Glacier Bancorp Inc (GBCI) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Glacier Bancorp Second Quarter Earnings Conference Call. (Operator Instructions). Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker for today, Randy Chesler, CEO and President, you may begin.

All right. Thank you, Twanda, and good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator.

Yesterday, we released our second quarter 2020 earnings. And today, we're ready to review the state of the company and the financial results.

The second quarter was very solid and highlights the strong core of the company, and the strength of our team and our business model despite the stiff headwinds caused by the global COVID-19 pandemic. We continue to navigate through the pandemic extremely well, and I'm exceptionally proud of the Glacier team, their commitment and leadership, and their service to their communities.

As I noted in our last earnings call, the Glacier franchise covers almost 1,500 miles from Montana to Arizona, and the impact of the pandemic is different across that franchise. Our unique business model with 16 different divisions serving over 140 communities, provides us with 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-thru service, with in-lobby meetings by appointment. This is in response to a resurgence of the virus in many of our markets. Most of our 8 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 $0.66, an 8% or $0.05 increase from the prior year second quarter. Net income was $63.4 million, which is an increase of $11.1 million or 21% from the prior year second quarter.

And highlighting the company's core earnings strength, pretax 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 noninterest-bearing deposit growth of $1.2 billion or 30%. Noninterest-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 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 PPP loans from us, totaling close to $298 million in loans. And this was due to a number of our competitors that were struggling with offering the PPP program. Total debt securities of $3.7 billion increased $104 million or 3% during the quarter and increased $1 billion or 37% from the prior year second quarter. Net interest margin was tough to hold as we saw it drop from 4.36% last quarter to 4.12% today, dragged down by the 150-basis-point reduction of short-term rates by the Federal Reserve in late March. Pricing on new production during the quarter was around 4.40% versus our portfolio rate of about 4.85% last quarter's new production yields averaged 4.80%.

The core margin looked better, ending the quarter at 4.21% versus 4.30% in the prior quarter and 4.27% 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 6 basis points from the prior quarter. Debt security income was $26 million, which was an increase of $5 million or 23% over the prior quarter and 18% over the prior year quarter. This shows the effectiveness of the actions we have taken to maintain our investment portfolio returns. Noninterest 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 a number of our out-of-state buyers in addition to strong local demand.

Credit performance was better than expected, with net charge-offs at $1.2 million or 2 basis points of total loans, about the same as the prior quarter. Delinquent loans were 22 basis points of loans versus 41 last quarter and 43 a year ago. Nonperforming assets increased $7 million, but were 27 basis points of assets, which was up 1 basis point from the prior quarter and was 14 basis points less than the level a year ago. For the quarter, excluding PPP loans, our NPAs 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 severe, but hopefully short-term business disruption like we're now seeing. Both the PPP loans and the modification helped 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 a record number of loan requests for PPP loans. While most of the modifications are for 3 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 include loans in the following industries: hotel/motel, restaurants, travel, tourism, gaming and oil and gas. The largest industry with increased risk in our portfolio is our hotel/motel loans, totaling $422 million or 4.2% of the portfolio. Most of these hotel loans are smaller loans, less than $1.5 million, and have an LTV under 60%. Most of you know that we have not materially increased our position in hotels for over 3 years, so many of these loans have a good amount of equity, which generally translates into a lower debt burden. The next largest exposure in the higher risk group is restaurants, totaling $151 million or 1.5% of the loan portfolio. Similar to our hotel portfolio, these are smaller loans with an average loan size of $175,000 and comprised of a solid group of operators. Many of these owners have already started to adapt to a new operating model by shifting to take out while they wait for the ability to reopen fully. We plan to continue with our enhanced monitoring process of these industries for the foreseeable future.

Credit loss expense of $13.6 million for the quarter brings us up to $36.3 million for the year and 1.42% of loans. 1.62% of loans, not including the PPP loans, which are 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 noninterest 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 PPP liquidity facility, and $400 million of capacity at correspondent banks. In addition to $1.6 billion in unpledged and marketable securities and cash of 400 -- 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 MidCap 400, moving up from the SmallCap 600. And finally, Bank Director just this week published the 2020 Bank Director scorecard, and we moved up in the rankings quite a bit. For banks with assets between $5 billion and $50 billion nationally, we are in the Top 5, #4. That's up from #16 last year. So overall, an outstanding performance from the team.

And that ends my formal remarks, and I'd now ask Twanda to open the line for any questions that you may have.

(Operator Instructions). Our first question comes from the line of Michael Young with SunTrust.

