
Slide 20, I, just I see the fundings I'm just curious what the.
Outstanding balances were for a round 1 and then also the balance for round 2.
Oh yeah.
Yeah, I think it's on the C&I funded Matt.
Net funded just the outstanding balance.
Josef on the graph at the bottom there yeah, yeah yeah.
So it's 340, <unk>, Oh, I see a day.
Got it never mind. Thank you got it and then last 1 just on M&A and capital return buyback as well any updated comments around your.
Your discussions with potential partners and whether or not that's this thing those conversations are picking up or not and also on the buyback how actively you might be given where the stocks trading today, yes.
Yes, Don I'll take the first part and you can take the second part with regard to M&A, Matt we were.
Saying that things were pretty quiet.
Through the pandemic and leading up until the end of the.
This last quarter, but.
We kept up conversations on I guess I'd characterize it that now that things are opening up those conversations are becoming more.
There's more of them.
Would indicate to me that there is potential for us.
Maybe later this year or potentially early next year.
Yeah, and then on Matt regarding buybacks, we have 164 million remaining on our current repurchase plan. So we've got a lot that we can.
Can do this year.
At these prices, we will be active how much will depend on on the movement on the stock price and other opportunities that we have for the capital.
Got you. Thank you.
Thank you.
Next we'll go to the line of Tim Coffey. Please go ahead.
Great. Thank you good morning, everybody.
Good morning, Tim.
Jeff.
Can you kind of talk about the on the other side of the technology projects, you're looking at you're not noninterest expenses as a percentage of average assets Youre definitely trending lower is there a range that you think you will likely settle on.
Yeah, I think that's a good question done for you to answer.
Tim can you repeat that please for the noninterest yeah I'm looking at your noninterest expenses as a percentage of average assets and they are on.
If we look beyond the other side of this technology project, where do you see that settling out at because it seems like you're definitely coming off of a higher plateau.
Right I think that you know.
Sure.
Obviously, we have different goals before the pandemic.
Our goals are.
Have elevated as far as our wanting to be as efficient and from a tech.
Using technology and other means.
You know I think we want to stay on the load the low twos for the overhead ratio.
Long term I think this year, we might see the next couple of quarters.
A little bump on the overall expense levels compared to where we were in Q2 because of trying to get through some.
Technology initiatives. This year in addition to things like eggs.
<unk> costs on branches.
So it might be a little elevated.
From the next 2 quarters, but we do want to keep it.
The overhead ratio itself again.
It might not be quite as low as it is like this last quarter, but.
But again in the low twos.
Okay. That's helpful. Thank you.
And then forgive me for asking this question, but if the excess liquidity stays on the balance sheet longer. There's obviously a number of levers you can pull.
To reduce that which ones are you most focused on.
Well I think we mentioned this earlier in the call that we're more focused on organic growth.
On right now.
And we just talked a lot about that we'd love to do.
Further M&A to flesh out our footprint as well.
And Dan you May have some comments that you wanted to add to it I know that.
The opportunity to buy investments is kind of rigorous territory right now given the rate environment.
We bumped up our purchases in the last 2 quarters, even Q2 over Q1.
Well, you know I would say that when the rates come down on questions. They have we slowed down a little bit.
We still want to keep buying but maybe not.
Okay.
Rapid of a paces, we were conference recording has stopped.
So.
I think that all of our lending it out and those type of opportunities is our first choice, but we're going to continue to decline from just being recorded.
The average price.
Yes. It did thank you very much.
And then I'm just curious on the originations and loan originations in the quarter was there a specific geographic areas that you're seeing the highest win rates.
Jeff do you want me to take that 1 yes, please to Brian Yeah.
We're still seeing really strong originations out of King County.
And then our other metro markets to the North of Seattle, Snohomish, and Pierce County, and then in Portland.
Though I would say I'm looking at the pipeline.
Going forward King County continues to be really strong and then we're seeing building in in all of the other geographies.
Okay, Okay, great. Thanks, Brian Thanks, everybody.
Thank you.
Yeah.
And next we'll go to the line of Jeff <unk>. Please go ahead.
Hi, Thanks, good morning.
Good morning, Jeff I'm glad you're on I, usually number 1.
