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Ladies and gentlemen, thank you for standing by, and welcome to the Glacier Bancorp, Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions].
I would now like to hand the conference over to your speaker for today, Randy Chesler, CEO and President. You may begin.
Alright, thank you Wanda. Good morning and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer and Tom Dolan our Chief Credit Administrator.
Yesterday we released our second quarter 2020 earnings and today we're ready to review the state of the company and the financial results. The second quarter was very solid and highlights the strong core of the company and the strength of our team and our business model, despite the stiff headwinds caused by the global COVID-19 pandemic. We continue to navigate through the pandemic extremely well and I'm exceptionally proud of the Glacier team, their commitment and leadership and their service to their communities.
As I noted in our last earnings call, the Glacier franchise covers almost 1,500 miles from Montana to Arizona and the impact of the pandemic is different across that franchise. Our unique business model with 16 different divisions serving over 140 communities provides us with the unique capability to respond to our employees, customers and communities in a way that best suits that local market. We continue to take advantage of our model today to respond to the quickly changing conditions.
At this time most of our locations had moved back to drive through service with in-lobby meetings by appointment. This is in response to a resurgence of the virus in many of our markets. Most of our eight states have active cases and mortality rates well below the national average, but are still seeing increase in cases with more testing.
Despite the pandemic, we are amazed at how well customers have adjusted to the circumstances and are carrying on with business. Our mortgage volume is at record levels with the refinancing and new home purchases, our commercial lending business is beginning to pick up and many of our business customers report solid increased activity.
As expected, tourism in our western markets has generally rebounded very well due to a lot of pent-up desire to get out of the house and travel. Our markets were strong before the pandemic, driven by high quality of life, business friendly environments and low cost of living, and we're seeing some signs that the natural social distancing that comes with our more rural markets will add to the attractiveness of our markets.
And now on to our results for the second quarter. Once again the second quarter results really highlighted the consistent strength of our core business. We reported earnings per share of $0.66, an 8% or $0.05 increase from the prior year second quarter.
Net income was $63.4 million, which is an increase of $11.1 million or 21% from the prior year second quarter. And highlighting the company's core earnings strength pre-tax, pre-provision net revenue for the quarter was $91.3 million, which was up 41% from the prior year second quarter. Core deposits increased $1.8 billion or 16% over the prior quarter, with non-interest bearing deposit growth of $1.2 billion or 30%. Non-interest bearing deposits were 38% of total core deposits at the end of this quarter compared to 34% at the end of the quarter a year ago.
Deposits continue to flow into the balance sheet, so we significantly reduced our federal and home loan bank borrowings by $475 million during the quarter to about $40 million and put an additional focus on reducing the cost of deposits given the drop in interest rates. We were pleased to see our cost of core deposits decline to 14 basis points from 20 in the prior quarter and the total cost of funding dropped to 21 basis points from 29 in the prior quarter.
The loan portfolio organically increased $1.4 billion or 14% in the quarter and increased $1.5 billion or 17% from the prior year quarter. All the loan growth in the current quarter and most of the deposit growth was due to our paycheck protection program or PPP loans. We have approved and closed over 15,000 PPP loans for about $1.4 billion with most of these funds deposited in accounts with us.
We expect to earn about $55 million in fee income from these loans. So as part of this effort, we also acquired over 3,000 new customers who received PPP loans from us totaling close to $298 million in loans. This was due to a number of our competitors that were struggling with offering the PPP program.
Total debt securities of $3.7 billion increased $104 million or 3% during the quarter and increased $1 billion or 37% from the prior year second quarter. Net interest margin was tough to hold as we saw it drop from 4.36% last quarter to 4.12% today, dragged down by the 150 basis point reduction of short term rates by the Federal Reserve in late March.
Pricing on new production during the quarter was around 440 verses our portfolio rate of about 485. Last quarter's new production yields averaged 480. The core margin looked better ending the quarter at 421 versus 430 in the prior quarter and 427 a year ago. The pace of PPP loans forgiveness could help the margin in the next few quarters, as fee income will be accelerated upon forgiveness.
