Q2 2021 Mercantile Bank Corp Earnings Call
Good morning, and welcome to the Mercantile Bank Corporation second quarter 2021 earnings results conference call on.
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I would now like to turn the conference over to Jeff Shane born Lambert Investor Relations. Please go ahead.
Thanks, Gary Good morning, everyone and thank you for joining mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the second quarter of 2021.
Joining me today are members of mercantile as management team, including Bob Kaminski, President and Chief Executive Officer.
Truck Christmas Executive Vice President and Chief Financial Officer.
And Ray Reitsma.
Didn't of Mercantile Bank, Michigan.
We will review the call with <unk>.
Management's prepared remarks and presentation to review the quarter's results and Paul.
All up for questions.
Before we can begin today's call and it's my responsibility to inform you that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives for the company's business.
The company's actual results could differ materially from any forward looking statements made today.
Due to the factors described and the Companys latest Securities and Exchange Commission filings.
The company assumes no obligation to update any forward looking statements made during the call.
If anyone does not already have a copy and the second quarter 2021 press release and presentation deck issued by mercantile today, you can access it at the company's website Www, Merck King Bank Dot com.
At this time I would like to turn the call over to mercantile is president and Chief Executive Officer, Bob Kaminski.
Thanks, Jeff and good morning, everyone on the call. This morning, we will provide you with detailed information on the company's performance and the second quarter.
And Tom has once again accomplished a strong quarter and along with progress being made with the COVID-19 pandemic, including widespread availability of vaccinations across the country and the reopening of the Michigan economy, specifically, we remain very optimistic about our future performance. Although we have spent the better part of.
The last year and a half working remotely our dedicated team did not Miss a beat.
As we continue to return to an environment of normalcy and our communities. The extraordinary work that was done by our team in 'twenty and into 2020, 1 and set the stage to allow us to remain intensely focused on our mission of acquiring new customers and servicing existing ones to the highest level of standards.
With businesses working to reopen more fully as they strive to return to pre pandemic performance. We continue to closely monitor COVID-19 related developments, well always prioritizing the health and safety of our customers and employees.
We seek to consistently find ways to operate effectively within whatever the current conditions and environment may be.
Our full time line of COVID-19 related activities can be found on slide 10 of our debt.
Our teams demonstrate continued resilient resiliency and adaptability as we close out the second quarter delivering another very strong period on financial performance.
We achieved net income of $18.1 million and per share earnings of $1.12 per cent, which includes a negative provision for loan losses for the quarter, reflecting the continuing improvements and both current and forecasted economic conditions.
Our focus on achieving strong and sustained growth has positioned us well for ongoing creation of shareholder value today.
Today, we also announced the third quarter cash dividend of <unk> 30 per share as we remain committed to delivering the consistent high performance our shareholders have come to expect.
During the second quarter, we also continued with purchases under our stock buyback program.
Chuck will dive deeper into the details of our financial statements for the quarter, which again highlight our ongoing strength and mortgage banking income sound asset quality strong growth strong growth and core commercial loans as well as managed overhead costs.
We remain persistent and identifying new ways to improve our fee income, especially growing the bank, while growing the bank to create additional value for all of our stakeholders, especially in light of improving and COVID-19 conditions, we have been able to leverage our strategic initiatives that are designed to increase market.
Sure.
Over the past few months, we are seeing great progress achieved by our cities and communities to resume and economic activity as the effects of the pandemic subside.
We remain encouraged by these steps and are enthused about our ability to meet the changing needs of our customers as we have prioritized our efforts to further strengthen our relationships within these markets and supportive transitions towards economic growth and recovery.
Throughout the quarter, we demonstrated strong core loan growth by meeting the credit needs of our existing customers, while fostering relationships with our new and prospective clients.
Our loan pipelines remain solid and our asset quality continues to be extremely strong.
Our mortgage banking team continues their incredible for credit.
Credible performance and the second quarter.
While refinance activity remains robust our volume of loans to finance home purchase exceeded refinances during the quarter.
