Q1 2020 Earnings Call
Good morning.
Welcome to the region Financial Corporation quarterly earnings call.
My name is Shelby and I'll be your operator for today's call.
I'd like to remind everyone that all participants phone lines have been placed on listen only.
At the end of the call there will be a question and answer session.
I wish you ask your question. Please press star one on your telephone keypad.
I'll turn the call over to Dana No went to begin.
Thank you Shelby welcome to reach a first quarter 2020, <unk> earnings Conference call. John trial will provide some high level commentary and David Turner, well take each or an overview of the corner earnings related documents, including forward looking statement are available I don't think Investor Relations section of website. Thanks disclosures kinda.
Presentation materials prepared comments as well achieving exactly today's call.
Now I'll turn it over time.
Thank you all for joining our call today.
I'll begin the call today by thanking our 19000 associates <unk>, despite tremendous disruption their personal and professional while.
Continue to come together as a team to support each other our customers and communities through the cope with 19 and then.
The last few weeks have certainly been challenging.
Our top priority, just health and wellbeing of our associates and customers in always doing our part to reduce the spread over 19, we were one of the first banks to limit in person branch activity tour and drive throughs and convert in office services to appoint normally.
We also reopened previously closed locations to better serve our customers. Fortunately do our footprint. The majority of our branches have dropped through capabilities and I'm proud that we've been able to keep 97% of our branches open during this time.
Additionally, almost half of our associates are now working remotely.
Our teams remain committed to delivering financial advice and guidance our customers have come to expect from the regions bankers. These changes will help us do show and away that minimizes the associated health risks.
[noise], we're offering special financial assistance to support our customers, who are experiencing financial hardships related to the pandemic.
Through Tuesday.
We didn't processed approximately 17000 consumer payment deferral requests.
Putting approximately 4000 related to residential mortgages.
In addition, we processed request for approximately 12000 mortgage loans serviced for others from a business customer perspective.
Cost us approximately 4000 more.
Also as a certified SBK lender, we've been working very hard to help customers through the new Paycheck protection program.
Proud to say that through yesterday.
Facilitated assistance to our business customers totaling $2.8 billion.
We recognize the importance to our customers and their employees have access to funds through this program.
In the span of eight days, we established a cross functional team to create an end to end digital applications.
Bill automation around every feasible point in the process reassign several hundred staff from other departments and train them to except in process loan applications for small business owners, we're hopeful Congress will appropriate additional funds as significant need remains.
Importantly, the bank also contained to lend to customers outside of the stimulus programs during the quarter, new and renewed loan originations to business customers totaled just over $10 billion.
Further through the bank in our foundation, we've committed approximately $5 million toward consumer and small business recovery efforts.
We're also donating advertising around.
Originally purchased for promoting bank products and services.
Banks across our footprint.
These advertisements encouraged viewers to financially support food banks as they strive to help those in need.
As we navigate through this crisis, our teams will continue to come together to identify innovative and meaningful ways to better connect with us and serve our customers.
For sometime now we have communicated her goal generating consistent sustainable long term performance through every economic cycle all of our plans are built around this concept.
Because of our focus and the deliberate steps we've taken we enter these challenging times from position of strength.
Underpinned by robust capital and liquidity.
This will allow us to better support our customers as we work together to get through this unprecedented.
In our history.
We will incur some stress that's just the result of the economy, wherein as we combat this public health crisis.
Like the crisis, the financial services industry experienced a decade again, we're providing solutions to meet the needs of our customers. During this extraordinary Tom.
We have spent decades strengthening our capital position and risk management framework.
Through an intense focus on risk adjusted returns clients will activity and robust concentration risk management.
We have built more balanced and diverse portfolio.
Our strong capital and liquidity positions combined with extensive de risking efforts.
It's confidence that we cannot whether the pressure from the abrupt economic slowdown.
In addition, two years ago, we initiated a significant hedging strategy to reduce net interest income variability and protect us from the impacts of a lower interest rate environment.
The benefit from our hedging strategy provides us with a substantial competitive advantage in the current low rate environment.
All of this allows us to move forward confidently and remain focused on things, we can control providing support to our associates and communities.
Offering first pass advice guidance in education to our customers.
Although we're at a time of significant economic stress, it's too soon to estimate is duration or severity.
We are encouraged by the actions taken by government and bank regulators to provide relief to individuals and small businesses. While also supporting the smooth functioning of the financial markets.
In light of this uncertainty, we're sending our financial targets for this year, along with our three year targets previously announced in 2019.
We remain committed to our strategic plan, but acknowledged the need to remain flexible during this time of unprecedented and historic uncertainty.
We will provide updates with respect to our financial targets wants conditions stabilize and we have better visibility.
We adopted a concept of shared values several years ago.
Whereby what we do as the business must create long term value for customers communities associates and shareholders.
Frankly, I'm convinced that it has never been more important as we work through the current health crisis, together with our customers and committed.
Thank you for your time attention. This morning with that I'll now turn it over to Dave.
Thank you John let's start with our quarterly highlights first quarter net income totaled $139 million, resulting in diluted earnings per share a 14 cents.
Items impacting our results. This quarter included a significant cecil provision in excess of net charge offs and a large increase to our PVA associated with customer derivatives as interest rates move down substantially during the quarter and credit spreads widen.
Partially offsetting the negative adjustments our MSR net of hedges perform favorably during the quarter in total the adjustment of an additional selected items highlighted on slide reduced our pre tax results by approximately $280 million.
