Q1 2020 Earnings Call

Some all participants I know it should be no I.

I think if he could you mikes so we'll be a question answer session.

The question. During this session you will need to press star one I need telephone if you wish to give yourself from the Q. These paxton Towne team.

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Oh, sorry.

Thank you I would now like turn the conference over to you hope it's a quick style.

Really.

Thank you Laura good morning. Thank you all for joining US today, we'll be discussing our financial results from the first quarter of 2020.

Please review the cautionary statement on materials, which can be found in our earnings release and presentation.

Cereals contain reconciliations to non-GAAP measures along with information for treatment of use a non-GAAP measures.

As most forward looking statements about two thirds performance, we undertake no obligation to would not expect to update any such forward looking statements. After the date of its call.

This morning, I'm joined by our President and CEO back or might be.

Yes, I was hoping to do.

Chief Risk Officer Jeanne Leonard.

Chief Credit Officer, Richard Stein.

Following prepared remarks, there Greg it's actually.

Call for questions.

We turn call over another Greg.

Thanks, Chris Thanks for joining us this morning.

One of the Unprecedent nature, the current environment I will focus most of my commentary corrective steps, we're taking to navigate this crisis due to the pin debit and I talked to provide more details related to the quarterly financial results in his remarks.

It's all of your where you dancer with the past couple bunch related to cope with 19 health crisis in resolving economic.

Oh, well has led us to Reprioritize our focus.

We're taking significant and ongoing actions to serve our customers protect our employees and assist Turkey news.

We believe these proactive steps will ultimately deliver long term sustainable value for all stakeholders, including our shareholders.

Starting in early February executive team and the board begin actively planning a prioritizing the organizations response efforts, we quickly mobilized our workforce to God comedy remote access where a large number of employees.

Currently more than 50% of a workforce is working remotely across the company and for many groups that numbers over 95%.

For employees, who are not able to do their job remotely we have established social distancing enhance cleaning badger's based on CDC guidelines.

Throughout these uncertain times.

We had been proactively communicating with our customers and employees.

We have issue more than a dozen press releases.

Several factsheet numerous proactive outreach as to our customers. In addition to ongoing updates on our website.

We've also increased the frequency of communications with our employees in order to keep informed the latest developments recommendations and help precautions.

From a customer perspective, we're leveraging the strength of our balance sheet could help address the economic challenges many of our customers are facing.

Youre prudently extending credit to customers were support economic activity.

Maurcio alone, we extended $13 billion, a new credit, including approximately $8 billion.

See an idling drops.

In addition to keeping our traditional linear channels oak.

We're also participating in government sponsored programs established as part of the cares that such as the U.S.P.A.P. Beattie into forthcoming main Street Monday program.

With respect to PPP, we assisted approximately 10000 clients employee over 300000.

Employees fully nearly $3.5 billion.

To maximize our support we recently announced we suspended share repurchases.

Yes, I feel will discuss in greater detail, we continue to have strong capital inquiry levels to whether a prolonged downturn.

In addition to utilizing our strong balance sheet.

Rocky supported consumers and businesses, but I mean, my personal or branches open fully operational modified helped protocols and amended hours as appropriate we.

We continue to process over 100000 branch transactions per day underpinning our role as essential service provider.

For many other banking needs, we continue to encourage our customers use a highly rated digital platforms. In addition to our network of approximately 53000 feet free ATM.

Furthermore, we continue to proactively engage with our customers our bankers have personally connected with 2 million customers over the past Bob the shield, they're doing under these circumstances, but personally in financially and to offer systems that needed under our extensive financial hardship really programs.

In March we began providing relief in the form of payment deferrals and forbearances to customers across a wide array of lending products. We also suspended vehicle repossessions at home foreclosures.

Since the raw bar assistance program programs, we are processed over 96004 should request.

Represents approximately $1.5 billion. Good third loan balances in addition to $6 billion from our mortgage servicing portfolio.

As I mentioned, taking care of our employees as a top priority. In addition to our safety measures, we have announced special payments of up to $1000 per employee for those providing a central banking services. These measures have helped maintain call center operations and branch personnel at appropriate levels.

Four communities, we recently committed nearly $9 million and philanthropic funds to help address the effects of children 19 pandemic.

We will continue to take corrective an aggressive measures to help mitigate the effects of the downturn.

From a macro perspective, what we do not know the duration. We're severity of the crisis. We have spent many years preparing for a downturn, but strengthening our balance sheet through a disciplined approach to credit by increasing our capital inquiry levels.

We have also improved the diversified revenue streams no loan portfolios.

Finally, we evaluate our firm wide resiliency through stress testing or balance sheet under a range of conditions worse than the last crisis and more severe than a regulatory run stress test.

Since the financial crisis, but taking several steps, which have put us in a very strong position.

We transformed our overall approach to credit risk management.

Centralized credit underwriting added stringent geographics.

Sector imply global concentration limits.

We exited certain commercial real estate segments remain disciplined in our existing surety portfolio. The client selection focused on top tier developers and virtually no landmines. We also continue to maintain underweight position relative.

For peers.

Yes, the businesses such as commodity trader lending mezzanine lending.

Three years ago, we actually the $5 billion in commercial loans given the risk return profile. This is help reduce our leverage lending exposures over 50%.

We have also reduced our indirect commercial leasing portfolio by almost $2 billion over the past two years, which has significantly lowered our exposure certain assets such as commercial aircrafts and railcars.