Well I don't know where that what that means if book number 4 but anyway.
I wanted to yeah, I just wanted to follow up on the you had the the conversation on the pipeline a little stretching out just in terms of the net growth discussion wanted to check in kiosk you mentioned in the prepared remarks about taking a less.
Census stance and Brian I think you itemized about $16 million on your pay offs out of non accruals that I'm on.
On a piece of the net growth.
Factor is.
And I wanted to confirm that.
Feel less.
As credit improves do you feel like you know a part of that is <unk>.
Leading some credits that you didn't feel great about it.
Get through those.
<unk> for better net growth is there.
Product to that or is that ongoing.
Yeah.
That's part of it Jeff and as Tony pointed out.
A lot of what we saw I'll get straightened out.
On the non accrual aside.
On the last quarter was really stuff that's been around for a while it was not PPP related. So we're going to continue to actively manage the portfolio likely normally do and that could potentially have a little bit of a.
And impact on our net loan growth.
The indirect portfolio running off doesn't help but we've talked about that before too.
So.
And then the payoffs that we talked about earlier so.
Well, we're going to start to see the net improve in.
I think thats why were for card.
Cautiously.
Optimistic for the rest of the year, because we can see the activity.
It might not even beyond the on the pipeline yet but.
But we know it's coming our way and it's going to come our way between now and a good portion of it now on the end of the year, Brian anything you want to add to that.
Yes, I've been watching you know really the activity pick up you know really February on and then since we opened as Jeff said lots of.
Lots of activity and so.
That's those are the positives the market is competitive and we are seeing some increasing pay offs. So I think over the next couple of months.
It really going to see it play out.
And then we didn't talk about utilization rates, but with all liquidity, though is also continuing to be pretty low on the <unk>.
You can see on.
On slide.
Okay.
Slide 18, which has to change and loans. There is up there is it just a tiny amount of net advances, but on our commercial lines the utilization rates still down at 24 per <unk>.
But really we're looking at the activity since since since February and then since the.
Governor's race the restrictions, we've got more staff in the office and more meetings, calling on them.
A lot of economic activity in the in the markets as well so.
Where exactly that those factors balance out a little unclear, but we are happy to see the activity.
And our customers looking at doing things.
Okay got you Yeah, I was just trying to it sounds it sounds positive and turning the right way I, just didn't know which the internal messaging.
Defensive stances softened to some degree.
Anyway, and I understood that you guys had some pre existing credit things that were non pandemic got cleaned up so.
Yes.
John I wanted to just nail down the if you had kind of a core margin sequentially. If we if we were to kind of a lot of recoveries P. P. B.
You know any sort of other impact, but do you have a Q1 to Q2, what you would assign a core margin.
That we could track.
Well, yes core as a start.
Subtracting too many things and you've got to make a lot of assumptions I mean, pvp is going to be around for a while.
So you know.
The numbers are in there I think if they did come down I think if you looked at especially if you look at the impact of the non accrual, which I would think as you might consider non core item growth was 18 basis points.
Impact on the loans.
Compared to 5 basis points.
In the prior quarter, but.
We do hope to continue to work down our non accrual balances play not to the same extent.
But we do plan to continue to work those down and then.
We do list what the PPP impact is it's it's you know.
You can strip all that out but.
We are going to have PPE P for a while but just going on it isn't a low threes.
If you strip all that out for probably just above.
<unk>, 3%, but I would say by the time we.
You know the.
The PPP loans go around we expect to have more leverage and we expect to.
I'm, hoping the rates increase when no 1 offs.
On a happen, but if nothing else I think we'll have more leverage by the time value of PPP loans go away. So.
I hope that helps you okay yeah.
No I was just trying to.
Ask a different question is I think you've alluded to on a margin bottoming.
By year end.
Knowing that the P. P. P. We identify a balance there we can kind of track that separately on recoveries time ago, but just trying to get.
What you were alluding to in terms of your margin bottom on trend and that may just be everything running keep running out and and others. So we're just confirming that but it sounds like.
It's all on the same so that's it for me thanks.
Thanks, Jeff.
As a reminder, if you have a question. Please press 1 zero. The next question is from Andrew <unk>. Please go ahead.
Hey, Thanks, good morning.