Let's take a look at our results starting with the balance sheet.
Adjusted average loans increased 1%, while adjusted ending loans increased 7% loan growth was driven primarily by elevated commercial drawl activity late in the quarter.
Utilization rates increased from 45% at the end of the year to 54% at the end of March as a point of reference our utilization rate is typically around 45% and during the global financial crisis peaked around 51%.
In the last week of the quarter the pace of increased slowed and we expect utilization ratio remained relatively stable for the time being.
The drops we experienced have been primarily defensive or cautionary in nature, and our broad based geographically and across all industries.
Approximately 60% have come from investment grade companies. So we anticipate a portion of these customers will eventually see permanent financing through the capital markets. However, it is too early to try and predict timing of any refinancing.
As a result predicting loan growth this challenging.
However, I do want to remind you that on April 1st we closed out purchase Cynthia capital, which included approximately $2 billion in loans to small businesses.
We look forward to leveraging the technology speed and convenience at a symposium is known for in combination with our broad spectrum, a banking solutions to meet the needs of small businesses. During this difficult time.
Let's turn to deposits.
Average deposits increased 1%, while ending deposits increased 3% as many of our corporate customers drawing other lines are keeping that excess cash in their deposit accounts. We expect these balances will come down over time as customer secure financing in the capital markets or customers get more clarity regarding.
Economic impact of the health crisis.
We have experienced in previous periods of stress consumer deposits increased as customers seek the safety and soundness of a regulated and insured financial institution.
We expect total deposits will continue to increase both at regions and across industry.
On an ending basis corporate segment deposits increased 8% well think consumer segment deposits each increased 3%.
These increases were partially offset by decrease in wholesale broker deposits within the other segments.
Shifting to net interest income and margin, which is a strong story four regions.
Net interest income increased 1% linked quarter and net interest margin increased five basis points to 3.44%.
As expected net interest income.
Under an extremely volatile market interest rate backdrop. So.
Specifically lower loan yields were offset by lower funding costs and the benefit afford starting hedges, becoming active in the quarter.
Now that most of our forward starting hedges have begun and given our ability to move deposit costs lower our balance sheet is largely insulated from movement in short term rates.
Loan hedges added $10 million to net interest income and four basis points to the margin in the quarter.
This will increase going forward as the benefits are realized for the entirety of future quarters.
Further all of our hedges have five year tenors and at quarter end market valuation of $1.7 billion another relative differentiator.
Of note net interest income was supported in March as LIBOR rates remained elevated at a time when other short term REIT indices, which are large driver of deposit costs move close to zero.
The benefit of elevated live or is projected to normalize by mid year.
Additionally, higher average loan balances increased net interest income, but reduced net interest margin, while one fewer day in the quarter reduced net interest income, but increased net interest margin.
Total deposit costs declined six basis points compared to the prior quarter to 35 basis points and interest bearing deposit costs declined nine basis points to 55 basis points.
Regions continues to deliver industry, leading performance in this space exhibiting the strength of our deposit franchise over the coming quarters, we expect deposit costs to migrate back down into the 10 to 14 basis point range.
Looking ahead to the second quarter, let me start by saying these expectations exclude the potential impact from the Feds Paycheck protection program, but are too uncertain to include in the forecast at this time, we expect second quarter net interest income and net interest margin to benefit from the certainty on capital.
All acquisition.
Net interest margin as anticipated at roughly 3.4%.
Excluding a cynthia.
A larger average balance sheet and near term is anticipated to given increased loan and liquidity needs from our customers. While this will benefit net interest income it will slightly reduce net interest margin.
Let's take a look and see revenue and expenses.
Almost all non interest revenue categories were impacted by market volatility and economic uncertainty, resulting in a 14% decrease compared to the prior quarter.
After experiencing a record quarter in the fourth quarter capital markets revenue decreased to $9 million, excluding unfavorable CV a capital markets income totaled $43 million.
We generated record customer derivatives income in connection with lower interest rates, but experienced decreases across all other categories.
Looking forward M&A transactions in particular are likely to remain on hold until market stabilize and economic outlook becomes more certain.
Mortgage income increased 39% over the fourth quarter, driven primarily by elevated sales and record application volumes associated with the favorable rate environment.
As well as positive net hedge performance on mortgage servicing rights.
Lower interest rates sparked a significant increase in year over year production in fact, our first quarter total application volume was more than double our historical first quarter average.
Wealth management revenue remained stable despite market volatility.
If market conditions persist. However, we could experienced a decline next quarter in line with lower asset values.
Service charge revenue and card and ATM fees decreased five and 6% respectively.
During the last two weeks of the quarter, we observed a reduction of approximately 30% and consumer spending activity.
Looking forward if current spend levels persist we estimate total consumer non interest income will be negatively impacted by approximately $20 million to $25 million per month from pre March levels, partially offsetting these headwinds however, our positive revisions to.
Anticipated mortgage income, resulting from lower interest rates mortgage production increased 60% compared to the first quarter of the prior year.
Pipelines are strong.
Full year 2020 production is expected to increase by approximately 40% versus the prior year.
Let's move on to noninterest expense.
Adjusted noninterest expenses remained well controlled increasing 5% compared to the prior quarter, driven primarily by lower salaries and benefits professional fees and marketing expenses.
Salaries and benefits decreased 4% driven by lower production based incentives and negative market value adjustments on employee benefit assets, which are offset by lower non interest income.
Professional fees decreased 36% driven primarily by elevated legal consulting and professional fees in the fourth quarter.