Lastly, we have maintained our credit discipline in our consumer portfolio with a weighted average FICO score above 750.

We have consistently communicated or through the cycle principles of discipline Klein selection conservative underwriting and overall balance sheet management approach focused on long term performance horizon.

Our unwavering adherence to these principles and our balance sheet strength.

Gives us confidence as we navigate this environment.

Our fourth our first quarter operating results reflect the strength of our franchise and a strategic decisions, we've made and managing our balance sheet.

Our interest rate risk and all the clear risk exposures and lay the rapid widespread economic deterioration, we sold towards the end of the quarter.

And interest income and it's just margin noninterest income and expenses all performed in line with were better than or January guidance with a net charge off ratio also consistent with our previous expectations.

But it will discuss the changes in our allowance in more detail.

Similar to what you have seen for many of our peers our reserves reflect the Cecil adoption the economic impacts of Koby 19, lower oil prices and the impact of loan growth during the quarter.

As I mentioned earlier he believed that we got rid of very strong position from both a capital and liquidity perspective.

Well continue to evaluate potential economic scenarios. We currently believe our capital position is strong enough to maintain our current dividend if these conditions persist.

We ended the year for me well capitalized.

Before I turn hotels soon to discuss our results in our outlook.

The once again, thank our employees I'm very proud of the way you have responded.

New ways to support our customers or communities each other as we navigate these unprecedented times.

With that I'll turn it over time to discuss our first quarter results. Our current outlook. Thank you Greg.

Good morning, and thank you for joining US today, our company is well positioned to deliver on our pledge to provide financial support to our customers communities and employees. During the current pandemic ended duration of the economic downturn.

It is important to note that despite the unexpected and nature of events that led to the sudden declining economic activity. We are entering this downturn from a position of balance sheet strength that was built through the actions that we've taken during the past few years.

Although it is impossible to predict the timing of inflection points in the economy with precision.

Since late 2018, we had been anticipating an eventual change and economic cycle after a record expansion period.

Our client selection capsule interest rate and liquidity risk management decisions have all reflected that expectation.

What makes this downturn more challenging than others is clearly the unexpected nature of the initial trigger and the ensuing low visibility surrounding the depth and duration of the downturn.

All parts of the global economy, our entry this cycle at the same time.

But the unprecedented level of fiscal and monetary actions will undoubtedly provide a level of support to cushion that portion of economic setback.

The actions that we have taken so far and those that you'll be taking in the coming months, we'll focus on maintaining and leveraging our strength to support our clients on standby them as we help them manage through this difficult period.

As always we incorporate all information that is available to us at the time, when we provide commentary about our business and discuss our expectations.

Our overall perspective on the next few quarters have been very negative at the end up.

Even before the rapid deterioration in the data and market expectations that we have seen over the past couple things.

As we look at the economy today, we do not expect a V shaped recovery.

Our discussions on relevant factors, including credits will be based on that assumption that it will take a number of quarters before we see visible signs of recovery.

What is unclear is the interaction between the fiscal and monetary programs and the pace over the recovery and what the new run rate won't be after that point.

Turning to slide four.

With respect to the first quarter, we were pleased with our overall financial performance despite the economic disruption.

Our performance in January and February was ahead of our expectations.

Once again, our net interest income net interest margin noninterest income and noninterest expenses for the full quarter all performed in line with a better than our guidance.

Credit quality remained strong during the quarter.

Charge offs were consistent with our prior expectations and the NPL ratio decreased two basis points sequentially.

Reported results for the quarter included and negative nine cents impact from several notable items, including a credit valuation adjustment for client derivatives and charge related to the valuation of the visa total return swap the impact of and be merger related charges and marketing.

Our private equity portfolio. In addition to the 55 cents impact of the provision in excess of charge offs.

Adjusting for those items and the purchase accounting impact shown in our earnings materials first quarter pre provision net revenue increased 22% from the prior year.

Excluding the first quarter seasonal impacts on compensation and benefits expenses PPNR increased 2% sequentially.

Our core return on tangible common equity excluding AOCI <unk> increased from the prior year to nearly 15% and our efficiency ratio continues to trend toward the top quartile among peers.

Moving to slide five.

Total average loans increased 1% sequentially with growth balance between the consumer and commercial portfolios.

Prior to the market disruption in March total loan growth was generally tracking in line with our previous guidance.

Growth in average commercial loans was impacted by the line draws of approximately $8 billion in March.

Since the end over the quarter line utilization has remained very stable.

Average commercial real estate loans more classic.

With the construction book declining by 4%.

Our CRT balances as a percentage of total risk based capital remained very low around 80%, which is significantly lower than our exposures prior to the last downturn, which stood at 174%.

Average total consumer loans grew 1% from last quarter.

In general our consumer portfolio trends from the past year or so continued again during the first two months with the auto portfolio, leading the growth, reflecting strong production of $1.7 billion with healthy spreads and the same risk return parameters as before.

Clearly the origination activity significantly slowed down in March.

And in the near term, we expect the weakness to continue.

The quarter over quarter broken auto was partially offset by a decline in home equity balances.

Average deposits were up 1%.

In addition, our end of period deposit growth exceeded our end of period long growth, which enabled us to maintain very strong liquidity levels during the quarter, even when we experienced very high utilization rates.

The ability to grow deposits, so strongly while reducing deposit rates by 14 basis points during the quarter shows the strength of our franchise and our relationship based banking ball.