We believe we are well positioned to capture and even greater share of the mortgage banking market and upcoming period as a result of our team's proven record of fast and effective delivery of mortgage products to our markets supplemented by our recent strategic hires of seasoned lenders both on our current and new markets.
Ray will provide you with the highlights of the operations of our company and his comments.
We are pleased with our ongoing activities to adapt industry best practices, while leveraging available data to capture efficiencies customize unique client interaction and refine our internal systems.
The success of our commercial loan interest rate swap program delivers value to our clients and help position us to improve our long term loan yields.
Our sustained growth and other key fee income categories, and the increase and debit and credit card income above pre pandemic levels demonstrates our focus on noninterest income revenue streams and our continual average to gain additional profitability for our company.
Digital delivery remains a primary focus for mercantile bank and as we look to leverage the momentum built during closures necessitate during the pandemic when alternative delivery channels were fully implemented and successfully serve our client base.
We have prudently investing in technology over the years, which continues to serve us well as we meet and exceed the evolving needs and expectations of our clients.
We strive to transform our locations into customer relationships centers were routine transactions can be performed efficiently, allowing staff to focus on and relationship building with all clients, including the exploration on and fulfillment are financial service needs.
Our current footprint can be viewed on slide 3 of the debt.
In closing I want to express my thanks, and appreciation for the mercantile staff for their dedication and excellent work during the first half of 'twenty 'twenty 1.
We remain committed as an organization to seize in the wide range of opportunities before us. So that we may continue our successes for the benefit of our customers communities and shareholders for the balance of this year and be on.
Those are my introductory remarks, I'll now turn the call over to Ray.
Thanks, Bob strong core commercial loan growth net of P. P. P activities, 1 of the central stories of the quarterly and year to day performance.
Year to date core commercial loan growth is $135 million as shown on slide 14 comprised.
Comprised of $83 million, and the first quarter and $52 million and the second quarter.
Note that the second quarter growth was offset by nearly $20 million and payoffs related to the sale of borrowing and.
The year to day annualized growth rate of core loans is 11% the quarterly growth rate is 8%.
Additionally, our construction pipeline remains solid with $167 million of commitments and commercial construction and development loans, which we expect to fund over the next 12 to 18 months, representing an increase of $32 million over the prior Corp.
Our current commercial pass through loans and of course on nominal in dollar terms totaling $1.5 million representing for borrowers overall passenger information can be found on slides 17 and 18.
Asset quality remains strong as nonperforming loans totaled just $2.7 million or 0.08% of total loans at June 32021.
The breakdown of nonperforming assets can be found on slides 25 and 26.
During the second quarter of 2021, we recorded a negative provision expense of $3.1 million, primarily reflecting a reduced allocation associated with the economic conditions and environmental factor amid a recovering economy.
As you'll recall during 2020, we built up for a long deserved significantly and large part due to the unique challenges and economic uncertainty caused by the pandemic as.
As of June 32021, our allowance for losses to total loans was 1.2% net of P. P P loans.
Payment deferrals at the peak of the program in mid July 2020 impact at 738, borrowers and represented $719 million and exposure.
Presently and as of June 30, there are no payment deferrals and place for commercial loans.
There are extensions and place beyond that date for 5 mortgage borrowers representing a half a million dollars of exposure as seen on slide 11 and.
The current deferral numbers when combined with our expectations for no future deferral requests and our strong past due performance are positive indicators.
The risk rating process depicts a portfolio with solid characteristics, reflecting strength similar to that of the pre crisis economy as seen in slide 16.
And any accurate risk ratings will remain a key focus and the upcoming quarters as our borrowers continue to report results impacted by the pandemic.
We continue to monitor the financial condition and performance of credits, particularly in the following segments.
Hotels, and lodging assisted living restaurants and entertainment.
And 1 of these individual segments account for more than 5% of commercial loans. The composition of these segments can be seen on slide 13.
We recorded noninterest income during the second quarter of $2014.6 million up $3.5 million or 33% from the prior year second quarter.
Which includes a $1 million from the sale of a branch.
As can be seen on slide 21 mortgage banking of $7.7 million continues to be the primary driver of noninterest income.
