Enterprise Financial Services Corp
NASDAQ:EFSC
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Enterprise Financial Services Corp
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[00:00:01] Good day and welcome to the EFSC earnings conference call. Today's conference is being recorded at this time. I would like to turn the conference over to Jim Lally, president and CEO. Please go ahead.
[00:00:15] Well, thank you, Ryan, and thank you all very much for joining us this morning and welcome to our twenty twenty third quarter earnings call. Joining me this morning is Keith Turner, the FCC chief financial and chief operating officer, Scott Goodman, president of Enterprise Banking Trust, and Doug Volsky, our company's chief credit officer. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website, the presentation and earnings release for Furnished on s.E.C. Form 8-K yesterday. Please refer to slide two of the presentation titled Forward Looking Statements and our most recent 10K and ten to four reasons why actual results may vary from any forward looking statements that we make today. Overall, the third quarter represented another solid quarter for our company on a fully diluted basis, the earned sixty eight cents per share and reported the net income for the quarter eighteen dollars million on a pre-tax reprovision basis. That income was thirty eight million dollars, yielding pre-tax DeGennaro of one point eight one percent. Which is relatively consistent with what was reported in the second quarter. These strong earnings allowed us to continue to build our capital position, even with the elevated provision for credit losses at nine 30, the ratio of tangible common equity to tangible assets stood at seven point nine nine percent. And when adjusted for triple P, this increase to eight point eight nine percent. Then we'll get into the details around margin in our rationale for the provision expense, but I just wanted to comment that we are preparing the company for a prolonged low and flat interest rate environment.
[00:02:07] Gail and maximizing our returns are invested in people and technology will be key. Furthermore, we believe that we are still in the early stages of this current credit cycle and we will use our strong earnings profile to build our allowance for credit losses in light of this. This does not mean the growth is not a focus for us, because it is means that more than ever we have to be consistent in our credit process in order to take advantage of others who will not be. We ended the quarter with three primary focus is first, we wanted to continue working diligently on the loan portfolio to ensure that we focused on the high risk industries and customers to mitigate the impact of further deterioration while identifying other potential issues on specific credits. Not within these industries. As you will hear from Doug and evidenced by our asset quality statistics, we feel very good about the current state of the portfolio. Secondly, we wanted to attend to the needs of our clients who are thriving and make sure that they have all the tools and capital to maximize the opportunities that lay ahead of that. This included working closely with the several hundred new clients acquired through triple p. Scott was going to spend some time in his comments on our process and successes that we are seeing. And finally, we wanted to heighten our focus on growth and reloading the loan pipeline. Obviously, the balance between credit quality and price needs to be struck with this with this desire to grow.
[00:03:40] But this is something we've been we've mentioned well in our company over the years. So I feel very confident in our efforts. And you will hear some encouraging trends from Scott regarding this. In addition to all of this, we announced the acquisition of Zikos Commerzbank Holdings back in early August. As we discussed back then, this combination considerably improves. Both sides of our balance sheet is better than 10 percent accretive to earnings in twenty, twenty two. And further, Derice, our company in a myriad of ways. We have received FDIC approval, a waiver from the Federal Reserve and anticipate other necessary approvals shortly and planned to proceed towards a close later in the fourth quarter. Having now work more closely with the Seacoast team over the last month and a half preparing for integration, I can tell you that the quality of the business and the upside of this combination is exactly what we thought it was when we last spoke to you about this. Before I had to call off the Scott, I would like to call your attention to our areas of focus on slide four. Looks a little bit like more of the same, but the flawless execution of these areas will put us on solid footing to accomplish both our near and long term goals. Furthermore, all of these areas play to the strength of our company, which gives me further confidence in our ability to succeed. I would not like to call the turnovers. Now turn the call over to Scott Goodman. Scott.
[00:05:12] Thank you, Jim, and good morning, everybody. The loan portfolio, which is highlighted on slide number six, was relatively stable in Q3, with balances posting a minor decline of less than one percent from the prior quarter. In general, relatively solid production was offset by continued declines in line of credit usage and some commercial real estate related payoffs. While loan demand from private business is somewhat soft given economic uncertainty, our continues to drive consistent organic activity through stable demand in our specialized services and proactive calling on new relationships. Production in Q3 was roughly 85 percent of historical averages with an upward trend which saw September production above monthly averages. Payoffs in general are at levels below historical norms and are mainly concentrated in the carry category relating to refinancing into long term secondary market fixed rate structures. Behavior we witnessed during Q2, which resulted in a steep reduction to line up credit usage, continued into Q3, with pay downs outpacing advances as businesses continue to deleverage and build cash balances. Looking at the loan categories which are outlined on Slide seven and eight. The change in the book of Triple P represents loan activity most prevalent in the CNI investment theory and tax credit businesses. However, the aforementioned police activity stifled net growth in CRE for the quarter. As we discussed last quarter, our sales activities in twenty twenty have been focused on leveraging our outstanding results with the triple program, which is illustrated on slide number nine. Through an internally led process, we were able to fund over thirty eight hundred companies across all of our markets, including all of our existing clients who fully applied, as well as over 700 non clients.