Moving on to slide six.

Reported net interest income increased $1 million compared to the prior quarter.

With adjusted and I are increasing $3 million.

This strong performance reflects the impact of our 11 billion dollar cash flow hedge portfolio as well as the wider than normal libel fed fund spread near the end of the quarter.

Purchase accounting adjustments benefited our first quarter net interest margin by four basis points this quarter compared to five basis points last quarter.

Our reported NIM increased one basis point and the adjusted NIM increased two basis points sequentially, which was at the upper end of our January guidance.

Our NIM performance reflected the benefits of our balance sheet hedges proactive management of deposit rates and lower day accounts [noise].

The excess short term liquidity levels in the first quarter caused the three basis point drag on our NIM compared to last quarter.

Interest bearing core deposit rates were down 14 basis points during the quarter better than our previous guidance range of eight to 10 basis points.

We expect interest bearing core deposit costs declined another 35 to 40 basis points over the next two quarters and be heavily front loaded into second quarter.

This forecast combined with the deposit rate actions, we have taken since the third quarter of last year in response to the fed rate moves results <unk>.

In a cumulative data in the mid Thirtys.

In the near term, we intend to maintain higher than normal liquidity as we continue to gauge the duration of the line draws and the corresponding deposit growth that we witnessed over the past month.

Excluding the impact of P.P. loans, we expect our loan core loan to core deposit ratio to remain stable into second quarter.

As a reminder, our margin is approximately two thirds sensitive to the front end of the care, which results in a three to four basis point reduction in NIM for 25 basis points move in fed funds.

And one third to the long end, which results.

Together in a cumulative four to five basis point impact.

It is worth noting once again that our differentiated hedge and securities.

I would expect it to provide strong NIM protection on the relative basis.

We executed our hedges early when the 10 year was around 3%.

And also structured them to provide protection for much longer than most peers with hedge protection against low rates through 2024.

And as we have discussed before our securities portfolio is also structured in a way that is meaningfully different than peers, which results in significantly lower cash flows and less stress on the portfolio yet.

Our net premium amortization was under $1 million during the quarter.

Moving onto slide seven.

We had a stronger quarter in fee income then be guided in January.

The resilience in our piece continues to highlight the level of revenue diversification.

Adjusted non interest income increased by 1% sequentially. Despite the March Edwards compared to our previous expectation down 3% coming into the quarter.

The strong performance was driven by mortgage banking client financial this management and wealth and asset management revenues.

Mortgage banking revenue of $120 million increased $47 million sequentially, reflecting the widening of primary secondary spreads and strong volumes combined with the impact of the MSR valuation net of hedges.

Origination volume of $4 billion increased 6% sequentially and 145% from year ago quarter as customers took advantage of the low rate environment to refinance.

We expect second quarter mortgage revenue to be adversely impacted by cold with 19.

In our commercial business, we generated another strong quarter of capital markets revenues, which were up 25% over 25% from a year ago quarter.

CLI and financial this management revenue was very strong this quarter, reflecting investments in talent and technology. The continued focus to deepen client relationships as well as the market volatility during the end of the quarter.

Wealth and asset management revenue increased 4% from the prior quarter due to higher brokerage and seasonally strong tax prep fees.

We continued the U.M. flow momentum again this quarter, despite the broader market dynamics.

Given the current portfolio allocations, we expect our wealth and asset management revenue experienced approximately 50 beta relative to the S&P 500 on about a month lag.

Deposit service charges declined slightly this quarter commercial deposit fees were positively impacted by reductions in earnings grip.

And solid gross T M revenue, which was offset by seasonal declines in consumer piece.

Moving on to slide page.

First quarter reported pre tax expenses included merger related items totaling $7 million and intangible amortization expense or $13 million.

Adjusted for these items and prior period items shown in our materials non interest expense increased 2% sequentially well below our previous guidance of 5%.

In line with previous years, our first quarter expenses were impacted by seasonal items associated with the timing of compensation awards and payroll taxes.

Excluding these seasonal items, our total expenses in the first quarter would've been down approximately 4% sequentially.

In the current environment, there won't be a natural decline in expense items that are directly tied to business performance in activity.

In addition, we recognize that as we navigate this environments investments and projects with low returns will need to be reprioritized, which gives us the ability to evaluate a wide range of potential actions.

As we develop better visibility on the extent and duration of the downturn several of these items will be actionable.

We will provide more details on our expense management in this environment in the coming months.

Yeah.

In March at the RBC Conference, we provided a snapshot picture about exposures to cold at 19 high impact sectors.

Slide nine provides an update full quarter end exposures and also expands our scope of highly impacted industries to include non essential retail and exposure exposures to health care facilities.

We are also adding boring formation on the utilization rates and the percentage of the portfolio that is described as highly leveraged.

The totals on this page represent 12% of our total loans approximately one third of our total leverage loan portfolio, which at the end of the quarter was just over $4 billion Outstandings.

We believe that in these segments our client selection has been very disciplined.

Focus on larger companies that have access to capital is fast environments.

75% of our total cnine loans in industries, most stressed by called it 19, our shared national credits.

Yeah.

In addition on slide 10, we give you a snapshot of our energy portfolio.

This portfolio is less levered and more hedge then the portfolio before to last downturn in oil prices.

Nearly 80% of the portfolio is in reserve based lending.

During the 2015 disruption, we experienced approximately $25 million and losses.