Now last night the SBA issued some direction on how and when to submit the forgiveness applications and we look forward to getting started with the process, which according to the SBA will most likely started in mid-August. Longer term though, we still expect lower rates will continue to put downward pressure on our margin.
The return on our debt securities held up well, ending the quarter at 3.16% up 6 basis points from the prior quarter. Debt security income was $26 million, which was an increase of $5 million or 23% over the prior quarter and 18% over the prior year quarter. This shows the effectiveness of the actions we have taken to maintain our investment portfolio returns.
Non-interest income was driven by a record mortgage production. We booked gain on sale of loans of $26 million, which was $14 million over the prior quarter on increase of 118% and $18 million or 233% over the quarter a year ago. Mortgage purchase and refinance business continues to be very strong and we've seen an uptick in a number of our out-of-state buyers in addition to strong local demand.
Credit performance was better than expected with net charge-offs at $1.2 million or 2 basis points of total loans, about the same as the prior quarter. Delinquent loans were 22 basis points of loans versus 41 last quarter and 43 a year ago. Non-performing assets increased $7 million, but were 27 basis points of assets, which was up 1 basis points from the prior quarter and was 14 basis points less than the level a year ago. For the quarter, excluding PPP loans, our NPA's would have been 30 basis points of assets.
We've also made over 3,000 loan modifications on loans totaling over $1.5 billion, representing about 15% of the portfolio, excluding PPP loans. We have received regulatory flexibility to make these modifications and there are a good way to help customers get through severe, but hopefully short term business disruption like we're now seeing.
Both the triple PPP loans and the modification help customers maintain and build their balance sheets, while they get back to business. We’ve also made in excess of $200 million in PPP loans to the modification customers that will provide additional support.
We finalized closing many of these modified loans a bit later in the second quarter, as we were very busy with handling the record number of loan requests for PPP loans. While most of the modifications are for three months, we'll begin to see the majority of them come up for renewal in a few more weeks. We expect to see a good number of these customers go back to paying as agreed. It's important to note that all of these loans that receive the modification were performing as agreed before we gave them the modification.
In addition to relying on the substantial inherent strength of the loan portfolio, we've implemented enhanced monitoring of industries that we think pose higher risk due to the pandemic. The total amount of loans under enhanced monitoring is $630 million or 6.29% of our portfolio. This includes loans in the following industries, Hotel/motel, restaurants, travel, tourism, gaming and oil and gas.
The largest industry with increased risk in our portfolio is our Hotel/motel loans totaling $422 million or 4.2% of the portfolio. Most of these hotel loans are smaller loans less than $1.5 million and have an LTV under 60%. Most of you know that we have not materially increased our position in hotels for over three years, so many of these loans have a good amount of equity, which generally translates into a lower debt burden.
The next largest exposure in the higher risk group is restaurants, totaling $151 million or 1.5% of the loan portfolio. Similar to our hotel portfolio, these are smaller loans with an average loan size of 175,000 and comprised of a solid group of operators. Many of these owners have already started to adapt to a new operating model by shifting to take out while they wait for the ability to reopen fully. We plan to continue with our enhanced monitoring process of these industries for the foreseeable future.
Credit loss expense of $13.6 million for the quarter brings us up to $36.3 million for the year and 1.42% of loans, 1.62% of loans not including the PPP loans which are a 100% guaranteed. This is a 13 basis point increase over the last quarter. This increase is primarily driven by the impact of COVID-19 on the economic forecast, and not deterioration in the underlying credit portfolio. Our allowance for credit loss stands at $162.5 million, which we believe is a very adequate and prudent amount given the uncertain circumstances.
Total non-interest expense was $98.1 million, which increased $6.2 million or 7% over the prior quarter, and increased $12 million or 13% over the quarter a year ago. For the quarter the efficiency ratio was 49.29%, an improvement compared to the prior quarter efficiency ratio of 52.55%. On the year-to-date basis the company's efficiency ratio was 50.81%, improving from the 54.93% efficiency ratio for the first half of last year.
