Q1 2020 Earnings Call
Greetings and welcome to the be Okay financial first quarter 2020 earnings call.
At this time all participants are in listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference a please press star zero on your telephone Keypad. As reminder, this conference is being recorded I would now like to turn the conference over to host Mr., Stephen No Chief financial officer be okay.
Thank you Sir you may begin.
Good morning, and thanks for joining us today, given the unprecedented environment in which we operate wanted you to hear from several leaders across the company first our CEO, Steve Bradshaw will provide opening comments next Mardi Gras start chief risk officer.
But.
At an update on our business resiliency operations related to the Corona virus pandemic.
You'll also hear from norm back well executive Vice President of our regional banking Division, who will discuss our response to customer needs across the region, including the significant efforts to provide loans under the paycheck protection.
Graham.
Stacy times Executive Vice President of corporate banking will cover our energy health care and commercial real estate portfolios and Mark <unk>, Our Chief Credit Officer will also join us to discuss other loan portfolios, our credit metrics and the impact of our Cecil implementation.
Lastly, I'll provide first quarter details regarding net interest income net interest margin fee revenues expenses, and our overall balance sheet position from a liquidity and capital standpoint.
Pds other slide presentation in first quarter press release are available on our website <unk> be okay, yes dot com.
We were.
Refer you to the disclaimers on slide two as it pertains to any forward looking statements we make during the call.
I'll now turn the call over to Steve Bradshaw.
Good morning, Thanks for joining us to discuss the first quarter 2020 financial results I want to begin our call. This morning by playing to our thoughts go out to all those.
Actually by the Corona virus epidemic this isn't a bit without parallel for our company or region and our nation. We recognized that our clients a community is dependent on us now more than ever.
The company that serves a vital role that economies of our footprint. We see first hand, the impact this crisis has gotten individuals and companies.
And we remain committed to helping our clients through this troubled times.
And while our call will detail our first quarter results, we'll spend a significant amount of time today discussing the impacted this new economic environment on our company.
As Steven mentioned, we have a big line up today that should provide insight into our response and our outlook relative to cobot nicely.
With respect to the first quarter be Okay financial recorded net income 62.1 million and diluted earnings per share of 88 cents earnings this quarter were impacted dramatically from a shifting economic outlook and falling oil prices.
Drove a significant increase in our low loss provisions under the newly adopted Cecil accounting standard, which Mark mom, we'll talk about in detail a bit later.
Not to minimize expected credit losses, but if we focus on Preprovision net revenue in comparison to previous quarters. The results were really solid.
Preprovision net revenue was 173.1 million this core versus 160 million last quarter and 148.2 million for the fourth quarter last year showcasing the contribution of our diversified mix of business revenues.
Net revenue declined 8.9 billion to 261.4 million this quarter.
Multiple rate cats in the latter half of 2019, and 150 basis points of emergency rate cuts in March of 2020 lie more has remained relatively elevated this combined with our ability to decrease deposit costs has preserved a large portion of our margin. Stephen we'll talk later about actually taking the position about sheet and drive.
Deposit costs further down.
Brokerage and trading the mortgage banking revenues continued out perform on strong mortgage backed securities trading and mortgage loan production volumes.
Easing conditions revenue was up over seven per cent from last quarter building on the previous years momentum while mortgage banking revenues grew over 46% on a lake quarter basis as you can imagine the growth in this area accelerated in the last month and the first quarter and likely will continue to be a leader in coming quarters.
Expense management was excellent this quarter as well with expenses down 7% compared to last quarter.
Decreased incentive compensation was the main drive or this quarter. We also took several steps related to delay the feeling of open positions and reducing discretionary spending detailed later in the call, which should help expense levels for the remainder of this year.
Hurting the slide by period in loans were 22.5 billion up over 30% from last quarter.
This was positive for the company overall, a significant portion of this was due to increased draws particularly in our commercial and industrial portfolio.
Deposits were up nearly 6% links quarter and that over 15% year over year I continuation of the string we demonstrated in 2019.
Even with the significant growth in deposits, we were able to bring overall interest bearing deposit costs down from one point o. nine per cent in the fourth quarter to 0.98 per cent. This quarter as we were able to adjust rates paid on exception price deposits in our commercial portfolio much more quickly than expected.
Assets under management or in custody were understandably down to the quarter is equity markets white on asset prices.
That said prudent diversification of our clients assets helped us to relatively outperform broad market sell off.