And the current environment, we estimate that the production bake even is about $18 per barrel.

On slide 11, we give you an updated view at the consumer and mortgage.

The FICO scores clearly indicate the high credit quality of the portfolio with over 55% of the portfolio containing FICO scores of 750 or higher on a balanced weighted basis.

Approximately 90% of the consumer portfolio is secured and as you can see by our FICO band distributions. Our portfolio is heavily weighted in the high Prime Super Prime space.

From my hardship perspective, only 10% of the mortgage forbearance requests have LTV is greater than 80%, except for those with guarantees or insurance.

Also in February we further tighten their underwriting standards, specifically on minimum FICA scores and maximum LTV levels.

Turning to credit results on slide 12.

Net charge offs remain near historically low levels during the quarter.

The consumer net charge off ratio was down 12 basis points and commercial was up 12 basis points sequentially, resulting in a total net charge off ratio of 44 basis points consistent with our previous expectations.

And P. Ace continued to be well behaved up just 4% sequentially.

Given the loan portfolio dynamics I mentioned earlier, the NPL ratio was down two basis points sequentially.

Obviously with the adoption of C.. So we substantially we substantially increased our reserves at the beginning of the quarter and given the cold at 19 impact and loan growth our provision was 525% of charge offs.

Slide 13 provides an overview of the major changes in our law.

Our day, one build was $653 million consistent with our previous guidance.

And includes $171 million from and be portfolio as we discussed previously which was significantly impacted by the disparate manner in which purchase accounting discounts were treated under the incurred model versus the seasonal mall.

The post day, one incremental allowance during the quarter was based on several factors.

Significantly weaker economic outlook, including a lower oil price higher funded loan balances and the impact of unprecedented fiscal and monetary stimulus.

The overall approach is the combination of quantitative model base estimates.

And qualitative overlays.

We use a three a reasonable supportable period, followed by a two year their version to historic losses.

The quantitative process is based on multiple economic scenarios the expectation for the two predominant macroeconomic factors is a sharp downturn in GDP.

And at rising unemployment in the next two quarters, the impacts of which are partially cushioned by the aggressive levels of fiscal and monetary stimulus leading to a very weak recovery in the fourth quarter.

The challenge associated with calibrating, our expectations is as other banks have discussed the speed at which the real time updates of economic forecasts are changing.

The base scenario assumes that GDP growth will slowly start to recover in the fourth quarter and will reach a year over year grow over approximately 3% in 2021 with the unemployment rate remaining about 6% throughout 2021.

The more stressful scenario has GDP continuing to decline through the first quarter of 2021 and unemployment staying about 7% for almost the entire three year reasonable and supportable forecast period.

The oil price under the base case reaches $33 in the fourth quarter, but under the more stressful scenario remains below $30 through 2021.

As a reference points, we compare our current reserve level within nine quarter total loss estimates within the two most recent severe stress test runs that for you ran.

Including the 2019 stress test that you ran last year. Despite the fact that we will not required to submit.

And the 20 Twond he stress tests that we recently submitted to the said in addition to the most recent fed Ron.

Grocers severe stress test from 2018.

Our current reserves stand at 76% of the nine quarter cumulative losses projected under the two to 2018 fed adverse scenario.

44% over the nine quarter losses under the 2018 fed severe scenario.

50% of the nine quarter losses under the 2019 severe scenario.

And 54% over the nine quarter losses on the 2020 severe scenario that we just submitted.

In the absence of better visibility on future levels of economic activity. These reference points give you some guidance on the strength of our current a sales ratio of 2.13%.

In addition, we still had approximately $200 million or 17 basis points of our total loans the remaining discounts associated.

50 M.B. portfolio.

As other management teams have mentioned during the holidays falls most of the economic scenarios published since the end over the quarter are forecasting a weaker outlook compared to previous forecasts.

As more quantitative and qualitative information becomes available we will incorporate them into our reserve analysis.

As a significant fiscal and monetary support is likely to reduce the impact of both the near term decline and the GDP and the increase in unemployment the more meaningful impact on reserve levels will be the shape of the recovery and the level of economic activity in the post recovery period.

Turning to slide 14.

Our capital and liquidity positions remains very strong during the quarter.

I see T. One ratio ended the quarter at 9.4% over 280 basis points above the well capitalized minimum.

Given the various dynamics during the quarter.

We are providing U.S.C.T. one reconciliation between net income our double your growth Cecil adoption and the impact of dividends.

As a reminder, you did not repurchase shares during the first quarter.

As you can see the majority of the 39 basis point change in C.G.. One is a tribute attributable to line loss from the commercial book along with the impact of Cecil.

Dividend payouts constitute a smaller portion of the change in.

[music].

[noise] understandably the topic of dividend sustainability is a major interest to our shareholders.

We believe that we are in you are similar to other banks in that we are entering this downturn from a position of strength and that strength will be able to withstand severe downturns.

That does that mean that dividends will be sustainable in all scenarios, but at this time, we expect to maintain our dividends, which our board will continue to evaluate based on the data available.

Our tangible book value per share was $22.02 this quarter.

Up 18% year over year.

We have grown our book value for five consecutive quarters.

At the end of the quarter, our unrealized pre tax gain in our securities and hedge portfolios was approximately $3.3 billion, which is not included in our regulatory capital ratios.

From a liquidity perspective, we have over $80 billion in readily available and contingent liquidity.

