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National Bank Holdings Corporation (NYSE:NBHC)
Q2 2020 Earnings Call
Jul 22, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2020 Second Quarter Earnings Call. My name is Mariama, and I will be your conference operator for today. [Operator Instructions] We will conduct a question-and-answer session following the prepared remarks.

As a reminder, this conference is being recorded for replay purposes. I would like to remind you that this conference call will contain forward-looking statements, including, but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expense.

Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks and uncertainties, and other factors, which are disclosed in more detail in the company's most recent filings with the US Securities and Exchange Commission. These statements speak only as of the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise these statements.

In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com.

It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Mariama. Good morning and thank you for joining National Bank Holdings' second quarter 2020 earnings call. I have with me our Chief Financial Officer, Aldis Birkans; and Rich Newfield, our Chief Risk Management Officer. We continue to address the challenges presented by the COVID-19 pandemic head on.

During the quarter, we realized annualized net charge-offs of just 5 basis points while also experiencing a decline in our non-performing loan ratio. Adjusted net income of $0.62 per share during the quarter resulted in growth of our tangible book value by $0.40 per share to $21.67. We continue to fortify our balance sheet with our common equity Tier 1 capital ratio growing during the quarter to 13.2%. The stress in the current environment represents a legitimate test to our underwriting approach, and I like what I'm seeing.

Underwriting with conservative LTVs, cash flow coverage and reasonable liquidity reserves tends to provide solid downside protection during challenging periods. We also benefit from operating in markets that have performed better than the national average during the COVID pandemic. Ensuring the safety and soundness of our bank remains a top priority, and I've asked Rick to speak to the actions we've taken on this front thus far. Rick?

Richard U. Newfield -- Chief Risk Management Officer

Yeah. Thank you, Tim, and good morning, everyone. I'll cover three areas in my comments. First, I'll briefly summarize our first quarter -- sorry, second quarter credit metrics and performance. Second, I'll discuss the COVID-related modifications we've completed through June 30. And third, I'll describe the actions we've taken to mitigate credit risk within our portfolio while working to prudently support our clients.

With respect to our credit metrics, trends held up well. I'll note that the asset quality ratios I'm about to cover exclude the Paycheck Protection Program loans, thereby showing a more conservative view of asset quality. Our non-accrual loans decreased during the quarter with our non-accrual ratio improving from 0.47% at March 31, 2020 to 0.45% at June 30, 2020. Our classified loans remained relatively flat with the ratio ticking up to 0.90% at June 30 from 0.86% at March 31 but lower than 0.96% at December 31, 2019.

Our total non-performing asset ratio improved to 0.60% from 0.63% at March 31 and 0.66% at December 31, 2019. 30-day plus past dues were very low 14 basis points improved from 27 basis points at March 31. Net charge-offs for the quarter were only $616,000 or 5 basis points annualized. The positive credit trends and strength of our loan portfolio leaves us well-positioned to deal with the continued challenges presented by the pandemic and the current unexpected economic stress.

The provision expense this quarter was driven by a worsening economic outlook relative to March 2020, and Aldis will cover that in more detail during his comments. Cumulatively, through June 30, we have executed modifications on 10.3% of our total loans. 98% of these modifications were for 90 days and 52% required clients to continue to make interest payments versus full payment deferral. We expect the majority of our clients to return to regular contractual payments during the current quarter after the initial 90-day modification. In fact, as of today, the percentage of loans on payment modification has fallen to about 7% of total loans.

Tim, myself and our banking teams have continued our intensified portfolio management and further refined our process. We are reviewing all commercial and specialty banking clients as well as business banking clients with either larger credit exposures or at higher risk sectors on a weekly basis. During these reviews, we assess weekly revenue versus revenue required to cover the client's expenses and contractual debt payments. We discuss operating status particularly to the extent impacted by pandemic-driven jurisdiction mandated restrictions as well as weekly and trailing quarterly trends.

Not only has this enabled us to quickly detect credit deterioration and take actions faster to address as needed, but has put our bankers in a position to be more advisory with our clients, as they're having a minimum of weekly discussions on each client's operations and trends. While the vast majority of our clients have been able to stabilize revenue and expenses at sufficient levels to cover debt service at contractual levels, we recognize that our hotel clients representing only 3.8% of our total loans will most likely face a longer road to recovery.