The company's capital levels remained very strong with CET1 ending the quarter at 12.35% up compared to 12.14% at the end of the prior quarter and up from 12.19% from the quarter a year ago. Tangible book value per share was $17.08 at the end of the second quarter and increase from $16.35 at the end of the prior quarter, and increased from $15.03 from the prior year's second quarter.
Our access to liquidity remains robust with growth due to an increase in core deposits and borrowing capacity. At the end of the second quarter the company had access to over $11 billion in liquidity. This includes $5.6 billion of unused borrowing capacity with $2.6 billion at the Federal Home Loan Bank, $2.6 billion in borrowing capacity at the Federal Reserve discount window and PPP liquidity facility and $400 million of capacity at correspondent banks, in addition to $1.6 billion in un-pledged and marketable securities and cash, of $547 million.
An additional $3.5 billion in liquidity is available from other sources, including broker deposits, over pledged securities and loans eligible for pledging at the Federal Home Loan Bank.
So, in March we declared our 141st consecutive dividend. With our robust capital and liquidity position, we don't see any change in our dividend strategy at this time. Dividends have been and remain one of our preferred excess capital management strategies.
And a few important items before I end my comments. We completed the operational conversion of Heritage Bank in Reno, and I'm pleased to report that the conversion went very smoothly, and it will be good to have the Heritage Bank on the company's core platform. My thanks to the Glacier and Heritage teams for an excellent conversion.
S&P selected Glacier to become part of a MidCap 400, moving up from a Small-Cap 600. And finally, bank director just this week published the 2020 Bank Director Scorecard and we moved up in the rankings quite a bit. For banks with assets between $5 billion and $50 billion nationally, we are in the Top 5, number 4, that's up from number 16 last year. So overall, an outstanding performance from the team.
That ends my formal remarks. And I’d not ask Wanda to open the line for any questions that you may have.
Thank you. [Operator Instructions]. The first question comes from a line of Michael Young with SunTrust. Your line is open.
Hey, good morning.
Good morning, Michael.
Maybe just starting on PPP, you guys obviously have recognized the expenses or deferred the expenses rather. And so I was just kind of trying to figure out the cadence of how you expect both the fees and the expenses to kind of flow back into the income statement as we move forward?
So, we've been amortizing the total fees that we expect to earn over a two year period. So that started in the second quarter, you can see that in the financials.
You know how that's going to change; we do expect it to get accelerated. We just are a little uncertain about the pace of that as I noted. I mean just last night the SBA gave us direction on how to submit the paperwork for those forgiveness loan applications, and so we believe that's going to start in mid-August.
They have 90 days then to turn that around and so probably going to see most, a fair amount of activity in the fourth quarter, probably spilling over into the first quarter. So some acceleration of those loans will happen in those two quarters and that's still subject to you know the SBA sticking to the process that they outlined last night.
Okay, thanks. And maybe kind of a broader question, just on the overall maybe business climate and loan demand. You guys have a very broad foot print obviously with a lot of different, subsidiary banks. So just trying to think about, you know kind of what may be driving strength or weakness in various areas and what areas you may see some credit issues pop-up if any?
Yeah, well I'd say I'm very, very surprised that the strong level of activity across the total footprint, starting in Arizona where you see a lot of press about the virus and issues, but talking to business owners in the market, there is a surprising consistency and back-to-business that's going on there.
And for example, one of our customer builds roads. You know they are backlogged; they’re doing more business than they ever have with all the infrastructure investment. Another one in the car business, pace of – can't get enough cars to sell. So home builders you know reporting a lot of activity on new homes, and so we see a surprising amount of activity, no real areas of weakness popping up. If you go, it kind of moves further north into Utah similar story; Nevada, all the way up into Montana.
So we are hearing from our customers that business is resuming and nothing is really starting to bubble to the surface at this point as an area that other than the enhanced risk areas that are already mentioned that areas that we are concerned about.
Okay. And then maybe just last one for me. You noted kind of the decline in loan yields. I'd imagine there has been some maybe loan spreads widening and we may not expect this faster turn of kind of refinances and what not within the books. So just on a core basis, do you feel like there is an ability to kind of hold loan yields around that, new loan yields around that 440 level or do you think there's going to be incremental pressure from there?