However, it is important to note that during the current quarter purchase activity represented 61% of originations compared to the second quarter of last year when purchase activity represented 21% of originations as seen in slide 24.
This significant shift from refinance volume towards purchase volume will greatly enhance our ability to sustain strong mortgage banking performance as refinance activity and diminishes and future periods.
And <unk> applications and backlog suggests that refinance opportunities will for system for the near future and purchase applications are seasonally high levels.
Continuing to enhance mortgage banking income through increased market share, including the expanding share and the purchase market remains a priority and we will continue to hire proven and mortgage loan originators as we are able and as in the case of our new mortgage office and the Cincinnati Cincinnati area, which opened during the fourth quarter of 2020 and the task.
And loan production office, which opened during the second quarter of 2021.
The primary contributors to the growth of noninterest income include interest rates swap income card income payroll services and service charges on accounts as seen on slide 21, we.
We reported $1.1 million and swap income, reflecting interest rate risk management products, putting into place for clients during the quarter.
Credit and debit card income increased by 39, 7% on a quarter over quarter basis as activity within the accounts recovered from reduced activity during the pandemic.
And the base of activity grew as new relationships came to the bank and existing relationships where more fully developed.
Service charges on accounts grew 15, 7%, reflecting increased economic activity and a broader base of relationships utilizing our suite for Treasury management products.
Payroll services income increased 9.5% as existing customers rebuilt their employment base and new relationships were established that concludes my comments I will now turn the call over to Chuck and.
And as noted on slide 19. This morning, we announced net income of $18.1 million or $1.12 per diluted share for the second quarter of 2021, compared with net income of $8.7 million or 54 cents per diluted share for the second quarter of 2020.
Net income for the first 6 months of 2020, 1 total of $32.3 million or $2 per diluted share compared to $19 for $19.4 million or $1.19 per diluted share during the first 6 months of 2020.
Turning to slide 'twenty interest income on loans declined and the 2021 periods compared to the prior year periods, primarily due to F. O M. C rate cuts totaling a 150 basis points through March of 2020, and a low interest rate environment since that time.
Interest income on securities 3 and the 2020 period benefited from accelerated discount accretion on called U S government agency bonds totaling <unk> $9 million during the second quarter and $2.7 million for the first 6 months.
In total interest income for the most recent quarter declined $1.4 million from the second quarter of 2020, it was down for $5 million for the first 6 months of 2020, 1 as compared to the prior year period and.
In large part, reflecting a lower interest rate environment that could not be fully offset with growth in earning assets.
Interest expense declined in all categories, starting in 2021 periods compared to the prior year period, reflecting the declining and low interest rate environment.
And total interest expense declined $1.7 million during the second quarter of 2021 compared to the second quarter of 2020 and was down $4.1 million during the comparable year to date period.
Net interest income increased zero point and $3 million during the second quarter of 2021 and compared to the second quarter of 2020, but was down zero point and $5 million. During the first 6 months of 'twenty 'twenty, 1 compared to the first 6 months of 2020.
Overall gross.
And earning assets was able to essentially offset a low net lower net interest margin.
And as Ray noted during his remarks, we recorded a negative provision expense of $3.1 million or and the second quarter of 2021 compared to provision expense of $7.6 million during the second quarter of 2020.
While a negative provision expense of $2.8 million that was recorded during the first 6 months of this year compared to provision expense of $8.4 million 3 last year for 6 months.
The negative provision expense recorded during the second quarter of 2021 was mainly mainly comprised of a lower reserve allocation associated with the economic and business condition environmental factor, reflecting improvement in both current and forecasted economic conditions.
The relatively large provision expense during the second quarter of 2020, primarily reflected an increase reserve allocation associated with the economic and business conditions environmental factor as well as the introduction of the COVID-19 pandemic and are bad and.
Environmental factor.
We elected to postpone the adoption of CSO until January 1 and 2022.
We continue to run our fees, so miles and currently with our incurred loss model.
Based on preliminary results on the reserve balance under the <unk> methodology would be about $6.6 million lower than our reserve balance as of June 32021, as determined using the incurred loss methodology. This is an increase from the $4.9 million difference at March 31.2000.