[00:07:25] Contributing to our success in CNI this quarter, we have since developed a robust sales and marketing campaign which has to date converted two thirds of these new businesses to clients, including new loans, operating accounts and six figures of new annuities, fee income. This same process also places higher focus on deepening relationships with existing clients in value added areas, such as Treasury management programs, private banking and wealth. And as we now progress into the forgiveness phase for Tripathy, we continue to take an advisory based approach to these conversations, arming our sales teams with continually updated program information which enabled them to build trust and provide value added consultation to our clients. Doug will touch further on the forgiveness process in his comments. The loan portfolio is further broken up by business unit industry and product type onsides 10 and 11. And generally reflect my prior comments, the decline in specialized lending follows from seasonally slower activity in evil originations and life insurance premium finance, as well as an additional line pay down the evil sector. The Arizona portfolio posted a strong quarter, rising by five percent and reflecting higher levels of economic activity in this market, including new career development and acquisitions. This market has also been responsible for adding the most triple based new relationships to the company.
[00:09:05] Looking ahead, the current loan pipeline is encouraging and provides some reason for optimism that barring further deterioration of external headwinds, growth is possible near-term. High level, the current pipeline shows opportunities which can provide net growth in nearly all of our major business units. The largest unknown around this outbreak, however, is timing, as we have seen loan requests and planned investment taking longer to close or being pushed out. Our approach to credit will continue to be consistent in supporting existing clients, opportunistic for new relationships but disciplined relative to credit, structured despite growing competitive pressures. Our portfolio is performing well today, and you'll hear more on this from Doug in his comments. Overall, deposits remain in the healthy position, and our focus continues to be on building core relationship based accounts and reducing cost. Portfolio changes are highlighted on slide number 12 and show a slight dip in the quarter, mainly reflecting continued pro-active management to reduce higher costs brokered and non relationship based balances, as we discussed in detail last quarter. The reduction also reflects the deployment by our client base of some of their triple related funds. Sales efforts around triple P and the ongoing focus on new relationships is resulting in a new average account balances that are trending larger and at a lower cost than those that are closing. And now I'd like to turn it over to our chief credit officer, Douglas Bauche, for further color on credit stud's.
[00:10:54] Third quarter asset quality results were solid, non-performing loans declined modestly to thirty nine point six million classified assets were reduced to eighty five million dollars. Net charge offs total just over one million dollars for the quarter. Now two point five million year to date and 30 plus day delinquencies were approximately five million or nine basis points on total loans, excluding Peepli. Furthermore, as shown on slide 13, loans in deferral or payment modification due to covid-19 declined substantially to one hundred and thirty nine dollars million or three percent of total loans, excluding PTP. This includes 40 loans totaling 86 million that are still in a deferral status due to the granting of a second round of 90 day principal and or full contractual payment relief. The hospitality sector represents approximately 58 million or 68 percent of loans with multiple deferrals that are still in deferral status. I would note that while we are pleased with the results, we continue to monitor the portfolio very closely and I meet weekly with our senior credit management team to evaluate and implement strategies to remedy our largest troubled credit. The return to payment performance alone is not an indication that a borrower is out of the woods. We are taking prudent steps to downgrade credit where appropriate, build reserves in light of continued uncertainty and stress, and to work with our borrowers in a manner that both protects bank capital and maintains our reputation as one of the best relationship lenders in the market. 514 provides detail on loan accommodations by loan type changes and risk ratings assigned to loans granted payment modifications and the scheduled expiration of payment deferrals between now and January 20, 2001. Slide 15 reflects the allocation of our one hundred and twenty three million dollar allowance by lone type. And further highlights the factors contributing to the build in the reserve from the prior quarter.
[00:13:20] Higher levels of reserve are held against the construction real estate portfolio, approximately three point ninety nine percent due to lower risk ratings, inclusion of some hospitality related construction exposure and prior lost history during the prior financial crisis. During our Q1 and Q2 earnings call, I provided in-depth commentary on certain portions of our loan portfolio that were viewed as most susceptible to the changing economic environment.