You're right about this spread growing a little bit, but we're still fighting the markets and the Fed and the softening and the flat curve. So you know we think on that – if it holds where it is today, you're probably looking more at kind of 425 to 450 range in this quarter on new production, and whether I think that you know holds or gets a little better is really a function of what's going on in the interest rate curve.
Okay, thanks. I’ll step back for now.
Thank you. Our next question comes from a line of Jeffrey Rulis with D.A. Davidson. Your line is open.
Thanks, good morning.
Good morning.
Maybe take it – maybe the full margin question further I think. Maybe remind us – the moves you made in late Q1 and the securities brought certainly hoped [ph] based yields in the second quarter. I guess I’m trying to recall, how does that support strength into the third quarter if at all, and maybe just stops overall on the margin. You noted the, maybe the loan yield pressure, but you got a lot of liquidity and just want to see how that shakes out, a lot of moving pieces?
Yeah, so on the securities, the debt securities, we've been doing a lot of work there and I think that strength showed through in this quarter and Ron has spent a lot of time looking at it. So Ron, do you want to give a little more color around the debt security?
Yeah, so we bought those late March and the great deals we got, put on the munis, about 70% of the $725 million were high quality muni’s and the tax equivalent yield there was 4.12%. We also bought of that $725 million 30% were corporate which were the set banks, you know the large names through it, J.P. Morgan, etc.
So those were 435, so we blended all and we have a 420 yield and that's what showed up in the second quarter, and that will continue really till those things are called, with the munis based on a very long call today.
So we think this will continue to be an under pending, you know certainly through next year and feel very good about that. We initially funded those at FHLB, but as Randy talked about in his remarks, we’ve been able to pay down those borrowing and so now we're really financing that list, so deposit costs, that came down nicely. So both sides of it has really helped.
And then just on the – what we have been doing with the excess liquidity, which really showed up towards the latter half of June, we just purchased a week ago, just about $170 million of securities. 80% were residential mortgage backed securities, Fannie, Freddie, 20% were structured corporate MBSs and the combined yield, 84 basis points. So that's just where the market has come. So that’s why – I want you to know that, because that's why opportunistically that three days in late March when we were able to buy what I described, we really pulled forward things that we would have bought otherwise.
Okay, thanks. Any detail on the, increase in the non-accruals, where these sort of pre-COVID stressed or kind of what was in that grouping at the uptick.
Yeah, the very slight uptick, but Tom, I’m going to ask Tom to give you a little more color around those.
Yeah, for the slight uptick, a little, about half of it was CRE, the other part was Ag. All of these were pre-pandemic weaker credits. On the CRE side, you know the pandemic may have kind of put the issues in the hyper drive. But certainly these were all pre-pandemic issues that likely would have ended up here anyway.
Okay, and then just a last one on the deferral breakdown. Randy I think you mentioned predominantly three months was in time line. I don't know if you've got a 100% of deferrals or 70% in three months, but just trying to get a sense for what were the nicks of timelines on the deferral.
It’s about 60, three month 46.
Okay and as those three months have come in, I’d get $1.5 billion on deferral at the quarter end and your comment on, hoping those come in or a vast majority – I guess to date, those that have expired, you’ve seen a vast majority not seek extension?
Little early to tell, because as I pointed out, you know we finalize these month later in the second quarter, and so the three months, you know we've just seen very few start to come forward, so I hate to draw conclusions. I think what we've seen is encouraging, but it's just a little bit early because we were, so busy with our PPP production, we put them odds on the back burner and got to them later in the quarter.
I see, okay. Well, thank you.
You're welcome.
Thank you. Our next question comes from the line of David Feaster with Raymond James.
Your line is open.
Hey, good morning everybody.
Good morning.
I just wanted to kind of follow up on the redeferral topic and implications for reserve. I mean just from your commentary, it sounds like most of the heavy lifting has been done. I guess how do you think about reserve builds going forward as we might get some, you know some redeferrals and potential risk rating downgrades? Just any thoughts on that?
Yeah, you know what – I’m going to ask Tom to give you a little insight into that, but you're specifically David asking for the, what you think are expense will be or did you maybe you could just tuned your question, and also make sure we get to your answer.