21, and the $2.6 million difference at year end 2020.
The primary difference between the 2 reserve models over the last few quarters related to the economic forecast aspect of the calculation on.
For seasonal employed economic forecasts have shown significant improvement under the incurred model our view of the economic and business conditions as generally positive and improving but less so than what is reflected and market economic forecasts.
We will continue to assess all of the qualitative factors at the end of each quarter and will adjust our loan loss reserve balance via the provision expense line item on the income statement.
Continuing on slide 22 overhead costs increased 3 point and zero $1 million and the second quarter of 2021 compared to the year ago quarter and increased $5.2 million are and the first 6 months of 2021 compared to the first 6 months of last year.
A majority of the increase and overhead costs and salary and benefit costs, which were up $2.1 million and $3.6 million during the second quarter and first 6 months of 2021, when compared to other respective 2020 period and large part reflecting increased health insurance costs and annual Merit and <unk>.
And merit pay increases and a lower level of deferred salary costs related to the PPP loan originations.
In addition, we accrued for our bonus programs during the second quarter and first 6 months of 2021, which we did not do and the first half of last year, given the onset other corona virus pandemic.
Continuing on slide 23, our net interest margin was 276% during the second quarter of 2021 virtually unchanged from the first quarter of 2021, but down 41 basis points when compared to the second quarter of 2020.
Compared to the second quarter of last year, the yield on earning assets decreased 65 basis point, while the cost of funds declined 24 basis points for the most recent quarter.
The yield on loans declined during the second quarter of 2021 by 4 basis points from that of the first quarter of 2021.
As seen on slide 12, net fee income accretion of $2.9 million or and the second quarter was almost identical to that of the first 3 months of the year.
As of quarter and unrecognized P. P. P. Net fee income totaled $6.2 million, a vast majority of which is related to our P. P. P round number 2 fundings.
Our net interest margin continues to be negatively impacted by a significant volume of excess on balance sheet liquidity depicted by low yielding deposits with the federal reserve bank of Chicago.
The excess funds are a product of increased local deposits, which are primarily a product of federal government stimulus programs as well as lower business and consumer investing and spending.
Total local deposits increased $276 million or 8% during the first 6 months of 2021 and are up $1.1 billion or 42% since year end 2019.
Approximately 2 thirds of the growth and local deposits over the past 18 months is comprised of increased non interest bearing checking account balances.
Overnight deposits average $610 million during the second quarter and for 6 months of 2021 substantially higher than our typical average balance of around $75 million. This excess liquidity and lowered our net interest margin during the second quarter and first 6 months of 2021 by about 35%.
40 basis points.
We expect the level of overnight deposits to stay elevated well into the foreseeable future.
The cost of funds as bad on an improving trend, primarily reflecting the falling interest rate environment, and we expect that trend to continue throughout the remainder of 2021 as time deposits originated and higher interest rate environment and <unk>.
Prior periods mature.
As shown on slide 27, we remain on a strong and well capitalized regulatory capital position.
And 1 leverage capital ratio was 9.5% and the total risk based capital ratio was $13.1 per cent as of June 30th the tier 1 leverage capital ratio continues to be impacted by the PPP loan portfolio and that's for severity, but no similar impact on the risk based capital ratio as both components are assigned a zero for <unk>.
<unk> risk weighted.
The total risk based capital ratio was $110 million above the minimum thresholds to be categorized as well capitalized.
We repurchased about 229000 shares for $7.3 million at a weighted average cost of $31.99.
Per share during the second quarter of 2021, bringing our year to date total up to 347000 shares for $10.9 million at a weighted average cost of $31.28 per share.
During the second quarter of 2021, our board of directors approved a new $20 million stock repurchase plan as we were close to exhausting. Our then outstanding plan with this new authorization as of June 30th we had $17.3 million available and our stock repurchase plan.
In closing we are pleased with our operating results from the first 6 months on 2021 and financial condition as of quarter and and believe we are well positioned to continue to navigate through the unprecedented environment created by the coronavirus pandemic and other events.
