Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Comericas first quarter 2020 earnings Conference call.
This time, all participants' lines are in listen only mode.
For the speakers presentation, there will be a question and answer session to ask a question during the second you'll need to press star one on your telephone.
To withdraw your question press the pound ski.
I would now like to hand, the conference over to Darlene persons director of Investor Relations. Please go ahead.
Thank you Carmen Good morning, Welcome took America's first quarter 2020 earnings conference call participating on this call will be our chairman President and CEO farmer.
Chief Financial Officer can hurt our Chief Credit Officer, Pete go from an exact [laughter] Pico quell executive director of our business Bank and Peter something.
During this presentation, we will be referring to slide which provide additional detail the presentation slides in our press release or they're up on the Fccs website as well as Investor Relations section of our website, Connecticut outcome.
This conference call contains forward looking statements and that regard, Michigan Michaels risks uncertainties and cause actual results to the Charlie vary from our expectation.
Forward looking statements speak only as of the data this presentation and we undertake no undertake no obligation to update any forward looking statements. Please refer to the safe Harbor statement in today's release on site to incorporate into this call as well other refugee filings are factors that could cause actual results to differ.
Also this conference call look well reference non-GAAP measures and in that regard it directly to the reconciliation of these measures within the presentation now I'll turn the call, but the Kirk will begin on slide three.
Good morning, everyone. Thank you for joining our call.
No you and your families are healthy and management as fast as possible jury this unprecedented.
The first burden for me along with our leadership team and Primerica is a whole is the wealthy and give our customers employees and community.
Primerica is a quickly adapted to the kinds of 19 crisis.
I'm extremely proud of the worker team has done to ensure we continue to deliver the same high level of service.
We currently have over 65% of Acumera keeping working from home.
This transition happened quickly and without any significant issues.
For those that cannot work remotely such as operations and banking center comedy.
We are facing precautions to minimize volterra.
Increased compensation the show our deep appreciation for their dedication to continue to provide a potential services.
To further support our boys, we're married monetary assistance available for dependent care and Tele health services at no cost.
Oh, so we've been working closely with our customers provide financial assistance.
Doctors, providing additional liquidity as well, it's pretty much deferrals and the waiver.
That's an MLP I preferred lender, we had been a 15 coach nurse and accessing the government SP, a paycheck protection program under which we have thus far provided 1.8 billion in logs.
Finally.
Sure regarding our communities is more important than ever at this time.
Therefore, primerica together with Comerica charitable foundation, that's worth $4 million to nonprofit organizations that cure for it provides critical services to our communities.
These sorts of redeployed to support strategic programs designed to meet the needs of small and micro businesses as well as community service organization to serve you seniors and other vulnerable public populations, particularly those organizations addressing food and securities and access to health care.
Hopefully our customers in communities navigate this challenging environment by providing our expertise products and services is there's a harder for America's relationship banking strategy.
Turning to slide four and a summary of our first quarter results.
Due to large increasing our credit reserves, we reported a loss of 46 cents per share.
For the forecasted impacted the covert 19 pandemic, including the economic impact the social distancing continued stress in the energy portfolio.
We prudently increased our credit reserves to over $900 million or 1.71% of total loans.
Our reserves reflects our documents Cecil which incorporates a lifelong methodology.
Well there was a great deal of uncertainty about the duration and severity of the impacts related to Carbonite team, we're closely monitoring our portfolio and proactively reaching out to customer.
We believe that our reserves are appropriate and we are currently well position.
Average loans in our mortgage banker business, which serves mortgage companies decreased were seasonally lower home purchase activity and a decline in refinance volumes for the quarter.
Also national dealer continue to decline due to lower inventory levels.
However, total period end loans increased over $3 billion sure record high its customers grew older credit line beginning in mid March to meet cash needs and to build liquidity buffers.
Also purity of mortgage banker increased or a record level is riyadh fly activity picked up as rates decline.
Following strong seasonal deposit growth in the fourth quarter average deposit levels remained relatively stable.
As is typical decline in January deposits increased throughout the quarter.
Relative to the first quarter last year average deposits were up $2.8 billion were 5%.
Net interest income decline when the fed action to reduce interest rates.
Currently we are taking action to appropriately or just deposit pricing.
Non interest income declined with the decrease in non customer related activity, including a reduction in deferred compensation returns, which is all staffing expenses.
As well as the gain on the settlement business in the fourth quarter, which was not repeated.
In addition, falling robust volume in the fourth quarter syndication activity just learn as economic uncertainty increased.
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<unk> expenses decreased $26 million as we maintained our discipline and putting a 15 million increase in salaries and benefits.
This resulted in an efficiency ratio below 57%.
Well below the peer average of 58.4% into fourth quarter.
Capital remains strong.
We suspended our share repurchase program last month, because we focused on deploying our capital to meet our customers growing financial requirements.
The tone of the recent conversations I've had with customers across our markets reflects the challenges with the current environment.
It is important to note that in general over the past several years.
Customers have remained cautious.
Prudently managing expenses, and reducing leverage and anticipation of that into economic downturn.
Well the environment is turned abruptly we're all remain hopeful that covered 19 will be contains true and what economic stimulus that has been provided orderly business will return to normal quickly.
Now I will turn the call the gym to review the quarter in more detail.
Thats correct and good morning, everyone.
Turning to slide five Armstrong's decreased approximately 900 drilling dollars in the first quarter.
As Curt mentioned mortgage banker decreased following very strong refi activity in the fourth quarter and typical slow home sales in the first quarter.
