Glacier Bancorp, Inc.

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. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today. Randy Chesler, CEO and President. You may begin.

All right. Thank you, Twanda. And good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer, Don Sherry, our Chief Administrative Officer, Angela Dosey, our Chief Accounting Officer, Byron Pollin, 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 is provides us with a 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 have moved back to drive-through service within 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 increasing cases with more testing. Despite the pandemic, we're amazed at how well customers have adjusted to the circumstances and are carrying on with business. Our mortgage volume is at record levels with 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 are 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 66 cents, an 8% or 5 cent 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 earning 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 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 and the total cost of funding dropped 21 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 Triple P 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 Triple P 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 $4.40 versus our portfolio rate of about $4.85. 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 loan forgiveness could help the margin in the next few quarters, as fee income will be accelerated upon forgiveness. And 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 start 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 six 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 record mortgage production. We booked gain on sale of loans of $26 million, which was $14 million over the prior quarter, or an 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 the 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 two 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 one 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 MPAs 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 they are a good way to help customers get through a severe but hopefully short-term business disruption like we're now seeing. Both the PPP loans and the modifications 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 received 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 posed 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 risk in our portfolio is our hotel motel loans totaling 422 million or 4.2 percent of the portfolio most of these hotel loans are small are smaller loans less than 1.5 million and have an LTV under 60 percent 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 and 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 takeout 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 Triple P loans, which are 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 a 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 remain 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 increased 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 Triple P liquidity facility, and $400 million of capacity at correspondent banks. In addition to $1.6 billion in unpledged 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 the mid-cap 400, moving up from the 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 and $50 billion nationally, we are in the top five, number four. That's up from number 16 last year. So overall, an outstanding performance from the team. And that ends my formal remarks, and I'd now ask Tawanda to open the line for any questions that you may have.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Young with SunTrust. Your line is open.

Hey, good morning. Good morning, Michael. Maybe just starting on PPP, you guys obviously had, you know, recognized the expenses or deferred the expenses, rather. And so I was just kind of trying to figure out, you know, 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, you know, 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 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 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 footprint, 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 at the strong level 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. For example, one of our customer builds roads. They are backlogged. They're doing more business than they ever have with all the infrastructure investment. Another one in the car business, can't get enough cars to sell. Home builders reporting a lot of activity on new homes. We see a surprising amount of activity, no real areas of weakness popping up. If you go kind of move further north into Utah, similar story. Nevada, all the way up into Montana. So we're 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 I already mentioned, areas that we're concerned about.

Okay. And then maybe just last one for me. You noted kind of the decline in loan yields. I'd imagine there's been some maybe loan spread widening, and we may not expect as fast a churn of kind of refinances and whatnot within the book. So just on a core basis, do you feel like there's an ability to kind of hold – new loan yields around that 440 level, or do you think there's going to be incremental pressure from there?

You're right about the spread growing a little bit, but we're still fighting the markets and the Fed and the softening on the flat curve. We think if it holds to where it is today, you're probably looking more at 425 to 450 range in this quarter on new production. Whether I think that holds or gets a little better is really a function of what's going on on the interest rate curve.

Okay, thanks. I'll step back for now.

Thank you. Our next question comes from the line of Jeff Rulis with DA Davidson. Your line is open.

Thanks. Good morning. Good morning. Maybe take another question. maybe the full margin question further. I think maybe remind us, the moves you made in late Q1 in the securities book certainly helped boost yields in the second quarter. I guess I'm trying to recall, you know, how does that support strength into the third quarter, if at all, and maybe just thoughts overall on the margin? You know, you noted that maybe the loan yield pressure, but you've 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, you know, 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, you know, the great yields we got put on the munis, 70% of the $725 million rounding were high-quality munis, and tax equivalent yield there was $412. We also bought of that $725 million, 30% were corporates, which were the GSEV banks, you know, the large names, Truist, J.P. Morgan, et cetera. And so those were at $435. So you blend it all, we have a $420 yield. And that's what showed up in the second quarter, and that will continue, really, until those things are called, which the munis, they've got a very long call date. So we think this will continue to be an underpinning, 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, you know, we've been able to pay down those borrowings, and so now we're really financing it with deposit costs, which came down nicely. So both sides of it have 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 Freddies. 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? Were 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, slight uptick, a little, about half of it was... CRE, the other part was that all of these were pre-pandemic weaker credits. On the CRE side, you know, the pandemic may have kind of, you know, put the issues into hyperdrive, but certainly these were all pre-pandemic issues that likely would have ended up here anyway.

Okay. And then just the last one on the deferral breakdown, Randy, I think you mentioned Predominantly three-month was the timeline. I don't know if you've got it on a percent of deferrals where 70% three-month, but just trying to get a sense for what were the mix of timelines on the deferral. It's about 63-month, 46. Okay, and as those three months have come in, I think you had $1.5 billion on deferral at the quarter end, and your comment on hoping those come in are a vast majority. I guess to date, those that have expired, you've seen a vast majority not seek extension.

