Image source: The Motley Fool.
Altabancorp (NASDAQ: ALTA)
Q2Â 2020 Earnings Call
Jul 30, 2020, 12:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the Altabancorp's Second Quarter Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.
I would now like to turn the conference over to Mark Olson, Executive Vice President and Chief Financial Officer. Please go ahead, sir.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Thank you and good morning. Thank you for joining us today to review our second quarter 2020 financial performance. Joining me this morning on the call is Len Williams, President and Chief Executive Officer for Altabancorp.
Our comments today will refer to the financial results included in our earnings announcement and investor presentation released last night. To obtain a copy of our earnings release or presentation, please visit our website at www.altabancorp.com.
Our earnings release contains forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and beyond the control of the company. We caution readers and listeners that a number of important factors could cause actual results to differ materially from those expressed in or implied or projected by such forward-looking statements. These forward-looking statements are intended to be covered by the Safe Harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements speak only as of the date they are made and we assume no duty to update such statements except as required by law.
I'll turn the call now over to Len.
Len E. Williams -- Chief Executive Officer and President
Thanks, Mark. Good morning and thank you for joining our call this morning. We're about five months into the economic downturn resulting from the COVID-19 pandemic. The situation continues to be rather fluid for our clients and for us.
As events began to unfold with the health risk of COVID-19, our immediate concern was the health and welfare of our dedicated associates. We immediately executed on our pandemic response, incorporated into our business continuity plan. And response effort has been the largest coordinated project undertaken by the bank and I'm incredibly proud of how our associates responded and continue to respond to the challenge, and so quickly and dramatically altered how and where we work. We've seen strength and leadership emerge through this unprecedented business twist.
While all of our branch locations are open and fully staffed, approximately 65% to 70% of our workforce remains working from home. Protection measures are in place for our associates working in our branches and administrative offices. Masks and hand sanitizers are available for our clients as they enter the buildings.
Our technology team was able to respond quickly to the needs of our associates working from home and purchase the necessary equipment to ensure our continued operations. Our sales force continues to connect with our clients to ensure that we provide whatever relief we can offer through either government programs or through our own deferment programs.
While we rapidly deployed our back-office support areas, we did so in a safe and secure environment. We continue to ensure appropriate data security as our operations shifted to new delivery methods.
At the outset of the public health crisis, we responded swiftly to our clients need, including actively participation in the Small Business Administration Paycheck Protection Program. Since the inception of the program, we have funded over $85 million in PPP loans, helping over 330 local small and medium-sized businesses. Another 700 of our clients were referred to and funded by Kabbage, a FinTech aggregator.
We also offered payment deferrals of up to six months to our commercial clients and up to 90 days for our consumer clients. We offered temporary loan payment relief to 435 businesses and 108 individuals, totaling approximately $327 million or 20% of total loans, excluding SBA PPP loans, to address cash flow challenges for those impacted by the COVID-19 pandemic.
Of the $327 million in loans, where the payments were deferred, approximately 90% were on loans secured by real estate with a weighted average loan-to-value ratio of approximately 50%. And $89 million went to higher risk business sectors that we have identified, including hotels, retail, restaurants and assisted living centers.
We expect to reamortize each loan at the end of the payment deferral period to extend the maturity rather than retain the original maturity date with a balloon payment upon maturity. We believe this approach provides our clients with the short-term payment relief they need to address the negative cash flow effects resulting from the pandemic and this approach mitigates large cash outlays after the deferment.
It's important to note that average deposit balances for clients who either applied for payment relief with us or have loan payments made by the SBA, increased $32 million or 118% to $58 million from the first quarter of 2020 to the second quarter of 2020. In particular, we have seen that many of our borrowers who requested payment deferments, have held on to their cash that would have otherwise been used to make their monthly payments and approximately 15% of our borrowers who requested loan deferrals have continued to make their monthly payments as agreed.
We anticipate that these additional funds held by these clients, provides cash flow, so they will be able to resume making payments on their loans after the deferral period.
We continue to work together with our clients to ensure that we can provide financial solutions to assist them on their path to economic recovery as we overcome the pandemic.
I'd like to direct your attention to Pages 9 through 13 of our investor presentation. In evaluating our loan portfolio, we have identified approximately 20% of our portfolio is in business sectors that could potentially be impacted by the COVID-19 pandemic. These business sectors include retail, assisted living or nursing home facilities, hotels and motels, restaurants, and arts, entertainment, tourism, and recreation. The vast majority of these loans are secured by real estate and our commercial and industrial loan exposure is small.
For all ADC loans, we use the loan-to-cost ratio as well as the loan-to-value ratio in our underwriting. We do this to ensure real money is into the deals. The loan-to-cost on our acquisition development and construction loan is approximately 51%. The average loan-to-value on our owner-occupied commercial real estate portfolio is approximately 58% and the average loan-to-value on our investor commercial real estate portfolio is approximately 54%.
Of the total loans potentially impacted by the pandemic, approximately 14% are acquisition development and construction loans. We've not seen a slowdown in construction activities through the pandemic.