Beginning in June, well before initial 90-day payment modifications were set to expire, we began working with our hotel clients on a conservatively forecasted path to sufficient occupancy and average daily rates to represent restabilization. Based on any operating deficits forecast and ongoing interest-only loan payments, these clients require to infuse additional cash equity and agree to certain additional loan terms. To-date, we have successfully negotiated such agreements with the majority of our hotel clients. We benefit from our conservative underwriting of this portfolio and are further protected by an average loan-to-value of 56%.

Given the additional equity infusions and other enhancements to our loan structures, I believe our hotel exposure is well-positioned to weather the potentially protracted stress from the pandemic. Given the pandemic's continuing impacts as noteworthy where we have no direct exposure, aviation, cruise lines, malls energy services casinos and gaming, convention centers and hedge funds. We have no dealer floor plan, indirect auto, car leasing and no consumer credit card exposure.

I believe maintaining a diverse granular loan portfolio was a strain. We've conducted twice a year stress tests on our commercial loan book. The most recent of those tests was just completed by an outside party with the focus on continuing stress by the COVID-19 pandemic and an elongated path to recovery over the coming years.

In the most severe scenario model, which assumes no meaningful rebound in the economy in 2020 and a weak L-shaped recovery, we remain very well capitalized. I'll also point out the non-owner occupied commercial real estate is only 14% of our total loan portfolio, excluding PPP loans and as conservatively underwritten as Tim said relative to loan to cost, loan to value and other key metrics. We are well diversified across industry sectors with most industry concentrations at 5% or less of total loans and all concentration levels remained well below our self-imposed limits.

I'll now turn the call over to Aldis.

Aldis Birkans -- Chief Financial Officer

All right. Thank you, Rick, and good morning. As we reported yesterday, our second quarter's net income was $17.7 million or $0.57 per diluted share. Included in this quarter's results was a non-recurring charge related to our decision to consolidate 12 of our banking centers. Excluding this $1.7 million pre-tax charge, adjusted EPS for the quarter was $0.62 or a $0.12 increase from the prior quarter.

This quarter's results demonstrated financial strength and the resiliency that our bank has built over the years. In these difficult and uncertain economic times, it has allowed us to focus on the safety of our clients and associates, while also delivering solid financial results. During the quarter, we grew our core transaction deposit balances 57.7% annualized, improving the loan to deposit ratio to 88.3%. We funded $358.8 million in PPP loans, realized the record residential banking revenues and added to our allowance for credit loss reserve increasing it to 1.36%. Our strong financial performance generated pre-tax pre-provision net revenue of $33.7 million for the second quarter, which was 27.3% higher than the first quarter of 2020 and 20.4% higher than the second quarter of 2019.

During the quarter, we originated $461.6 million in new loan fundings. However, as Tim and Rick had already mentioned, our efforts this quarter were focused on working with our existing clients to ensure the safety and soundness of our bank. As such, $358.8 million of new loan fundings were PPP loans. Excluding PPP loans, our loan portfolio decreased by $72 million from the prior quarter. The decrease was primarily driven by a $55.8 million reduction in the revolving lines of credit, as some of our clients took the opportunity to pay down their debt. We view this activity as a positive.

Moving to deposits. Our average transaction deposits grew a very strong $521.7 million or 57.7% annualized. Our transaction deposit costs decreased 13 basis points to a low 19 basis points this quarter, and we saw strong deposit inflows from both our existing client base as well as newly established finance relationships. The fully taxable equivalent net interest income totaled $48.6 million, a $3 million decrease from prior quarter. The linked quarter decrease was driven by a 106-basis-point decrease in the average one-month LIBOR rate, as well as the lower accelerated loan mark accretion income.

Rick provided a detailed summary of our credit trends, so I'll just touch on the provision expense and allowance this quarter. As a reminder, our CECL model incorporates Moody's macroeconomic forecasts. Other than covering for the nominal net charge-offs of just $616,000, this quarter's $10.3 million provision expense was entirely driven by a worsening macroeconomic outlook as compared to the March 2020 forecast.

