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Edited Transcript of SBKK.PK earnings conference call or presentation 28-Jul-20 3:00pm GMT

·22 min read

Q2 2020 Suncrest Bank Earnings Call Sep 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Suncrest Bank earnings conference call or presentation Tuesday, July 28, 2020 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ciaran McMullan Suncrest Bank - President, CEO & Director * Jean M. Carandang Suncrest Bank - CFO * Peter Nutz Suncrest Bank - Chief Credit Officer & Executive VP * Steven C. Jones Suncrest Bank - Executive VP & COO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Welcome to your Suncrest Bank Second Quarter 2020 Earnings Webcast. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, President and CEO of Suncrest Bank, Ciaran McMullan. Sir, the floor is yours. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [2] -------------------------------------------------------------------------------- Thank you. And good morning, everyone. Thank you for joining our Q2 earnings webcast. As ever, I'll be joined by my friends and colleagues, and you know them all by now. So I'll just simply introduce them as Peter, Jean and Steve, not quite a '60s folk band, but they would all agree, and I'm sure that the times are definitely a-changing. So per our normal structure for these events, we will run through the financial highlights of the quarter and then drill down into a particular topic. And of course, no surprises here. This quarter, it will be our response to the economic challenges that have been created by the COVID pandemic. And we're going to look at that in 3 ways this morning. Firstly, an update on how we've been working with our borrowers to assist them with short-term cash flow challenges through our loan modification program. Peter will give you an update on that. We will also provide an update on our participation in the Paycheck Protection Program, which we're still actively involved with and still receiving and processing applications. And then we will talk about what we're doing to prepare ourselves and our borrowers for what's coming next, in particular, what we've been doing to ensure we achieve maximum forgiveness for the maximum number of our borrowers and also plans we have to help our small businesses with ongoing working capital needs as the stimulus money runs dry. Steve and I are going to talk about all of that. To keep the talking heads to a minimum, no speaking slot for Jean this quarter, but she's on the line and available to answer your questions at the end. But before we get into all of that, I'd like to start by finding a more positive and optimistic note that I've been perhaps hearing recently from others. This is not, in my opinion, 2008 all over again. And there are some really important and fundamental differences between then and now as it relates to the banking industry, and they're worth highlighting. The first is banks are in a significantly stronger capital position today than they were back then and, therefore, much better positioned to weather a downturn. And we're no exception there. A lot of the weaker lending practices that existed pre-2008 have been moved out of the banking system entirely, and regulatory oversight of credit quality, in particular, is much more robust than it was prior to 2008. And finally, and this is probably the most important difference between then and now. Back then, banks were part of the problem. Certainly seen as a big part of the problem, whereas today, we are absolutely part of the solution, and community banks, in particular, as we've demonstrated through how we've stepped up to lead the way supporting our small businesses with the PPP program. So I think investors, some investors, at least, are still "fighting the last war" with regard to how they're looking at bank stocks. And as a result, I think we are hugely undervalued right now, and there's no better example of that than us. We're in an extremely strong position to manage through the next year or so. But yet we are trading below our tangible book value, and that just doesn't make much sense to us. So I'm extremely positive and I'm extremely optimistic based on both facts and history. And I would encourage all of you to join me in that outlook. With that, I'll refer you to our cautionary statement, the next slide. Please read that in your own time. And I'll now run through the financial highlights for the quarter on the next slide. Given the circumstances and despite a significant allocation to loan loss reserves of $1.2 million, we actually posted a decent quarter with net income of $2.7 million, down only slightly; an EPS of $0.22, roughly on par with the previous quarter and the same quarter last year. Core net interest income, which excludes nonrecurring items like recoveries and accelerated loan marks, showed strong improvement of over 8% year-over-year, which was, for the most part anyway, driven by a reduction in our cost of funds of 27 points from last year to 29 basis points for this quarter. Total assets increased to just under $1.3 billion, in part, of course, due to our participation in the PPP program but also driven by extremely strong deposit growth of over $250 million or 