[00:13:52] Overall, our portfolio mix remains largely unchanged from the prior quarters. The details of these portfolios will be included in our investor deck that will be filed in the next couple of weeks. And I'll provide an update on some of the highlights. While many of the portions of the portfolio have seen revenues return and operating performance somewhat stabilized, the hospitality sector has continued to suffer due to the extended impact of covid-19.
[00:14:23] Our three hundred and seventy five million dollar hospitality portfolio consists of approximately two hundred and thirty million in hotel and lodging loans.
[00:14:33] The top five hotel borrowing relationships represent nearly one hundred million dollars for 45 percent of the lodging exposure, and we remain highly confident in their ability to withstand the downturn due to strong balance sheets, quiddity, personal sponsorships and low loan to values. We have, however, applied additional qualitative reserves against the hospitality portfolio and special reserves against individual credits that have defaulted or remain in payment deferral status. As noted in the release, an eight point seven dollars million in market hotel alone was put on non-accrual in the third quarter. This specific lodging alone had been watch rated prior to the impact of covid-19, and it is not representative of a trend in the overall portfolio. Other industries previously highlighted, including aircraft, AG, Evil and Life Insurance Premium Finance, have demonstrated stable performance that is consistent with our overall strong asset quality results for the third quarter. As a reminder, we had engaged an independent third party consultant to conduct a thorough review of our evil exposure and to stress test the portfolio under various economic recovery scenarios. That report exam, which achieved 78 percent penetration, was completed in July. The findings of the exam supported and confirmed our risk assessment with stress losses that were well within our internally identified stressed ranges.
[00:16:21] Before turning it over to Keene Turner, I'd like to comment on our PP loan portfolio, as you saw back on slide nine. We have three thousand eight hundred and forty nine PPY loans totaling roughly eight hundred nineteen dollars million that we originated and that we are servicing today. We did not purchase, nor have we sold any TBP loans. We are making final preparations to begin accepting forgiveness applications from our clients, and we are pleased to report that 50 percent of our people loans are less than fifty thousand dollars and therefore qualify for the streamlined thirty five Slate? S application that provides significant administrative and financial relief to both small business owners and lenders alike. And with that, I'll turn it over to term.
[00:17:17] Thanks Doug. My comments reflect Slide 16 of the presentation, our operating fundamentals continue to produce organic earnings that further supported our capital and reserve levels. In the third quarter, we generated seventy six million dollars of operating revenue. Net income of eighteen million dollars in earnings per share of sixty eight cents. The combined effect of operating revenue on EPS in the quarter was essentially flat with the changes and fee income and net interest income offsetting one another while we continue to build our reserves during the third quarter. The provision for credit losses of 14 million dollars decreased from nineteen point six dollars million in the second quarter and reflects an improvement in the macroeconomic forecast. We also recognized one point six million merger related expenses that impacted EPS by five cents per share.
[00:18:07] On slide 17, net interest income was sixty three point four million dollars in the third quarter, a decrease of two point four dollars million in the second quarter. Net interest margin was three point two nine percent, a decrease of twenty four basis points in the second quarter. Just to note, and Doug hinted at this, the deep forgiveness process was not kicked off in the third quarter and we did not realize the acceleration of the loans. We do expect the fourth quarter to resume forgiveness and just a note loaned under fifty thousand dollars that will qualify for the simplified forgiveness process. We had about two thousand loans totaling thirty nine million dollars, with one point six dollars million of amortized fees at the end of September.
[00:18:56] What we expected in the third quarter were full quarter impact from continued erosion of loan yields from the early two thousand twenty decline in LIBOR, which is around 15 basis points per quarter, average of balance and sub debt at five basis points combined. But we didn't anticipate was the additional liquidity which pulled five basis points from net interest margin and accelerated investment premium amortization, which was another three to three basis points.
[00:19:23] Based on the initial comments on the quarter, apparently the margin trend was unexpected, and so I'll try to crosswalk to my second quarter comments and give you some perspective as to what transpired.
[00:19:36] Average loan balances declined approximately one hundred million dollars in the quarter, and while yields on those loans declined twenty one basis points compared to the second quarter in the quarter, we realize the full impact of decreases in the short term LIBOR rates, which occurred in the first and second quarter. The impact on the third quarter, with approximately 15 basis points of net interest margin of expected point for portfolio loan yields, were basically flat during the month with within the quarter consistent with our expectations at the end of the second quarter. We believe this trend will continue and limit further margin compression of coming quarters, absent material shifts in the balance sheet composition. Investment yields also declined 16 basis points in the quarter as cash flows were reinvested at slightly lower coupons and premium amortization increase as a result of higher prepayment speeds and mortgage backed securities. It was noted that around five basis points. Also of note, the remaining on AMORTISE premium on mortgage backed securities at around eight dollars million.