This is a month data reported by the mortgage bankers Association.
Also bunch decreased and national with your work is lower inventory levels, particularly in January and February.
Energy declines decreasing capex and slightly better capital market activity early every quarter.
These declines were partly offset by continued growth in commercial real estate driven by multifamily projects, where we work with proven developers who provide substantial equity upfront.
Loan activity picked up significantly in the back half of March with rapid change in economic conditions.
The increase in period end loans to a record 53.5 billion was due to a combination of customers trauma binds to be higher operating needs as well as on a cash reserves and the timing of uncertainty.
Mortgage banker long piece at quarter end with rising refi volumes.
Also as widely reported in companies, particularly larger customers drew down our minds to ensure they had excess cash as a buffer.
As a result, our bond utilization increased to nearly 57%.
Entered on itself would do not see this is a sign of credit issues.
Average banker general middle market and national dealer customers typically have a borrowing base and to our financial covenants that govern the amount it can be drawn and therefore curtail risk.
Further details provided on slide 20 in the appendix.
Since quarter end line usage has leveled out it isn't the utmost importance that we support our customers inquiry needs as challenging time.
We are proactively reaching out to customers to determine their needs and provide our expertise.
We are granting amendments on dressing among pricing as appropriate.
Loan yields for 4.19% decrease of 24 basis points for the fourth quarter. This was the result of more interest rates, primarily one month LIBOR.
Slide six provides details on deposits average balances relatively stable included a 300 billion dollar reduction in average non customer brokered deposits.
Typically deposits declined in the first quarter in fact first quarter deposits into the last four years of declined 1.5 billion or more.
This year has been different in line with my comments regarding line Cross we believe customers are conserving cash and holding on to excess liquidity in this time of uncertainty.
Interest bearing deposit cost decreased 16 basis points as a result for the fourth quarter benefit of actions taken in the fourth quarter as well as recent rate adjustments made in conjunction with the fed action and Mark.
Total funding cost remained low at 60 basis points, primarily due to a large portion of noninterest bearing deposits as was the floating rate nature of our wholesale funding.
How should we see on slide seven RMBS portfolios stable when youre in the portfolio health status.
We opportunistically pre purchase a portion of second quarter expected payments that relatively attractive deals.
This resulted in a period on portfolio balance being a little higher than our target around 12 billion.
We had a modest decrease in prepays in the first quarter, but we expect that it will pick up in the second quarter.
I don't expect to establish a significant impact on our duration, Oregon, unamortized premium which remains relatively small.
Turning to slide eight.
Net interest income declined $31 billion to 513 billion and the net interest margin was 3.06% a decline of 14 basis points relative to the fourth quarter.
The negative net impact of lower rates was $15 million, an 80 basis points.
Interest income on loans declined $47 million and reduce the margin 21 basis points.
The major factor was lower interest rates, which had a 27 billion dollar impact and 16 basis points on the margin.
Also contributing to the decrease for lower balances one less day in the quarter and more loan fees.
Lord Nonaccrual interest activity and other portfolio dynamics, such as on mix shifts in the portfolio, including an increase in higher quality lower yielding loans provided another headwind.
Slightly more yield on the securities portfolio and use that interest income by $1 million.
Interest on deposits are the fat had a $2 million negative impact or four basis points on the margin.
The lower fed funds interest rate had an impact of $4 million or two basis points and higher balances. The fed attitude million dollars resulted in two basis point drag on the margin.
Deposit cost declined by $14 million and added two basis points to the margin primarily result of our prudent management of deposit pricing as interest rates decline as I previously discussed.
Finally, with more rates wholesale funding cost declined by five to $1.73 basis points to the margin.
In summary, given the nature of our portfolio our loans for price very quickly.
Also we continue to closely monitored the competitive environment and our new liquidity as we manage deposit pricing.
Slide nine provides an overview of credit we increased our allowance for credit losses by $279 million to 916 billion EUR, 1.71% of total loans.
This reflected our expectations for the impacts of Coke 19, and social distancing as well as the continued pressure and energy.
We thought that seasonal in the first quarter.
For modeling purposes, we use economic forecast through March 30, Onest to inform us as we determined the allowance.
There's a high degree of uncertainty regarding the ultimate economic impact to the pandemic as was the effectiveness of the government stimulus packages and payment deferrals.
Before we also concerned qualitative adjustments based on more severe weaponized forecast for certain sectors.
We considered more severe assumptions for areas, where we have the most concern such as those weren't risk due to social distancing as well as auto production leverage lending and energy.
This forecast includes GDP declining anywhere from 13% to 33% in the second quarter.
It is important to know that we're starting to cycle with very low levels of criticized and non accrual loans.
As you can see on the table, putting energy aside net charge offs were only $17 million or 13 basis points.
In addition, total nonperforming loans were near 45 basis points in criticized loans remained low at only 4.6% total loans as of quarter.
Energy loans, which are outlined on slide 10 were about $2 billion at quarter end and represent 4% of our total loans.
NP loans made up about 80% of the Arjun portfolio and energy services, which is concerned the risk is segment was only $55 million.
Volatile oil and gas prices that resulted in more stress in the energy portfolio as evidenced by increases in criticized and non accrual loans as well as charge offs.
Therefore, we increased our reserve allocation to more than 10% of energy loans.
Spring Redeterminations were approximately 8% complete as of March 31st and as of yesterday, 16% complete. So we are still very early in the process.
With the decline in energy prices, we expect to see a relatively significant decrease in borrowing bases as well as collateral efficiencies.