Another 30% of the potentially impacted loans are owner-occupied commercial real estate, primarily in the retail space. Another 30% is in the investor real estate, again primarily in retail, assisted living, or nursing home facilities, coupled with some hotels and motels. Lastly, approximately 12% of these loans potentially impacted are in the commercial and industrial loans.
The ultimate extent of the impact to our overall loan portfolio is difficult to predict at this point as it's contingent upon the length of time that the individuals are required to shelter-at-home, and the length of time it takes for businesses to resume normal operations.
I'd like to discuss the credit quality of our loan portfolio and our balance sheet position. Over the past 24 months, we have communicated each quarter our efforts to fortify our balance sheet, based on our perspective that we were at the end of an economic cycle and wanting to ensure we were prepared for an economic downturn.
While we certainly did not anticipate that the economic downturn would be the result of a pandemic, our strong balance sheet provides safety and security to our stakeholders as we work through the negative effects of the economic slowdown.
We believe our balance sheet strength is reflected in the level of allowance for credit losses held by us and our strong regulatory capital position. In addition, our focus to reduce loan concentrations in our ADC and commercial real estate portfolios and the tightening of our overall underwriting standards over the past couple of years will help to mitigate the negative effects that the pandemic may have on our loan portfolio. Lastly, our strong liquidity position provides us the flexibility to grow aggressively as the economy recovers.
We've experienced positive credit quality trends, including lower delinquency rates, lower non-performing assets, lower loan concentrations, and lower classified assets. We experienced slightly higher loan charge-off with our annualized loan charge-off rates increasing to nine basis points to 0.16% in the second quarter 2020.
While we are pleased with the positive credit quality trends that we've experienced year-to-date, we do not expect these trends to continue short term as relief program start to wind down beginning in the third quarter. The severity of the impact to our credit quality trends will depend on the length of time that businesses and individuals are negatively impacted by the COVID-19 pandemic and the timing and level of recovery that occurs post pandemic.
We are closely monitoring the portfolio to determine if any additional allowance for credit losses are required. At this time, however, we believe our allowance is adequate and our regulatory capital position is strong.
I'd like to now direct your attention to Pages 16 through 21 of the investor presentation. We are fortunate to operate in one of the strongest states in the nation from an economic perspective. Utah's economy has consistently performed better than most states and the nation as a whole. The unemployment rate for the nation was 3.5% at February 28, 2020. It rose to 14.7% at April 30 and it recovered to 11.1% at June 30, 2020.
The unemployment rate for the state of Utah was 2.5%, February 28. It rose to 10.24% at April 30 and recovered to 5.1% at June 30, 2020, which is the second lowest unemployment rate of any state in the nation. Nationally, total jobs increased by 1.6% year-over-year at February 28, 2020; fell to a negative 13.4%, April 30; and has recovered to a negative 8.6% at June 30, 2020.
Total jobs increase year-over-year for the state of Utah, were 2.4% at February 28, 2020; fell to negative 7.2% in April and has recovered to a negative 2.7% at June 30, 2020. This is the lowest year-over-year negative change for jobs of any state in the United States.
Despite the negative effects that the pandemic has had on the overall year-over-year change in jobs in Utah at the end of the second quarter, construction jobs have actually increased 8.7%, which we believe is a leading indicator of the beginning of an economic recovery in Utah.
We believe that Utah will continue to outperform other states and the nation as a whole, as we continue to recover from the negative economic effects of the pandemic.
Despite the onset of a pandemic, we earned a net income of $10.3 million for the second quarter, achieved a return on average assets of 1.5% and earned a return on average equity of 12%.
The Board of Directors declared a quarterly dividend payment of $0.13 per common share. The dividend will be payable on August 17, 2020 to shareholders of record as of August 10, 2020. The dividend payout ratio for earnings for the second quarter 2020 was 24%. This continues the over 50-year trend of paying dividends by the company.
We announced last quarter that we discontinued the repurchase of Alta shares until further notice. At this time, we anticipate continuing to pay a quarterly dividend. We will continue to actively manage and monitor our capital adequacy to determine future share repurchases and dividend payments.
I will now turn the call back over to Mark, to discuss more specifically our financial performance for the three and six months ended June 30, 2020. Mark?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Thank you, Len. Total assets grew $754 million or 33% year-over-year to $3.1 billion at June 30, 2020, which is primarily the result of a significant increase in total deposit
. Total deposits increased $631 million or 32% to $2.61 billion at June 30, 2020, compared with $1.98 billion at June 30, 2019. Noninterest-bearing deposits increased $278 million or 39% to $985 million at June 30, 2020 compared with the same period a year earlier. And interest-bearing deposits increased $353 million or 28% to $1.63 billion at June 30, 2020 compared with the same period a year ago.
Noninterest-bearing deposits to total deposits, increased to 38% at June 30, compared to 36% a year ago. The increase in total deposits is primarily the result of both governmental and bank relief programs and businesses and consumers actively conserving cash to try to counter the negative effects of the shutdown in the economy from the COVID-19 pandemic.