30% since last year. And in fact, $165 million of that came in during the last quarter. Now what's really interesting about that is based on a current-by-current analysis we undertook on each of our PPP borrowers, we estimate that only $45 million of PPP funds are still as yet unused and sitting in our depositors' accounts. So that means $120 million was non-PPP-related inflows. And while a lot of that represents some of the normal cyclicality we see with our agribusiness clients, particularly processors and packing houses, the size of the inflows do appear to be higher than in previous reasons. Now we think that's explained by a couple of things. Some of our clients are actually achieving significantly better pricing this year. For instance, I talked to one processor/packer in the stone fruit business who said that Costco was paying and significantly more this year than last year on his fruit. And I suspect there's one of the positive pandemic effects going on in there. And we also think the buildup in deposits is a reflection of people being more cautious about undertaking new projects, and that's also reflected in lower loan origination this quarter. And then, of course, in general, savings mentality that tends to emerge during times like this. Finally, our tangible book value per share stood at $9.62 at quarter end. So with that, I will hand it over to our Chief Credit Officer, Peter Nutz. -------------------------------------------------------------------------------- Peter Nutz, Suncrest Bank - Chief Credit Officer & Executive VP [3] -------------------------------------------------------------------------------- Thank you very much, Ciaran. Also welcome to everyone listening in. As you can see from this very colorful Slide 4, it's all of the list of numbers. We have granted payment deferrals on 88 individual loans for about 80 borrowers. The aggregate principal balance of all these loans with implemented payment deferrals is about $72 million or about 9% of our total loan portfolio. 80% of these deferral requests, as you can see also on this table, were for 6 months with the remaining 20% for about 3 months. And we either defer the interest-only or principal interest, which is highlighted in the top of this table. Additional payment deferrals going forward are also being considered on a case-by-case basis for certain 3-month deferrals, which are now expiring. Another interesting fact is despite us granting these payment deferrals, about 30% of our borrowers made at least some payments during the deferral period. Also, not surprisingly, as you can see by these numbers, industries primarily financially impacted by COVID represent the largest deferral penetration such as hotels, retail and restaurants. By itself, in each of these categories, these high-risk categories represent less than 5% of the bank's portfolio. Due to these payment deferrals but also due to the significant government stimulus, including the SBA now making payments on SBA-guaranteed loans for 6 months, the traditional portfolio monitoring techniques such as delinquency monitoring are less effective to identify any type of warning signals. As a result, our loan officers remain even more closely engaged with our clients to determine any further COVID impact. Ongoing monitoring focuses on overdrafts occurrences or line of credit usage and competitive positioning of our clients while always following close the [liquid] market behaviors. Having said that, Ciaran, I think it's back to you. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Peter. So turning now to the Paycheck Protection Program on the next slide. A bit like Peter's slide, it sort of speaks for itself, so I'll just cover it briefly. Through July 23, we had assisted nearly 700 borrowers access over $150 million in PPP funds. We put $133 million on our own balance sheet, and then through partner channels, including the California Statewide CDC, who is actually a business client of ours, and a fintech player called SmartBiz loans, we assisted customers to get another $19 million-or-so funded. And as you can see from the table, the vast majority of loans, just under 600, in fact, were in the sub $350,000 category, and we expect to generate about $4.3 million in fees. Now what has been really satisfying about our participation in the program is that we were also able to help over 180 small businesses who were not previously customers of the bank, which, over the long term, I think, will ultimately prove to be even more valuable than the fee income we're generating in the short term. And I can tell you, we've picked up some really good clients that we may not ordinarily have had a shot at. We plan on tracking just how much new business we generate from these new customers, and that might be some data we can share in a future webcast. Now part of why we were able to acquire so many new customers while still taking care of our existing customers who applied was done through how effectively we established our partnering model and the people we chose to partner with who were able to handle a much higher volume at a much quicker throughput rate than we could have managed by ourselves. So I have to say, our partnering approach worked extremely well and to some