As we've done to previous cycles, we aim to work with customers secured efficiencies through repayment overtime.
Our energy customers rack, and prudently cutting costs and reducing capex in order to preserve liquidity.
The ultimate outcome will depend on the duration of the cycle with more than 40 years of service industry, we have deep expertise and remain focused on supporting our energy customers.
Overall, our customers are well positioned at weathered many cycles.
Slide 11 provides detail on segments, we believe post higher risk in the current environment.
We're closely monitoring working with customers scenarios for social distancing seven a serious impact such as hotels retail and recreation related businesses.
Our exposure to any one of these industries is not significant and there are many areas for you know exposure such as franchise restaurants for consumer credit cards.
I've already covered energy in regard to auto production, we have long history of working through economic cycles, and two thirds of the loans or the middle market companies.
At quarter end, there were only $9 billion non accrual loans in this sector.
We are always closely monitoring our leverage loans, which tend to be with middle market relationship based customers sponsors management teams and industries, we know well.
Also our sweet spot would be on for end of the leverage spectrum.
We've increased our allowance allocation for loans in these areas as Curt mentioned, we maintain a well diversified portfolio, which is a fundamental part of our credit strategy to help minimize losses during times of stress.
Turning to slide 12, noninterest income, which was impacted by non customer activity.
This includes deferred comp asset returns of a negative $3 million.
Seven to $1 declined from last quarter.
Recall this is offsetting noninterest expenses.
Also during the fourth quarter, we benefited from the sale of our HSH business for a gain of $6 million.
Customer derivative income was $9 million decline of 4 million as record driven sales of $22 billion were offset by $13 million negative credit valuation adjustment due to the decline in interest rates.
Commercial lending fees decreased $8 million following near record high syndication activity in the fourth quarter and fewer deals in the first quarter due to economic uncertainty.
There was a $3 million decrease in card fees, partly due to lower transaction volume.
Fiduciary income increased $2 million with strong sales.
Note that market related fees are built on a one must play therefore, the recent decline in equities in money market rates is expected to be reflected in the second quarter.
Yeah.
Expenses declined $26 million as shown on slide 13.
Salaries and benefits decreased $15 billion due to a number of factors.
Deferred comp was lower as I mentioned on the previous slide.
Incentive compensation, including annual executive stock grants was lower as it is tied to our performance.
In addition, we had a reduction in contingent workers and seasonally lower staff insurance is most employees have not yet that their health care deductibles.
Seasonally higher payroll taxes, partly offset these reductions.
In addition outside processing fees decreased $13 billion as a new accounting standard resulted in the $7 billion reclassification of software expense.
Recall in the fourth quarter been paid a $4 million vendor transition.
Seasonality drove a $4 million decrease in occupancy expense and a $3 million decrease in marketing expense.
We continue to carefully manage costs as evidenced by our efficiency ratio, which remained solid at 57% under 57%.
In light of current environment, Myrisk America's Conservative approach to capital and liquidity management positions us well to meet our customers' needs.
Slide 14 provides an overview of our strong liquidity position and funding base.
We have ample access to multiple funding sources with 75% of or funding coming from relationship oriented deposits, which nearly half or noninterest bearing deposits.
At quarter end, we had approximately $4 billion on deposit at the fed.
Through the federal home loan bank, we have almost $10 billion available to draw very attractive rates.
At quarter end, we held $7 billion of unencumbered Liquidsecurity liquid securities in the form of treasuries and mortgage backed securities, which had an accumulated unrealized pre tax gain of over $400 billion.
Finally, we are ready access to grow in deposits as well as the discount window in the fed if necessary.
Our capital levels remained strong with an estimated one of 9.51% as shown on slide 15.
And the first quarter, we returned a total $283 million to shareholders, including an increase in the dividend to 68 cents per share and the repurchase of 3.2 million shares.
Last month, we suspended repurchases as we focused on deploying capital to be customers financial requirements and providing attractive dividend.
Note that we have elected to defer a portion of the transitional impact of adopting Cecil which provided a benefit of 10 basis points to the estimated cetone ratio.
As we navigate the current environment, we expect our capital levels to remain strong for.
Our first quarter Cc, one ratio is below our 10% target we expect to return to this level when the economy improves.
Slide 16 provides our outlook for the second quarter relative to the first quarter.
We are assuming recessionary conditions, including a significant decline in GDP and increases in unemployment.
Given the high degree of uncertainty pertaining to the economic impacts of Coca 19, as well as the government stimulus, we do not feel comfortable providing a full year outlook at this time.
We expect average loans to grow with increases in mortgage banker, who is bring home sales to continued strong refi volumes.
Also we expect elevated line usage to continue as we support customers liquidity needs, including loan advances under the government's Paychex protection plan lending program.
Partially offsetting this we anticipate business to have more financing needs as a result of reduced working capital and Capex requirements.
We expect average deposit growth in conjunction with customers conserving cash and receiving distributions under the stimulus program.
We believe this will mostly be offset by business customers using funds to meet high operating needs.
The net impact from rates alone on net interest income is expected to be $55 million in the second quarter relative to the first quarter based on our economists LIBOR forecasts.
This expectation includes the full quarter effective March that cuts combines the actions we've taken the lower deposit rates.
Of course actual results will vary depending on a variety of factors such as movements in LIBOR, which remains somewhat elevated relative to the fed funds for the quarter element.
Loan growth is expected to provide a partial offset this rate headwind.
Credit quality is expected to reflect the economic environment, which is highly uncertain and therefore it makes it impossible to provide clear guidance at this time.