The company's first quarter adjusted efficiency ratio was 57.9% and the effective tax rate was 20.6%.
We continue to benefit from continuous improvement processes as we have completed only 40% of our current list of identified initiatives. For example, since the first quarter of last year, we have reduced total corporate space by almost 900000 square feet or 7%.
While it's still early the pandemic has already having an impact on how we interact and communicate with customers and each other.
We've already initiated changes and in many instances are discovering that not all change is bad for example, we have wealth teams, calling on and winning business using webex and video conferencing and effective and dynamic ways, whether it's through new ways to interact with customers or increased use of hotel.
We believe there are additional opportunities where corporate space is concerned.
So we're going to keep our minds open as we navigate through this disruption.
So let's shift asset quality.
We adopted the seasonal accounting standard as of January one 2020.
As permitted by the Federal Reserve, we will defer the impact from the seasonal accounting standard on common equity tier one capital each quarter until the end of 2021, after which it will be phased in at 25% per year.
As of March 30, Onest. This amount is approximately $440 million and represents all of our day one after tax adjustment recorded directly as a reduction of shareholders equity on January the first.
Well as 25% of our first quarter provision in excess of net charge offs.
Related impact to our first quarter common equity tier one ratio is approximately 40 basis points.
Under Cecil credit loss provision expense for the quarter totaled $373 million.
This amount includes providing for $123 million in net charge offs as well as $250 million of additional provision, reflecting adverse economic conditions and significant uncertainty within the economic forecast, including uncertainty surrounding the benefits of government stimulus.
Already enacted and potential additional stimulus all occurring since the initial assessment at adoption on January one 2020.
The additional provision was further impacted by higher specific reserves associated with downgrades, primarily in the energy and restaurant portfolios.
The resulting allowance for credit losses is 1.89% of total loans and 261% of total non accrual loans.
Charge offs were 59 basis points this quarter and included the impact from our most recent shared national credit exam.
Nonperforming loans increased to $131 million, primarily driven by energy credits.
Total delinquencies and troubled debt restructured loans decreased 4% and 9% respectively, while business services criticized loans increased 12%.
Recently regulatory agencies issued guidance, stating short term modifications to borrowers experiencing financial distress as a result of economic impacts created by Cobot 19 will not be classified as a troubled debt restructured loan as long as their payments were current as of December 3rd.
Onest, we do not expect a material increase in tdrs.
In this environment, we are monitoring all of our portfolios closely.
However, I want to take a couple of minutes to highlight a few portfolio is currently experiencing stress.
In most instances. These are the same portfolios we have been discussing for sometime now.
Energy as a portfolio, we continue to monitor direct energy balances totaled $2.4 billion or 2.7% of loans outstanding at quarter end.
Since 2014, we have worked diligently to remix the portfolio and reduce our exposure to the oilfield services sector, which is where most of our losses have occurred.
During the quarter, we conducted an intensive review of all of our energy clients, including NPS midstream and oilfield services, which resulted in a handful of downgrades in both BNP.
And midstream space.
We have been in the energy business for over 50 years and have always maintained a heavy focus on client selectivity.
Spring borrowing base Redeterminations are in process and we are continually reassessing our price deck.
At current oil price levels, we do expect additional stress, but overall I believe the portfolio will perform at least as well as it did and the 2014 crisis, perhaps even better given the significant re mixing in the portfolio.
Within the hospitality portfolio, which includes restaurant and hotels, we're closely monitoring casual dining and quick serve.
Total restaurant balances were $1.9 billion at quarter end.
Casual dining restaurants with balances of approximately $550 million are continuing to experience stress due to higher labor costs oversupply digital transformation challenges and general pressure on margins.
Expect additional pressure in this space as shelter in place orders continue.
In fact, we're already receiving requests for mitigation and payment deferrals.
A quick serve which represents 63% of our restaurant portfolio seems to be holding up well.
Our exposure to hotels is primarily limited to a handful of large well structured reads, which typically have lower leverage and strong cash positions.
Depending on the ultimate duration of the pandemic, we expect most whether the downturn. However, we have already experienced several requests for relief.
We're also closely watching the transportation retail and agriculture portfolios as they also have the potential to be adversely impacted by the current business environment.
I previously mentioned the approximately $2 billion, a small business loans, we acquired as part of the Cynthia capital acquisition on April 1st.
These balances will be reported with our second quarter results, but let me briefly remind everyone that under Cecil you will see a sizable adjustment currently estimated to be between 101 hundred $20 million, establishing our initial allowance for these loans.
Which will run through provision expense.
This expense will be offset by accretion of the credit discount through interest income over the life of the purchase loan portfolio.
Recent annual loss rates on this book of business have been in approximately 2.5%.
Because they focus on business, the central equipment and high FICO Guarantors, we believe the business will be resilient through periods of stress recall the average yield on these loans are approximately 10% and they do include certain prepayment protection.
So while losses will increase in the near term due to the economic environment. We continue to feel very good about the acquisition and are looking forward to working together to better support our small business customers.
The extent to which are all of our customers are ultimately impacted won't be a factor of the duration and severity of an economic impact as well as the effectiveness of the various government programs in place to support individuals and businesses.
There is a lot that is still on.
However, what we do note is that we enter this environment from a position of strength and are committed to assisting our customers and communities.
As John mentioned, we know we will experience some stress however, our strong capital and liquidity positions accompanied by a decade long journey to enhance our credit risk management framework, and our disciplined and dynamic approach to managing concentration risk have made us better managers of risk.