It's a little early to tell because, as I pointed out, we finalized these mods 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 Triple P production, we put the mods 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 Fester with Raymond James. Your line is open.

Hey, good morning, everybody. Good morning. I just wanted to kind of follow up on the re-deferral 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 re-deferrals and potential risk-rating downgrades in Just any thoughts on that?

Yeah. I'm going to ask Tom to give you a little insight into that. But you're specifically, David, asking for what you think our expense will be, or did you maybe just tune your question a little so we can make sure we get to your answer? Sure.

Yeah, just interested in your thought. I mean, again, it sounds like most of the reserve bill has already completed based on your commentary about incorporating economic scenarios versus credit deterioration. I guess just thoughts on how you plan to or just thoughts on additional reserve bills going forward in the back half of the year and you know, implications? Is it primarily going to be driven by potential, you know, credit migration from risk rating downgrades as loans get re-deferred, or just any thoughts on reserve bills going forward?

Yeah, David, this is Tom. Yeah, I think with the world we know today, we're pretty comfortable with where we're at, but, you know, barring any, you know, deterioration in our forecast or material deterioration in the credit portfolio, I would agree with you that probably the heavy lifting is done. But it's still a little early, especially given that a lot of our footprint is in higher tourism areas. The early signs are 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're able to acquire from the Triple P program. Just curious, How much of this has 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 the larger banks that might be interested in making a change and creating a hiring opportunity for you all?

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 the triple P, 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, in some of them, the straw that broke the camel's back. And they came over to one of our divisions and, And that's a fair portion of those 3,000 of people that we've been looking to get into the bank, and a fair amount of them were with the Money Center banks. And so step one is we now have a deeper relationship with them, with the PPP. We did require 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. It's 3,000 new customers into the bank, all with – 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 at 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, and as really good opportunities present themselves, we take advantage of it. But I think 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, with as 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 today? Do you think you'd get pushback if you tried to raise your dividend now? And just maybe any overall thoughts on capital deployment and capital return?

Yeah. Well, we're very thankful that we're in a position to pay a dividend and continue to pay a dividend. There hasn't been a lot of industry discussion, you know, around this other than, you know, 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 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 dividends. I think it's maybe more of an issue for companies that are paying out a higher percentage of earnings with less capital. But 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 always 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. Morning. On the comp expense, you benefited from the deferred origination cost, the 1091 stuff on the PPP, about $8.4 million or so. You also had strong production on the mortgage side, so that probably masked some of that relief. How should we think about the run rate of comp expense? That was $58 million this quarter.

Yeah, so you're right about kind of the dynamics in play there with a deferral. And then, you know, underneath that is increased mortgage comp expense due to the record level of production we're having there. 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, Matt, you're right. That $8.4 million was certainly a benefit, but that's ended. That's not going to continue. And we did have a higher compensation expense that 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 notice that we added some people. So included in that higher compensation is we had a great mortgage banking income. So we paid on that production. And then we had the higher body count. But that's all baked in now.

That's great. OK, thank you. And then just on the PPP, the $1.4 billion, it looks from the release that you only had $166 million of that that went toward the higher risk industries that you're focused on. Is there some other portion of your PPP portfolio, at least from an industry perspective, that 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, there was a bit of a matchup with the mods. Yeah. but that Triple P was pretty widespread. So I don't know, Tom, do you have any thoughts on that?

No, I mean, I think the industries were pretty widespread that did receive a Triple P. Outside of what we have in the enhanced risk portfolio, there's nothing that gives me any immediate concerns. So, for example, when you look at some of the industries that did receive Triple P, we had some health care, some construction. Construction has remained very strong. through the pandemic and healthcare once elective procedures were opened back up, the pent-up demand that existed through the shutdown really is keeping a lot of the medical providers very busy. A lot of the conversations I have with our providers and also our contractors state that summer vacation plans are over. We're very, very busy right now. and things are looking good. Outside of that, Matthew, it's pretty widespread and nothing of overt 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 risk rate as we move through this process? Have you seen any migration yet, or do you feel like there might be some as you some of these deferrals come up for renewal?

We haven't seen any migration yet, Matthew, but I certainly would expect some as we roll some of these modifications up, especially in this higher risk portfolio. So as we continue to dig through each of those credits in a very detailed credit perspective, I would expect some deterioration, but I don't expect anything significant or serious, at least as of yet.

Okay, great. Thank you, guys. You're welcome.

Thank you. Our next question comes from the line of Gordon McGuire with Stevens. 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 the past couple quarters, the FDIC 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's not a big number, but it was nice to have a rebate for the first half. 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 what was the other part that's

I think that was it. I was trying to get a gauge for what the run rate for the regulatory assessment expense was. I think you said 600 a quarter in addition, so 1.6 million. Let me look here one second.

I was 1.5 million per quarter. Pardon me. I'm thinking of a change.

Thank you. Then I was hoping you could provide a little bit 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 loans then?