Specifically, our models incorporate the national unemployment rate, GDP growth, home price index and the retail sales growth as the key macroeconomic forecast drivers for the allowance calculation. In terms of the loan loss provisioning, we finished the quarter with an ACL to total loans, excluding PPP, of 1.36% as compared to 1.13% at the prior quarter end and 0.88% at the prior year end.

Additionally, as of June 30, 2020, we held $15.2 million in loan marks against the acquired loan portfolio. These loan marks continue to increase [Phonetic] through net interest margin and they also provide additional protection from credit loss and our portfolio. During the second quarter, we realized record non-interest income of $38.8 million, which was $15.3 million or 65% higher than the prior quarter. The increase was driven by the gains on sale of our residential mortgage loan originations. This was somewhat offset by lower consumer service income and lower swapping income as we saw significant slowdown in our client activity due to pandemic restrictions.

Needless to say however, this quarter was an exceptional quarter for our residential mortgage group. Our team generated record mortgage origination volume, almost double that of the second quarter 2019. On top of the record volume, our teams are able to widen margins by 70%. During the second quarter, we closed $663.3 million in new loan mortgage loans or a 98.9% increase from the same quarter last year. While we are experiencing strong refinance activity driven by the low rate environment, an important factor that we continue to monitor is an activity within the purchase market.

Our team sub-bankers are doing an excellent job supporting new homebuyers within our footprint, and we benefit from operating in markets where the housing activity remains strong. As a result, on a year-to-date basis, the purchase market represents a solid 36.9% of the total mortgage disclosed.

Turning to expenses. The second quarter's non-interest expense of $53.8 million was $5.1 million higher than the prior quarter. The increase was primarily driven by the variable compensation related to the residential mortgage activity and the previously announced non-recurring expenses related to the bank and center consolidations.

As the residential banking activity has increased over the past several quarters, so has the variable compensation related to it, which elevates our total expenses. So, to break out a few components this quarter, off the $53.8 billion non-interest expense, $10.5 million was related to the mortgage activity and $1.7 million was non-recurring expense due to the banking center consolidations.

During the quarter, we also incurred approximately $600,000 in additional COVID-related expenses from actions we took to protect our associates and clients. Excluding these items, expenses this quarter would have been slightly lower than the first quarter similarly adjusted numbers. In regards to the banking center closures announced earlier this month, we are planning to consolidate 12 of our banking centers into other nearby locations within our footprint. We continue to see client preferences shift toward mobile and online banking. And we are confident that with the healthy mix of digital client engagement and the convenience of neighboring banking centers, we will serve all of our clients well.

The total non-recurring banking center consolidation expense for the year is expected to be $2.5 million with approximately $400,000 yet to be realized during each of the third and fourth quarters. Going forward, based on these actions, we anticipate to lower our operating expenses by approximately $3.5 million annually, earning back the one-time charges in less than a year.

With regards to capital, as Tim pointed out earlier, we finished the quarter with a strong 13.2% common equity Tier 1 ratio, and we grew our tangible book value by $0.40 to $21.67 at the end of second quarter. Over the past four quarters, the tangible book value has increased 9.3% as our solid financial results during this period have more than covered the quarterly dividend payouts, as well as covered a meaningful build of reserves set aside to address COVID-19-related economic weakness.

Tim, with this, I'll turn it back to you.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Aldis. We are operating under a range of assumptions that suggest a protracted level of economic stress running well into 2021. We believe that our prudent approach to credit and capital management leave us well-positioned to address the severe consequences of the COVID-19 driven crisis. Further, we've tested our ability to deliver our dividend in a range of stress scenarios, and we believe our ability to deliver the dividend is strong. We clearly benefit from operating end markets that are performing better than national averages across a range of economic measures.

We also believe, as Rick pointed out, that the diversity of our loan portfolio will continue to serve us well during this downturn. Most important, we remain vigilant in our work to protect our teammates, our clients, and of course our balance sheet.