Although we are no longer its object to the LCR you have since continue at the trough that I'll stress test out positions on a monthly basis under seven different types of liquidity. So.

And we then hold ourselves to the most trustable scenario.

Our liquid securities positions have not changed since our phase out of the LCR.

[noise] Slide 15 provides a summary of our current outlook.

Given the uncertain environment, we have withdrawing our previous full year guidance until we get more visibility on the economic environment.

For the second quarter based on the line draws at the end of the first quarter.

Yeah.

We expect low double digit growth in average commercial loans and relatively stable consumer loans.

Net interest income should grow slightly as a result of higher loan outstandings, while NIM tightens based on my earlier discussion on our interest rates.

In addition to the impact of the rate environments. NIM will also be impacted by the PPP loans and the amount of short term liquidity on the balance sheet.

Non interest income and expenses are both expected decline by high single to low double digits from their current levels, reflecting the impact of called at 19 related impacts.

So in that chip told net charge offs are expected to be in the 45 to 50 basis points range.

In summary, our first quarter results were strong and continue to demonstrate the progress we've made over the past few years, improving our resiliency diversifying our revenues and proactively managing the balance sheet.

That being said we are in an unprecedented environment right now and have limited visibility with respect to the economic passport.

We will continue to rely on the same principles disciplined client selection conservative underwriting and we'll focus on a long term performance horizon, which gives us confidence as we navigate this environments.

With that let me turn it over to Chris to open the call up for a few and [noise].

Thanks, I seen before we start una as a courtesy to others. We ask that you limit yourself to one question a follow up question and then returned in the queue. If you have additional questions.

We do our best answer as many questions as possible in the time, we have a lot of this morning.

During the question and answer period, please provide your need and out of your firmly up.

Laura Please open the call for questions.

[noise] all right. Thank you, ladies and gentleman that that's fine if it wasn't like I asked the question Sealy Press Star then the number one on your telephone keypad.

We will pause for a moment compiled documenting roster.

Your first question comes from the line of cell Martinez from you'd be yes. Your line is now open.

Hey, good morning, Thanks for taking my question wanted to ask about of the.

The outlook for credit and.

The interplay there with your reserving and you know your reserve as you highlighted taking your your reserve levels are very high versus and then there, especially hybris Pearson 213 basis points suddenly hybrids is other regional but I think even more striking.

He is just within product category Cnine hundred 68 basis point your way above.

Think anybody who's who I've seen report on reserve ratios on on resi and home equity. Despite you know seemingly hybris sports a high quality portfolio sorry. So.

You know I know, there's a lot of you talked about your estimates in your process and your assumptions, but I guess you know I just want to your perspective, a little bit on to what extent. Your reserving is a function of taking maybe a more conservative stance and others within the confines of a plausible scenarios and Florida.

To what extend it actually reflects perhaps a riskier portfolio or at least the portfolios that might be more susceptible to a downturn in terms of the the impact on lifetime losses.

Thanks. Good question, obviously it is a broad question.

And the difficulty here is.

The environment has changed so quickly it is difficult to compare one bags ratios in coverage to another us, but having said that what we gave you are on page 12 of the slide presentation is a similar set of coverage numbers for stress test runs that other banks hat and clearly.

Our coverage levels are exceeding those losses that you know we have predicted through our models compared to other banks. What we have done is we have we have incorporated the as the environment continued to deteriorate in March into the end over the quarter.

And basically reflect its.

A fairly drastic change in economic environment, not only in the second or third quarter, but tried to project a weaker recovery into the second year and third year, because we are looking at ethree or or an S period here and I gave you some statistics around our assumptions in our minds.

The current fiscal and monetary policies are likely to cushion the second and third quarter impacts, but are not going to be necessarily providing a significant support to the latter years. So our reserve levels as conservative as they are at two point, 13% do reflect you know a slowly recovering economy.

Rather than they V shaped recovery underlying that those numbers. It's also the quality of the portfolio that we have we shared with you statistics on our consumer and mortgage portfolios and we are also sharing some details on the commercial book. The commercial book you know I think our Jamie and Richard can comment on the commercial book, but.

The portions of the commercial exposed to cold. It 90 also tend to be the that book that has more large corp. exposure is more heavy sneaker exposures. So all of those combined hard to compare our numbers to another but we do believe that weve appropriately accounted for.

A week outlook slow recovery and the quality of the portfolio that you haven't place Jamie our do it yet.

Yeah. So what was you know I stepped into this chair and started looking at the portfolio.

The one thing that stands out to me is just how intentional or we have been about where we do business with the clients a that we select that should be resilience in times of stress and frankly the focus.

For us has been on companies with larger scale that should be able to persevere in this environment and so our loan book I would tell you is comprised of high quality liquid resilient mains and the best data we could.

Used to prove that point is the shared national credit information that we included on the page and as you can see et cetera.

Very high percentage with 75%.

Got it now know suggests that this is that it's obviously, we continue to evaluate you know the data as it comes we continue to evaluate these new programs and you know we at the end of this quarter, we'll do that evaluation again I'm just like every other banks will do and then we'll share with you.

The results of our analysis.

And we can you know I know there's gets into the weak, but you know some some elements of your modeling three year reasonable affordable and whatnot and maybe on on the more conservative side, then and some other peers, but one follow up question.