We anticipate the total deposits will decline through the remainder of the year as businesses and individuals pay federal and state taxes that were postponed by the government agencies to address the pandemic, as borrowers begin to make payments again on loans where payments were deferred and as cash reserves are used by both businesses and consumers to address any shortfalls in income resulting from the pandemic.
Our loan portfolio declined $14 million or 0.8% year-over-year to $1.7 billion as we further tightened underwriting standards and reduced loan concentrations, which was offset by the funding of $85 million in SBA PPP loans. Quarter-to-date average loans increased $6.7 million or 0.4% to $1.69 billion for both the three months ended June 30 and the year prior.
We are focused on reducing our loan concentrations in our ADC portfolio as well as our overall commercial real estate concentrations. ADC loans to total capital declined from 140% at June 30, 2018, to 71% at June 30, 2020. Commercial real estate loans to total capital declined from 285% to 287% for the same respective periods.
Lowering our loan concentrations and limiting our portfolio for certain collateral types has made it more difficult to generate net loan growth, but we believe this course is appropriate given the current economic conditions.
The allowance for credit losses increased $15 million or 52% to $43 million at June 30, 2020 compared with $28 million for the same period a year ago. The allowance for credit losses to loans held for investment was 2.6% at June 30, 2020 compared to 1.7% at June 30, 2019.
Remaining accretable discounts on non-purchase credit deteriorated loans was $2.9 million at June 30, 2020, which provides additional credit protection. If we remove the $136 million in government guarantees from the SBA and other government agencies from our loan totals, of which $85 million is SBA PPP loans that are 100% guaranteed, and we add the remaining $2.9 million in accretable discounts for allowance for credit losses, our total loss coverage for outstanding non-guaranteed loan amounts is 3%.
Nonperforming loans decreased to $6.4 million at the end of the quarter compared with $8.8 million at the end of the year. Non-performing loans to total loans were 0.39% at the end of the quarter compared with 0.53% at the end of the year. Non-performing assets decreased to $6.4 million at the end of the quarter compared with $8.8 million at the end of the year and our non-performing assets to total assets was 0.21% at the end of the second quarter compared with 0.37% at the end of last year.
Cash and investment securities grew $770 million or 146% to $1.3 billion at the end of the second quarter compared with a year earlier. Cash and liquid investment securities represented 42% of total assets at the end of the second quarter.
Shareholders' equity increased by $37 million or 12% to $350 million at the end of the second quarter compared with $330 million at the end of the June 30, 2019.
Tangible book value per share increased 13.5% year-over-year, $17.12 at the end of the second quarter. Our leverage capital ratio was 1.7% at the end of the second quarter compared with 12.8% a year ago. Our risk-based capital ratio was 19.2% at the end of the second quarter compared with 17.2% a year earlier. Our leverage capital ratio was impacted by the significant increase in total assets resulting from the increase in total deposits.
Our total risk-based capital was not similarly affected as the funds received from the increase in deposits were held in low risk weighted cash and investment securities. Tangible equity plus allowance for credit losses totaled $364 million or 22% of total loans held for investment at the end of the second quarter, which provides overall credit protection for both expected and unexpected credit losses in our loan portfolio.
Turning to the income statement. Net income was $10.3 million or $0.55 per diluted common share for the second quarter compared with $11 million or $0.58 per diluted common share for the same period a year ago. For the six months ended June 30, net income was $21 million or $1.11 per diluted common share compared with $22 million or $1.13 per diluted common share for the same period a year earlier.
Our return on average assets and return on average equity was 1.5% and 12.1% respectively for the second quarter compared with 2% and 14.3% respectively for the same period a year ago. For the six months ended June 30, our return on average assets and return on average equity was 1.7% and 12.6% respectively compared with 2% and 14.4% respectively for the same period a year ago.
Pre-tax/pre-provision income was $14 million for the second quarter compared with $17 million for the same period a year earlier. For the six months ended June 30, 2020 pre-tax/pre-provision income was $29 million compared $32 million for the same period a year ago. The decline in pre-tax pre-provision income was primarily the result of lower net interest income and higher non-interest expense.
Net interest income decreased $2 million or 7% to $26 million for the second quarter compared with $28 million for the same period a year ago. The decrease was primarily the result of net interest margins narrowing a 128 basis points to 3.96% for the same comparable periods offset by average interest earning assets increasing $494 million or 23% to $2.6 billion for the same comparable periods.
The narrowing of net interest margins is primarily the result of the Federal Reserve reducing benchmark rates to almost zero, and an increase in the average amount of lower yielding cash and investment securities held by us stemming from average core deposits increasing $232 million or 18% for the same respective periods. The percentage of average loans to total average interest earning assets declined to 65% for the second quarter compared with 80% for the same period a year earlier.
Yields on interest earning assets declined 147 basis points to 4.21% for the second quarter compared to 5.68% for the same period a year earlier. The declining yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by us increasing $487 million or a 113% to $909 million for the same comparable periods with a yield on cash and securities decreasing 59 basis points to 1.63% for the same comparable periods.
In addition, the yield on loans declined 96 basis points for the same comparable periods and average loans outstanding increased $7 million or 0.4% to $1.69 billion for the same comparable periods.