Mariama, we are ready to open up the call for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Jeff Rulis with D. A. Davidson. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning, Jeff. Thank you. Good morning, Jeff.

Jeff Rulis -- D. A. Davidson -- Analyst

Good morning. Thanks. And Rick, I thought the credit overview was succinct and as thorough as, as I'm heard this quarter. So, I appreciate the detail there. On the questions, may be indicative of the environment, but I'll just say typically if you've offered some guidance on margin expenses maybe even touch on mortgage, maybe not specific but any thoughts on those fronts as we headed into the back half?

Richard U. Newfield -- Chief Risk Management Officer

Yeah. I'll take it starting with the margin. Certainly it behaved the way we thought and be guided last quarter or our last quarter's earnings call for this quarter. By now, most of the rate changes that took place in late March have been priced in and our earnings assets, so that's good there. It's hard on the guidance go forward basis kind of three items that it will be impacting margin calculation itself is liquidity, excess liquidity we're starting to build with a solid deposit behavior here late in second quarter and going here in the third quarter.

So, the earning asset deployment will be important. The timing of PPP loan forgiveness clearly will impact margin calculations for the third or fourth quarters, and then certainly the purchase mark, accretion speed is going to be important for us yet still as I mentioned we have $15.2 million and market still being accretive, and I did see some of those slowdown in pay downs, payoffs in late second quarter. So, the speed of that will impact it.

I'll say that on margin though that really what we focus on and as we look forward is growing the net interest income right over time. That's important. And the good news I think is that in the second quarter net interest income is, as I mentioned, priced in most of the rate movements. So we, all else equal, no assumptions made on PPP loan timing. We should be able to hold here and then look to grow from here.

Jeff Rulis -- D. A. Davidson -- Analyst

Yeah. And any thoughts on...

Aldis Birkans -- Chief Financial Officer

And on expenses, I know you mentioned the expenses, expenses I broke out this time a little bit more given how much the residential mortgage contributed to the variable compensation and expenses. So, if you were to strip out those three items that I mentioned, $10.5 million of mortgage, obviously $1.7 million non-recurring, and then $600,000 of COVID-related items. You'd come up with the low $41 million type of number, that's the number -- that's the core bank number that we would project going forward. And that's really the number that we look to improve on based on the -- banking center consolidation announcement and moving it down on $3.5 million annually type thing.

Jeff Rulis -- D. A. Davidson -- Analyst

Okay. And also those thing, did you include -- was there a deferred comp benefit on PPP in the quarter?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yes.

Jeff Rulis -- D. A. Davidson -- Analyst

When did you booked that net in the revenues?

Aldis Birkans -- Chief Financial Officer

[Indecipherable] book net. So if you look at the footnotes and the loan tables, you'll see that our net -- but what we founded to what we've reflected on the books is about $10.1 million, that's net of the fees and the defer comp fee component that's remaining.

Jeff Rulis -- D. A. Davidson -- Analyst

Great. Thank you. Yeah. And just the last piece is that -- where even just commentary on the mortgage front, has that strength -- I wouldn't anticipate that closes the year like this, but as it continued at least in the Q3, any thoughts on the mortgage piece?

Aldis Birkans -- Chief Financial Officer

Yeah. It's very difficult to forecast mortgage. Clearly the rate environment is very low [Technical Issues]. We are still on.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Jeff, are you still on?

Jeff Rulis -- D. A. Davidson -- Analyst

I'm here, yeah.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Online, yes, we're hearing now. Busy signal in the background. Can anybody check that?

Aldis Birkans -- Chief Financial Officer

And in terms of mortgage, it's obviously a forecast given the volumes to be realized this quarter. What we focus on is building on that purchase market year-over-year with holdings steady there. We are operating in markets that are good markets. I will say that this last quarter second quarter, our teams are able to, given the volumes on the financing, we were able to widen the margins quite a bit, as I mentioned 78% increase. I don't expect to hold on to that, but clearly the environment for refinancing is quite favorable going here in second -- third quarter.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

I would add, Jeff. I'm obviously very proud of the work on the part of our residential banking team from leadership through that entire organization. And as Aldis pointed out, we did benefit from being in very healthy markets. There almost seems to be an increased desire or focus on people moving into our markets like Colorado, and so that obviously bodes well for the residential banking space. We actually believe third quarter will be pretty strong for us. But it's -- again, no one has a crystal ball, but based on what we're seeing, activity continues to be pretty solid.