Yes, you did have six consecutive quarter, where you had pretty elevated amount of nonperforming loan formation in your commercial book do you can talk to that and was it was any of that related to sort of the pieces accounting noise with PC eyes, you know moving to P.C.D. and then getting reclassified into non accrual or was there you know actually.

Something underlying that that you know is is suggesting some worsening credit trends in some parts of your book.

So the on the first part of the question, there's very little impact on the.

P C hi, the PCB transition so the M.P.A. inflows or that you're seeing the deck of about 175 million. So it was driven by several factors one one about a third of the inflow was a single.

The real estate mall exposure.

About one fourth of the NPL formation is actually in smaller businesses business banking lower middle market and then the remainder a when you look at what drove it it's really spread across industries and geographies, but the one common thread that's what they're all predominantly in the service industry. So professional a medical.

Education financial advisory so.

Spread there.

Okay got it thank you very much.

Your next question comes from the line of Matt O'connor from Deutsche Bank. Your line is no offense.

Good morning.

Hey, Matt.

Wondering if you could comment at all in terms of the PPP long going to I guess those.

Small pay per view than the most I mean, obviously this is kind of a broader question I just a third but it seems like a little bit of a free for all Dom are suffering from articles out there about maybe some bigger companies getting alone.

Not really kind of criteria for deciding who gets it and just wondering if you could comment on that on your thoughts.

Matt This is Greg them as I've mentioned, we processed about 10000 loans where customers. So soon about 3.5 billion. The average loan size is about 350 370.

Thousand dollar so that for our portfolio I think it was pretty pretty broad base, but.

Good job I think a servicing both yellow my community a businesses small business in general very few of our loans were up for that nine to 10 billion dollar range. So far portfolio I think we did a pretty good job of opportunities much through the system as we could a short time that we had available system was available to us hope.

It gets refunded tomorrow at the latest Oh, we got more resources, there because we definitely have a larger pent up demand on foot forward the PPD program.

Overall with respect to fifth third I think you did a nice job a sizable loans indicate that we serve a a large portion of the smaller.

Businesses that are out there versus the larger business I've read the headlines I've seen some of the challenges although the banks are faced with with sports parts housing loans. We did not do that we worked as far as we could because many loans through the system. A lot of is depended on its complexity of the request itself and the ownership structure of companies kind of dictated how much we can get through it with pace.

If you don't get through or not but once again weve already.

And put a significant additional number of applications hopeful with the window will open your shortly I won't get those through.

And then it sounds like a call out what the pipeline is for when as additional funding.

Yeah, well, obviously I think.

Those bankers would agree and most people would agree that the additional 300 billion is not going to be adequate to disturb. The total demand that's out there right now we expect that 300 for 350 billion to be absorbed pretty quickly even faster than the last you know two you know 350, whereas orbs. So we think it's going very fast and they'll think it's going to be out.

Adequate would need to demands going to outpace did outpace the available funds.

Okay. Thank you how full color.

<unk>.

Your next question comes from the line of African the Jargon from Bank of America. Your line is now open.

Hi, good morning familiar enough.

So just to piggyback off her so question you said in significant reserve.

Bill and fill our four cents no whistle stop.

<unk> dollar.

75 cents intangible book value per share I'm trying to Buck.

The market in your car tangible book erosion and I guess my question here in <unk> and a realistic scenario tracking on extract that you see and it seems like New York fans as applications are reasonable do you see yourself continuing to earn cognizant, earning during creationism downturn.

[laughter].

[laughter] a good question I will not call, but I'll, just say like all the time [laughter] Oh look I mean I think.

Our away from reserve builds and losses Asian, I think the underlying.

PPNR activity is going to continue to look good we intend to manage our expenses at an appropriate level.

Relative to the environments or we have a strong.

Protection against a lower rate environments, and do we have diversified revenue streams. So the company has a strong.

Below teacher generate capsule and earnings in this environment.

As I mentioned earlier, it is little difficult to predict exactly what will happen or to the provision and the charge offs, but clearly our intent is to continue to outpace the impacts of the credit here Oh. This is one of those environments, where unfortunately looking.

The longer then beyond one or two quarters easy extremely difficult. So we will give you had better updates as we get a better read on the environment, but obviously, we believe strongly.

Our ability to manage this company profitable levels.

Thanks, There and then my follow up question.

Yes, you noted that no bear with me.

Total impact of four to five basis points on the net interest margin. If we consider HM each 25 basis point decline in the short end spots. What happens is a long time and I'm wondering does that include TPP NPAC and good day.

The reduction in deposit costs, and anticipate and how do you plan to find the TPP loans are coming on balancing Oh yeah.

Yeah. So we did not give any NIM guidance this quarter and that was Oh that was on purpose I think the general.

Dynamics around NIM and the impact of lower short term rates and a flatter to our at lower age is pretty set for us as I mentioned its four to five basis points per move. The reason why we chose not to gave guidance. This quarter is because there are three.

I view, the second quarter as they Transitionary quarter. There are three main impacts one of them is the very high levels of liquidity that we are carry on our books I mentioned that March you know carried a significant really more liquidity on our balance sheet here in early April were carrying even more because some of the government programs are starting to.

Throw cash.

The second one is PPP as we mentioned and the third one is the libelous I phone spread we expect LIBOR based on spreads have tightened throughout the quarter from the current levels and what we also believe is because the high level of liquidity that we were carrying off balance sheet.

Better ability to manage the deposit rates down during the quarter. So all those together is the second quarter is going to be one of those quarters, that's going to be very busy.