Of course, the largest are variable is the duration of the severity of cobot 19, and the resulting effects.
The current credit reserve was based on recessionary scenarios. However, we are in unchartered waters. In addition, Cecil may cause greater volatility in our provision.
We expect noninterest income to benefit from an increasing cart fees with higher transaction volumes as customers receive the government stimulus funds, partly offset by lower merchant and commercial card activity.
On the other had a reduction in economic activity and lower market related fees is expected to have an impact on derivatives investment banking fiduciary and brokerage activity.
Deferred comp, which was a negative $3 million in the first quarter and is offsetting expenses as hard to predict and does not assume to repeat.
We remain focused on controlling expenses that are closely managing discretionary spending.
However, we expect to see a rise in outside processing type of growth in currencies.
Also we expect cobot 19 related expenses to rise with increased compensation for employees, who are not able to work with globally as well as measures we've taken to protect employees, such providing masks and intense cleaning facilities.
In addition, we expect seasonal increases in annual Merit staff insurance and marketing.
As far as capital I mentioned on the previous slide we suspended the share repurchase program and are focused on meeting customers financing needs as whilst maintaining and attractive dividend.
Now I'll turn the call back to occur.
Thank you Jim.
Over our 170 year history, we have managed through many economic cycles, we have demonstrated at our resiliency and our ability to work to heatedly and leverage our ingenuity and not linear entrepreneurial spirit in order to persevere through the great depression, two or more and the great financial.
Crisis, we have a long tenure experienced team, which is able to adapt to the rapidly changing environment as well as support our customers as they navigate these challenges in terms.
It is at times like these that you build and solidify loyal customer relationships.
Our geographic footprint is diverse and we last week reliance on any one industry.
As discussed we significantly increased our credit reserve in the first quarter.
Of course, it is impossible gauge the ultimate impact to the pandemic.
But we believe our conservative underwriting standards prudent customer selection in history of superior credit performance through last recession demonstrates our ability to weather the current cycle.
We're also focused on maintaining our expense discipline.
We look forward to returning the business is normal and we're taking steps to ensure we are prepared to serve our customers when the economy rebounds.
With strong liquidity and capital levels.
We are able to meet our customers growing financial needs as appropriate and are focused on maintaining an attractive dividend for our shareholders.
In summary during times of stress, we believe our conservative approach the banking serves us well.
And now we would be happy to take your questions.
At this time I would like to remind everyone. If you do you have a question. Please press star one on your telephone keypad.
Your first question will come from the line of John Pancari with Evercore ISI. Please go ahead with your question.
Good morning, Good morning, John.
As you looked at the loan loss reserve and as you.
Decided on the on the magnitude of the additions and just want to give some color on how you thought about through cycle losses.
As soon as particularly how that would break out for the overall loan book, but also for energy how would you think about that that could play out this time around thanks.
Pete.
More John.
Diesel is it's not a stress test it's not about capital in your through the cycle.
This is it's really an accounting exercise and so we did our best too.
Those are reserves appropriately given.
Cecil calls for.
I think we feel really good about the number we came up with we use.
The most.
Recent.
Economic scenarios are available even kept our books opened a couple days to make sure we got that.
I think that that.
1.71 coverage ratio is a really solid number we feel good about where we ended up.
Okay. Thank you and.
Right and then when it comes to the dividend Jitters your comment about the.
You are focused on maintaining an attractive dividend.
So I guess just give us your thoughts around you're able to your ability to maintain it as.
Credit pressures way here, then considering vision.
To your common equity that we sold this quarter.
Also curious where do you see your common equity ratio playing out in a stress scenario. Thanks.
Turning now I'm going to start.
And your question to ask Jim to fill in a few details first let me just reiterate what I think you're already noted when that said we have done a very good job of returning capital to our shareholders. The last few years, both in terms of our buyback.
Well as our raising our dividend.
So we remain focused on leveraging capital really first to meet loan right, but we also want to provide really a healthy a competitive dividend to our shareholders and obviously right now there are a lot of unknowns, but a lot of uncertainty we're either so uncertain around for the duration in depth of the economic cycle and how long the.
The Caribbean 19 situation will wind up but today based on what we know that we feel comfortable where their capital position and our dividend and I'll turn to June for more color.
I would just supplement that was we do stress tests or dividend that say ongoing exercise, we do at least once a year.
Very strong levels of parent company cash, which is very important when you want to maintain dividend. We took very healthy reserves. This quarter, we still have strong capital. So we feel good about that and when I look at Alex the earnings projections as things start to normalize of credit. We certainly believe the dividend can be managed within the context of those earnings even at a low rate environment.
So.
No no written held for future might play out with cold it over the next several quarters, what we're seeing in the near and medium term, we feel good about dividend and believe that can be maintained.
Got it thanks, and we'll just little more can you remind us what your internal target is for your common equity tier one ratio.
RCP, one target was 10%.
That's all we publicly disclosed.
Okay, Great alright, thank you.
John.
Your next question from the line of Kim.
With Morgan Stanley. Please go ahead.
Karen good morning.
Good morning, Thanks for taking my question.
I guess, maybe stirring up just in terms of energy portfolio.
So you guys increase your reserve to over 10% can you just help us understand like from our perspective.
You have a very large reserve on energy portfolio. Another bank for example might have a much lower reserves on their energy portfolio, how do we from the outside no whether the reserve is because you're being much more conservative than other banks, perhaps or because the credit quality of your portfolio might not be to say.
Same as theirs.
Thanks.
Eight.