Good morning, Andrew.
Hey, so maybe just thinking on margin on I think you mentioned potential rate increases a second ago, just just thinking about should we get to that point I think about 55% on the total loan book is variable rate or adjustable rate can you just remind us.
Within those 2 buckets, how much of those those loans are currently out there kind of a floor rate and.
And then as a follow up just on average how many rate hikes would we need 25 basis point rate hikes would we need to move off of the average kind of loan for.
Yeah.
Don you want to take that well and the second 1.
I'd have to look up some more information on that Andrew.
We don't have we're not expecting too many.
Loans to re price further down this year I think we had about $65 million.
You don't have floors are not on their stair floor.
So theres not theres not too much there, but the biggest the biggest risk I guess to the overall loan yield is the fact that we're again continue to put on new loans at rates lower than the current portfolio yields.
That's the biggest risk there.
Go on the other direction.
I think we're pretty asset sensitive so if we can get rate hikes in <unk>.
The.
They're starting to be some indications we might have even some short term rate hikes by the end of next year.
We hope that the.
The long end would call before that so.
We are pretty asset sensitive and so that will hopefully help us in the coming year.
Okay. Thanks, that's helpful. And then maybe just kind of ticky-tacky on on modeling out loan yields.
The non accrual interest recovery was $2 million this quarter $1.5 million of that was 1 specific credit as we think about kind of normalizing normalizing the interest recovery moving forward should $1.5 million fall out on the run rate or is it the full kind of $2 million.
Well [laughter].
And maybe Tony you can talk about where we are on our prospects are as far as non accrual loans, but.
I think that we do continue to hope to work that down I think it'll be you might call lumpy.
Some quarters will be higher than others, I think even 5.
Basis points might be high overall, but I think we're going to see some of it maybe every quarter, but some quarters will be more than others and so that was obviously a really big 1 I don't expect to have that bigger 1 again, but we could have other quarters with 5 basis points on 'twenty.
If you have any other thoughts on the.
Working out of non accrual loans.
Yeah, Yeah. Thanks, Andrew.
We do expect to see some continued move maybe not payoffs on some of the non accruals. We may have some of that but we also are looking more at moving some back to accrual status. If you look at page 21, you can see about 2 thirds of the way down you can see the non accrual loans that are on some of these impacted industries as those continue to improve and get back to a more normal payment.
Sure we might be able to move some of those back into accruing status that that wont necessarily result in a recovery of the interest.
Like a payoff would but we could see some continued improvement in that area, but theres also some long term workouts that we've been that had been in place for a long time that that could resolve but I don't I don't think well see the magnitude of the drop like we did this quarter.
In the next couple of quarters some of the recovery on that Covid related stuff could move.
Move more out into 2022, before we feel comfortable with putting it back on accrual status.
Got it okay. Thank you.
And then sorry, if I missed this but for the 4 branches.
Turning to consolidate in October.
Are you modeling any kind of deposit attrition or do you expect any deposit attrition or are some of that kind of actions you are taking on technology investments on the technology investment side and kind of be able to offset any any kind of excited on attrition.
Yeah, we typically do model some leather.
The level of attrition hinder when we consolidated branches it really depends on.
How close they are to another branch.
And typically model, you know 10 or 20% for a.
Close consolidation and maybe up to 50% growth a distant hum consolidation and if we just use the last 9 as indicators of how things are going these days.
They have none of them have really come close to what we budgeted for the the attrition and I think it goes to the point that you've just.
You just had on your your your question, which is the technology has made the customers a lot stickier than they used to be.
And I think that's playing to our advantage and as also as we've watched how customers.
Manage through the pandemic it gave us.
I'm a bit more confidence to take the actions we are because we're seeing a.
A pretty significant uptick in the consumer on the commercial side with customer.
Customer usage of our technology.
So that's helping as well so we don't expect significant run off in any of the 4 that we are talking about.
Yes.
Great well, thank you for taking my questions.
Thank you for being on the call.
Okay.
William are there any other callers.
There are no additional questions at this time.
Okay, well, we'll call that a wrap.
And well. Thank you all for your time and your support and your interest in our ongoing performance.
And hopefully we will be talking with many of you in the coming weeks. So thank you and goodbye.
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