Yeah, the mortgage volume, yeah, obviously was substantial. And we are, you know, just way – above where we were in the prior year in terms of the level of activity. If your question is on the spread that we're seeing there, those are holding really nicely. The pricing on those is obviously going to be dependent on where the market price is. Future, 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 lot of demand. That coupled with, as I noted, the increase in the out-of-states. purchasers is now almost 20% of our purchase volume is from people outside of the market. That's almost double 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 those costs lower?

There is, definitely. One thing to point out, you know, all of the, when you look down our funding liabilities, interest-bearing deposits, certainly even wholesale, all categories dropped, and so we've still got some room. You know, the CDs, that book rolls off, that'll come down, and then Definitely in the repo, to your point, there is room.

Good. Thank you.

Thank you. Our next question comes from the line of Jackie Bolin with KBW. Your line is open.

Hi. Good morning, everyone.

Morning, Jackie.

I wondered if you could provide a little bit of color on the unfunded commitment expense that was in that other line item, 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, that's been a little frustrating with the new accounting rules, how that has kind of entered our landscape now and, you know, We've talked to our accountants about a way to reduce that volatility, and the answer is there is none. And so maybe, Tom, you can give 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 from my chair speaks to the strength of their balance sheets and the lack of need for borrowed funds. But the negative side of that is it increases the unfunded balances and the unfunded liability that goes along with it. And then secondly, similar to the funded allowance for credit loss, the unfunded is sensitive to changes in the economic forecast as well. And on the unfunded side, 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 have, as Randy mentioned, a little bit more volatile change. So expectations in the future, 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 a little difficult to project it out, but, you know, certainly I think we'd expect maybe not quite the volatility we saw this quarter.

Okay. So, and correct me if I'm not thinking about this properly, but was there an offsetting factor maybe a lower amount of provision expense related to the $6.9 million in unfunded commitments because you had those line balances go down, so meaning that because your commercial balances declined as utilization declined, you had a lower reserve requirement, but then that increased your unfunded commitment 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, well, you know, that follows the logic behind it is balances decrease, you know, it shifts from the funded to the unfunded side.

Okay. And if I adjust for the swing and unfunded commitments, which was roughly around $10.5 million quarter to quarter. It looked like other expenses were 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.

Okay. So outside of unfunded commitment, it's a pretty good runway, you'd say?

Jackie, you've dealt with the $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 looking at the quarterly variances there.

Yep, that's correct.

Okay, thank you. And then one last one that's, sorry, is once again a little bit technical. When I look at the fees that were just closed on the PPP loans, and thank you for providing that level of detail here, Does that include the loan origination cost 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 table.

Oh, for the quarter, $7.3 million.

Yeah, I'm just wondering if that's the gross number or if that's already net of the deferred loan origination cost.

That's the net number.

Okay, perfect.

Yeah, the number I quoted in my 53, that's the gross number, not netted out by anything. Okay.

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 Janie. Your line is open.

Great. Thanks. Morning, everybody. Morning. Randy, as we look at kind of the portfolio with enhanced monitoring on 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 it be something like you're open to the right opportunity in these categories?

Yeah, I'm going to ask Tom to make a comment on that. That's, you know, 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're managing it, Tom, do you want to give some insight on that?

Oh, yeah, Tim, that's a great question. Yeah, I would say we're managing it very closely. You know, the reduction, you know, combination of normal amortization and then, as I mentioned earlier, we had some, you know, paydowns on the revolving side, which a portion of were from the enhanced risk portfolio. And just like anything, there's stronger credits and there's 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, you know, 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 their 90-day expiration?

You know, as Randy mentioned, we have about a 60-40 split between 90 days and six months. We're just now starting to see those hit expiration. So, you know, 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 modifications on the enhanced risk is kind of – dispersed throughout the timeframe we were 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, Under $150,000, I believe. Ron has got that number.

Ron, what are we at there with? Well, the total is roughly $600 million is in that range of below the $150,000. Okay. So $600,000 to the $150,000 is below $150,000. Okay.

All right. And then on mortgage banking, congratulations on a record year. Thank you. If volumes stay elevated like they have, would you consider putting more of these into the portfolio if organic loan growth starts to slow down or stall in the second half?

No, we like our portfolio rate where it is. 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 it's a way to maintain, you know, relationships with realtors and with our branch customers. So we don't look at that as a way to significantly grow, and its 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? You're looking at total funding costs or core deposit costs?

I'd take core deposit costs.

So, Ron, if you want to go back to the end of this quarter.

Yeah, just for the – you're talking right at – At the end of June. Yeah, so we were inclined. So it's 13 basis points is what that is. That includes the CDs at 88. Again, there's definitely room over time. Those are time deposits, of course, but 13 basis points. And it dropped steadily 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 Stevens. Your line is open.

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? It does. Okay. Yeah. So fourth quarter would be the expectation that probably moves lower from that number.

Yeah, to the extent that the gain on sale would decline, yeah, the variable expense for the commissions would similarly decline. Okay. All right. Thank you. Yep.

Thank you. I'm sure no further questions. I would like to turn the call back over to management for closing remarks.

All right. Thank you. Wanda? 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.