[00:20:37] Growth in funding, particularly non-interest-bearing balances, resulted in one hundred and twenty million dollars in additional interest bearing cash balances, which further eroded net interest margin by five basis points.
[00:20:48] Our cost of liabilities is relatively unchanged, declining one basis points in the linked quarter, the total cost of interest bearing deposits declined six basis points due to lower balances and rates on brokerage CDs and customer time deposits. But it was offset by additional expenses from the full period of our most recent debt issuance and reset on some hedges we use to control borrowing costs.
[00:21:17] As noted by Scott, we remain focused on growing the earning power of the company and we do have some elevated expectations regarding loan growth in the upcoming quarters, that should help us to slow the sequential decrease in net interest income. As Ultima, that is our focus and it remains growth and for growth in the upcoming quarters.
[00:21:38] Beginning to slide 18, let's review our credit metrics and asset quality changes during the quarter, net charge offs in the quarter remained relatively low at seven basis points of average loans, or approximately one million dollars. These credit losses were mainly attributable to one evil relationship that had been previously identified and reserved in a prior period. We also incurred a charge off on this loan in the second quarter, and we believe that we have now worked through this particular credit. We have remaining book balance on this loan of three point seven million dollars for a specific reserve of two point four million dollars. Overall, asset quality metrics improve with both non-performing loans and classified assets declining, but we have experienced a slight uptick in our watch category. Looking at Slide 19, we provided some additional color on the changes in the allowance this quarter as there are a number of moving pieces. We increased our allowance for credit losses to one hundred and twenty three million dollars at the end of September. This was the result of an increase to specific reserves, qualitative reserves allocated to certain loan categories and the previously mentioned increase in watch loans. The qualitative reserve allocation was based on a review of certain loan portfolios, primarily those that have received multiple deferrals, including hospitality loans that make up a large portion of loans with multiple deferrals.
[00:22:55] The increase in specific reserves was mainly from the addition of the noted hotel loan that we placed on nonaccrual status this quarter. It's important to note that while we put this loan on nonaccrual, we have not seen a trend in this industry segment. It's also worth noting that this loan could have received a deferral. However, our relationship with this borrower was already stressed. These increased reserves were offset by an improvement in the macroeconomic forecast variables that are significant drivers in the allowance under the diesel model, the primary variables driving the forecasts are unemployment and changes in GDP. The combination of these factors resulted in a provision for credit losses of 14 million dollars down to nearly 20 million dollars in the second quarter. Excluding keep the allowance, the total loan was increased to two point three two percent from two point zero one percent at the end of June. We believe it's prudent to build and maintain a reserve that reflects the uncertainty in the economy and the risks it poses to our customers and the potential for lifetime credit losses within the portfolio. With that said, we'll move on to fee income, which is outlined on slide 20, and that came in at twelve point six dollars million for the third quarter, which was an increase in 10 million dollars we saw in the second quarter deal flow return in the tax credit space during the third quarter.
[00:24:12] And we experienced positive impact on card services, cash management, service charges and well, which we experienced rebounding activity and revenue from second quarter levels. Mortgages expanded again in the third quarter as volumes increased from the prior quarter as the interest rate and real estate environment continue to support, refinance and purchase activity. We strategically sold from lower yielding securities in the investment portfolio during the quarter and posted about a half a million dollar gain as a result. Expenses on slide twenty one continue to be well controlled, coming in at thirty eight million dollars for murder charges, the third quarter saw one point six dollars million in murder related expenses, primarily consisting of legal and professional costs as we work towards closing Seacoast. As we have in previous quarters, we continue to support the community and employee families affected by current economic conditions and social unrest. We continue to work hard to ensure that we're spending prudently in this environment and we're extremely pleased that we've kept expenses in check despite challenging revenue.
[00:25:19] Headwinds we also continue to experience to operate effectively across all of our markets with a large part of our workforce, we're working remotely with regard to the Seacoast acquisition. Our internal integration team has been working hard with US Coast partners and using our established playbook and procedures to make progress along our expected timeline.