Yeah, just interested in your thoughts – I mean whether most – it sounds like most of the reserve build is already completed based on your commentary about, incorporating economic scenarios versus credit deterioration. I guess just thoughts on what’s the – you know how you plan to or just thoughts on additional reserve builds going forward in the back half of the year and you know implication. Probably only going to be driven by potential credit migration from risk rating downgrade, as loans get redeferred or just any thoughts on the reserve builds going forward.
Yeah, Dave this is Tom. I think with the world we know today, we're pretty comfortable with where we're at. But you know borrowing any deterioration or forecasts or material deterioration in the credit portfolio, you know I would agree that probably the heavy lifting is done. But you know it's still little early, especially given that a lot of our footprint in higher tourism areas with the early signs of all pointing positive, but it's a little early.
Okay, and then I appreciate the commentary on the 3,000 of new customers that you were able to acquire from the PPP program. Just curious, how much of this is translated into non-PPP growth. And then maybe similarly, have there been increased opportunities from lenders who might be frustrated at a competitive bank or at a larger bank that might be interested in making a change and creating a hiring opportunity for you’ll?
Yeah, so let me start with the 3,000 customers. I would tell you that a fair amount of these were people that we wanted to do business with. That we had been calling on for a number of years and then PPP, if you turn the clock back to when this first started, there was a lot of anxiety around this and a number of the money center banks were very slow in their response to the customers, and that was the – and some of them, the straw that broke the camel's back and they came over to one of our divisions and that's a fair portion of those 3,000 people that we've been looking to get into the bank and a fair amount of them were you know with the money center banks.
And so step one is, we now have a deeper relationship with them, with the PPP. They all – all the – we did require our accounts to be open, so we do have that established now, and I think you know that is a project for the next year for us, is to deepen those relationships. So we just had last month an all-hands on deck meeting with all our divisions, talking specifically about how to – we spent a day and a half talking about how to deepen those relationships now that we have them in the bank, and if you think about it, it's like a small acquisition for us. Its 3,000 new customers into the bank, all the lending relationships that are an opportunity.
So we'll see how we do. We are very focused on it and that's one of the things we have on our to-do list for the next year, is further deepen those relationships and pull over the good business that’s sitting in another bank right now.
In terms of new commercial lenders, we’re pretty well staffed. I mean I think we always maintain a list of people who want to come on over to Glacier, but – and as really good opportunities present themselves, we take advantage of it. But I think there is – you know generally we have a good short list in most of our markets of people we know we'd like to have join us when the time is right. But right now our focus is on those 3,000 new customers and you know how to deepen that relationship over the next 12 months or so.
Okay, that's great. And then just one more, you talked about the commitment to the dividend. You know where there’s much excess capital as you have and a strong credit performance, when do you think you can return to dividend growth? What are you hearing from the regulators? Do you think you’d get pushed back if you try to raise your dividend now or just maybe any of your thoughts, overall thoughts on capital deployment and capital return?
Yeah, while we're very thankful that we're in a position to pay a dividend and continue to pay a dividend, there has been a lot of industry discussion you know around this, other than initially there was some of the bigger banks, got some direction to slow it down. I think you just need to be smart about it I guess from our point of view, which is to have a very – maintain very solid capital and very solid liquidity and keep your payout ratio in a reasonable range, because I think it's a legitimate regulatory concern at this point to make sure that banks retain capital and don't push it all out through dividend.
So I think it’s sensitive, may be more of an issue for companies that are paying out a higher percentage of earnings with little less capital, but I – you know from an industry regulatory standpoint, I don't think it's on the front burner. But from our standpoint we don't really want it to become an issue, so we're going to be proactive to make sure we take steps to ensure that we're all able to pay a dividend.
That's great, thank you.
Thank you. Our next question comes from the line of Matthew Clark with Piper Sandler. Your line is open.
Hey, good morning guys.
Good morning.
On the comp expense, you benefited from the deferred origination cost, the Fed 91 stuff on the PPP, about $8.4 million or so. You also added strong production on the mortgage side, so that probably masked some of that relief. I guess, how should we think about the run rate of comp expense, close to $58 million this quarter.