Ken.
As you know with Cecil will be the main driver.
And particularly this quarter may be more in any other quarters, the economic forecasts and so the economic forecasts had a lot to do with the reserves.
That we decided to build for for energy and so.
We made some assumptions about.
But oil we're well prices were going to be.
Overall reasonable insupportable period.
The other point that we.
Just did as kind of a gut check was.
We felt this felt worse than what we went through a few years ago, and we decided that we wanted to make sure that that number was above.
We are reserves were in the last Downtimes that 10 half percent exceeds the reserves that we had last time and we we didnt need all those reserves last night, but we felt the severity here was worse.
And do you feel that portfolio qualities worse this time around.
Hi, higher here, yes, not till the opposite for a couple reasons. One is I think our MP borrowers are.
For the most part less leverage we have a lot less energy services than we had in last downturn.
Energy services contributed contributed 45% of our credit losses than last downturn. It was only 15% of the portfolio.
Today, we're out of that business and then I think the most important factor really is our portfolio is smaller is about doing two smaller than what we had going into last downturn I think that is probably the biggest factor of all.
Got it okay that helps out and then just one last question in terms of the NIM impact I know some procedure guidance is based on.
LIBOR 70 basis points it looks like it's down about 12 basis points already this quarter accuse remind us like what the sensitivity is to say no 25 basis point reduction in one month LIBOR on the and high high thanks.
Jim Yes, you island, probably offer you a very crude rule of thumb.
Fairness trend or you guys are trying to get models right, obviously, black horse and jumping around quite a bit it down more than I went back over 100 balance back down again, so depending on how close it plays out ultimately dictate the stress on economy, we're livewatch ends up that.
But you probably applied to that you know about $700000 a quarter firms like work and I went off warranty thats very prudent roll call. It depends on when during the month LIBOR might go up or down resets occur but.
Just to be transparent that hopefully gives you a little bit more information.
Got it does alright, thank you very much.
This is good.
Your next question is from the line of Steven Alexopoulos with JP Morgan. Please go ahead.
Good morning, everyone at either.
First just a follow up on your commentary around the energy reserve how much of that is specific reserves and how much is qualitative.
Okay and person.
By specific.
I mean sided.
Right and so thats, our specific credits rather than I mean, because you're implying that a lot of the build versus peers may have come from just your model assumptions I'm trying to delineate between what's model what specific.
Percentage will be credits, yeah, I understand it's a little bit more complicated than that because we also increased our loss given default in the process and so that that did make it really apples to apples on portion was was just driven by the standard versus the qualitative.
But.
It was very little of it was cited reserve because our.
Our criticized at the end of quarter, we still reasonably well.
Okay got you and then.
I may have missed this but did you give the portion of loan deferrals the balances of loans that were deferred in the corner.
Yes, so so far.
We have deferred payments on 1000 loans totaling 1.6 billion.
To 600 borrowers.
And the average deferral period is 90 days.
Okay and.
And then finally.
Given that you did report a loss in the first quarter do things need to secure special regulatory approval to pay the dividend and is that on already.
Yes, we are always in communication with the regulators and they're aware of.
Our actions and how we're proceeding so we don't disclose details there, but I'll just say, we're always in ongoing contact with them.
Okay fair enough. Thanks for taking my questions.
Thank you Stephen.
Your next question is from a line of Jennifer Demba with Suntrust. Please go ahead with your question.
Good morning Jpmorgan.
Hi.
Follow up on the deferral question, if you looked at your slide deck with.
The listing of the kind of greater at risk portfolio is what percentage of those borrowers have asked for deferrals.
Jeff I don't have the breakdown.
Mike My sense is it is that a fair number the them live come from those carve out portfolios, but I would say also many we're really borrowers that really didnt need.
Deferrals, they they looked at asking for the deferral is this really an insurance policy for their liquidity and so I.
I wouldn't necessarily jump to the conclusion that all of the.
Deferrals that we granted we're do troubled borrowers at all.
Thank you so much.
Your next question is from a line of Mike Mayo with Wells Fargo. Please go ahead with your question.
Good morning, Mike Hi, Hey.
Leading planned for an oil environment like this I can't imagine a man nowhere some flukes with these negative oil prices, but it seems like we need oil prices as you look out ahead.
Would be below the level, where the fed stress test takes place and it might be below the level.
Where are you have your own stress test. So can you talk about the impacting the oil price like where it is today and what that could mean for losses now that differs from the path.
Yeah.
Sure Mike.
As you know it's not so much it's not so important where oil is today or next week or even a month for now it's where it's going to settle in over the longer period of time and so the.
And that's because two thirds of our borrowers can generate positive free cash flow before capex with oil really in the twins.
While only about 10% of our oil portfolio needs. It will that be in the mid thirtys or higher to generated positive free cash flow before capex.
The more.
I would call it an immediate concern is going to be liquidity.
Using much lower price decks, and given where prices have gone over last month to determine what our borrowers borrowing bases are and so the borrowing base has come down.
Some of our borrowers are going to get squeezed in the liquidity standpoint in this environment, we more than ever we need to work with them, we need to bridge them to a point where prices stabilize demand stabilizes supply stabilizes. So that we can get down to a point where.
They can just function in a more.
Normally environment. So that's the way we kind of Steve This playing out not so focused on where prices are in right now today, but try to bridge to a point were prices stabilize.
Matt that's a good clarification.
In working with our energy analyst I. He had a couple of questions that might help us back gallons. So.
Matt can go back in the queue, if I need to but what is the level of utilization for your energy borrowers public versus private.