And have positioned us well to whether an economic downturn.
So, let's take a look at capital and liquidity.
During periods of stress liquidity management as critical Mike the rest of the industry, we experienced a spike in credit line draws late in the quarter.
We are primarily from companies being prudent and wanting to ensure they had adequate cash on hand, we did the same thing through additional advances at the federal home loan bank, which we used to increase our cash at the federal reserve.
Liquidity at regions really starts with our granular and stable deposit base, which provides superior liquidity value.
Regions has traditionally maintain one of the lowest loan deposit ratios in our peer group and at quarter end. This ratio stood at 88% and includes the impact of increase line of credit draws observed by customers late quarter.
Further our risk management and stress testing framework ensure our liquidity positions are prepared to meet customer needs and turbulent times such as these.
Beyond deposits regions also has ample sources of additional liquidity, which can be readily used to meet customer needs. Our primary liquidity sources include cash balances held at the federal reserve.
Borrowing capacity at the federal home loan bank and unencumbered highly liquid securities. These readily available sources totaled approximately $28 billion at quarter end and when combined with another $15 billion availability at the federal reserve discount window total available liquidity.
Stands at $43 billion.
FHLB advances remain the primary too we used to fulfill short term funding needs. We have seen great interest in the SP, a paycheck protection program loans, and we are endeavoring to meet the needs of customers.
While we will use liquidity resources on hand to meet those near term needs. We're also looking at the federal reserves, New Paycheck protection program lending facility as an alternative funding source.
With respect to parent company cash we also maintain a conservative position by policy parent company cash must always exceed 18 months worth of debt service and dividend payments and current cash forecast remain above our management target of 24 months.
Turning to capital.
Regions continues to maintain strong capital levels, our common equity tier one ratio is estimated at 9.4%.
Our quantitative target for this ratio is derived mathematically and as we have previously discussed is 9%.
We believe this is the appropriate level of capital to withstand the severely adverse scenario and still remain above post stress limits.
We've also maintained approximately 50 basis points as a strategic management buffer, which could be deployed opportunistically.
We used a portion of the management buffer on this NTM transaction, which closed April 1st as we go forward future economic performance and its impact on earnings will be the primary driver of near term capital levels.
In addition to the negative implications due to cope with 19. It is also important to keep in mind that we have never seen the volume at which fiscal stimulus and government lending programs have been implemented.
The ability of these programs to effectively work to help support the businesses and consumers within the economy will dramatically impact credit performance for us and the industry.
During this period of uncertainty we will continue to work with our customers to help them navigate these uncertain times. Additionally, we will lean into our early warning and key performance indicators that we have built over the years, which give us a granular view into the performance of our portfolios.
Where we see indications that a customer will continue to face stress once the short term relief once over we will move those credits into more adversely rated categories and well continue to review their performance.
As you know we have a robust capital planning infrastructure and perform a range of stresses on credit performance within our portfolio.
Whereas this environment as unlike anything we've ever seen our stress testing gives us confidence that we have the capital and to withstand the stress.
During the quarter the company declared $149 million in common dividends.
We had no share repurchases during the quarter and have announced plans to suspend share repurchases through the second quarter.
Because we established our dividend to withstand adverse conditions. We currently have no plans to reduce or eliminate our dividend.
However, we will continue to exercise prudent capital management and monitor the business environment.
So in summary, our robust capital and liquidity planning processes, which are stressed internally as well as externally by our regulators are designed to ensure resilience and sustainability.
This gives us confidence that we can continue to meet the needs of our customers and communities. During this exceptional period of economic uncertainty.
And John mentioned, considering the unprecedented environment. We are facing we are we're sending our financial targets for this year as well as our three year targets previously announced in 2019.
We have a good strategic plan and are committed to its continued execution.
When economic outlook becomes more certain we will provide you with updated targets in the meantime, we're focusing our attention on helping our associates customers and communities navigate through this difficult landscape, which in turn benefits you our shareholders. We believe strongly in the concept.
The shared value in order for us to thrive the communities, we serve also need to thrive.
Rest assured during this extraordinary time region stands ready to help and support all of our stakeholders.
With that we're happy to take your questions in light of the current environment, We do asset each of you ask only one question to allow for more participants.
We'll now open the line for your questions.
Thank you the floor is now open for questions.
Did you have a question. Please press the Starkey followed by the number one on your telephone keypad.
At any point. Your question is answered you may remove yourself from the Q by pressing the pound.
Lots for just a moment compile the M&A roster.
Your first question comes from Betsy Graseck of Morgan Stanley.
Hi, Good morning, Hey, good morning.
A couple of so my one question is regarding.
The decision to pull the medium term guidance I totally understand the 2020, but when I see that you're playing the medium term guidance I'm wondering is is that because.
The concern you have around the depth of how tough 2020 could end up being or is there some other rationale for that.
This is David I, just think given the uncertainty that's in the.
And the environment right now is prudent for us to just remove at all there will be at appropriate time for us too.
Two.
Put back and give you our target long term targets I mean, you've known.
After a couple investor days, where we strive to get.
But it just didn't seem appropriate for us to have those at this time.
Your next question comes from Ken is then of Jefferies.
Good morning, Ken.
Thanks, Good morning, guys. So I just.
A question on just all the moving parts around your Eni forecasts I understanding that there is the lower PPP, there's the us NTM.
[music].
I guess with the persistence of your hedges.
Do you still believe you've got that general sustainability.
Past two Q.