Yeah, so you're right about kind of the dynamics in play there with the deferral and then you know underneath that is increased mortgage comp expense, due to the record level of production we’re having. So Ron maybe you can give Matthew a little view of kind of the run rate that we think we're going to see there.
So Mathew, right, that $8.4 million you know was certainly a benefit, but that’s bended, that's not going to continue, and we did have higher compensation expense you alluded to. So roughly $66 million would be where I would think the run rate would be for the compensation expense for the third quarter and you know you noticed that we added some people, so we included in that higher compensation. As you know we had a great mortgage banking income, so we paid on that production and then we had the higher body count, so – but that’s all based in that.
That’s great, okay, thank you. And then just on the PPP, the $1.4 billion, it looks from the lease that you only had $166 million of that you know that went toward the high risk industries that you're focused on. Is there some other portion of your PPP portfolio, atleast from an industry perspective that you know may be of more concern just given the support that they needed?
Not that I'm aware of. I don’t know Tom if you have any? I mean we certainly look at where the PPP has gone and you know it did. There was a bit of a match up with the mods, but PPP was pretty widespread. So I don't know Tom, do you have any thoughts on that?
No, I mean I think the industries are pretty widespread that then we’ll see the PPP outside of what we have in the enhanced risk portfolio. There's nothing that gives me any immediate concerns you know.
So for example in our – you know when you look at some of the industries that did receive PPP, we had you know some healthcare, some construction. Construction has remained very strong through the pandemic and healthcare once you know elective procedures were opened back up, the pent up demand that you know existed through the shutdown really is keeping a lot of the medical providers very busy, and a lot of the conversations I had with our providers and also our contractors state that you know summer vacation plans are over. We're very, very busy right now and things are looking good.
Outside of that Mathew is its pretty widespread and nothing of overly concern.
Okay, thank you. And then just on credit migration, I mean it sounds like you're kind of just going through the deferrals now, but I guess how are you going to on a risk rate as we move through this process, have you seen any migration yet or you feel like there might be some as you – and some of these deferrals come up for renewal.
We haven't seen any migration yet Matthew, but you know I certainly would expect some as we roll some of these modifications out, especially in this higher risk portfolios. So as we continue to dig through you know each of those credits at a very detailed credit perspective, you know I would expect some deterioration, but I don't expect anything significant or serious, atleast not as yet.
Okay, great. Thank you guys.
You’re welcome.
Thank you. Our next question comes from the line of Gordon McGuire with Stephens. Your line is open.
Good morning.
Good morning.
Ron, I was hoping we could round out the expenses. The release mentioned a state regulatory assessment credit or an adjustment. I guess in the past couple of quarters the FERC credit has helped. Can you help us think about the run rate for that line item?
Yeah, the state expense will go back up to about $600,000 and so that is not a big number, but it was nice to have a rebate for the first half. It’s not – by the way, they have not ruled out a second rebate for the remainder of the year, but we'll wait to see what that is, but the – what was the other part you had stated and then what…
I think that was it. I was trying to get a gauge for what the run rate for the regulatory assessment expense was and I think you said $600,000 a quarter in addition to $1.6 million.
Let me look here, one second. I was – 1. – Angela, what’s that number?
$1.5 million.
Yeah, $1.5 million per quarter, pardon me. I think you’ll have to change.
Then I was hoping you could provide a little more color into origination volumes in mortgage, the margins this quarter and what's the outlook there heading into the third quarter.
On the origination of the loan then?
Yeah, the mortgage [Cross Talk] – yeah, obviously was substantial and we are just way above where we were in the prior year in terms of the level of activity. You know if your question is on the spread that we're seeing there, you know those are holding really nicely. The pricing on those is obviously going to be dependent on you know where the market price is so.
Future is, you know it's going to look like it’s going to be another strong quarter. We've been very surprised at the level of activity, but it's maintained a lot of – almost the concern about shortage of inventory, because the builders weren't able to build houses for the first quarter and now there's a line of demand. That coupled with as I noted, the increase in the out of state purchase services, now almost 20% of our purchase volume is from people outside of the market, that's almost double of what it was in the first quarter, so a lot of activity there.