But beyond the second quarter that relationship between rate moves and the curve shape.

And our NIM impact holds pretty tightly three or four to five basis points is a pretty good numbers that.

You can use.

Got it thank you.

Your next question comes from the line of John from Carney from Evercore ISI T. All your line now often.

Morning.

Hey, John.

Thanks for the detail on slide 12, I think it's a very helpful and I acknowledge that.

What are the prior comments that your reserves are.

Book to a level that that's higher than peers can you discuss your confidence in your reserves relative to the de fast numbers that you signed these I guess or approximating around 50% of de fast severe you know given that you are factoring in a U shaped [laughter].

See versus the V. <unk> why wouldn't you seem to do is numbers should be higher not that I've got a problem with them or anything I'm, just saying if it is factoring into you should that warrant, possibly oh level, that's higher than about 50%.

The percent of D C or D Fas. Thanks.

Yeah in order to achieve and better level of precision we need to know more about this environment. This we are giving you. These reference point as a comparison I think the scenarios that underlie the defects are are known and they are quite severe but no.

ER stress scenario is like the other one and this one in particular is going to be very different in the sense bad. These support programs <unk> <unk> are yet to be evaluated with respect to a holiday impact the recovery path and where we are.

Going to end up that's a big difference because in most classic stress test usually the economy comes back at one point to where it started what we don't know today is where this economy is going to end up when the recovery period flattens out too far too. So I'm very hesitant to answer your question because we.

We just don't know enough it got to nature.

But at least showing you the de faster results gives you the ability to compare us with others and then as this economy develops then we have the ability to reshape our expectations.

No I agree okay. Thanks type funds and then the another question on the reserves do you have the allocation of the reserve to the high impact hearing is that you flight.

So we did not provide that John.

So relative to the 2.1% one would assume it's north of that number, but we did not disclose that percentage.

Okay. All right that's fine and then one last question if I could just on the.

Loan modifications how much of your loan modifications have didn't done on the commercial side of the portfolio and do you have.

Any industry concentrations really where you're starting to see those out there's deferrals. Thanks, yeah. So within the commercial segment.

We've actually had a fairly limited number of requests in the commercial side relative to the consumer side, we've only had about 400 or so and that's predominantly covenant waivers.

For terms and 2020 and that's on a roughly 2 billion of Outstandings and that's led by a car dealers hotels and restaurants.

When it comes to restructured or modified actual dollars. That's a very small to date with only 200 million in loan balances.

And probably the one sector with the most activity.

Would be restaurants, you see that on slide nine or or billion nine in outstandings are the good news is were favorably weighted.

With only 35% is in dining and 65% is fast food quick service. So about 80% of the book continues to remain open those that are closed are predominantly in the in dining.

Category. So overall some activity here in the in the modifications, but it's.

Still a little earlier, we'll see how it plays out over the course of the year.

Got it alright, thanks for taking my questions.

Your next question comes from the line of Gerard Cassidy from RBC. Your line is now open.

Good morning, Greg Good morning, TFM learning through morning Gerard.

Game is very good detail on number of you just different.

You know risks that you have on the portfolios today.

And in the opening comments, Greg you mentioned that I think.

About 96000 fee waivers had been executed also deferrals some loans up to 1.5 billion.

Yeah, I think represents just under 5% of the consumer loan portfolio.

Do you guys have any expectations were those deferrals of Maine peak on that as a percentage of your portfolio. Yeah. Let me, let me start Delta total Virginia here first off that this 96000 Hearts west.

But duffy waiters, so nice she sells the requested total which a lot of that included obviously both forbearances.

And deferrals and our loan book also but the fee waivers actually much smaller than I think the G. Jamie numbers like 400 do that number.

A favor so about half a million dollars in any way versus yeah, and so Gerard.

In terms of the hardship relief to date, a byproduct and this is through the end of last week, so a little bit updated for April activity.

What we're seeing is a lot of the fixed rate.

Her a fixed payment.

Products have the higher or request level, so autos that 5%.

Mortgages on our owned portfolio or at a.

4% of the portfolio and then as you see the minimum monthly payments or lower you know in home equity and credit card there at two and 3%. So as we model obviously, we expect us to rise as unemployment rises, but the ultimate amount of hardship.

Relief that we give.

Ultimately depend on where unemployment peaks Alf and for US right now on most products were offering 90 day loan payment deferrals and then in mortgage we offer the six month forbearance. So I will continue to update you as a but the quarter transpires.

Thank you and then obviously the focus is quota for you and others has always been on credit quality the provisions.

Equally as important typhoon as you pointed out is P.P. and arm.

You feel with us.

Your outlook for PPNR from the standpoint that obviously the second quarter ended period first CRE loans for the industry was extremely high due to the drawdowns and revenues, obviously would benefit from that in the second quarter, but as we get into the third and fourth quarters and you know the unemployment rate goes up underwriting standards Titan should we anticipate.

You know PPNR revenues start to shrink for you guys just because of the environment. We're in.

I think I Gerard Here's my take on but as the year Oh I do believe that assuming these draw downs will stay with us for awhile.

The higher loan balances will provide a decent amount of support against the low rate environment.

And assuming that you know, we manage the deposit rates down and our liquidity positions.

Optimally.

The year. Despite the fact that it is a you know the worst case scenario or beyond just negative interest rates full bags. The balance sheets should supports you know a decent healthy level, though and I in terms of.