Yields on loans were negatively impacted by the lower yield on SBA PPP loans. The yield on SBA PPP loans was 2.8% for the second quarter, including the amortization of deferred fees and costs recognized over the contractual term of the loans. We expect that the yield on SBA PPP loans will increase as we begin the process of loan forgiveness with the SBA and the remaining net deferred fees are earned into income.
Total cost of interest bearing liabilities decreased 31 basis points to 0.43% for the second quarter compared with 0.74% for the same period a year earlier and is the result of the cost of interest-bearing deposits decreasing 31 basis points, 0.3% compared with 0.74% for the same period a year ago. The total cost of funds decreased 22 basis points for the second quarter to 0.27% compared with 0.49% for the same period a year earlier. Acquisition accounting adjustments added five basis points to net interest margins in the second quarter.
For six months ended June 30, 2020 net interest income decreased $2 million or 3% to $53 million compared with $55 million for the same period a year earlier. The decrease is primarily the result of the narrowing of interest margins resulting from the reduction in benchmark rates and an increase in the average amount of lower yielding cash and investment securities held by us, stemming from average core deposits increasing $178 million or 14% for the same respective periods.
The percentage of average loans to total average interest earning assets decreased 69% for the six months ended June 30, 2020 compared with 80% for the same period a year earlier. This decrease was offset by average interest earning assets increasing $358 million or 17% to $2.5 billion for the same comparable periods.
Yields on interest earning assets declined 105 basis points to 4.66% for the six months ended June 30, compared to 5.71% for the same period a year earlier. The declining yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by us, increasing $353 million or 87% to $761 million for the same comparable periods with the yield on cash investment securities decreasing 35 basis points to 1.89% for the same comparable periods.
In addition, the yield on loans declined 64 basis points for the same comparable periods and average loans outstanding increased $5.2 million or 0.31% to $1.69 billion for the same comparable periods. We expect our net interest income and net interest margins to continue to be adversely impacted in future periods because of the Federal Reserve lowering benchmark rates to near zero.
Provision for credit losses was $2 million for both the second quarter of 2020 and of 2019. We incurred net charge-offs of $0.7 million in the second quarter compared with less than $0.1 million for the same period a year ago. For the six months ended June 30, provision for credit losses was $2.8 million compared with $3.7 million for the same period a year earlier.
For the six months ended June 30, 2020, we incurred net charge-offs of $1 million compared with net charge-offs of $0.9 million for the same period a year earlier. The decrease in provision for credit losses in the six months ended June 30, 2020 is primarily due to a decrease of reserves on individually evaluated loans and no loan growth during the same period.
Non-interest income increased $2.5 million or 70% to $6.1 million for the second quarter compared with $3.6 million for the same period a year ago. This increase was primarily due to $1.4 million increase in mortgage banking income resulting from higher loan volume of refinance mortgages, which was driven by a lower interest rate environment for the same comparable periods.
Total loans sold increased $20 million or 58%, $76 million for the second quarter compared to $48 million for the same period a year earlier. In addition, we recorded $1.4 million gain on sale of investment securities in the second quarter, as we sold $48 million of securities to rebalance our investment securities portfolio.
For the six months ended June 30, 2020 non-interest income increased $2.9 million or 42% to $9.9 million compared with $6.9 million for the same period a year ago. The increase was primarily due to a $1.7 million increase in mortgage banking income resulting from higher loan volume, which was driven by a lower interest rate environment and the gain on sale that I mentioned earlier.
Total loans sold increased $35 million or 38% to $126 million for the six months ended June 30, 2020 compared with $91 million for the same period a year earlier. Non-interest expense was $16 million compared with $15 million a year earlier. Our efficiency ratio was 51% for the second quarter compared with 47% for the same period a year ago. For the six months ended June 30, non-interest expense was $32 million compared with $30 million and the efficiency ratio was 52% versus 48%.
The increase in non-interest expense for both the three and six months ended June 30, was primarily the result of higher salaries and employee benefits resulting primarily from higher incentive payments made to mortgage loan officers, higher data processing costs and higher marketing and advertising expenses. These amounts were partially offset by lower occupancy, equipment and depreciation costs.
As we look forward, we anticipate that net interest margins will remain narrow, given the Federal Reserve's outlook that interest rates will remain near zero through at least 2022. As a result, we are reviewing our overall cost to determine how we can operate our platform more efficiently and effectively, while retaining our high touch client experience. We anticipate making changes over the next several quarters to improve our operating leverage.
Income tax expense was $3.2 million for the second quarter compared with $3.5 million for the same period a year earlier. Effective tax rate was 23.6% compared to 24.1% a year ago. For the six months ended June 30, income tax expense was $6.6 million compared with $6.8 million for the same period a year earlier and the effective tax rate was 23.7% compared with 23.9%.
I'll turn the call back over to Len. Thanks, Len.
Len E. Williams -- Chief Executive Officer and President
Thank you, Mark. Catch your breath. We find ourselves in a challenging and uncertain times as we navigate the effects of shutting down the economy to mitigate the impact of the pandemic. Throughout this crisis, our primary concern has been the safety and security of our associates. I'm very proud of our team and how they have handled this crisis.