Maybe just starting on PPP. You guys obviously had recognized the expenses or deferred the expenses rather. And so I was just kind of trying to figure out the cadence of how you expect the -- both the fees and the expenses to kind of flow back into the income statement as we move forward?

So we've been amortizing the total fees that we expect to earn over a 2-year period. So that started in the second quarter, you can see that in our financials. How that's going to change? We do expect it to get accelerated. We just are a little uncertain about the pace of that, as I noted. I mean, just last night, the SBA gave us direction on how to submit the paperwork for those forgiveness loan applications. And so we believe that's going to start in mid-August. They have 90 days then to turn that around. And so probably going to see most -- a fair amount of activity in the fourth quarter, probably spilling over into the first quarter. So some acceleration of those loans will happen in those 2 quarters. And that's still subject to the SBA sticking to the process that they outlined last night.

Okay. 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 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?

Yes. Well, I'd say I'm very, very surprised at the strong level of activity across the total footprint, starting in Arizona, where you see a lot of press about the virus and issues. But talking to business owners in the market, there is a surprising consistency and back to business that's going on there. And for example, one of our customer builds roads. They are backlogged. They're doing more business than they ever have with all the infrastructure investment. Another one in the car business, case of can't get enough cars to sell. So homebuilders reporting a lot of activity on new homes. And so we still -- 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 we've -- that I already mentioned that 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 turn 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 loan yields around that -- new loan yields around that 4.40% 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 and the flat curve. So we think on that, if it holds to where it is today, you're probably looking more at kind of 4.25% to 4.50% range in this quarter on new production. And whether I think that holds or gets a little better, is really a function of what's going on in the -- on the interest rate curve.

Our next question comes from the line of Jeff Rulis with D.A. Davidson.

Maybe taking the -- 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 how does that support strength into the third quarter, if at all? And maybe just thoughts overall on the margin? You noted 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.

Yes. So on the securities, the debt securities, we've been doing a lot of work there, and I think that strength showed through in this quarter. And Ron and -- has spent a lot of time looking at it. So Ron, do you want to give a little more color around the debt security?

Yes. So we bought those late March and the great yields, we got put on the munis. About 70% of the $725 million, rounding, were high-quality munis, and tax equivalent yield there was 4.12%. We also bought -- of that $725 million, 30% were corporates, which were the G-SIB banks, the large names, Truist, JPMorgan, et cetera. And so those were at 4.35%. So if you blend it all, we have a 4.20% yield. And that's what showed up in the second quarter, and that will continue really till 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 certainly through next year and feel very good about that. We initially funded those at FHLB, but as Randy talked about in his remarks, we've been able to pay down those borrowings. And so now we're really financing it with the deposit costs, which came down nicely. So both sides of it has really helped.

And then just on the -- what we have been doing with the excess liquidity, which really showed up towards the latter half of June, we've 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 3 days in late March when we were able to buy what I described, we really pulled forward things that we would have bought otherwise.

Right. Okay. Any detail on the increase in the non-accruals or these sort of pre-COVID stressed? Or kind of what was in that grouping, the uptick?

Yes. The very slight uptick. But Tom -- I'm going to ask Tom to give you a little more color around those.

Yes. A slight uptick. A little -- about half of it was CRE. The other part was ag. All of these were pre-pandemic weaker credits. On the CRE side, the pandemic may have kind of 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 3 months was the time line. Is -- I don't know if you've got it on a percent of deferrals where 70%, 3-month, but just trying to get a sense for what were the mix of time lines on the deferral?

It's about 60%, 3-month; 40%, 6.

Okay. And as those 3 months have come in, you had $1.5 billion on deferral at the quarter end. And your comment on hoping those come in or a vast majority, I guess, to date, those that have expired, you've seen a vast majority not seek extension?

It's a little early to tell because as I pointed out, we finalize these mods later in the second quarter. And so the 3-month, we've just seen very few start to come forward. So I hate to draw conclusions. I think what we've seen is encouraging. But it's just a little bit early because we were so busy with our PPP production, we put the mods on the back burner and got to them later in the quarter.

Our next question comes from the line of David Feaster with Raymond James.

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 re-deferrals and potential risk rating downgrades? Just any thoughts on that.

Yes. The -- I'm going to let -- I'm going to have Tom -- ask Tom to give you a little insight into that. But you're specifically, David, asking for the -- what you think our expense will be? Or did you -- maybe you could just tune your question, I'll also make sure we get to your answer.