Operator

Your next question comes from the line of Chris McGratty with KBW. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

All right. Thank you. Good morning.

Chris McGratty -- KBW -- Analyst

Hey, Tim. Good morning. Let me come back to the net interest income. I just want to make sure I understand kind of the trajectory going forward. Aldis, we take the 46 [Phonetic] that was reported in FTE basis this quarter, what was the amount of accretion. I know you said it was down but how much accretion was realized?

Aldis Birkans -- Chief Financial Officer

The way I look at it is really on the acquired loan book yield basis and you can see the book is yielding about 8.5%. The coupon underneath it is closer to 4.5%, so that's the additional accretion that you can back into it. The book though is outside that the book is typically amortizing about 30% -- on a 30% annualized basis. And while that is -- you lose that 8.5% yielding type of an asset on to the extent that it is prepayment and payoff driven amortization, you'd get to accelerate that mark. So it's not an exact science, but that 8.8% is where it's yielding.

Chris McGratty -- KBW -- Analyst

And we didn't pick up any... but to your last point on this, we didn't pick up any kind of an accelerated marks in the quarter that stood out.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

That stood out.

Aldis Birkans -- Chief Financial Officer

As you know, Chris, that tends to be pretty sporadic, it's nice when it comes, but second reporter was light.

Chris McGratty -- KBW -- Analyst

Okay. So maybe -- maybe I'll start. If I take out [Indecipherable] I did start with the 48.6% [Phonetic]. The PPP was a 1% learned. Did you realize any fees in the quarter from PPP?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah. We...

Chris McGratty -- KBW -- Analyst

Or is that more of a...

Aldis Birkans -- Chief Financial Officer

Yeah. We [Indecipherable] fee amortization over two-year period. So, we've realized a -- take $12 million over 24 months and...

Chris McGratty -- KBW -- Analyst

Okay.

Aldis Birkans -- Chief Financial Officer

And about three months worth of -- or two-and-a-half months worth of fee memorization, that fee amortization.

Chris McGratty -- KBW -- Analyst

Okay. Okay. I guess, what I'm trying to decide is, this concludes NII trajectory from here, obviously the liquidity build in the margin makes it a challenge for everybody. But I'm trying to kind of get a sense of where loan growth might be and kind of the comments on margins just to see if NII is going to grow or is it going to kind of bottom out for the next couple of quarters?

Aldis Birkans -- Chief Financial Officer

I think, I mean, again excluding the accelerated component of fee realization, we've kind of bottomed out here. And then, the,...

Chris McGratty -- KBW -- Analyst

Okay.

Aldis Birkans -- Chief Financial Officer

...trajectory will be how fast and what type of earning asset can we growth.

Chris McGratty -- KBW -- Analyst

Understood.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Chris, I would add. This is Tim. I would add that, look, first and foremost in this environment, our focus is on protecting the balance sheet. So it's an interesting time to be talking about picking up additional market share. Needless to say, the levels of additional underwriting that's required to make that happen are, in some cases, almost insurmountable what we are starting to see are opportunities working with existing clients that we know well and understand to take advantage of certain opportunities. We'll also continue to look at with every renewal of pricing opportunities with the indexes like LIBOR where they're at today. We don't necessarily think that's the appropriate index or the way to be thinking about pricing credit on renewals versus looking at overall yield.

So, we think there is opportunity with yield management. We think there is opportunity with existing clients but we're not going to be running hard into the marketplace at this point expanding our balance sheet with the number of unknowns that are out there.

Chris McGratty -- KBW -- Analyst

Understood. Great. And maybe last question if could sneak one in. The color on the mortgage was great, Aldis. But I just want to understand, how do we think about the marginal efficiency ratio of that business? You talked about the $10.5 million of comp, you did $30 million roughly of revenue. Is that how I should be thinking about kind of understand marginal efficiency ratio for that business?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah. And the best way I would summarize is, if we're looking at year-to-date basis it's running where we think to be is gain on sale of mortgages, or I should say the variable compensation representing about 40% of the gain on sale of mortgages. So that's the variable component.