[00:25:43] I'll conclude my remarks with our final slide, number 20 to. Our strong organic earnings profile continues to drive our capital levels with tangible common equity to tangible assets ratio at eight point eight nine percent, an increase of twenty two basis points in the quarter when excluding our tangible book value per common share, increased to twenty four dollars and eighty cents, an eight percent increase over the prior year, while building the allowance for credit losses by one hundred and fifty one basis points. We maintained our dividend at 18 cents per share in the fourth quarter to provide an ongoing return to shareholders while providing flexibility in our capital structure. I want to conclude by saying that we're pleased with our financial results in the quarter in particular, we believe we have been proactive in bolstering capital and reserves, which will allow us to focus more intently on business development and maintaining and expanding earnings over the coming quarters. We're also excited about the pending acquisition of costs and the addition of their SBA loan generation and low cost deposits. Specialty's. We discuss the financial merits of the transaction when we announced the deal in August, but it's worth repeating that we expect double digit EPS accretion in twenty twenty two and an unbaked earned back under three years in an IRR around 20 percent. I appreciate those who have taken the time to listen today, and we'll now open the line for analyst questions.
[00:27:05] Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment again for any questions. That is star one now. And we will take our first question today, and that is from Andrew Lisse with Piper Sandler. Please go ahead with your question.
[00:27:33] Morning, everyone. I just I just wanted to kind of circle back to the provision here and you referenced some of the hotel loans and setting aside specific reserves on the hotel, they did go to nonaccrual. Can you tell us a bit what the LTV on that on that property is?
[00:27:59] Hey, Andrew, good morning. It's Doug Bauche. So, you know, we have TV's prior to, of course, the impact of covid and the TV would have been around 75 to 80 percent prior to the impact of covid. As I mentioned, this was a particular credit acquired that was on our watch list and really relatively considering a higher risk credit due to the higher loan to value and nonrecourse nature of the loan. And the fact that SCÈNE pointed out our relationship with the borrowers already stressed we've taken the loan into a nonaccrual status and established some special reserves.
[00:28:41] Ok, and then just overall in the hospitality books referenced Lowell TVs, they just have the blended average of that entire portfolio.
[00:28:58] Yeah, the hospital are the only the hospitality portfolio on average was around 60 to 65 percent loan to value well sponsored by the owner developers of those hotels. That's good liquidity. And again, I mentioned the top five relationships to have multiple hotel properties total about one hundred million dollars. The balance of that lodging portfolio is really representative to about 20 various and independent relationships.
[00:29:32] Ok, that LTV seems pretty reasonable and I understand the wanting to add to the allowance and build the reserve, but these TVs do seem pretty manageable, just given up to what's currently going on. I mean, if you look at that portfolio, I mean, where do you see lost content coming in? It seems like with that with the with that underwriting, it should be pretty modest and really just trying to get to provisioning going forward. It seems like you've already built a lot of the loans that you'll need to. But with the LTVs here and with some of the higher being, some of the higher risk loans, provisioning may not need to be as high as it has been in recent quarters.
[00:30:16] And I would say under the CECL model, at any given point in time, I think we need to make sure that we got what we think is a life of loan result. I think the first two quarters you had the economic forecast, you know, driving a lot of that reserve. And we had some time, as Doug noted, to gather a lot of information about what the potential for losses could be. And so, to your point, I think that we feel like sitting here today, barring material changes in information deterioration or underlying trends, I think you're probably right. We're probably pretty well reserved. And I think our posture is to, you know, reflect more of the uncertainty, you know, than less of it. And we just we want to be proactive and get that reserve where it needs to be. I would say when you think about what we did on the qualitative made me think more about the second round deferrals as the starting point, which typically included some loans in some categories that were maybe more stressed in the hospitality space that we're referring to. And I think there's some breakouts on the slides as well as the evil loans. So from that perspective, I think that that's more qualitative in terms of the P&L and the hotel piece, but more quantitative in terms of, you know, loans that had a second round deferral. I think we're looking at that and saying overall, those are probably higher, you know, loss given default, given the commercial nature of the portfolio and some of those chunks out there. So that's the way we're thinking about it. But again, I think, you know, absent further deterioration, I think, you know, we would expect certainly that that we've gotten the reserve to a point where, you know, we can feel comfortable and we've got a really strong balance sheet to move forward.
[00:32:06] Ok, thanks for taking my questions on that. I'll step back now.
[00:32:13] Thank you, Andrew.
[00:32:16] Thank you. We'll move on to our next question, that is from Jeff Rulis with D.A. Davidson.
[00:32:22] Thanks. Good morning. Just on the seacoast, wanted to kind of get an update, I think, Jim, you mentioned expecting a later Q4 close. How does that impact integration, timing? I mean, I think this was initially a make. Twenty four early, twenty one clothes, so forget about integration and then thinking about ultimately cost savings, timing possible to get all of that by the end of next year.