So that's good question I don't think we haven't broken down that way.
Right.
And that's something we could gap and I don't have that Mike.
No that's fine and what's the process for covenants.
If they are breached.
No well again, it's too when you were going to be tree eyes in the portfolio and there's not one blanket answer but the bottom line here is not just comerica, but all the banks, we're going to be we're going to be working with our borrowers to does get through it and and the ones that can be.
Indeed to be supportive, we're going to be very supportive.
Okay last too.
Reports that banks are creating shell companies to owning the assets is America, considering doing anything like that or you're allowed to.
Yes, so owned but not but not to operate we're not big enough energy player that we would consider operating energy assets, but if we need to if we need to have an equity position in them.
Yes, we're prepared to do that.
And then lastly limits that you can place on Mds.
On outspending cash by lean line revolvers.
I'm sorry, Mike you said, one more time.
What are the limits that America can place on Ian piece.
One outspending cash by leaning on revolvers, Danny I mean, what kind of control do you have over the borrowers what they do it the money.
You are you talk about the energy portfolio. So yes, yes.
Yes.
Yeah. So.
There are not a lot of restrictions in that regard, but if they are using the money for.
Distributions or something that is not going to be accretive to their borrowing bases.
Yes, they know that wouldn't sit well very well with the banks and I can't imagine any of our bar is doing that in fact, I would say I've been really.
He played its with the way our borrowers are handling those so far there they're really came back on expenses. There came back on cap that there they are using whenever.
Little free cash flow they have to pay down debt and we've not seen gourmet defensive draws at all.
One last thought again this is the issue in the stock market today at the moment oil prices banking you're exposed to oil.
You are kind of one thought you really want us to have.
Those who owner analyze comerica would be what.
I would say we're going to get through this we've been we have a very long hundred 70, plus year history of getting through a lot of different downturns.
We'll get to this one as well.
Have a diversified portfolio energy is only a us very small piece of our portfolio.
In fact ex energy our portfolios is really in great shape, our charge offs are pretty nominal this quarter again. So we go into this downturn, where the really from I think a position of strength of our credit quality standpoint.
One issue, particularly in particular energy, we got our eye on that social distancing portfolios, but you know as we work through this with our customers move I think we'll get through excitement.
Alright, thank you.
Hey, Mike.
Your next question is from the line of Erika Najarian with Bank of America. Please go ahead.
Good morning here good morning.
Good morning.
My first question is a follow up to John and Steves question on the dividend.
My understanding is that automatic restrictions on the dividend don't kick in.
So you breach that 7% 81 level and in the restriction is a 60% payout on on trailing eligible net income I'm wondering if the steam rules apply on tier one capital if you fell below 8% and as we go forward what are the are.
WH considerations that you have on hand in order to.
Prevent further erosion in capital.
Right. Good morning America, yes at the same restrictions to apply to all levels of capital so that would be 8.5% for tier one and as you know I think you've asked in previous calls of tier one is or binding constraint.
We don't anticipate getting down 8.5%, obviously, we haven't very strong at over 100, that's above that level estimate of 9.51 again, I don't know recoveries going to take industry.
But we do not anticipate going down to that level.
But you do I should point out that risk weighted assets is probably the biggest variable. It's got the potential to move the capital ratio was even more in that provision or that income.
And we're watching that this is a very different type of crisis, we know that in the last saw great reception. We had some initial why am trials, but ultimately companies de lever and risk weighted assets shrank in that really drove up capital ratios. It's unclear. If that's going to occur. This crisis is more of a demand destruction crisis.
It's not clear of the customers will lever summer obviously have drawn up let's just remaining seeing where that goes so risk weighted assets will have tried a lot of this we are appropriately rightsizing mer customer commitments out are there for them.
But where there are smarter tremendous than perhaps need to be we are talking to customers and I'll just make sure though to right size to meet their needs.
Well just met them onto the risk weighted assets will do the right things for the customers and we'll see where demand for loans goes over the next year, Jim I might just that maybe a theater to add a little color just around what we're seeing in terms of draw activity with customers.
But first focus has always been taking care of our customers. That's why we're here were relationship banking, we're going to make sure that our customers are taking care of and those that are operating well and those that are working through.
Difficult situations as Peter alluded to earlier, but Peter I would just add what Jim said earlier I recall that we saw utilization go up into the first quarter a little bit into April but since then it's really kind of taper off their customers are well positioned.
Going into Q2, the rest of your so I think.
I think that we haven't seen a whole lot more active defensive draws are drawing down lines that we did for the first quarter April.
Thank you.
My second question and everybody is grappling with what cumulative losses can look like in the industry.
And Comericas now has clearly had a very strong history on cnine. So if I if I'm looking at the regulatory data correctly, you know cumulative losses of two and a corridor on in Onein, intending cnine and in two or three cumulative losses of 3% and I'm one.
Sorry, we carve out your energy portfolio, which is clearly uniquely stress. If those are good starting point for you know to your cumulative losses as we look forward.
Most of the type of recession that we're going to have any impacting your sina portfolio.
Sure. Okay, Let me to let me give yet a couple of data points and hopefully that this would help so first of all this comparing ourselves to.
The great recession, a this recession every recession of course is going be different and of course has got the social distancing a segment of the portfolio, which which is different this time around that we didnt have to be concerned about in oh, eight or nine but if you just compared our book today to old eight it.
We've made it very concerted effort over the last seven to 10 years to make it more recession resilient and so we can look good the lines of business that were what we call recession susceptible.