Those are my prepared remarks, I'll now turn the call back over to Bob. Thanks.
Thank you Chuck and.
That concludes management management's prepared comments and we will now open the call up for question and answer period.
We will now begin the question and answer session.
And to ask a question you May Press Star then 1 on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
The first question is from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, guys how are you.
Laurie on it.
Maybe just wanted to start off on this quarter's strong commercial loan growth.
And you can definitely stands out for for you folks where the where the other you are still keeping on continuing to struggle to see and.
Good loan growth. So I'm, just kind of curious to hear from you guys. You know where it came from this quarter and and what you're hearing from commercial customers at this point.
And this is ray I'll address that.
The pandemic and the P. P. P program gave us the opportunity to really.
To put our money, where our mouth is so to speak as it relates to the community banking proposition.
And the service and support that we demonstrated through that process not only to our existing clients, but also to our clients that we had been calling on previously but had not done business with.
It was delivered in a way that really showed that we.
We do what we say, we're going to do and we act with speed and precision and.
And are those things have been very warmly received and the marketplace and we've been able to increase our market share and and get some prospects over the fence to being customers based on those interactions and bad actors.
The activity is.
And has been strong and it has not concluded yet we have more runway with similar types of activities. So we expect to continue to grow our commercial core outstandings and a similar fashion going forward to the way, we have and the first 2 quarters of the year.
Alright fantastic.
That's helpful color and then maybe as a follow up on loan growth more broadly and something that was different this quarter than in recent ones and it looks like and you guys put more and more into for family production on sheet.
And just kind of curious what drove that decision what is the appetite to put more residential production on and she's going forward and and how that ties into your thoughts about kind of total loan growth for the next couple of quarters.
Yeah. This is Chuck I can address the mortgage loan and I'll, let ray so to speak on the on the gross commercial loans, but.
On mortgage loans, what we have done and the last quarter was what we have bank continuing to do is we saw a vast majority virtually all of our fixed rate mortgage loans, but when we do arm loans, which are typically 5.1 and 7.1 arms. We generally put those on the balance sheet. So the growth that you happen to see and the second quarter.
It's just more of a reflection of the originations that we did in the quarter the composition of those <unk>.
Originations and.
And I think that at least as we sit here now and.
And we will continue to.
To employ that methodology going forward.
Got it all right and that's it thank you for taking the questions.
Thank you.
The next question is from Damon Delmonte with K BW. Please go ahead.
Hey, good morning, everyone hope everybody's doing well today.
And I didn't hear David.
Thanks for that first question regarding.
The outlook for the for the margin Chuck.
You know I think you laid out on a good back drop of what's going on and everything. So it's probably fair to say that you know youre going to continue to see some modest erosion and on the core margin over the next couple of quarters before maybe finding a floating by by the end of the year is that fair yes.
Yeah, I think that's a pretty good conclusion there Damon.
Thank the the margin spend in the mid 270.
And so far this year.
I think primarily because I expect a little bit of our some drops and PPP fee income accretion I think we're looking at a margin probably closer to $2.65 to 70 for the rest of this year.
There's a lot that goes into that.
Certainly the excess liquidity that calculation that I, just provided assumes that excess liquidity stays unchanged and of course that remains to be unseen, but we'll obviously see overtime. So expect a little bit of a reduction and some softness from the back half of this year.
But we will see what happens as we go forward, especially in regards to the excess liquidity, which again has really backed by the growth and local deposits that we've seen.
And we do have some you know.
And some produce relatively significant run off of our managed funds broker deposits and <unk> advances as we get into late this year and throughout a good chunk of next year.
Got it okay. Thanks, and then with respect to.
The outlook on credit I mean.
Don't think you can get much better than what you guys are putting up for numbers right now so as we think about the loan loss provision going forward.
Obviously, we're going to have a good pipeline for loan growth on.
Do you feel that you know on and net basis, you'll need to provide something for loans or do you feel that any reserve release. It can be kind of stepped up with what you would provide for that new loan growth and and it would it was.
And you know close to zero or negative again.