extent, opened our eyes and certainly accelerated our own thinking on our own plans with regard to how we can work with the fintech industry in the future on what opportunities that might create for us. So that's all I think I'll say on this slide, and I can take some questions on it when we wrap up the presentation. With that, I will hand over to Steve to talk to us a little bit about our forgiveness program. Over to you, Steve. -------------------------------------------------------------------------------- Steven C. Jones, Suncrest Bank - Executive VP & COO [5] -------------------------------------------------------------------------------- All right. Thanks, Ciaran. Yes. I mean this is unprecedented for us in banking that we're really excited about the loans that we're producing, but at the same time, we're equally excited about how well we can forgive our customers for those loans. We are going to focus on several aspects of the forgiveness program. One is the education of our customers and our existing customers and our new customers to be able to maximize forgiveness for the maximum number of borrowers. We have partnered with a local CPA firm to deliver preparatory webinars. We delivered 3 webinars over a period of several months. Our last one just concluding several weeks ago after the new information on the forgiveness came out by the SBA. The webinars were about 95 -- 97% of our PPP borrowers participated in the webinars. And we expect about 94% of our borrowers could qualify what Congress is looking at now and what they're calling expedited forgiveness, some under the $150,000 level. It -- our understanding is that, that is going to be a fairly quick and painless process for those borrowers and then even borrowers that we've seen under $1 million. And even yesterday, I saw possibly under $2 million that, that will be an expedited process for them. So we're hopeful that through that program, we'll be able to improve the effectiveness of the forgiveness for the customers. We're implementing an online and streamlined forgiveness process through our core processor for the forgiveness application and ultimate process and payment back to the bank from the treasury. So as you can see, we've got a lot going on, on the forgiveness side. We're, again, trying to just pull all these pieces together, get as much information out to our customers and make this as successful a process and as easy a process as we can for them. So to finish it up, I will hand it now back over to Ciaran. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [6] -------------------------------------------------------------------------------- Thanks, Steve. So on the other half of this slide, we just outlined the other thing that we're starting to think about and plan for, which is how can we continue to support our clients when this current round of stimulus money dries up and even when any subsequent round dries up, how do we continue to support them going forward if they've not got their businesses fully back up and running yet. Of course, we will continue to participate in any future stimulus efforts that are beneficial for our client base. And just reading this morning some of the content in the Senate Bill, it looks a little bit like what we were planning to do in the 7(a) space is going to dovetail with what's in the new Senate Bill. So we've been starting to think about the existing tools and products that we have to help businesses address working capital shortfalls. And in particular, we think the SBA 7(a) program could be ideal, even in its current form and potentially better in some expanded version. Now it's just my guess, but it's possible we could see 25% to 50% of our original PPP borrowers needing additional help. And we think the 7(a) program with its guarantee could be the best way for our bank to provide that assistance. Now it could also create significant new loan volume for us. And as we learned during the early days of PPP, we are not geared up, technology or personnel-wise, to handle a high-volume loan program. And as you know, the PPP loan product was extremely simple relative to the normal 7(a) product. Therefore, we're planning to partner with a number of players in the fintech space to help us deliver that program for our client base and to help us really efficiently and quickly handle the future potential volume that it could create. We're pretty excited about what we've been doing in that space. And there'll no doubt be more to come on that in a future webcast. So with that, let's address your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [1] -------------------------------------------------------------------------------- Let's see now. Okay. Peter, let's start with you. Have you undertaken any stress testing of the loan portfolio? How did you do it? And what can you tell us about the results? -------------------------------------------------------------------------------- Peter Nutz, Suncrest Bank - Chief Credit Officer & Executive VP [2] -------------------------------------------------------------------------------- All right. It's a really great question, and I have even a better answer for that. We are actually, on an ongoing basis, stress testing our loan portfolio based on various scenarios that may impact the bank's earnings potential, capital efficacy. From a conceptual basis, our stress test model actually follows the comprehensive capital analysis and review, the CCAR guideline, which is a regulatory requirement for large U.S.