Our next priority has been the safety and soundness of the bank. We believe that we've built a fortified balance sheet that will withstand the negative effects of this pandemic. Lastly, we've focused on providing relief to our impacted clients. It's our goal to provide as much assistance as we can to our clients and communities to support them through this crisis.
Thank you for joining us today. At this point, I'll turn the call back to Chuck, the moderator, to open the lines for the analyst questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question will come from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis -- D.A. Davidson -- Analyst
Thanks. Good morning, Len and Mark.
Len E. Williams -- Chief Executive Officer and President
Good morning, Jeff.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Hi Jeff.
Jeff Rulis -- D.A. Davidson -- Analyst
Just wanted to maybe dig in a little deeper on the margin. Mark, you mentioned about expectations to remain narrow. It seems like you've got quite a bit of some balance sheet goings on that would -- if this is somewhat artificially impacted by PPP, could you either pin it, what you think the core margin is and as you kind of look forward and maybe those loans come off and/or will just get forgiveness and the yield bumps, as you mentioned. Kind of range bound, where this settles in? Even to the point noted, you have a core margin for the quarter if you would exclude PPP, would be helpful.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes, Jeff, great question. Boy, hard to answer. I mean, you look at what happened in the second quarter and the fundamental change in our balance sheet was pretty dramatic. And with that, we're holding onto a ton of cash and securities, which we would prefer not to do. And as we look into the third and fourth quarter, we anticipate those deposits, at least some of them coming out as our clients make tax payments, etc.
So, what that looks like is frankly difficult to look at. We anticipate, certainly that with the forgiveness of the SBA PPP loans, that will get a positive effect, given the fees that we earned by making those loans. And our expectation is, as soon as we get to August 10, we will begin making applications to get loan forgiveness. And then, as those loans are forgiven, we'll earn that additional fee and that will certainly help the margin in the third quarter.
What does that look like going forward? I think it's difficult, frankly, for us to predict and our goal certainly is wanting to grow the portfolio, our loan portfolio, in an appropriate way, given the economic conditions that we're in. And we will look at that and try to grow the portfolio accordingly to those economic conditions.
But what I would say is, as we see the economy improve, our goal is to aggressively grow our loan book. We think, as Len mentioned, we've -- Utah has got a strong economy and we are not seeing the same negative effects that other states are seeing. And frankly, we're back to business in Utah and we think that's positive for us overall.
So, as we get out of the forgiveness period with the PPP loans, we are done with deferments, we'll have a better understanding of really what the credit quality looks like and that will give us an opportunity to look at how aggressive we are on loan growth going forward.
So, I know that's a long-winded answer and it doesn't really respond specifically to core NIM. But in my 30-year career, I've never seen a balance sheet change as much as it did in a single quarter. And frankly, the third and fourth quarter are going to change pretty dramatically as well. So, it's hard for me to give you a specific number.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay. Yes, maybe I guess, I'm just [Speech Overlap] Go ahead.
Len E. Williams -- Chief Executive Officer and President
I'll just add another comment or two to that. As we look at these times, I mean, it's a little bit of a fluke and it's going to drive down NIM as deposits come in at the rate they come in, when you can't safely deploy them in the loans. I mean, I think we all understand that. The PPP does drag it down a little bit, but we've talked a lot over the last couple of years about positioning the balance sheet and moving the organization from really a real estate asset-based lender to more of a cash flow ratio analysis lender.
We've got 80 individuals throughout the company undergoing some pretty intense training right now with Moody's Commercial Banking training to bring along our ability to recognize and move forward on some of the growth in the market that's safe growth.
We're looking for -- over time -- quality, sustainable, profitable growth, not growth that just flies with the economy moves in the real estate sector. Although real estate will always be an important part of what we do, we're continuing to diversify around it.
So, I didn't answer your question either, because we don't know what's in store the next couple of quarters. From a lending side, we will be cautious. I think I mentioned last quarter that our pipelines were at high levels. They continue to be at high levels. They have not transformed into new business yet, because we're seeing a lot of business on hold. So, we continue to work and continue to build pipeline and the backlog. But when things break loose, we want to make sure we're in a position to move. and we have the balance sheet and liquidity to do it.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes. And then just responding a little more from what Len said, we -- this morning what -- the Federal government announced 33% decline in GDP for the second quarter. That's the worst in recorded history. We have a fortress balance sheet that we believe can withstand that negative effect.Despite that negative decline there, we were in the 90th percentile with our peers. From a capital perspective, we were in the 97th percentile with respect to reserves. And even with those strong positions, we were in the 93rd percentile for an ROA and then 92nd percentile for net interest margins last quarter.
So, when you look at that in totality, having the balance sheet strength that we have and still being able to get best in class earnings. We think we're doing the right things for the organization given the uncertainty that all of us have right now.