Okay, good. And then Ron, you brought down the customer repo costs this quarter, but still yielding around 1%. I guess it's a smaller balance relative to the total balance sheet, but is there still opportunity to bring down those costs lower?
There is, definitely. One thing to point out, you know all of the – when you look at our funding liabilities, interest bearing deposits, certainly even wholesale, all categories dropped and so we still got some room. You know the CD’s, that book rolls off, that will come down and then definitely the repo’s here to your point, [inaudible].
Good, thank you.
Sure.
Thank you. Our next question comes from the line of Jackie Bohlen with KBW. Your line is open.
Hi, good morning everyone.
Good morning, Jackie.
I was wondering if you can provide a little bit of color on the unfunded commitment expense, that was in the other line items on non-interest expense and just what the driver was in the quarter and then what your expectations are going forward?
Yeah, I’m going to ask Tom to talk about that. That's been you know a little frustrating with the new accounting rules, how that has kind of entered our landscape now and we've talked to our accounts about a way to reduce net volatility and the answer is there is none and so maybe in time you can get a little more color on kind of what has occurred and maybe what your expectations are.
So yeah, Jackie there are two primary reasons we had an increase in the quarter. First, we've seen a reduction in the utilization rates of our revolving lines of credit. It's actually been fairly significant over the quarter. Customers are using their lines of credit less and less, which you know from my chair speaks to the strength of their balance sheets and the lack of need for borrowed funds. But as the negative side of that is it increases, the unfunded balances and the unfunded liability that goes along with it.
And then secondly, you know similar to the funded allowance for current loss, the unfunded is sensitive to changes in the economic forecast as well, and you know on the unfunded side there is, it’s made up of a combination of revolvers, also construction loans and construction loans are newer. They have longer weighted average lives and can be you know – can have as Randy mentioned, a little bit more volatile change.
So expectations in the future, you know we're starting to get into the growing season on the Ag portfolio. I think we'll see some utilization there. We’ll also see some seasoning of the construction portfolio as those draws continue. So it’s a little difficult to project it out, but certainly I think we’d expect maybe not quite the volatility we saw this quarter.
Okay, and correct me if I'm not thinking about this properly, but was there an offsetting, maybe a lower amount of provision expense related to the $6.9 million in unfunded commitments because you had those wide balances go down. So meaning that because your commercial balances declines as utilization declined, you had a lower reserve requirement, but then that increased your unfunded committed requirement. Am I thinking about that properly?
Yeah, I think you're thinking about it properly. I mean I can't – you know I don’t have a number to nail down what the difference was between the two. But you know that follows the logic behind it, as balances decrease you know its shifts from the funded to the unfunded side.
Okay and if adjust for it the swing and unfunded commitments, which were roughly around $10.5 million quarter-to-quarter, it looked like other expenses was low outside of that and I pulled merger charges out of others, so maybe that’s the variance there. But was there anything else unusual in the quarter that caused that item to be lower?
No.
Right. So outside of unfunded commitments it’s a pretty good runway you would say?
Jackie, you’ve dealt with $8.4 million of the deferred comp coming from the PPP origination.
Yeah, yeah. I’m speaking specifically to just the other expense line item and then looking at the quarterly variances there.
Yeah, that’s correct.
Okay, thank you. And then one last one, sorry once again a little bit technical. When I look at the fees that we've just closed on the PPP loans and thank you for providing that level of detail, does that include the loan origination costs offset in there?
I believe those are the gross fees, so what table are you looking at there for the PPP. Is it in the release?
It was in the release. Sorry, right now I just got it in my model, so I’m not sure where I pulled it from. It’s the $7.3 million.
Oh! For the quarter, $7.3 million.
Yeah, I’m just wondering if that’s the gross in number or if that’s already net of the deferred loan origination costs?
That’s the net number. Yeah.
Okay, perfect.
Yeah the number I quoted in my 53, that's the gross number, not netted out by anything.