Chris McGratty -- KBW -- Analyst

Got it.

Aldis Birkans -- Chief Financial Officer

Now embedded obviously if there is a fixed component of facilities and shared services staff and all that. So, in the long run, that business still is running above the 60% efficiency ratio. This quarter again, as I mentioned, margin driven we were quite profitable in that business.

Chris McGratty -- KBW -- Analyst

Understood. That's great. Thank you.

Aldis Birkans -- Chief Financial Officer

Thank you, Chris.

Operator

Your next question comes from Gordon McGuire with Stephens. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning, Gordon.

Gordon McGuire -- Stephens, Inc. -- Analyst

Good morning, Tim. Maybe I start with Aldis, you touched earlier that some of the deposit growth came late in the quarter and was continuing, but it's such a large job 14% transaction growth in average balances. I'm curious if there's anything that might be more transitory that could be outflows, I'm just trying to think about the size of the balance sheet from here?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

That's a great question, and we spent a ton of time looking at our deposits and the sources of this. And I think the most -- and I think you've heard it from other banks have talked about it, but the most hard one to kind of put your finger on it is, we had the entire PPP loan book that got funded on day one, got put in the transaction account with our bank. And those are our clients and we serve as a primary bank for them. So those dollars as they get used are certainly likely to leave the bank. Other than that, it's hard to say, it feels like a lot of -- a lot of our dollars that we've gathered have come from new relationships or out of expanding relationships. And it's just there's a lot of liquidity in the system and how that get utilized over time, we certainly want to be part of it, and retain most of it, if not all.

Gordon McGuire -- Stephens, Inc. -- Analyst

Okay. And then, Tim mentioned maybe focusing the loan portfolio more in existing clients, not necessarily taking market share right now. So it will be fair to say that the liquidity -- the excess liquidity this quarter probably gets plugged into the securities book? I guess, how should I think about the strategy with your liquidity now -- now that that portfolio is starting to grow off of 15% of assets?

Aldis Birkans -- Chief Financial Officer

Yeah. I mean, potentially I think it's going to be a mix relatively [Phonetic] conservatively. I think we will be ready to deploy it into loan growth, and I certainly don't want to tie it up in the longer duration very low yielding asset today. So, we'll be smart about that. I think we might leave some of it in cash and can hold on and wait for the opportunity to turn out long pipelines again.

Gordon McGuire -- Stephens, Inc. -- Analyst

Okay. And Tim, with the office consolidations, I'm curious if there is any specific targets, efficiency or overhead that you're targeting with this and whether there could be more to come on that side of the house?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

As most of the listeners would know, and I know you recognize this quarter [Phonetic], as a team, we have a pretty strong track record of continuing to identify opportunities to better manage expense. And we certainly believe to be more specific in answering your question that we still have nice runway on that front.

Certainly an area that we'll continue to focus on is the right balance between brick-and-mortar and digital. With the COVID pandemic, we've seen like other institutions really amazing adoption rates on our digital capabilities. The work thus far with the 12 branches or banking centers that we've announced earlier in the quarter are -- that work is going really well. And we'll continue to look at opportunities to better balance the way we serve our clients while reducing expense. And as I said before, while I'm not prepared today to talk about specific targets, I can tell you, at a strategic level, we're confident that we still have nice runway on that front.

Gordon McGuire -- Stephens, Inc. -- Analyst

Okay. I appreciate it. I'll step back. You bet.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Gordon.

Operator

Your next question comes from Andrew Liesch with Piper Sandler. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hi, Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

Hi. Good morning.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning.

Andrew Liesch -- Piper Sandler -- Analyst

A few follow up questions for me. It sounds like the cost savings from the branch consolidation is expected to follow the bottom line. But you also referenced the increase in technology usage. So, is some of these cost savings can be reinvested back into the franchise, or is the right way to look at it is just straight benefit to expenses?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

We'll continue to look at investing in our alternative delivery channels. But I would tell you that this is an effort that's been under way in our company over the last number of years. And so, in terms of any big expected spikes in those areas, that's not something that we've forecasted. We're pretty comfortable with our current run rates of investment.