In addition, we saw an opportunity to getting desperate there in our company. This quarter as we bought back 442000 B.O.K.F. shares at $75.52 per share in the open market.
Provide additional perspective on the results after the prepared remarks, but now turned over to Mardi Gras start chief risk officer.
Over our business resiliency and employees safety response to the Corona virus pandemic, Marty and his team were instrumental and making sure we were able to respond quickly while also maintain business continuity throughout our footprint Marty.
Thank you, Steve I will summarize the steps we have taken pentech invading our business continuity plan at the outset are cheap human resources officer, and I established a dual mandate maximizing employees safety and ensuring continuity of service.
We then developed and implemented in Iran strategies to accomplish the schools, including.
Work from home, 470% of our employee base, whose jobs can be performed remotely.
An array of social distancing actions for those working in the office, which includes separating work teams among multiple locations further separation using split shifts.
Into signing dedicated entry and exit doors break rooms in the lake for different teams.
We migrated banking centres to a drive through an appointment only format and subsequently reduced hours a bit and close some banking centres temporarily to enable more shift rotation.
Enhance cleaning procedures have been implemented in all our locations.
<unk> increased demands on our call center and increase volumes in both mortgage and S.B.A. landings, we have temporarily reposition employees from banking centres and other departments all across the firm into those high demand areas.
And most importantly, we rolled out an array of employees support initiatives in recognition of the changing environment for our staff.
These include up to five days of additional paid time off incremental financial support for employee childcare.
Waving co pays for usage of our tell medicine capability.
And premium pay for certain Nonexempt employees, who need to remain in the office.
Our team is ready to support operations in whatever environment. We find ourselves then lastly, I would like to offer my thanks to the many employees who have worked tirelessly. These past several weeks to ensure we are there for each other our customers and our communities.
Well now turn the call over to norm Bagwell to cover our response to customer needs norm.
Thanks in part of the impact of Kobe 19, Oh, many mid size and small businesses across the nation is unprecedented unnecessary distancing efforts will not only pack will to businesses would have a lock on social gatherings, but the special effects are being felt throughout our market.
Class rely on us now more than ever so our focus haven't been on coordinating the building up an effective bridge to clients as most of our bankers transition to working from home.
We've engaged our clients and beat portfolio management discussions focused on the state of the business along with managing three that request for payment <unk>.
We are also worked when clients are whiteside interest call adjusting green credit right in English right <unk> as the interest rate environment has shifted.
Yeah reintroduced into straightforward were appropriate we're having after discussions on air strike swaps also purring and some of our class they take advantage of low right environment.
Business or being book that we haven't been able to pull through pipeline items. During this time as well all the while we're actually risk writing our portfolio through the cycle.
We've also been incredibly proactive with our class and wealth management space.
Active management have cut class service have been out of favor recently, but times like they allow us to demonstrate why be okay financial wealth management expertise.
Stand out amongst peers.
We have employees, providing guys to thousands of clients writing from diving individuals somehow to whether try markets with personal assets.
Helping corporate clients way position or balanchine's.
Bar Hot that service has been facilitate primarily by the phone and email. We're also seeing these client to utilize our technology at a higher right.
Private wealth and retail brokerage digital log ins or up 16% and 6.5%.
Vermont, respectively, and we've seen in 32% increase in digital transactions by participants in our institutional <unk>.
I, just don't count performance monitoring capability that same dramatic increases and usage as well with some areas and wealth management, saying upwards of 65% increases in performance lobbyist.
March with all this rapid adoption continuous digital communication with our clients and all the broader economic factors at play has been a real Kay.
Most recently our client discussions have been centered on the cares Act and it's aimed to provide nearly $350 billion evolve small businesses.
Yeah, the small business administration Paycheck protection program for P.D.P.
Has a certified ask the island or the Okay apples open for P.P. They business that day that program went live on Friday April.
Hundreds of our employees will be deployed from their typical roles and commercial biking in consumer biking, working tirelessly to take applications and reserve funding for their clients.
Feedback from our clients as it relates to our ability to respond has been very positive improving differentiated versus our peers.
Proud of our efforts to serve our clients and communities, helping them bridge this time of economic uncertainty.
Be okay financial has process approximately 4700 completed P.P.P. applications, and we perceive 1.8 billion an S.B.A. approvals.
Well, we would characterize our quick action for our classes and success. It was not without as challenges. The short 10 day funding window presented a bit of an operation burden, but we have successfully meant that standing.