In terms of the ability to support dollars of Eni as you look past. These ads as you get from first to second how would you help us understand that.
So.
Going into the second quarter, we said, we'd pickup eni, resulting from our Cynthia am acquisition.
Clearly the hedges you can see our we have chart in there as to what are our hedges continue to.
More of them kick in latter part of this quarter and into the second quarter.
We only had $10 million a benefit in the first quarter from our hedges.
You can see we also have $1.7 billion, a fair value which comes in over approximately five year. So if we just did some straight lining.
You would see an approximate 75 million dollar.
Benefit in each of the quarters and that is not straight line, but that just gives you a ballpark.
So with that we strongly believe in the support we're going to get from our hedges, we think thats a big differentiator for us.
Clearly the margin the margin will shift down a bit and then kind of stabilize there for the remainder of the year. After this NTM impact and you get the hedges rolling in the growth in Eni really will be driven by the balance sheet, what happens from that standpoint.
Okay got it thanks, a lot David I'll leave it there given your question one question request.
Thank you.
Your next question comes from Brian ran about autonomous.
Okay.
Oh hi.
Maybe a follow up on that.
It's interesting I mean, all the regional thing generally opted out of including is hearing capital has.
We've seen as a form of regulatory living.
But now, especially for banks like you, where you've got the outside in.
Understates here, how capital ratios in a way so I wonder if you just remind us.
With the capital ratios looks like if the unrealized gains were included and.
Is there any scenario, where the hedges are so valuable.
I would actually monetize them.
Invest in some way then acquisition or buyback or is that just too too far out there.
Well so.
We made their decision on to exclude OCI was a choice we had.
You know had we not made that choice. We had a had you just with the hedges that we have another billion seven thats pretax.
And our.
In capital, but once you make the decision yet to live by.
And that's okay.
So.
To the extent that we see.
Opportunities to terminate those swaps, we would take that gain it would be deferred and amortized in income therefore capital over the remaining life of the swaps, which as I've mentioned earlier, our five year tenders. So.
That would only be any case, where you saw the probability of rates increasing.
In the we'd get ahead of that that does not seem to be the case at this point in time.
But you're you're asking the right question there will come a point in time, where we do that.
Remember the hedges are to protect.
Net income from being integrated as result of the low interest rate environment is not an incremental is trying to protect what we do happen. So while we're enjoying that protection, there's no need for us to try and in front end gains and use that for capital actions is to this is to sustain our pro.
File and our consistency of generating PPNR.
Thank you.
Your next question comes from Matt O'connor with Deutsche Bank.
Morning, Matt.
Morning.
About something expense levers that you can pull.
Los Angeles write down and there's obviously a lot of Africa front employees, but.
You've had kind of continuous improvement on expenses for several years and talk about some of things that you can look at.
The environment here. Thanks.
Yes, Matt. So we've continued to be focused on expense management I think we've done a really good job. There. If you look at our top category salaries and benefits occupancy and furniture fixtures and equipment.
You know the places we've been able to reduce expenses have been attached to our branches. We've consolidated a whole lot more branches and we've opened up we continued to look at that and continue to have we have a whole group of people focused on our read retail network strategy.
To make sure that we're optimizing that network from a revenue and growth generation as well as cost optimization. So you should expect us to continue there. We have continued to reduce square footage were down some 300.
Yes.
2000 square feet in the quarter will be down another six to 700 for the full year.
And we're learning some things working from home and we've really had missed a beat in terms of efficiency and effectiveness of.
I had mentioned in the prepared comments kind of Hoteling and maybe maybe there's an opportunity for us to continue to ramp that up even more so.
Our vendor spend we continue to have programs in place too.
To control and reduce the vendor costs in particular on the demand management side of things.
So I think we have 73 initiatives that we've identified and continuous improvement.
I had mentioned we are through 40% of those actually were through about 32 of them.
We'll complete another 14 this year. So John has asked us to figure out how we get better at whatever we do wherever you are the bank how do you do better to borrow than you did today and so I think you should continue to see us look for ways to become more efficient and effective overtime. So.
We have some ways to continue to work on the expense side.
I would just add Matt we have.
We've seen a lot of change in improvement over the last four or five weeks as we've accelerated the need to react to the way we serve customers and so I think it bodes well for continued process improvement with process improvement grain and greater efficiency, we're absolutely committed to effectively managing.
Expenses, all the time, but particularly during this this period of some great uncertainty.
Thank you.
Your next question is from Jennifer Demba of Suntrust.
Morning, Jennifer.
Good morning.
You mentioned energy and restaurant lending the particularly stressed.
What kind of lost content.
These two buckets.
Good morning, a range of possibilities of economic recovery.
Are you want to take that question.
Sure Good morning, Jennifer.
As we look at Entergy back with Apple sample.
Right now, but there is a key demand location. However on the other forms will also have okay.
Came out and reduce the supply by 9.7 million barrel and then combine that with the opening of the economy, which were hoping will help.
Should happen soon and that's going to help with demand and with some stabilization prices.
I'd also point to with the books that we now have the fact that majority of it is now our midstream primarily to senior secured position no second lien position cetera that we're feeling pretty good about that so we actually stressed the jennifer down to $24 barrel.
Also during a contango market. So we do anticipate higher future prices as well, but we also know the food storage business.
So we've got a rise on energy, we're managing again on a day to day basis.
More energy losses.
Probably but.
Moreover, our CMP book, we've only taken $5 million losses.
2012.
The one that we have this quarter, we saw the loss number.