Jeff Rulis -- D.A. Davidson -- Analyst
Got it. Yes, I think on the margin remaining narrow, I guess the question I just -- that sounds like the pace of forgiveness and the amount of liquidity you can put to work, it's temporarily subdued but would be expected to lift as that pressure relieves. And Mark -- excuse me, Len, to your comment, I think you were alluding to a longer term. You changed the risk profile of the high five kind of margins are a thing of the past and we're settling in. But kind of a sub-4% seems temporarily low. Is that's -- that's fair as this kind of goes forward and maybe some of those pressures abate?
Len E. Williams -- Chief Executive Officer and President
You've known us long enough, Jeff, to know we tend to estimate relatively conservatively on these things. It is our objective to move that as quickly as we can transform the balance sheet safely. And the PPP loans, while I've seen some reports already where the accounting methodology is different than ours.
The PPP loans on our books are two clients we know and we have engaged with another organization to audit -- use a automated resources to get these things forgiven. We're already gathering data. The sooner we can get those off the books and get those margins back into the income statement, the better off.
So, we've got them listed over the time, but we have an effort going on internally to get those things paid down and out as fast as we possibly can. So, your comment, I guess it's a long way around. The 4% plus is still in our radar.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Short-term, I think sub-4% is right short-term.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay. Thank you. Just on the -- you mentioned the fortressed balance sheet. I wanted to kind of -- and it's small, but I just wanted to note the kind of -- if you could touch on the Board rationale of the kind of the penny reduction in the dividend rate for the next coming quarter. Was that a thing of -- you bumped it by a $0.01 pre-crisis and then it was effective. Had we known that, let's just keep it flat. Just trying to know your high reserves, your high capital and just to see what that reduction is, if you could comment?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes, it's really tied to our commitment to the 20% to 25% dividend amount. That kept it in there. $0.01 wouldn't have made a ton of difference, but we don't know what the future holds. And so, we came up with that number and the Board supported that number.
As just a statement that we're going to stay conservative, we're going to make sure that the organization is strong through this. It was a good debate and good discussion. But our objective is to hold it at a high reasonable level, best we can. It was a pretty minor move, but --
Jeff Rulis -- D.A. Davidson -- Analyst
Okay.
Len E. Williams -- Chief Executive Officer and President
The company has been paying dividends for over 50 years. We want to continue to pay a good dividend back to our shareholders going forward. And we think having a strong balance sheet affords and continue to have best of the class earnings that gives us the opportunity to continue to give dividends going forward.
Jeff Rulis -- D.A. Davidson -- Analyst
Right. It sounds somewhat formulaic then to some degree, but I appreciate it. I'll step back. Thanks.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Thanks
Len E. Williams -- Chief Executive Officer and President
Thanks, Jeff. Good talking to you.
Operator
Our next question will come from David Feaster with Raymond James. Please go ahead.
David Feaster -- Raymond James -- Analyst
Hey, good morning, everybody.
Len E. Williams -- Chief Executive Officer and President
Good morning, David.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Hey, David. How are things in Florida?
David Feaster -- Raymond James -- Analyst
Oh, man, we're hanging in there. We're hanging in there. We've set the bar pretty high for what not to do. I just wanted to follow-up on the commentary. I mean, I'm looking at loan growth going forward. I mean, Utah, you gave a lot of economic data, which is extremely helpful, just taking a better picture. In the second quarter, obviously the PPP program was a huge distraction, modifications were a big distraction.
Len E. Williams -- Chief Executive Officer and President
Right.
David Feaster -- Raymond James -- Analyst
I guess, as Utah continues to outperform, I mean do you think growth can accelerate from here? It seems like C&I utilization kind of weighed on that. But just curious, your appetite for growth, your -- the pulse of the market in terms of growth and just any commentary, ex-PPP obviously.
Len E. Williams -- Chief Executive Officer and President
I guess the first comment David, is the appetite for growth is intense, but the appetite for safety is more intense. As you just mentioned, going on down there, the gross numbers in illnesses here is spiking a bit again.
So, there is a big unknown. We are poised and positioned and ready to move. Matter of fact, we've started looking at some bigger safe real estate deals to put on the books that historically we may have passed on or sent to an insurance company. We're starting to compete on price a little bit more on some of those as well.
But the asset quality issues remain, the standards remain high, right now, and they will through this pandemic. We've seen across the country, loans back off due to credit quality standards changing. We did that a little bit early and we -- remember also, we acquired a couple of banks, couple of years ago. One of them had extreme credit issues in it, that has reduced our portfolio dramatically. We think we've worked through that.
In our last quarter, probably $25 million of our portfolio that we could have hung on to, we actually moved out based on asset quality trends, and issues. So, I think we're at a baseline now that we're pretty comfortable with and our objective is to start seeing some growth. But again, with the pandemic going on and the uncertainty of business on when to invest, we keep our eye on it, we can aggressively market it. But like I said, the pipeline is up. Pipeline was up last quarter, but they didn't get to the finish line because businesses aren't pulling the triggers quickly.
David Feaster -- Raymond James -- Analyst
Okay, that's helpful. And then just kind of staying on that asset quality topic. I mean, what's the early read on redeferral trends? I mean, what are you hearing from your clients? And then, I guess. as you -- maybe are there any -- what are the requirements to get a redeferral? Are you looking for additional collateral? Are you -- maybe more personal guarantees? And then, just curious on the redeferral rates.