Additionally, and the sheer volume of applications for our credit services Tang such a short time was challenging say delays, but the resiliency and flexibility of our credit team has proved out in fact enhance quality control checks were put in place. It was time ensure accuracy and reliability of applications.
With that now turn it over to Stacy to cover our energy health care and commercial real estate portfolios I see.
Thanks norm.
As you can see on the slide 11 period in loans were 22.5 billion more than 3% for the quarter.
Commercial real estate was largely flap this quarter scene I fainted over five per cent from the previous quarter, primarily in the general business energy and health care for folios.
In general the traditional scene I portfolio high growth that was a combination of both seasonal factors in customer responses to the <unk> 19 pandemic.
These revolving lines of credit or generally secured and governed by a boring base and in many cases, the customer draws were deposited back into the bank.
They were very limited Robert <unk> in a specialized lines of business in response to the current macro environment.
Line of credit draws have leveled off in a relatively unchanged since the end of March.
Energy loans outstanding told him 4.1 billion at the into the first quarter or 18% of total loans.
Energy exposure has created volatility our stock price for supporting the energy industry has been a hallmark of the company for over a century.
On Slide 12, you can see that the majority of this portfolio is firstly senior secured reserve based lending to oil and gas producers, which we believe is the lowest reform of energy Wendy.
And to climb into the band for energy related to the covert 19 pandemic, coupled with the OPEC <unk> production Conway whether declines in the current spot in future oil prices.
Approximately 62% of our committed production loans are secured by properties, primarily producing oil.
Remaining 38% are secured by properties, primarily producing natural gas.
Which has not been and significantly impacted by the recent events.
Most client had or production mix of oil and natural gas.
As we have sat in the past we believe the duration of the oil price decline is a more significant factor affecting performance then the level of prices.
Give drivers of this decline or short term, meaning less than 12 my than are expected losses in the portfolio will not be overly impactful to the company.
One factor that as much more in our favor during this downturn is customer hedges that are in place.
<unk> energy customers that we stress test, which makes up 92% of production loaned outstanding 95% of those customers have some level of hedging in the 12 month range and many of them carry into the 24 month range.
We believe the combination of our discipline underwriting approach and customer hedging positions.
Worked whether this downturn as we have previous downturns.
Our health care sector alone balances increased 131 million to 3.2 billion or 14% of total loans.
On Slide 13, you can see that our health care sector loans, primarily consisted of 2.4 million of senior housing and care facilities, including independent living assisted living and skilled nursing.
Generally we landed borrowers with a portfolio of multiple facilities that serves to help diversify risk specific to a single facility.
We have had a few instances of Kobe 19, among a handful of facilities.
But the response of our health care operators has mitigated any significant impact up to this point.
The remaining balance of our health care portfolio is comprised of hospitals and other medical service providers.
Also been impacted by a deferrals elective procedures to ensure adequate protective equipment and ventilators for those providing acute care for virus patients.
It should also be pointed out the <unk> have multiple revenue enhancement measures for both hospitals and skilled nursing facility as they managed to the risk of the virus.
We remain confident in the long term I'll look into space and expected to get seem to be a grossly or wants to help and economic conditions migrate one more normal state.
Commercial real estate loan balances were largely unchanged from the last quarter, representing 20% of total loans.
Looking a little deeper into this segment on slide 14 loan secured by office buildings and other properties increased a total of 141 million this quarter.
This increase was largely offset by a decrease of 128 million of loans secured by industrial facilities.
My family residential loans, our largest segment of commercial real estate lending, telling 1.3 billion a quarter in.
Loans secured by retail facilities were 774 million at March 31st.
As we think about real estate more broadly Wiener this downturn relatively well positioned.
We have traditionally unlimited theory to 175% up to your one capital with sub limits by category construction tenet in state.
March 31, our legacy commercial real estate portfolio was under all our limits and sub limits.
Clearly the retail portion of this portfolio is the most vulnerable to sustain stay at home and shelter in place directives.
This portfolio is roughly split between goods and services.
As of the end of 2019, the retail C.R.E. segment had a weighted average regulatory learned about 58%.
In a weighted average debt service coverage almost 1.5 times.
As with oil the last content in retail will be closely correlated with the duration of the various governmental orders and adjustments in consumer behavior. After these orders are lifted.
While office and multi family, we'll see impacts here, we believe our geographic footprint will help us in these segments in the long term because of the strong in migration overtime.
We will not be able to avoid the impacts of all the macro economic credit issues impacting financial institutions.
We have historically proven to be disciplined underwriters of credit.