Yeah, I think certainly we expect net loan growth as we go forward, excluding PPP of course.
And that will require some level of reserves.
I guess.
The Magic question of course is what what what ends up happening with the environmental factors as we go forward.
And while we improve the economic and business conditions trend.
Proved up from severely deteriorated moderately deteriorating so.
So we'll continue to assess that 1.
It certainly seems like we're on good trajectory there.
On the numbers are kind of very difficult to assess given the.
And the poor.
For economic conditions of this year and obviously some level of recovery this year and it seems like everybody's got an opinion on that.
Certainly the fed seems like they're pretty confident that the inflation and that we're seeing and some of these numbers are like we've ever seen before and is using their terminology is transitory.
And it seems like many economists agree with them and none of us sitting here at this table our economists but.
When we look at the the volume book the money supply for example, it's up 30% with all the stimulus that money is never going to leave the economy and to US analysis on the economic forecasting that seems inflationary to us. So I think we all agree that there is some level of transitory.
<unk> inflation and there.
But we're somewhat skeptical about the inflationary.
And our expectations going forward. The reason why I bring that up is because that environmental factor is economic and business conditions.
And inflation is certainly a big component of that.
And lastly, we still have the COVID-19.
Factor in there on.
Obviously, we all hope 1 day that we can take that 1 out that was obviously meant to be more temporary and permanent of course.
And there's a couple of things going on there of course, what is the what's going out of the COVID-19 itself.
And.
You read the news as much as anybody else and see what's going on there and the ups and downs that we continue to see.
But I think it's also 1 of the things that we look at what that factor is with the tremendous amount of stimulus. That's been provided over the last 12 to 15 months.
Is that highly some some stress that's out there within the economic environment, and including our own loan portfolio, and obviously with our loan review and our lenders themselves.
We continue to scour the loan portfolio to understand the impact of COVID-19 on all of our borrowers, but thats just kind of 1 of those question marks that we have going out. So that's why we still have that factor in there and.
And so we're confident that the impacts are known and obviously gone at some point, we will likely continue to keep that factor in there.
So I bring up those 2 factors because those other probably the 2 that will be a driving force of any reserve releases as we go forward.
And we'll just see at the end of each quarter, we will assess that and make any determinations.
My guess would be that if we do release and a reserves, especially related to those 2 factors that the release will out will be a larger number than what the reserve increase would be associated with new credits.
And I'll put a ribbon on that by just going back to the basic premise of the reserve or the part of the point of the reserve that looks at our asset quality and that continues to be extremely strong as Chuck mentioned we are.
And we're continuing to remain digits vigilant and examine the portfolio and looking for any signs of distress and we're very pleased with the performance of our client base throughout the pandemic when it started last year and continuing into this year and customers are dealing with their challenges.
Which relates to a lot of cases to labor market and some other challenges that we all know are going on there but continues to do the things that they do need to do to get their company for farming as strong as they can as they continue to fight through towards the end of this pandemic.
And I guess, just lastly, the elephant in the room is seasonal and as I mentioned in my prepared remarks, we are going to be adapting and seasonal on January 1 of next year and at least as of January 30, <unk>. There was about a $6.5 million difference between our reserve now and the lower amount that at least again as of June 30th CSL was.
Indicating our reserve should be.
Got it okay, that's great color.
All that I had for now thank you very much thanks, Dave.
The next question is from Daniel Tamayo with Raymond James. Please go ahead.
Hi, Good morning, guys and thanks Florian question.
First maybe if you can quantify perhaps the pipeline I know you mentioned that it's going to be it's remained solid but.
Kind of relative to prior periods, if that's something.
Something that you guys do on a on a regular basis.
Yeah. This is ray and the commercial pipeline is a very.
Very very similar to what it's been over the first 2 quarters and the mortgage pipeline.
Actually dipped a bit at the beginning of the quarter and has recovered.
2 equal to the prior part of the quarter and beyond.
<unk> is a little bit stronger than what we were experiencing say in April so.
That kind of gives you a bit of color on where we are relative to historical pipeline levels and I think and despite the fact that we've enjoyed and produce some from some very strong core loan growth.