Len E. Williams -- Chief Executive Officer and President
Yes, that's a really good question, because I think our whole industry is going to have to deal with that very quickly. On the deferrals initially, we required a one-page kind of history of cash flow and liquidity. And the approval process was relatively easily: Prove how you're impacted by COVID and show that prior to COVID, you had the ability to support repayment. That was done on round one. For round two, which has not begun yet, but will be shortly, the understanding we have in our credit administration group is they will be fully underwritten this time.
So, we've got to have updated financials, we've got to have data that supports that these are survivable. And so, the underwriting of redeferrals, we will do it. But the key to doing it is we've got to be able to validate that they are legitimate, they have a legitimate opportunity to succeed, to move forward. We don't want to just continue to kick the can down the road forever.
David Feaster -- Raymond James -- Analyst
Okay. Yes, that makes a ton of sense. And then just following up on the commentary in your prepared remarks about expense savings and just, updating the strategy to adapt to the changing customer behaviors. I mean, just curious as to what you've identified as opportunities between branch rationalization or just other savings? And maybe conversely, anything that you need to invest in further in order to keep up with the evolving client behaviors?
Len E. Williams -- Chief Executive Officer and President
David, great question as always. You ask good ones there. As we look at it, we're going to look at everything, and we have been looking at everything, and you mentioned some of those. But we're going to look at how we can be more efficient as organization. But we're not going to make it where we have a negative client experience.
Our high touch client experience is very-very important to us and we will make sure that that remains. But with that, we have to make sure that we operate, from a back-office perspective, as effectively and efficiently as we can, so we can afford that front office costs.
So, with that, we've spent a lot of money over the last couple of years in new technology. We mentioned in CNO, the implementation of that, which we continue to do. We've got a couple of other LOS systems we're implementing for our consumer side. Our mortgage operation that you saw, with great growth -- there was some good growth from lower rates, but we also implemented a best-in-class LOS there and the customer experience there has significantly improved.
So, we will continue to actually invest in technology, but we've got to be more efficient overall. And so, we're going to look at every area that we can. We're going to look at maybe flattening the organization. Can we -- where can we make it, where we can be faster, better, cheaper? But we will continue to have those discussions as we move forward every quarter and as things become more definitive and we're ready to talk about those. But as in the prepared remarks, the Federal Reserve is saying, the rates are going to be low for a long time, and we have to respond to that and that's what we'll do.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
I just will add a caveat on there though. A good reason for the increase in the NII for the quarter was the payroll in the mortgage group. And with that higher on a commission base, that higher productivity out of the mortgage group resulted in some higher salary costs as well, and we'll pay that every day.
David Feaster -- Raymond James -- Analyst
That's extremely helpful. Thanks, guys.
Len E. Williams -- Chief Executive Officer and President
Thank you, Dave.
Operator
Our next question will come from Andrew Weiss with Piper Sandler. Please go ahead.
Andrew Weiss -- Piper Sandler -- Analyst
Hi, good morning.
Len E. Williams -- Chief Executive Officer and President
Good morning, Andrew.
Andrew Weiss -- Piper Sandler -- Analyst
Guys, just kind of just following up on your last comment on the mortgage group, pretty strong quarter there. I mean, how do you view that going forward? What's the pipeline in the mortgage business look like going into the third quarter?
Len E. Williams -- Chief Executive Officer and President
Yes. The pipeline looks pretty good. Rates continue to hold down to where the refinance business has perked up again in a pretty big way. But we also actually have a pretty robust new home building market share. We've had a change in leadership over the last year in that mortgage group that has sparked it to new heights. They continue to hire best-in-class people, build processes that are much more advanced than we had in the past.
We've improved the turnaround time on a new deal by 14 days from what it was in the past. So, we're pretty bullish on what's happening in that organization and think regardless of rates or the refinance world, we think there's more opportunity to grow that business. So, we've gone all in with us.
Andrew Weiss -- Piper Sandler -- Analyst
Great. And then just the negative line in the other operating or the other fee income section; was that, I mean, MSR impairment? I'm sorry if you said it earlier and if I missed that.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
The decline in the other income item?
Andrew Weiss -- Piper Sandler -- Analyst
Yes, the negative 41,000.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes. So, we went through a general ledger conversion in the second quarter. And in doing that, we significantly expanded GL, and became more defined in our fee income, etc. And with that, we did have some reclasses and what you see on the other side, actually just simply move to the mortgage banking income. That's where really should have been reported historically and so, it's just a reclass between mortgage banking and other.
Andrew Weiss -- Piper Sandler -- Analyst
Okay. Thanks. You've covered all my other questions. I'll step back.
Len E. Williams -- Chief Executive Officer and President
Thank you, Andrew.
Operator
Our next question will come from John Rodis with Janney. Please go ahead.
John Rodis -- Janney -- Analyst
Good morning, guys.
Len E. Williams -- Chief Executive Officer and President
Good morning, John.
John Rodis -- Janney -- Analyst
Just to follow up on that last question. How much was the reclass to mortgage? And I guess, said another way, what should that other line item sort of be more normal?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Going forward, yes. Let me look here real quick, I can tell you.