Going into 2008, they totaled 31% of portfolio.
Today, we have reduced that by 20%. So now those those businesses that we consider most susceptible to recession or only 25% of the portfolios today and that includes energy energies in that that 25%.
It's just take a look at our reserves today, our RP reserves the right about from a dollar standpoint, right where they are today now the coverage ratio was higher in 2000 can.
When the coverage ratio peak, but that's because primarily due to the downturn. Our you know our oh loans ran off a bit but from a reserve standpoint are the billion dollars that we haven't reserves right now is very comparable to what we had in the downturn and then then lastly, some stress.
Test numbers.
Our last de fast.
Who is 2017 that that was 2.2 billion.
We have had to stress test with our model. Since then when in 2017, which was 1.9 billion and then.
In 2019 at 1.4 billion.
So our reserve level today as a percentage of the stress tests losses are 48%, 67% respectively.
I think that the take away. There is I think we're our portfolio is better positioned than we were going into last downturn and I think were better reserves as well.
Got it.
Just one last question you know just a little help in understanding PPNR as clearly that's it that the first line of defense in terms of absorbing provisions.
As your net interest income outlook for QQ include the impact of TPP loans and also as we think about your card fees.
Clearly, there's going to be lower transaction volumes, but.
Can't that you're right express business benefit from the stimulus is the stimulus packages and it could that be an offset from the the pain that we're seeing or remodeling in terms of the exit rate and transaction volume.
Yeah Erica.
Number one the PPP impact made an attempt to factor that in onto the overall outlook.
But it's really the known in terms of how it's going to affect income because a huge variable with PPP is how long loans outstanding when they pay off how many are for Kevin. So we took a stab at it but I think theres lot of uncertainty with all banks in terms of health ultimately to impact the financials and of course, we're primarily focused on just making sure we're taking care of customer.
Period regarding drug expressed in my remarks, you might recall that I mentioned that we expect on parties actually up in the second quarter, so stimulus payments being processes component of that.
So we have back.
Thank you.
If you Erica.
Your next question is from a line of Ken is done with Jefferies. Please go ahead with your question.
Hi, Thanks, Good morning, everyone. Good morning.
Just in terms of thinking about your diversity you guys also.
Happened also have a lot of specific industry expertise scenarios that are might be pretty severely impacted so I'm wondering if you could kind of walk through how mortgage banker auto for plan the equity lines business Tech and life Sciences can you just talk about what you're seeing and hearing in those businesses.
And you know to the extent that you expect volumes to change just under you know underneath the mine draws in each of those areas. Thanks.
So I'm, Dave from credit standpoint, maybe you can take it from more of a a revenue standpoint, I mean, you know the mortgage banker in equity fund services businesses.
Up fairly low risk businesses there.
Our mortgage banker portfolio as you know it's all conventional mortgages are service repayment on those is the secondary markets. They could get disrupted for a short period of time. That's okay. We've seen that before we work through that with our borrowers and eventually when the markets.
Stabilize again, they were able to to reduce their warehouse lines.
Equity to fund services very clean portfolio.
You know the Lps are institutional very strong type of borrowers we would not expect to see great issues at all developed in that.
Net portfolio of technology and life Sciences.
Tends to be.
Up and down not just in it and.
The cycles like this but it can be up and down in when segments are strong and so for instance, when the economy strong multiples are high and sometimes our venture capital firms are buying companies at very high multiples that results in charge offs for us so in a cafe or a more.
Dip more difficult market for the.
Equities.
If the sometimes translates into better results from our credit quality standpoint in that portfolio Automotives would be certainly when we got our eye on those companies are very volume dependent they have high fixed cost and.
And so when auto volumes drop off we tend to see some migration there.
I would say, though that we've got a lot confidence in our people in Michigan that debt manage the risk in those portfolios.
They've been through a lot of downturns in there really good from a customer selection standpoint, and knowing how that.
Worked with the borrowers I can't remember if there was another one that you had mentioned but.
I think goes with.
Oh, so that it thanks for that.
Yes.
Yeah, the only thing I'm from an activity level.
Same order that people would have a mortgage is clearly still very very active you've got less activity, obviously, npls and DFS event and the auto space.
Yes, there's there's about cars really being made right now so clearly you're seeing a slowdown in the actor.
The same order that being described is also what we're seeing on activity.
Got it and one follow up on on the series side of things not a big book for you guys, but if I remember talking them, we talked about this in 15 and 16 with regard to the secondary impacts you know around energy in theory can you just talk about just your your your views of just how that.
Play through this time in terms of secondary effects and the impact on the commercial real estate book. Thanks sure.
The commercial real estate book.
He is dominated by class a infill multifamily construction, it's a it's a really good product in downturns is it tends to hold up really well and thats why we like it.
The areas that we avoid or office, which is obviously something it's going to get is getting hit right very hard right now got a little bit of retail.
About 500 million of that but the most part very strong developers low loan to values.
Last time at least going into downturn I think our occupancy rates were in mid ninetys or something like that so it's a pretty pretty strong but small portfolio.
We do have multifamily in Houston, Houston, obviously is going to be ground zero with with what's going on in energy, we do have some history.
There in the last downturn, we did not have a single loss in our multifamily portfolio.
We were able to work through that with our our borrowers and these mostly developers their national developers.
They have equity partners with deep pockets, we have.
30% to 40% equity in each of the projects.
And.
They're not going to walk away from these projects given their investment and the fact that we've got long history with demos, knowing how they handle things and downturn. So we feel pretty confident about commercial real estate portfolio as a whole.