Roughly 21 million dollar loss.
Yes, good customer to that leasing at April say Master limited partnership so thats really improve for say they shared national credit as well.
Let me do see some of our nonperforming loans, so I would increase criticized classified within food.
In terms of storage off well be little building basins and still be well under control.
Let me cost discipline on less loss no if that is Watson said.
Merely for restaurants, it's going to be.
Some of the AD.
Serve and.
As will the said right.
What we know is our quick service down 20% to 30% fast casual this down 30% to 40% right now.
This is the Santa Barbara outstanding as are our well secured.
And we note that the full service restaurants, right now are experiencing the greatest impact.
So.
Again, saying that we hope is going to be small losses.
Yes, we feel that pretty well control viewpoint.
Thanks, Bob.
Your next question comes from Peter Winter of Wedbush.
Good morning, good morning, good morning.
Just talked about some of your economic assumptions, what you're assuming and I'm. Just curious if you cut it off one on March 31st because.
We've just seen the recent economic forecasts have gotten a little bit worse.
Yes, so Peter.
Given the significant economic volatility associated with Cobot 19.
We actually ran several economic scenarios to determine our our allowance for credit losses.
We also use third party.
Comparisons in particular, Moody's March 27 comparison.
Our models really were built for this type of change. So we knew we were going to have to have some some overlays on top of that to get.
So what we thought was an appropriate allowance for credit losses Theres been a lot of discussion in terms of what we think about.
The recovery what shape it is and.
Really we think a better question would be not the shape of the curve, but at what pace does it actually recover to pre recession levels and we'll call pre recession be in the fourth quarter 2019, So we have pretty severe numbers of GDP.
Approaching that 20% in the second quarter unemployment.
Approaching the 10% and while it does we do expect it to recover we expect that it's going to be very slow.
You go back to the.
Financial crisis. It took about 14 quarters before we got back to pre recession.
GDP.
Our expectation is it's going to be somewhere between 10, and 12 quarters before we get back there so call. It the latter part of 2022. So we do not think this snaps back we think its prolong we will get better from the second quarter. All right. So you start to come up but you just not going to come up at the pace that you just.
Went down therefore, it can't be it's going to be although it's as simple as but call. It the checkmark more so and the slope over that we'll be.
The recovery again getting back to GDP in the fourth quarter at 22.
Thank you.
Your next question is from Erika Najarian of Bank of America.
Good morning America Hi.
Good morning.
My question is where barb quickly.
The last time regions went through the staff the nine quarter loss rate replete mine.
Understood nearly adverse.
Thank you Ryan has six and a half.
I can see the historical bias in the theory bucket, but im wondering bar if you could.
Give us a sense of what the difference is particularly in where they sneaker cnine loss rate would be in such a scenario versus yours, that's a pretty wide gap there and then the most impacted industries that you outlined for US is a cumulative loss rate over two years of around 6% to 7% leg.
We saw that CST bear or.
Thank you.
Strong enough underwriting that would preclude that scenario from unfolding.
Well, we always know firstly Jennifer that.
We've got to capital since last was fairly.
So I'll start with that we also know.
Really comfortable on this.
That is back that.
The rating has changed our risk management as we always wrong.
At the entire comfortable is focused on overall with management. So we are performed better than in prior periods.
We look at what are.
Losses were I'll, just as 2018, maybe as a bellwether somebody said news apps and one for analysis.
And at the time full said the.
That.
Turning off the I'm sorry, my allowance is one point.
665 billion and the 20 can be tax losses at the time with 3.1 billion, so thats roughly 55%.
Adverse environment.
I think that's pretty good I think it's got a range somewhere between the high fortys and somewhere into the 50.
So again generally ceilings.
Comfortable with those numbers.
To answer your question.
Yeah, I guess we've.
Just to clarify what you think its primary difference is Arne comes in with the said Steve in your portfolio.
In terms of the worst loss experience.
I'll, just trying to figure out the upper bound of cumulative losses.
It was most impacted that Gary that you outlined in your presentation.
Hi, Thanks, So just the difference between what we look forward looks as well, even though we take history.
Let's now.
The fed models are much more heavily biased toward history.
Just the reason I started with we will it change possible, we're not going back to 2910 11, those areas well serious but both where our highest loss history.
Currently still in the model set model as you know they don't disclose hobby.
Hi, This your model. So we have to make some assumptions that we know that there's still a fairly happy with.
Well, if we have publicly lots of awaiting on lot, especially given all of our performance. Since then has been much better.
Yes, Eric on just to add.
John We've spent a lot of time a thanks, you know focused on cost slow activity on risk adjusted returns on balance and diversity on de risking if you look across our portfolios. We don't have any meaningful concentrations in my view anyway in any particular asset classes.
We.
Have a rigorous capital planning and stress testing process.
We are applying stresses against our portfolio and making observations about it based upon what we know today the provision and the reserves that were currently provision we experienced the reserves were currently holding reflect our expectation of losses, given what we know.
If.
This the economic environment that exist currently persist than it is very possible that we could see some additional provisioning, but we do believe our loss experience will be much better as to why our AR.
Own projections are different from the fed we're always trying to figure that out and we still have I think works due to better understand we've been advocating the fed is responding to giving us more transparency into their assumptions and their work because we think that will be helpful.
Theres a real difference between what they believe and what we believe we need to understand what that is so that we can react to it in and so just purely from a standpoint of regulatory relationships. It is something that we continue to advocate for.
Thank you next question.