Okay, great, thank you. Sorry for being so technical.
No, that’s good. You’re welcome.
Thank you. Our next question comes from the line of Tim Coffey with Janney. Your line is open.
Great! Thanks. Good morning everybody.
Good morning.
Randy, as we look at kind of the portfolio with enhanced monitoring of it, it looks like it's come down a bit quarter-over-quarter. What's your approach to that portfolio? Is that kind of actively managing it down or content with what you have or would be something like you're open to the right opportunity in these categories?
I'm going to ask Tom to make a comment on that. That’s – we carved that out early as the area that we thought due to the COVID-19 would have the most risk. I think it's proven to be an area that you know we think does have the risk. In terms of how we are managing it Tom, you want to give some insight on that.
Yeah Tim, that’s a great question. I would say we're managing it very closely. You know the reductions, the combination of normal amortization and then as I mentioned earlier, we had some pay downs on the revolving side, which a portion of were from the enhanced risk portfolio. And just like anything, there are stronger credits and there are weaker credits, so in terms of new originations, I wouldn't say that we're actively looking to increase the hotel or restaurant portfolio, but there may be the exception here and there. It just really depends on the individual credit in and of itself.
Okay. No, that’s helpful. And then also comparing to the prior quarter, there was a fair amount of modifications in that portfolio at the – I think when you reported on in May. How many of those are coming up on the 90 day expiration?
You know as Randy mentioned, we have about a 60/40 split between 90 days and [inaudible]. We are just now starting to see those hit exploration, so the 90 days is probably going to be within the next four to six weeks and then of course the six months will be longer. You know the enhanced – the modifications on the enhanced risk is kind of dispersed throughout the time frame and we are writing them all together.
Sure, okay, I understand. And then on the PPP loans, do you have an idea of what percentage of those are under 150,000?
Well, our average is below $100,000. We have one of the more granular ones. In terms of what percentage of our total loans that we did are under $150,000, we’ve – Ron has got that number. Ron, what is the – what do we have there with…?
Of the total its roughly $600 million, is in that range of below the $150,000.
Okay so, $600 million to the [Inaudible], it is below $150,000.
Alright, and then on mortgage banking, congratulations on a record year.
Thank you.
Yeah, if volumes stay elevated like they have, would you consider putting more of these into the portfolio if you know organic loan growth starts to slide down or stall in the second half?
No, we like our portfolio rate where it is. You know the portfolio is there to help customers that just don't quite fit the box. We don't look at it as a way, as a growth engine, but as a way to maintain relationships with realtors and with our branch customers. So we don't look at that as a way to significantly grow. I think a percentage of our portfolio has actually stayed about flat, shrunk a little. We’re very happy with keeping it right where it is.
Okay. And then on deposit costs, what were deposit costs at June 30?
So, total deposit costs or – you are looking at total funding costs or core deposit costs?
I’ll take core deposit cost.
So Ron, if you want to go back to the end of this quarter, so…
Yeah, just for the – you were talking right at the end…
At the end of June.
Yeah, so we were, not sure, 13 basis points is what that is. That includes the CDs, that 88 and again there is definitely again over time, because there are time deposit of course. But 13 basis points and it dropped steady from April to May to June.
Okay, great! Those are all my questions. I appreciate it. Thank you.
You’re welcome.
Thank you. And we have a follow-up from Gordon McGuire with Stephens. Your line is open.
Hi, thanks for the follow-up. I apologize for bringing expenses back up. Ron, did you say that the compensation run rate for the third quarter is 66 or 56?
66.
66, and does that assume strong mortgage and commissions are at a similar level to 2Q.
Yeah, it does.
So fourth quarter would be the expectation that probably had moved lower from that number.
Yeah to the extent that the gain on sale, the decline, yeah the variable expense for the commissions would similarly decline.
Okay. Thank you.
Yeah.
Thank you. I'm showing no further questions. I would like to turn the call back over to management for closing remarks.
Thank you, Wanda, and I want to thank everybody on the call today for dialing in and spending part of your summer with us. We appreciate it. We want to wish everyone to have a great day and a fantastic weekend. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone have a wonderful day!