[00:32:58] Yeah, I mean, Jeff, I was. I would say the integration is pretty well set for middle of first quarter, unless something, you know, materially goes away from us at this point or even as we were planning. I think that's fairly well set from a closing perspective. I think we're on we set an aggressive timeline and I think we're hitting it. I think you can see that based on, you know, some of the dates that are out there. So I think we feel good about it. And then I think that you might see a clean fourth quarter next year, maybe third quarter, depending on the timing and the environment a little bit. But, yeah, I think I think everything is essentially on track, as we had communicated and again on a fairly aggressive timeline.
[00:33:50] Got it on track or maybe even better than that, kind of delayed or worst case, but just that's OK. That's fair, I guess, on the margin. Can you alluded to kind of limiting further pressure here just to follow up on that and thinking about the core activity? It sounds like we're kind of nearing a trough here and some of the things you've done on. On the deposit side, this firm up, that outlook, that's kind of what you had indicated, that this is sort of settling in a go forward basis.
[00:34:32] Yeah, I would say I think we're entering the fourth quarter here, and I think the big wildcard is that we typically have strong growth in the fourth quarter, both in deposits and loans. And so I think you're going to probably just see some margin drift given. I think there's going to be some liquidity coming in. I don't know how much that is because we've seen so much seeing so much liquidity build already. And so we're really trying to get some insight into that. So I think just mathematically, excess deposits coming in are going to erode margins. But I think from where we sit today, same balance sheet, we're we've seen loan pricing, repricing stabilized from the June through September timeframe. And it's, you know, drifting down a little bit of basis, point or two here and there. But I think we feel like that should that has firmed up. And really we should have, I think, been more articulate about what the impact of, you know, May, you know, April, May and June versus July, August and September was going to be on margin. So, you know, I think we probably set a higher expectation than we should have given what we knew at the time, because my comments were we're not as clear, but I think we feel like it's going to firm up might be a few basis points of drift down from here. But I think, you know, we feel like this is probably a pretty good baseline, you know, some of the noise on liquidity and PCP. And ideally we'll get some loan growth that will help drive growth in net interest income dollars on a core basis for, you know, end of twenty, twenty and twenty twenty one.
[00:36:16] Certainly not alone on the liquidity front. I think as an industry, I've seen maybe a surprising number one, just a housekeeping the on the miscellaneous income, that line item up a little over a million linked quarter. Did you mention that was gains in there? What explain the sequential lift in the miscellaneous.
[00:36:40] Yeah, but so I think that some of the private equity activity that we have, that that happened sort of periodically as part of what we do in the evil space, we have a small investment in certain funds. And so I think there was an exit there that was really driving that. And then there's just kind of some little things that, you know, that that nickel and dime into that line item, you know, international fees and just some things like that that, you know, we're depressed kind of going into the second quarter based on activity. And you just had a couple of things additionally hit there. So probably not exactly repeatable to that level in the fourth quarter, but we do expect the tax credit line to continue to gain strength moving forward there. So, you know, something that probably had two out of four quarters a year from that perspective in the, you know, one to two cents a share.
[00:37:46] Ok, thank you.
[00:37:49] Thank you, Jeff.
[00:37:52] Thank you. We'll take our next question, and that is from Michael Schiavone with KBW. Please go ahead with your question.
[00:38:00] Hi, good morning, everyone, thanks for taking my questions. On the hotel loan that was moved to nonaccrual. Is there a large balance of a quiet hotel loans remaining? And then also can you just provide how much of the total hotel book is on deferrals still?
[00:38:22] Yeah, so there's not a large acquired portfolio. Michael, I can tell you that hotel loans that have received second round the frozen but still beyond the first or second round of pros were 58 million dollars, as reported. And there are a few others that are scheduled to roll off of deferral status in October and November. So I would tell you this, that I don't have the exact number of acquired portfolio in the lodging sector, but of the two hundred and twenty million dollars is probably less than 20 percent of the overall portfolio.
[00:39:04] Ok, thank you. So just to clarify, when you say acquired and acquired through acquisition as opposed to acquired through acquisitions.
[00:39:11] Correct.
[00:39:13] Understood. OK, thank you. And then I'll see it comes at a good quarter, grew about 30 percent last quarter, and mortgage income was a big contributor. Can you just talk about the mortgage pipeline and the outlook for overall fee income growth from here?
[00:39:36] Yeah, Keene, I think mortgage has been a bright spot for us this year prior to the Trinity, we didn't really have a meaningful contribution from mortgage and I think it was something that post acquisition late last year, we made an investment in you to really take advantage of the producers that the Trinity had and improve the processing shop here and in the organization. So I expect that mortgage will continue to be a regular contributor. Fourth quarter activity is hard to predict. I think typically activity falls off 60 or so percent from the third quarter. But I also think we're not necessarily at our limit in terms of market share, certainly the high watermark. So I would say that, you know, it's going to continue to be one to three cents a quarter moving forward, given continued low rates and, you know, a lot of housing activity in our markets. And then I think from an overall perspective, I think you're starting to see some return to activity in in charges in areas that are that are behavior dependent. And so the second quarter was the low in terms of volumes and activity. I think we're building off of there. And I think we're holding our own in a lot of categories versus last year. And then I do expect that fourth quarter will provide some good tax credit income, as it does as it has historically for, you know, to round out the year.