Yes. Just interested in your thoughts. I mean, whether most -- it's not -- again, it sounds like most of the reserve build is already completed based on your commentary about incorporating economic scenarios versus credit deterioration. I guess, just thoughts on what's the -- how you plan to -- or just thoughts on additional reserve builds going forward in the back half of the year and implications. And is it primarily going to be driven by potential credit migration from risk rating downgrades as loans get re-deferred? Or just any thoughts on the reserve builds going forward.

Yes. David, this is Tom. Yes, I think with the world we know today, we're pretty comfortable with where we're at. But barring any deterioration in our forecast or material deterioration in the credit portfolio, I would agree with you that probably the heavy living is done. But it's -- we're 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 PPP program. Just curious, how much of this has translated into non-PPP growth? And then maybe similarly, has 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 in creating a hiring opportunity for you all.

Yes. 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 at PPP, if you turn the clock back to when this first started, there was a lot of anxiety around this, and a number of the money center banks were very slow in their response to the customers. And that was the -- and some of them, the straw that broke the Camel's back, and they came over to one of our divisions. And that's a fair portion of those 3,000 of people that we have been looking to get into the bank, and a fair amount of them were with the money center banks.

And so step 1 is we now have a deeper relationship with them, with the PPP. They all -- all the -- we did require accounts to be opened, so we do have that established now. And I think 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 1.5 days 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. But -- and as really good opportunities present themselves, we take advantage of it. But I think there's -- 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 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. With as much excess capital as you have and the strong credit performance, when do you think you can return to dividend growth? What are you hearing from the regulators? Do you think you'd get pushed back if you tried to raise your dividend now? And just maybe any overall thoughts on capital deployment and capital return?

Yes. 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 around this other than initially, there was some -- some of the bigger banks got some direction to slow it down. I think you just need to be smart about it, I guess, from our point of view, which is to have a very -- maintain very solid capital and very solid liquidity, and keep your payout ratio in a reasonable range, because I think it's a legitimate regulatory concern at this point to make sure that banks retain capital and don't push it all out through dividends. So I think it's sensitive. Maybe more of an issue for companies that are paying out a higher percentage of earnings with less capital. But I -- 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.

Our next question comes from the line of Matthew Clark with Piper Sandler.

On the comp expense, you benefited from the deferred origination cost, the FAS 91 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. I guess, how should we think about the run rate of comp expense that was $58 million this quarter?

Yes. So you're right about kind of the dynamics in play there with the deferral. And then underneath that is increased mortgage comp expense due to the record level of production we're having. So Ron, maybe you can give Matthew a little view of kind of the run rate that we think we're going to see there.

Yes. So Matt, you're right. That $8.4 million was certainly a benefit, but that's ended. That's not going to continue. So -- and we did have the higher compensation expenses 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 noticed 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. So that's -- but that's all baked in now.

That's great. Okay. And then just on the PPP, the $1.4 billion. 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 it did -- there was a bit of a match-up with the mods. But that PPP has pretty widespread. So I don't know, Tom, do you have any thoughts on that?

No. I mean, I think the industries are pretty widespread that did receive a PPP. Outside of what we have in the enhanced risk portfolio, there's nothing that gives me any immediate concerns. So for example, in our -- when you look at some of the industries that did receive PPP, we had some health care, some construction. Construction has remained very strong through the pandemic. And health care, 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. And a lot of the conversations I have with our providers and also our contractors state that the 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 overconcern.

Okay. 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 kind of 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 -- as 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 at a very detailed credit perspective, I would expect some deterioration, but I don't expect anything significant or serious, at least as of yet.

Our next question comes from the line of Gordon McGuire with Stephens.

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 of quarters, the FDIC credit has helped. Can you help us think about the run rate for that line item?

Yes. 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. It's not -- by the way, they have not ruled out a second rebate for the remainder of the year, but we'll wait to see what that is. But the -- what was the other part? The state, and then what?

I think that was it. I was trying to get a gauge for what the run rate for the regulatory assessment expense was. And I think you said $600,000 a quarter in addition, so $1.6 million?

Let me look here one second. I would -- 1 point -- Angela, what's this number?

$1.5 million.

Yes. $1.5 million per quarter. Pardon me. I'm thinking of exchange.

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?

The -- yes, the mortgage...

The mortgage...

Volume, yes, obviously, was substantial. And we are 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. So future, 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-state purchasers as, 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 lot of activity there.

Okay, good. And then, Ron, you brought down the customer repo costs this quarter. But still yielding around 1%. It's, I guess, the 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, all of these -- when you look down to our funding liabilities, interest-bearing deposits, certainly even wholesale, all categories dropped, and so we've still got some room. The CDs that, that book rolls off, that will come down. And then definitely in the repo, to your point, there is room.

Our next question comes from the line of Jackie Bohlen with KBW.