John Rodis -- Janney -- Analyst
And I'm just curious, just while we're on fee income, card processing was also up linked quarter and that sort of went against what most other banks were doing. So, was there any reclass there or what drove the interest there?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes, that was a reclass as well, yes.
John Rodis -- Janney -- Analyst
Okay.
Len E. Williams -- Chief Executive Officer and President
Yes. So, you look at the totals, the totals were still up, but we did have some reclasses between those. And just give me one second here.
John Rodis -- Janney -- Analyst
And then, while you're looking at it, I realize all the excess liquidity on the balance sheet, maybe just your thoughts as far as where the securities portfolio goes, going forward? I assume the trend is down. And assuming that, how much down?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes. On the other income line going forward should be about $200,000, going forward on a quarterly basis. With respect to the investment securities portfolio, yes, we would really like to have that decline and to the extent that we start seeing the outflows will continue to let that amortize.
The thing that we did do is, we, all we bought were amortizing products. We wanted to make sure that as we are investing, that we are investing and we're going to get the cash flow back as quickly as we possibly can. So, we didn't invest in any municipal bonds, where we had long-term bullets etc. We want that cash flow to come back, so that we can reinvest it in loans since the market turns. So, yes, we would anticipate that that's going to go down going forward.
John Rodis -- Janney -- Analyst
And can you say what the expected cash flows are on the portfolio by quarter or over the next couple of quarters, roughly?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Again, it depends on what happens from a depository perspective, but we're amortizing or getting cash flows of about $20 million per quarter from the investment securities portfolio, if we don't -- just on the additional securities.
John Rodis -- Janney -- Analyst
$20 million, I'm sorry, Mark. $20 million a quarter or a month?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
$20 million a quarter.
John Rodis -- Janney -- Analyst
A quarter, OK.
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes.
John Rodis -- Janney -- Analyst
Okay and then just to make sure I heard you, on the other fee income line item, you said roughly $200,000, a quarter?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
That's right.
John Rodis -- Janney -- Analyst
Okay. And then just circling back to expenses, so, you said elevated mortgage. Assuming maybe some normal seasonality in mortgage, would it be fair to assume that just directionally the operating expense line item, maybe goes down a little bit, all things equal, from the second quarter level?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes, the mortgage business is set up to adjust and adapt to seasonality quickly.
John Rodis -- Janney -- Analyst
Okay. So, another, that's another way you saying it's a lot of variable cost, I suppose?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
There is a lot of variable cost, exactly.
John Rodis -- Janney -- Analyst
Okay. Okay. And then, you guys, just one more question, just -- I get the the excess liquidity, the margin pressure and so forth. But if we're just looking at net interest income dollars and if you back out the impact of the PPP fees in net interest income, do you think, given all the pressure out there, even though margin goes down, do you think net interest income dollars excluding PPP are close to a bottom or is there still meaningful room on the downside?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
We would say currently monitoring. We get those numbers weekly and they appear to have bottomed.
John Rodis -- Janney -- Analyst
Okay, OK. So, OK, that makes sense. Thank you, guys. Take care.
Len E. Williams -- Chief Executive Officer and President
Thanks so much.
Operator
[Operator Instructions] Our next question will come from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis -- D.A. Davidson -- Analyst
Hi. I'm sorry to beat up the income statement line items. But I just, given that discussion of some of the remapping, notice that occupancy and equipment was down meaningfully and then your data processing was up, was that tied to some of that movement?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes, yes it was. We did have some reclasses between the two. Mostly, in equipment depreciation, that was really IT-related. We also had some telephony that was in occupancy that's really managed and part of the overall data processing costs. So, again as we significantly expanded the general ledger and got more refined in each of our line items, we have the opportunity to make some adjustments to make the numbers more refined as we move forward.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay. So, the DP and occupancy, those expenses, from -- those levels are on a go forward basis, going to be somewhat consistent around those?
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Yes, I mean, I would expect data processing to -- yes, I'm looking at here, hold on. Our occupancy will continue to be at a lower and our data processing will be more elevated going forward, yes.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay. That's all I had, Thanks.
Len E. Williams -- Chief Executive Officer and President
Thanks, Jeff.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Len Williams, President and Chief Executive Officer, for any closing remarks. Please go ahead, sir.
Len E. Williams -- Chief Executive Officer and President
Great. Thank you, Chuck. And thank you again all for joining us. We appreciate the input, the investor support. And if you have individual questions or would like to follow-up with either Mark or myself, feel free to give us a call here.
Again, stay safe out there. We care for all of our stakeholders and wish you the best and look forward to this conversation again next quarter. Thank you.
Operator
[Operator Closing Remarks]
Duration: 57 minutes
Call participants:
Mark K. Olson -- Executive Vice President and Chief Financial Officer
Len E. Williams -- Chief Executive Officer and President
Jeff Rulis -- D.A. Davidson -- Analyst
David Feaster -- Raymond James -- Analyst
Andrew Weiss -- Piper Sandler -- Analyst
John Rodis -- Janney -- Analyst