Andrew Liesch -- Piper Sandler -- Analyst

Okay. That's helpful. And then, just circling back the deposit growth as referenced in benefiting from PPP recipients parking their money at the bank, but I mean beyond that it was still exceptional, is there anything you can point to that was driving it? Yeah. Thanks.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah. We were -- we had high expectations, and we expected our teams to be very disciplined around the PPP program in working with clients that were willing to open up if they didn't already have them with us to bring all of their operating depository business to our company. And that's just the core kind of philosophy of the way we do business here expecting to capture that full relationship. May be one of the unexpected benefits we saw was, with a number of prospects where we weren't able to work with them on the PPP, but this particular team seem to happen with the largest of banks in the country, we saw a meaningful number of new business relationships developed as a result of them being disappointed in response of their large bank on PPP and moving all of their depository and operating business to us. I don't think we were unique in that regard. We were focused on it, but -- we love that because we also see it as a first step in doing potential lot of business down the road when the economic environment starts to solidify.

So, I don't know, Rich, Aldis, anything else you would add.

Aldis Birkans -- Chief Financial Officer

We continue expanding our relationships as we grew accounts. I think, the -- or relationships, I should say, and it is driven by broadening in that sort of set.

Richard U. Newfield -- Chief Risk Management Officer

I think in some respects what Aldis just pointed out, Andrew, is maybe the most important focus for me, because I can't discern how much of this balance growth at the end of the day is just driven by the liquidity the government is pumped into the markets. But what we can measure with confidence is how many new relationships we're growing. And that's what's exciting us that we're seeing nice core operating deposit relationship growth. By the way, not just in small business and commercial but in consumer as well.

Andrew Liesch -- Piper Sandler -- Analyst

Okay. That's very helpful. Thanks for the color there.

Richard U. Newfield -- Chief Risk Management Officer

You bet.

Andrew Liesch -- Piper Sandler -- Analyst

And then, just one follow-up question. I understand the reserve ratio 1.36% excluding the PPP loans, but then you also referenced the $15.2 million discounts. Is the right way to look at that to add that $15.2 million into the allowance to circulate the reserve ratio. I'm just curious if we really should be including that in there.

Richard U. Newfield -- Chief Risk Management Officer

Well, certainly, it's -- look, I mean, if any of those loans we have trouble with that mark is there to protect. It doesn't matter whether it was on -- at the time the purchase was generated by credit or interest rate, that mark is there to protect you.

Andrew Liesch -- Piper Sandler -- Analyst

And if you add the mark, you get to what, remind everybody.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah. The mark on the book itself is worth 34 basis points. Overall -- sorry, overall loan book is worth 34 basis points, so we bring this up and comfortably into the high 1.6s. If you kind of narrow it to the purchase buckets for 5%, so it is quite a bit protection and we view it as a protection even though as these loans are maturing and rolling off. We are realizing it through net interest income.

Andrew Liesch -- Piper Sandler -- Analyst

Got you. So arguably the reserve is stronger than that 1.36%. Okay, great. Thanks for taking my questions. I'll step back.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Sure. Andrew, was that your dog with a question?

Andrew Liesch -- Piper Sandler -- Analyst

Yes, I think so. I think it might have been.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

We absolutely can relate. All right.

Operator

Thank you. I'm showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Mariama. I'll just simply wish everyone continuing -- their continuing safety and health, and thank you for joining the day. Take care.

Operator

And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and will run through August 5th, 2020 by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 8919639. The earnings release and an online replay of this call will also be available on the company's website on the Investor Relations page.

Thank you very much and have a great day. You may now disconnect.

Duration: 40 minutes

Call participants:

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Richard U. Newfield -- Chief Risk Management Officer

Aldis Birkans -- Chief Financial Officer

Jeff Rulis -- D. A. Davidson -- Analyst

Chris McGratty -- KBW -- Analyst

Gordon McGuire -- Stephens, Inc. -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

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