The sequence of quarters from second into third and fourth Ah I think we we'll probably see M. A changing fee picture here, because clearly the economy stops and that will have a near term and negative impacts on fees in the second quarter from spend levels or two.

Do you know asset management based on equity levels and to some capital markets activity. Our expectation is assuming that things start somehow normalizing either you know into the second half of the second quarter is the third quarter, we should see a little healthier fee picture in the second half.

The year and then the expense side of it we clearly are going to benefit from lower expenses that are tied to activity and then we will start making some decisions on Iran or based on this environment. So in general you are going through the second quarter definitely is going to be a transition quarter, but I.

Do believe that as we look into the third and fourth quarter, we are going to start seeing some normalizing PPNR actively keeping all levels.

Thank you.

[laughter].

Your next question comes from the line of the VIX <unk> from JP Morgan. Your line is now open.

Thanks can you hear me.

Yes, good morning Buck.

Couple of questions.

Firstly on your oil and gas exposure can you talk a little bit about where are you on your reserve base Redetermination and what that could mean now for the loans.

Yeah, Hey, it's Richard a worry about a third of the way through the Redeterminations and at this point, we've seen about a 16% drop in oil based borrowing bases in about a 12% dropped for those that are gas based production producers.

Oh.

Okay.

And then I.

I think I called the center said, even gotten a breakeven typhoon you set off a $18 a production price.

Yeah, what Texan was describing as we went through the portfolio and and looked at the average breakeven lifting cost for our portfolio. So think about what it takes to get out of the ground and what it costs and what it would take to service interest for that portfolio and that's about $18. When you when you benchmark it to Nymex what type thing.

Didn't give you I think this it's important for the portfolio. We also lets say on slide 10, the portfolios, 80% hedged for 2020 as hedges.

Our producers about 14, and a half dollars a benefit a net benefits or if you can take you add the head just do it five bucks breakeven.

Uh huh.

And and those hedges sounds like a lot of them mature by the end up 2020.

Hi, well we've described on slide 10 is the percentage of production that is that attaches, 80% in 20, and then it rolls down to 30% in 21.

[laughter].

And then what happens to those loans as those hedges roll off I you de <unk> do you get a to be donlin and the borrower has to figure out how to.

On another funding all have us well well walk us.

For those under reserve based structure the the borrowing bases Redetermined every six months. So there will be eight still they fall redetermination that will be based on current production current reserves and the outlook to prices at that time, so the <unk> the borrowing base in the loan mouth that we're willing to lend I gets reset every six months so.

So to the extent prices prices improve that'll change the borrowing base to the extent they dealt barring base would come down.

Okay great.

Jimmy any color on the.

Casino exposure to the though.

The casino exposure on slide nine or the top.

Part of the page or slide nine refers to.

Lending to the operating companies within the casino and then the.

See every portion would be.

Obviously, the land the hotel going along with it or we are really the names.

Our.

Large companies high quality resilient. So again, we feel like we're well positioned and while there may be losses in this portfolio, we feel like the loss content is very manageable.

It's Richard again, only got AD is a in addition, a high quality names, we're diversified by operator types. So global operators are some native American and some regional and in each case, a high quality operators, usually where they are to the extent. They are regional they have got agree our franchise area that is either.

Given to them by regulation or demographics that that give them a gives them a ton of resiliency and less competition.

Great. Thank you.

Your next question comes along the line of Scott Siefers from Piper Sandler Airlines now one thing.

Morning, guys. Thanks for taking my question I'm always to say.

Hey, I guess first of all just want to echo some my prior comments that really good detailing appreciate that disclosure and I think at this point I'm. Just one small question sort of follow up on the deferral of I guess I'm just curious on the commercial side and even though it's fairly was hoping you might be able to give a little insight as to how you would expect sort.

I guess I've read due diligence process to go as you know we come up on the end of the the deferral time period, and you know how will that go or you know sort of willingness to defer again or you know how does that entire process work through it.

Yeah. So on the mortgage are you talking on the consumer side. So no I you know I'm actually even though it's a relatively small I'm actually mark I'm curious about the commercial side yeah. So the commercial side, we'll just.

Continue on a case by case basis with each clients or the covenants relief periods expire.

As we're executing on these covenant waivers, we have been adding some additional liquidity capital retention requirements as well so we feel like the process.

[noise] has been productive it's been a good dialogue with clients.

And so that will just continue over the over the course of a year.

Okay, perfect and then at what point do you sort of I mean, I guess, it's all a case by case, but at what point do you sort of make that decision as to RK. We you know we could continue to sort forebear on this or you know maybe it needs to be a downgrade in charge off it et cetera.

Yes.

Yeah, Hey, it's Richard So we we review the portfolio actively and for the names that are that are going to be more impacted at least quarterly Ah, but there is active management active dialogue and so as new information comes and we adjust our internal risk ratings.

And then as we have financial reporting that would be the other driver that with that would change a few in our risk.

To the extent that borrowers continue to perform in line with expectations, we would expect to continue.

Deferrals in the four Barents that leaves.

<unk>.

Okay.

Alright, perfect I appreciate the color. So thank you guys again.

[noise] [noise] there now question at this time.

You mean now continue Chris.

Thank you Kyle and thank you all for your interest in fifth third.

If you have any follow up questions. Please contact the Investor Relations Department, and we will be happy to assist you.

That concludes today's conference call you may now disconnect. Thank you for your participation.

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