Your next question is from solo Martinez Libya.
More and so big that hey, good morning.
I just have very specific question on a sense.
So you you.
You're taking your Cecil true up on on that loan.
I'm sorry on the loan book, what was the credit Mark on that and.
By extension, how much of an incremental purchase accounting accretion benefit are you going to get on that.
Yes so.
Our day, one we are still working through that we've given you a range.
Of this adjustment.
And 100, the $120 million range.
That will be.
Utilized our set up as a to be amortized to margin over the life of loan.
And we'll up.
That's our that's our best estimate for that adjustment at this time.
Okay and then it has been if it just again just kind of frame it up as to where that number comes from so losses in that portfolio of in about 2.5% and the duration of that book is under three call. It two and a half years and so we will have something in the.
We'll have something to an two times that.
To 2.5 times that number.
That will be recorded in the allowance where they offset.
And then becoming part of the purchase accounting accretion over time.
Okay.
We're getting into believing it county, but my understanding is there is essentially a double hit.
Brian. This is you got to it but you so you'll have a similar size credit Mark and then use over the two two and half years. You would you would amortize you'd have that come back to you is purchase accounting accretion and theoretically that should also to the bottom line.
That's correct.
Got it thanks.
Thank you.
Your next question is from John inquiry of Evercore ISI.
Good morning, John.
Good morning.
A question Rick on the credit side the.
Based upon that we got new Moody's data that come out after the quarter close.
Does that points to a likelihood of.
An additional reserve build in the second quarter and then separately.
Could you, let us give a little bit detail what type of loan loss reserve you have again.
With those higher risk portfolios that you mentioned.
And on those slides in the back of the deck. Thanks.
Yes so.
From a second quarter standpoint, we did the best we could coming up with we believed to be an appropriate Cecil provision for the life of loan at March 30, Onest, taking then all available evidence.
Clearly as John just mentioned if.
If things persist at this level.
And the stimulus doesn't work or doesn't work to the degree we saying.
There is a risk that we provide over charge offs in subsequent quarters.
The question is we just need to wait and see what it looks like at the end of June we can't everyday is a new day. This is a very volatile environment. So.
You know things continued to trend worse at this point in time.
But we also have 5.1 trillion dollars the stimulus going into the system.
Which compares to about 2.1 trillion in the last crisis and I would remind thereby that 2.1 came over time. This 5.1 is coming pretty quickly and another government is continuing to look at additional ways to provide stimulus. So what does it all main it's just hard to estimate so.
We can't conclude right now that we would have an adjustment over charge offs, but that's reasonably possible given if things trend like this that's that's a likely event.
What was the second part of year.
Question was there was.
Just to the size of the reserve do you have again some of the higher risk portfolios that you flagged including leverage lending.
Yeah, I don't have I don't have that granularity.
In front of me on on those particular portfolios, yet we're going to have some incremental disclosure.
And our in our 10-Q.
The major components, so business services consumer them within that.
The breakout for.
For mortgage credit card.
Indirect auto and so forth, but I don't have that John on.
At that level, we did that.
Yes, we are just break down Kumar.
Business versus consumer, we're holding 150 basis points reserves against the business portfolio 260 basis points against consumer.
Yes, you back to the one night.
Got it thank you.
Your next question is from Dave Rochester at this point.
Morning, Hey, good morning, guys. Appreciate all the color on the energy in the restaurant books, just maybe dig in a little bit deeper was just wondering how far along you are on that borrowing base redetermination process at this point and if you have a sense for where the the new deck is how much lines of contracted for those customers and then just on the restaurant book if you've been.
Able to do for review of that book as well as you have a sense for how many customers may no longer be operating at this point just how you are your project.
Should be for that if you assume some of those guys come back into business. Thanks.
If you will respond to that question.
For the.
We are roughly.
On a quarter of the way through the borrowing base redetermination.
So far we've seen up of borrowing base will be also it is down about 12.5%.
So we note that this space and then back there.
This leads to the rest of our book and of course stuff will next month month, and a half isn't always give more color at that point.
On the.
Yes.
We've also looked at each client individually because there aren't that many client.
And so we are talking to them on regular basis Daily weekly monthly right now.
We have a hassle on that we do see some paulson discussions.
Well service in particular, so quick service is a lot better full service portfolio, which is not the most impact is really because.
Restaurants closed so until the economy opens up we're going to continue that this impressive there.
Just wanted to some losses.
Albeit we believe there very manageable unsustainable.
So what portion of that book would be closed right now and then do you just assume they come back later on in your reserving process.
I don't have the exact numbers that are closed at this minute.
I guess my book, we have 3600 customers in total.
And that it would be somewhere a portion of that obviously.
And in terms of CLO, yes, it's hard to Catholic health is individual.
Soft in terms of someone who's got multiple units and they've only close one or two et cetera that becomes a little bit the tricky.
The answer that question.
But yes, there are a handful probably in that.
10 to 20 right now.
Oh, the thing I would add just sort of point you to our slot.
Number two on page 23, I think that Barb says the.
The bulk of the casual dining portfolio represented by about 34 customers is just over a half a million have.
The dollars in exposure.
21% of that portfolio is currently criticized and that reflects our view of of the risk in that portfolio today based upon what we've got.
Alright, great. Thanks, guys.
Your next question is from Stephen Scouten of Piper Sandler.
Morning, Steve Hey, guys good morning.
Hey wanted to dig down a little deeper maybe into some of the impacts from the government.
Program I know, it's kind of hard.