I wondered if you could provide a little bit of color on the unfunded commitment expense that was in that other line item, this noninterest expense. And just what the driver was in the quarter? And then what your expectations are going forward?

Yes. I'm going to ask Tom to talk about that. That's been a little frustrating with the new accounting rules, how that has kind of entered our landscape now. And 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 yes, Jackie, there are 2 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 -- customers are using their lines of credit less and less, which, from my chair, speaks to the strength of their the balance sheets and the lack of need for borrowed funds. But as a -- 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, there's -- it's made up of a combination of revolvers, also construction loans and construction loans are newer. They have longer-weighted average lives and can be -- 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. And we'll also see some seasoning of the construction portfolio as those draws continue. So well a little difficult to project it out, but 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, maybe a lower amount of provision expense related to the $6.9 million in unfunded commitments because you've had those line balances go down? So meaning that because your commercial balances declined as utilization declines, you had a lower reserve requirement, but then that increased your unfunded commitment requirement? Am I thinking about that properly?

Yes. I think you're thinking about it properly. I mean, I can't -- I don't have a number to nail down what the difference was between the 2. But well, that follows the logic behind it as balances decrease. It shifts from the funded to the unfunded side.

Okay. And if I adjust for the swing in unfunded commitments, which was roughly around $10.5 million quarter-to-quarter, it looks 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.

No.

Okay. So outside of unfunded commitment is a pretty good run rate, you'd say?

Jackie, you've dealt with the $8.4 million of the deferred comp coming from the PPP origination?

Yes. Yes. I'm speaking specifically to just the other expense line item and looking at the quarterly variances there.

Yes. That's correct.

Okay. And then one last one, sorry, it's once again a little bit technical. When I look at the fees that were disclosed on the PPP loans, and thank you for providing that level of detail, 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.

Oh, for the quarter, $7.3 million.

Yes. 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. Yes.

Okay. Perfect.

Yes. The number I quoted in my $53 million, that's the gross number, not netted out by anything.

Our next question comes from the line of Tim Coffey with Janney.

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?

Yes. I'm going to ask Tom to make a comment on that. That's -- we carved that out early as the area that we thought, due to the COVID-19, would have the most risk. I think it's proven to be an area that we think does have the risk. In terms of how we're managing it, Tom, do you want to give some insight on that?

Yes, Tim, that's a great question. I would say we're managing it very closely. The reduction is a combination of normal amortization, and then, as I mentioned earlier, we had some 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 credit. So in terms of new originations, I wouldn't say that we're actively looking to increase the hotel or restaurant portfolio, but there is -- 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 in -- when you reported on in May, how many of those are coming up on their 90-day expiration?

As Randy mentioned, we have about a 60-40 split between 90 days and 6. We're just now starting to see those hit expiration. So the 90 days is probably going to be within the next 4 to 6 weeks. And then, of course, the 6 months will be longer. The enhanced -- the modifications on the enhanced risk is kind of dispersed throughout the time frame we are writing them all together.

Sure. Okay. I understand. And then on the PPP loans, do you have an idea of what percentage of those are under $150,000?

Well, our average is below $100,000. We have one of the more granular ones. In terms of what percentage of our total loans that we did are under $150,000.

Yes. I'm assuming it's high.

I believe Ron has got that number, Ron, what is -- what do we have there with...

Well, the total, it's roughly $600,000 -- $600 million, excuse me, is in that range of below the $150,000.

Okay. So $600 million of the $1.5 billion.

$1.5 billion, yes.

Is below $150,000.

All right. And then on mortgage banking, congratulations on a record year.

Thank you.

Yes. 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 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, it shrunk a little. We're very happy with keeping it right where it is.

Okay. And then on deposit costs, where were -- what were deposit costs at June 30?

So total deposit costs? You're looking at total funding cost or core deposit cost?

I'd take core deposit costs.

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

Yes, just for the -- you're talking right at June.

At the end of June for core deposits.

Yes. So we were declining. So it's 13 basis points is what that is. That includes the CDs at $88 million. Again, there's definitely room over time for those time deposits, of course. But 13 basis points. And it dropped steadily from April to May to June.

And we have a follow-up from Gordon McGuire with Stephens.

I apologize for bringing expenses back up. Ron, did you say that the compensation run rate for the third quarter is $66 million or $56 million?

6-6, $66 million.

And does that assume strong mortgage and commissions are at a similar level to 2Q?

It does. Yes.

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

Yes. To the extent that the gain on sale would decline, yes, the variable expense for the commissions would similarly decline.

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

All right. Thank you, Twanda. 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.