The great work of our lending teams have been able to replenish and.
And make that pipeline remain at the levels that Ray was talking about again twice for strategic initiatives. The work of our staff to.
To the.
The gain net new client acquisition and to keep that pipeline and a really solid number despite what we've already for other books.
Terrific.
And then maybe changing gears here just around the the remaining repurchase authorization of the $17.3 million how.
How how are you thinking about utilizing that as is that something you'd expect to utilize somewhat and regularly or or is that something you'd look at to be more of and opportunistic.
Tool for from a capital management perspective.
Yeah, I think we look at it more as opportunistic certainly and the price of our stock is going to be a driving factor.
And what we're doing.
For for most of the year, we've been kind of on the low thirties, and we've been buying back somewhere between 101 hundred $25000, a day and stock about 4000 shares on average.
Clearly at levels that for that right now, we would get more aggressive and and which we will.
And we'll come out of our blackout period on Friday, we're in.
Our plan right now and continuing to buy every day and a relatively modest way.
But it.
It's going to be price, driven and the lower the price the more aggressive we're going to be.
And.
And that's kind of what we've been doing really since late last year and will likely continue to go to do going forward.
We feel really comfortable with our capital position.
And.
So we wanted to take advantage of that opportunity.
Alright that makes sense, thanks for taking my questions.
Thank you.
The next question is from John <unk> with Janney. Please go ahead.
Good morning, guys.
Alright.
Chuck maybe just a question for you on expenses.
They were up.
For a little bit over $26 million for the quarter can you just talk about your thoughts there going forward and I know that you mentioned the bonus accrual. This quarter was there any catch up I guess on this quarter.
As far as that impact.
Yeah on the bonus.
Take that 1 first the bonus accrual was the same and the second quarter It was and the first quarter it.
And it continues to reflect our expected payout under our various bonus programs that we have and January of next year.
And that's unchanged when compared to the first quarter again, when you look at last year, we didn't accrue for any bonuses and the first or second quarters. Although we did later in the year.
1 of the drivers of noninterest expense as our mortgage commissions and of course, we bought and we've already talked plenty about the mortgage area, which is doing great and so that does spillover into the overhead cost component and the other probably they're really a driver right now is on our insurance card health insurance costs.
And we're self insured, although we do have cap insurance per employee as well as an aggregate cap for the entire bank.
1 other thing we started to see that late last year and it's really continued throughout the definitely the first 6 months of this year is some increased claims activity some of it COVID-19 related some of it just normal type of activity.
And as we see the claims coming in whether a weekly invoice. We did increase we did increase our accrual at the end of the first quarter I put in an additional 250000 and and then during the second quarter. We continue to see the increasing claims and so we put on additional I think about $600000 and.
Hum compared to what we typically would so about 350000 over the first quarter so well.
We'll see where that goes we continue to increase our monthly accruals on that and reassess where we're at at the end of each quarter.
As we speak we're caught up but again the trends are are not.
What we want to see but hopefully that turns here and the back half of the year as far as guidance. If you will I think.
Overhead costs for the third and fourth quarters will be closer to what we saw on the first quarter I think what you see the increase and the second quarter.
Is more of a blip if you will.
And especially with our expectation that as in the back half for the quarter. We will we expect to see lower mortgage banking activity income.
As Ray mentioned over almost 2 thirds of it now is purchase and as we get into the back half, especially the fourth quarter.
And would expect a decline there just from a typical seasonality standpoint.
Okay. So Chuck.
If I heard you right. So it sounds like closer to $25 million for the next 2 quarters, yes.
Yes closer to the first quarter Yep Yep, Okay. Okay. Thank you.
Thanks, John.
Your next question is from Bryce Rowe with the half the group. Please go ahead.
Hi, Thanks, good morning.
Alright, and good morning.
Hum.
Chuck I think I talked to and I ask this question on the on the on the first quarter conference call, but.
Just curious.
And how youre thinking about you know these these cash balances relative to the securities portfolio and <unk>.
You made the comment in your prepared remarks, and you expect.