And regulatory relief and maybe specifically on the payment deferrals. If you have a percentage amount of your loans that are in deferral currently and how you think those pan out maybe 90 180 days down the line if those do become TD us down the line and then with the main street lending program in particular, how might that impact your own.
Syndicated loan book and those People's ability to kind of borrow additional funds to pay TV.
Maybe I'll work backwards I think there's a lot of interest into mainstream lending program. We have a team working on better understanding the guidelines and how it will apply adult no that we have ER.
The real good feel yet or how many customers will ultimately be instead, and how that might affect our customer base clearly one of a number of.
Programs that are that the government and or Congress had made available to customers that that that will be helpful over time.
Got it on the first part of your question now.
Payment deferrals.
So with our business customers and we've we've now granted about 4000 deferrals 3000 to small businesses about a thousand middle market customers.
Our approach there is to treat those customers on a case by case basis to evaluate the ongoing F.C. or their business and if prior to the pandemic starting they had a viable business than were.
And doing well, where a good customer than we will typically print them a deferral and in some instances that might be for up to six months generally they're 90 day deferrals interest only typically and then we revisit those into that period, but that is specific to customers who were in good standing.
Prior to the pandemic beginning in and they clearly appear to have what we believe to be a viable business. After the pandemic whenever that is on the consumer side. We're generally offering deferrals for 90 days to customers at the end of that 90 day period, we revisit where we are in consider another 90 days.
For all the bank as I mentioned, we granted 4000 deferrals in our balance sheet more owned balance sheet mortgage book. Another 12000 deferrals for the portfolio mortgage portfolio, we service for others and about 13000 deferrals of other consumer credit whether it be credit costs.
Cards installment loans home equity lines et cetera.
Which is roughly little less than on the mortgage portfolio, a little less than $900 million.
Which that's a 14 in a half.
Our portfolio because that number right.
So I'll give you some perspective.
Dan This is Larry just to give you some percentages based on what John said on the mortgage portfolio for our own book, but stepping into half the stance of our accounts have been deferred on the commercial corporate book for Sam Consumer book is 2.2% just given a large number of performance.
I think on our mortgage book Barb half of the.
Loans that had been deferred loan to value is less than 50%.
That is correct.
Great. Thanks for the color guys appreciate it.
Okay.
Your next question is from Bill car Kashi of Nomura.
Morning.
Hi, Good morning. My main question is on how much you think the payment protection program will really benefit credit performance on the consumer side of your business.
Sure it because employees who are participating in PPP are getting those benefits in lieu of what would otherwise be unemployment insurance, which suggests.
I think that PPP may be understating. The level of initial claims was curious to hear your thoughts on that and since we know historically high level of initial claims.
Our associated with elevated consumer credit losses, I, just wondered whether you had any perspective on on whether the payment behavior of employees participating in PPP would help you guys minimize credit losses on the consumer side of your business.
It's completely anecdotal.
As I've talked to customers some have.
Have furloughed employees that they intend to bring back if they get funding under the PPP program and so those employees likely went and applied for unemployment, but may get an opportunity to come back at some point and and so you have that subset versus the group that had been maintain.
Turning their workforce and ongoing basis and are hopeful to get PPP funding in order to continue to employees. Those teams. She does the funding is typically for about an eight week period and so.
I think that as we look at the program. We think it is is very helpful. In the short run there's a tremendous amount of interest in the program way more interest in need for funding than has been appropriated today, we're very hopeful that Congress will appropriate some more money to help small business I would say that.
In the short run I do think that it will have a positive impact both on consumers small businesses and as a result, corresponding credit that we have but I don't think it's a it's a solution three or four months from now if they're not this is not other funding that comes back.
Hi, good in some way shape or form.
That's super helpful. Thank you.
Your final question comes from Christopher Marinac of Janney Montgomery.
Good morning, Thanks, Hey, I'll just wanted to ask about the Cecil forecast period.
It's hard to walk us through that does that work against you with the new numbers on unemployment or was that already factored at the end of March.
Yes persist so we already we did the nine quarter losses, we have a two year reversing curious though.
Looked at nine quarters compared to see car, which is nine quarters thats not a lot different.
Really what we did not come quickly.
Talk about that as we looked at.
Several different internally developed economic forecast that we did as well as industry sets level analysis included the Moody's critical pandemic that came out recently.
And then both of those looking at those Davis.
Range of potential losses, due to what's going to happen coded.
And then.
Outlook, which included again, both acute economic stress in the medium term as well as a general recession type as well.
And our analysis reflected in economic variables to our models for a base forecast as well as an abrupt recession.
Second set of US again, a lot of dissidents flip.
Will help inform us where potentially range of future charge off.
And then we'll perform specific stresses on success, we believe that most impacted as an example.
Included but not limited to energy restaurants hotels manufacturing sales grade.
And again, we'll talk with what we felt was our best number for specific will feel the charge off.
Thoughtful and walked you through that we rely on when we're doing our to cause.
Our capital plan. This is why we feel good about the process given we've been doing capital planning now for years and years have a towards saw very solid profit there does that incorporate.
Sure.
Yes.
Got to start with nothing with equivalent.
Great. Thank you Barbara Thank you John.
Thank you.
Okay. That's the last question we have will thank you all for your interest. So these are very unusual times were awfully proud of the work that our team is doing to take care of our customers and to focus on their own health and safety Hope you all do as well and.
I appreciate your interest intercompany. Thank you.
This concludes today's conference call you may now disconnect.
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