[00:41:28] Ok, great. And final question, just you know, your reserve and capital levels are looking pretty healthy at this point. How much economic improvement or continued capital take for the board to resume share buyback?
[00:41:44] Well, so we still have our we still have about one hundred thousand shares in our existing buyback, so we just we stopped buying shares in the first quarter and I think post Biko's closing and looking at out at the future, I think. You know, we need to replenish that as an ordinary course, but I think given the reserve build that we've done, I think I think it's pretty clear that we believe that we haven't really even entered the credit cycle yet. We have one loan that we're talking about that's gone bad or had some stress. We haven't taken a charge off on it yet. And so I think we're just trying to be really cautious about. You know, making sure that the balance sheet is. Is as strong as it can possibly be, and from my perspective, you know, as much as is, it's attractive at these prices with, you know, the debt markets and the stock market for banks where it is, I still think it's a little bit too early. And I think our provision this quarter, an allowance bill, reflects that posture.
[00:42:53] Ok, great. Thank you for taking my questions. Have a great day.
[00:42:57] Thank you, Mike.
[00:43:00] Thank you. And as a reminder, that is star one for any questions, we'll move on to our next question, and that is from Brian Martin with Jamie Montgomery. Please go ahead with your question.
[00:43:10] Hey, good morning, guys. I think, Scott, maybe you touched on just Zirkin that both of you guys just a little bit on the outlook for loan growth going forward. Can we can you just give a little color on where you're optimistic? You know, I'm kind of most of the new relationships. I know you said that things may continue to take longer to finalize, but just some outlook on the loan growth outlook would be helpful, just this demand among your current customers.
[00:43:43] Brian, this is Scott, I'll start and certainly keen can, and I think what we saw in Q3 was just continually liquidity building by clients and some pay downs. But also, as mentioned, there's some seasonality to the specialty businesses. So we saw typical seasonal lags in Elipse, maybe a little bit evil. So I think looking forward to Q4, we do expect the seasonal part of the specialty businesses to perform. So you're going to see a seasonal uptick there, as well as just continued growth and tax credits for low income housing tax credit businesses. I think, you know, maybe at a high level with existing clients across the market and in general, there's optimism, I would characterize it as optimism. And if you look at that, pipelines, there's a lot of near-term planning for opportunistic investment, M&A, some recapitalization relating to either succession or just repositioning of the balance sheet. And so all those deals are developing. But slowly. Right. They're staying in the pipeline a little longer. So I think the additional activity is really a result of ramping up our proactive calling, really, as you mentioned, to leverage triple P. And if you look at, you know, each market may be a little different, but in Arizona, you've got some good industrial development clients that are in the storage business owner occupied real estate that's being acquired opportunistically. And then we're getting some new books because there's disruption in that market from competition. Kansas City, a little bit of the same, some disruption from the changes that have occurred over the last couple of years, expanding existing CNI and then in St. Louis, we've got good activity in the pipeline from existing clients that are in the tax credit business that we do fund leveraged fund financing for some new CRE relationships. So that all to me is encouraging. But I think it's a little bit of the wait and see. I think if you talk to clients, they know they're going to do it. But what does stimulus look like? Maybe looking a little bit at seasonal covid trends, you know, how much is that going to impact massively as we hit the winter? You know, maybe some political. So just, you know, that uncertainty, I think, is just affecting timing, but I think what's up reports optimistic is all of this stuff is staying on the pipeline and even looking at further opportunities for new business. Those discussions are developing as well. So hopefully that's the color you're looking for.
[00:46:39] Yes. So that's how far it's gotten. How about just the last couple easy ones for me, the TPP forgiveness. Any thought as far as how you guys are thinking about timing? Is that a one QQQ event? And you talked about the, you know, the smaller size credit to get streamlined, but just big picture. How are you thinking about that today versus what was out there last quarter?
[00:47:08] I was just going to say, I think we continue to get delays here and, you know, if you look back first quarter, look back last quarter, it continues to delay. So, you know, we know those fees are sort of embedded gains and tangible book value. And I'm not sure the liquidity is going away, even if you get forgiveness. So, you know, from our perspective, we'll just we'll just see where it falls. But Doug or Scott might have more comments on specific borrowers. But from a from an organizational perspective, we're looking at the results, you know, without it knowing that that on unrecognized gain could come in at some point in time, but between now and the end of next year.