On liquidity to remain elevated so I'm wondering if you're going to continue to add securities portfolio here and and is there a certain level as EBITDA percentage of assets that you kind of target for them for us for a ceiling on those purchases or is that also more opportunist.
Along with some other things and we've talked about this morning.
Yes, I think overall, we generally.
Historically run on our investment portfolio at about 12%, 13% of Securities. We had allowed that to go down about 9 or 10, and this would be excluding PPP.
Brown 9 or 10, and so we've been building that back up I think we're getting closer to the high end of that.
We do plan on continuing to buy securities and.
Buildup and support that our investment portfolio.
We're not going to be like we're going to dump half of our excess liquidity into the securities portfolio, but.
But we will be probably regular investors there.
We have been buying as well as what the portfolio was and what I expect we will continue to buy and.
And that continues to be government agency bonds and municipal bonds issued from entities and the state of Michigan, and we're not doing anything different by the same type of bonds.
We're not extending the maturities the duration at all the.
And the agencies, which is the bigger dollar amounts we continue to buy primarily and the 3 to 7.
Timeframe and.
And basically just maintaining a ladder so and when we get into those years will have a good level of cash coming off and we can continue to manage our interest rate risk position and margin.
We get into those periods.
And my comment about the.
The excess liquidity stay and relatively unchanged.
I think that has more to do just what the local deposits that has that has created that excess liquidity and.
And it's more of a question of what our depositors do.
On the business side to the degree that theyre going to invest and their businesses expand their businesses.
On the consumer side, what are their spending habits is going to be.
What are they going to purchase or are they going to start spending and leisure activities, which of course a lot of this is driven by COVID-19.
And regards to the businesses I'm sure. It's this way throughout the country, but certainly here businesses continue to struggle to find employees. So.
And the opportunities that they might see with the opportunity to expand their business is somewhat tempered.
By the fact that they can't find the employees.
To support that that was expansion opportunities we'll see.
Know that customers are buying equipment.
Historically that would have been mostly financed.
But what we know, especially on the lower end of equipment purchases.
And what we're seeing and what we're hearing is that theyre just using deposits.
So maybe there is some for its future decline there.
But on an overall basis, it's going to be driven by what the local deposits and what the depositors who with their funds at least and the next 6 months to 12 months.
Okay. That's helpful. And then maybe on maybe a question here on on.
And on PPP balances and.
Obviously, you saw even some of the some of the round 2 P. P P loans and.
Get forgiven here and the second quarter, what are your expectations and what are you hearing from those customers in terms of what their what their plans might be to you know to pursue the debt forgiveness route.
Yes, I think we're already seeing as we saw as we noted on page 12, we've already hedged about $30 million as of June 30th.
Hum forgiveness, and so that has already started as you would expect some customers are quicker to apply for forgiveness and use those funds and they need to and of course, then we have the <unk>.
Federal government involved and they need to do their processes and and I would just say with update anymore that it's been very very inconsistent.
On a day to day week to week basis as to when we actually get paid when they process those applications.
So we can look at the trends on a longer term basis and see what's going on and try to project, what we see going into the future.
But it is like many other things that is it is hard to predict.
But we're down really on our.
PPP round number 1.
We had as of June 30, only 237 loans remaining.
To get forgiven.
And that has obviously declined and Oh.
And once on a daily basis, so it's hard to tell I would say that.
A good chunk of that will be gone by the end of the year, but we certainly expect to have PPP balances, especially for round number 2 on the books at yearend and and hopefully paid off in full by the end of the first quarter. So those are my thoughts.
Okay.
Okay, and you did say Chuck $6.2 million remaining.
And on the fee side.
And the deferred piece, yeah, Yeah, 5 point and I know that is round 2 and just about 300000 on round 1.
Okay, great. Thank you so much.
But for Mike right.
This concludes our question and answer session I would like to turn on the conference back over to Bob Kaminski for any closing remarks.
Yes. Thank you very much for your interest and our company.
And we look forward to speaking with you next at the conclusion of the third quarter and we hope the rest of your summers enjoyable call has now concluded.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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