-based bank holding companies. These scenarios that we are using carry all different loan loss rates by [Concorde] from loan loss rates that have been experienced over the last several years, all the way to peak loan loss rates, which we experienced in a recession from 2008 to 2010. These scenarios are based on loan growth rates by portfolio segment, and the financial impact is either measured over a 2- year or 5-year time horizon. The minimum capital requirements that we actually have set in this model are defined by the FDIC's minimum capitalization requirements. Currently, our A-program levels are in line with our moderately adverse scenarios. And our model will be run again in the current quarter to support our third quarter provisioning. Ciaran, I hope this was enough. Back to you. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Peter. Next couple for Jean. Do you expect your cost of funds to decline any further through the end of the year? Jean? -------------------------------------------------------------------------------- Jean M. Carandang, Suncrest Bank - CFO [4] -------------------------------------------------------------------------------- Thank you, Ciaran, and good morning to everyone. As Ciaran mentioned a bit earlier in the presentation, we are happy to report that our cost of funds declined to 29 basis points this quarter. And while we've been very successful in reducing deposit costs, our cost of funds is also impacted by the significant increase in noninterest-bearing transaction accounts. As we reported, total deposits increased over $160 million during the quarter, of which about 60% was actually in noninterest-bearing accounts. So while we do expect some additional interest expense savings in future quarters, the decline would probably be pretty modest compared to the 25 basis point decline we experienced this quarter. And we were projecting our cost of funds to range somewhere between 25 and 30 basis points in the upcoming quarters. The actual cost of funds would depend, though, on the mix of the noninterest-earning accounts. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Jean. Second question for you. I know we put our NIM exclusive of the impact of the PPP notes in the body of our earnings release, but there's a question -- a related question, what is the impact of PPP on your loan yield? -------------------------------------------------------------------------------- Jean M. Carandang, Suncrest Bank - CFO [6] -------------------------------------------------------------------------------- Right. We did report the core NIM exclusive of PPP at 3.78%, which was about a 20 basis point decline from last quarter. Given the 1% loan rate on just over $120 million in PPP loans, our reported loan yield this quarter was 4.78%. And excluding the impact of PPP, about 45 basis points was the impact to the yield. So it would range in about the 5.25% area. And this compares to core loan yield last quarter of about 5.4%, so a drop of about 15 basis points. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [7] -------------------------------------------------------------------------------- Thanks, Jean. Steve, a couple for you -- a few for you, actually. There's 2 similar questions. One is please provide some color around the drop in fee income. And I think basically the same question, I read in our earnings release, noninterest income was down. Some deposit-related fees were being (inaudible) at the beginning of COVID. Is this going to continue? I think that's basically the same question. Do you want to take that, Steve? -------------------------------------------------------------------------------- Steven C. Jones, Suncrest Bank - Executive VP & COO [8] -------------------------------------------------------------------------------- Sure, Ciaran. Thanks. Thanks for the question. As an organization, we wanted to do what we could to help those in our community that were being negatively affected due to the reduced cash flow they were receiving personally or cost to access an ATM near their home. So again, as an organization, we decided to waive all overdraft, foreign ATM and NSF charges stemming from these particular situations with our customers. We had intended on moving away from that practice at the end of the third quarter, but with the resurgence of COVID-19, particularly in our footprint, we felt it was best to leave that in place until the fourth quarter. So again, we'll reevaluate this at the end of the third quarter. That has an impact on there and on the fee income and the noninterest income piece of that. So... -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [9] -------------------------------------------------------------------------------- Thanks, Steve. Another one for you. How many of your branches are open? Discuss staffing approach. -------------------------------------------------------------------------------- Steven C. Jones, Suncrest Bank - Executive VP & COO [10] -------------------------------------------------------------------------------- Sure. That one's pretty easy. All of our branches are open. So we have not closed a branch for any significant period of time. So staffing has not been an issue as well. We monitor our staff in accordance with the CDC guidelines and state requirements. So we've been very fortunate that, for the most part, our staff has remained healthy and have been willing to operate in environments, masks required, of course, but that's allowed us to keep all of our branches open 9 to 5 every day. Thank you. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [11] -------------------------------------------------------------------------------- Thanks, Steve. Another one, I'm just going to give it to you even though I could answer it, but you're doing so well. Are you still participating in the PPP program? And do you plan on participating if Congress approves a PPP 2? I think it's probably PPP 3, isn't it? -------------------------------------------------------------------------------- Steven C. Jones, Suncrest Bank - Executive VP & COO [12] -------------------------------------------------------------------------------- Yes, probably. I don't know if PPP 2 was just the addition that they added to the PPP 1 or not. But whatever they call it, yes, as Ciaran noted earlier in the presentation, we are still taking care of our customers and noncustomers even though the current demand has diminished quite significantly. We believe, as you all have read as well that Congress will add additional stimulus. We're hearing $190 million in this new program, which is a combination of the existing program funds with some additional billions added. So that $190 billion will go to, I think, a different group of participants. And so that, again, will depend on when that starts. The current program expires August 8. And the next phase of the program, once we evaluate that and see how it aligns with our customers and noncustomers in our current footprint, we'll make that determination. But we're planning on it as I know many of our community banks across the country are planning on it. We're just waiting to see. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [13] -------------------------------------------------------------------------------- Thanks, Steve. Two questions. Last one for Peter, one for me. This is for you, Peter. Did you establish specific reserves against the new -- the 3 new classified accrual loans that you mentioned in the earnings release? -------------------------------------------------------------------------------- Peter Nutz, Suncrest Bank - Chief Credit Officer & Executive VP [14] -------------------------------------------------------------------------------- As I really like easy questions with a quick answer, the answer is no. As we outlined in our earnings release, we downgraded 3 lending relationships to substandard. For none of them we established a specific reserve. -------------------------------------------------------------------------------- Ciaran McMullan, Suncrest Bank - President, CEO & Director [15] -------------------------------------------------------------------------------- Thanks, Peter. Okay. I'll take the last question. Can you discuss spread management in light of the current yield curve? I'm not sure the word yield is still operable in that sentence, but I know what you mean. So we've been doing a number of things on the deposit side, the liability side. We've been focused on reducing our cost of funds. And as Jean mentioned earlier, I think we've done a good job there. We've also been utilizing a number of different products. For instance, we have a reciprocal deposit relationship, which allows us to provide 100% insurance. And at times like these, that's often a sought-after product. And with that product, we're not paying any interest on that whatsoever on the basis that the folks that are looking for that are looking for security and insurance first and yield second. Then on the asset side of the business, we've been very focused on shoring up the yield in our loan portfolio by ensuring that we have put floors on all our floating rate lines as they come up for renewal. The floor that we've been targeting is 4.25%. We've also been doing the same on new adjustable rate notes that we're booking so that there is a floor after the adjustment, similar target of 4.25%. We have an extremely strong liquidity position like a lot of banks now, but we had an extremely strong liquidity position coming into this. So we've also been trying to put out some longer-term fixed rates and then alongside that, put some strong prepayment penalties in there as well. Often for a 10-year note, the prepayment could start at 10% in year 1 and then drop down 1% a year for every year that, 10%, 9%, 8%, 7%, et cetera. So we're trying to stay disciplined about loan pricing. We're trying to not stretch for organic loan growth by dropping too low on pricing. And so far, I think we're doing a pretty good job. I think that's all the questions. So with that, I will thank my team for their participation, and thank you all for joining us this morning. Thanks very much. Have a great day. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.