[00:47:54] Ok, all right, I think that's helpful. This gives me an idea of how you're thinking about a so how about I guess maybe Doug, I guess you guys mentioned that the special mention moons or the watch list credits for up to touch and guess what was driving that was only certain. I mean, how much of an increase is a pretty minor or is it was it more material?
[00:48:14] Yeah, no, I tell you what, you know, we effectively manage the portfolio closely and review for any additional credit deterioration or stress and, you know, we're very pleased with classified levels remaining flat to actually somewhat improved. We have seen, you know, a migration, but we'll consider average five rated credit to the monitor status, which is risk rated six or to watch risk rated seven. I believe that, you know, the preponderance of those changes we've seen already occur in the second and third quarter. And now the portfolio looks to be quite stable. But again, we're just going to have to continue to monitor performance. The operating results as we head into the fourth quarter and the fiscal year end, and we'll evaluate changes in risk ratings as need be, but I think right now we feel pretty solid about the about the performance of the portfolio.
[00:49:15] Ok. And just to be clear, the watch list was uppercuts touch this quarter. Just nothing significant. That's what I was trying to get at. It was it was up. Yes. Classifieds that were down. Right.
[00:49:25] That's correct.
[00:49:27] Ok. And then just going back, Kim, just for the one question on the margins, just kind of the liquidity outlook and then just cut, if you remind us, I mean, the loans that are at their floors today and just and I know that you look at the variable rate portfolio and kind of what's going on with the loan book, how much of the loans today are protected after flaws versus I guess are not?
[00:49:50] Yeah, so we've got about three billion of variable-rate, one point a little over one point three of those have a floor and one point two of that is on the floor. And then, you know, they're pretty evenly distributed of zero to quarter basis, zero to 25 basis points, twenty five to 50, etc. and those increments to where the floor is. So not a whole lot more that that can set down the floor. So that'll help and has helped keep the loan yield fairly stable here in the third quarter from where they were at the end of the second quarter.
[00:50:28] Ok, and then the liquidity, I guess your sense is that that, know, the level that we see out there right now is probably sticks around for a little bit, is that, you know, kind of how you're thinking about.
[00:50:39] Yeah, we haven't we haven't seen it deploying. I mean, I think what we've seen is there are businesses who've gotten loans that are deploying it, but there's other businesses that are cumulate, are doing well and accumulating cash. And typically we'll see that accumulation be more aggressive toward the end of the year. So I don't know if that it's been more steady throughout 2010 20. And I don't know if that will affect, you know, what would ordinarily be a several hundred million dollar swing of liquidity accumulation. If that gets cut by a fraction, we typically don't have that information until after October and into November. So I think the way I think about it is it doesn't impact net interest income. It just impacts margin. And, you know, and I think that the underlying earnings of sort of where you are here at the end of September, regardless of what happens with that coming in, will pretty much be able to be fairly reasonably estimated. And then really the only other deltas, if we decide we want to do anything with some of the locked in funding that we have, which would come at a cost. But if we think that liquidity is going to stick around, that may be a good trade to trade down, especially if some of that comes in low interest bearing and non-interest-bearing deposits. So to me, those are really the only big levers you get from it.
[00:52:01] That's OK. All right, and just one last one, just on the hotel, the occupancies within the hotel booked today. How are the occupancies trending in that book? I mean, have they gotten better or are they just kind of flatlined now?
[00:52:18] Yeah, I think we've reported before, right, occupancy rates were starting to trend up and then were really impacted again by some regional shut downs and travel restrictions. And I think as we look at it today, we're seeing those occupancy rates slowly start to tick back up. So we might be getting back up into the mid 40 percent, maybe low 50 percent range. But of course, there's some room for improvement there yet as we head into twenty, twenty one. But, you know, maybe that fifty five percent range is kind of the necessary occupancy rate to start breaking, breaking even from a cash flow perspective. And I think we would still see, you know, the preponderance of that portfolio still falling short of that.
[00:53:06] Yeah, OK. I appreciate you taking the questions. Thanks, guys.
[00:53:14] Thanks, Brian.
[00:53:15] As a reminder, that is star one for any questions. And at this time, there are no further questions, I will turn the call back over to Jim Lally for closing remarks.
[00:53:33] Brian, thank you and thank all of you for joining us this morning. Appreciate your interest in our company. We look forward to speaking with you at the end of the next quarter, if not sooner. Have a great day.
[00:53:47] Thank you, ladies and gentlemen, this concludes today's conference, all participants may now disconnect.