[noise]. Thank you.
Thank you can't.
Your next question from a line of Gary Tenner with D.A. Davidson. Please go ahead, but to your question.
Good morning, Jerry Thanks, [laughter] excuse me. Thank you good morning.
So you can be do talk so Andrew portfolio reserve being over 10% I was wondering if there's any of the other at risk industries that you'd be willing to disclose where you've got the reserve levels that.
Yes, Gary we didn't go in <unk>.
That much detail I think the number that we are very feel really good about and I think it's the most important numbers the 1.71 coverage and I think it.
Going to stand pretty tall relative to our peers me, especially when you consider that.
Banks that have larger consumer books, and that's are going to should have larger reserves because that because of Cecil.
Our consumer book is very small so when you compare apples to apples commercial reserves to commercial reserves.
Yes, I think our reserves are going to be amongst the highest in the industry.
Okay, and then just follow up on your you'd made the comment on the companies that are coming to see requests deferrals.
I forget the percentage, but high percentage seem to be those that didnt necessarily need them, but we're looking at them as insurance just to clarify our you provided deferrals of moves in those scenarios.
We have and you know it's a you know if.
They were to come back to US again would lead we would have to reevaluating. The 90 days to see if they really need but yeah. We were.
<unk> been very accommodative this quarter with the just the I'm not turmoil that's out there. We just felt it with the right thing to do and we were happy to accommodate our customers.
Yeah I'd just say this is for a good I would apply that saving lives across all of our customers or whether there are a retail consumer customer or even a private banking wealth management customer originated commercial customer related or commercial channel. We've really tried to be accommodative on the front end.
Also the a great deal of uncertainty and then hopefully customers behave well, which we think they will through the cycle and and you always address the war into situations, where maybe they are not but we wanted to be is flexible one of the combination with we think it's the right thing to do for the country.
Thank you.
Your next question is from a line of Jon Arfstrom with RBC capital markets. Please go ahead.
Good morning, John Thanks, Good morning, good morning.
Just a real quick one kind of following up on Ken's questions you were talking about.
Economic activity I'm wondering if you and really by line of business can you talk about it by market I know that sounds like Texas.
Turning to open back up Michigan's a bit more restrictive.
California might be somewhere in the middle but you know talk about whether or not you think you've seen activity trough in some of your markets.
End of expectations, you have a place like Texas when it opens back up.
Well, John first of all day.
Obviously this impact is broad and it's really across all markets in almost all industries. So not just those that are.
We are dealing with a threshold distancing sort of disruption. So there is sort of broadly impact abroad impact on GDP brought impact on unemployment from a shorter consumer level answer you did all that has to play yeah. Yeah. We do believe our food economic view is that the economy should start to stabilize.
As as we get into the third quarter, assuming that we see some of the trends and the kindred abatement that we're anticipating and then it's a kind of go through the year short to see more into more normalization in its certainly a much stronger sort of a pace to GDP heading into 2021, a lot of that supported by what is.
Just unprecedented massive physical into the monetary stimulus kind of going back into the markets I'll make a couple of comments on all three of them.
Texas is a little bit unique in that it's facing the dual challenge not only to have a there could be situation, but of the oversupply of crude oil that feed has been talking about but having said all that it does seem like Texas got ahead of things early and at some point there seems to be a move.
But from the governor towards some more normalization in some selective reopening so we'll see how that plays out I'd also say just the Texas today, while they're certainly the energy issue, but definitely in a more diverse economy that it was last in 10 years ago. During the great recession and as you noted we've seen just very significant.
At the new job creation and that population in flow through Texas will take a blow your from from energy and kind of good but I do think longer term, it's better position than it was during the last a great recession, California seems to have gotten a little bit ahead of the quarantining early all deserves a recent news out there.
Maybe the numbers for L.A. were higher than originally reported.
And what I would say that in California. We are also we're seeing some opportunities.
There's always opportunity to get created on the only a few side as people are doing more automation in technology and then lastly, I'd just say as I've said previously in California is there a very resilient economy very diverse economy, six largest economy in the world and so.
Take longer term will be okay I'm, Michigan.
Add more concentration of issues that took a more restrictive quarantine early on to deal with the where that to do it appears that impact I think that state is filling some of the impacts of extended plant closures certainly in the manufacturing sector, we talked about the decline in our themselves as well and we would expect outage.
It's probably fall again in April, but then may start to stabilize in the summer if we start to come out this as people start to move around but I'd say the same thing about Michigan and you know you look at where the St is today versus where they were 10 years ago, It's definitely moving through a more diverse economy, we've had a tremendous resurgence in the core of Detroit.
And we've seen some population inflow, especially in looks millennials into the stages. So you never say so little bit different situation certainly the re opening will be governed by the governors.
And so we'll have to work with each day.
Right after that and we've been working now for a few weeks on our own. We originally planned for the good news is whether we go back to full throttle reopening or maybe a phase reopening it has not stopped us from doing business and we have been able to operate well in a more rebate a environment.
Some of our colleagues about 50 Bucks of our colleagues working remotely and that's certainly some who are making centers et cetera that are still in a more direct costs basic made contact with customers.
Okay, alright, thanks, a lot.
Thank you John.
There are no more questions at this time I will now turn the call back over to current farmer, Chairman President and CEO for any closing remarks.
Well. Thank you always for your interest in Comerica, we continue to wish all of you and your family's group health and safety and the days ahead. Thank you again for joining us.
Thank you for joining today's call America Conference call you may now disconnect.
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