The last cycle, certainly demonstrated that and we remain confident are standard will perform well in the current cycle.
Alternate call over tomorrow mom to discuss other one portfolios credit metrics and the impact of Cecil implementation Mark.
Thanks, Stacey turning the slide 16, we've compiled a list of loans segments, we'd consider more exposed to the economic slowdown driven by the social distancing measures in place to combat the Corona virus.
As you can see the exposure to entertainment recreation retail hotels church's airline travel in higher education that are dependent on load large social gatherings to remain profitable, it's roughly 7.7% of our <unk> totally portfolio. This group of loans is highly diversified with over 550 loans for an average loan size of less.
And $3 million some of these clients will participate in the paycheck protection program that will provide some measure of relief to stress that they may be feeling will obviously be monitoring these exposures closely in the coming months.
Just a few words from my seat as cheap credit officer on the energy portfolio that Stacy described above.
On the energy side, the spring barring base read it termination season is underway and we will be engineering the value of our customers reserves during the second quarter.
We also conduct a quarterly stress test of our energy borrowers with more than 50 per cent funding on their lines of credit and all criticized loans using a price deck discounted by 20%, which helps us identify potential issues.
Most recent stress test, which takes customer hedges into consideration resulted in no surprises.
On Slide 17, you can see credit quality has remained well intact to this point, but our expectation is to see migration of nonaccrual and potential problem loans, given the current economic environment.
Additionally, we have taken action regarding loan modification requests on a case by case basis requests have generally been for 90 days of principle and possibly interest with a re evaluation at the end of that period for another 90 days.
Based on a recent regulatory guidance. These loans are not considered troubled that restructures. If they are in current status as of March 120 20.
Nonaccruing loans decrease $17.8 million this quarter, primarily due to a 19 million dollar decreasing nonaccruing commercial real estate loans, However, nonaccruing energy loans increased $4.7 million in the first quarter.
New Nonaccruing loans identified in the first quarter totally 30 million offset by 9 million in payments and received and 19 billion in charge off.
Central problem loans total 293 million at March 31st up from 160 million at December 31st This increased largely comes from the energy portfolio as the recent oil price declines coupled with the capital markets environment, requiring certain customers to work through their liquidity needs.
Wait on some energy borrowers.
Situation may lead to additional nonaccruals and some and parents.
As Steve noted in his opening comments the company adopted Cecil as of January 120, 20, and we have increased told prisoners by 131.5 million since 12 31.
Slide 18 shows the drivers will be increased to our allowance for credit losses and provision under Cecil.
They want adjustment shows an increase in A.C.L. reserves of 49.4 million. The total day. One adjustment includes an additional $12 million for mortgage banking activities in H.T.M. securities for a total of 61.4 million, which is what we disclose last quarter and that amount impacted capital not earnings this quarter.
The day to provision for credit losses under Cecil was 93.8 million for the first quarter.
Degrading macro economic outlook during the first quarter related to the Kobe at 19 pandemic and oil price declines, but the two factors most impacting the Cecil calculations and those calculations. The company use base case downside and upside economic scenarios, including key economic indicators such as gross.
Mystic product unemployment and oil prices assumptions used in the scenarios for the second quarter of 2020 range from negative 10% to negative 30% for G.D.P., 6% to almost 10% for unemployment.
$19 to $27 for oil prices.
Afford view of the economy improves modestly over the remaining quarters of 2020 other economic factors used in the malls include credit spreads home price indexes and vacancy rates more detail would be provided in our first quarter 10, q. to support sensitivity analysis of these factors as it relates to our <unk> total portfolio.
Portfolio changes represent the impact of shifting loan balances aging mix as well as credit quality, adding $16 million to the A.C.L.
Quarter provision expense also included 17.2 million related to net charge off activity.
Are allowance for a loan losses after day, one and day to first quarter provision totaled 315 million plus another 28.5 million recorded and other liabilities to cover unfunded loan commitments, although the entire reserved for loan losses is available to cover losses in any portfolio $100 million is attributed to our outstanding energy.
Portfolio.
Alternate call over to Stephen now Steven.
Thanks Mark.
As noted on slide 20 that interest revenue for the quarter was 261 million down 8.9 million from the fourth quarter.
That interests margin was 2.80% down only eight basis points were in the previous border as well I bore has remained elevated relative to its historical relationship to other short term market interest rates.
S coupled with our ability to move interest bearing deposit costs down 11 basis points has allowed us to preserve a large portion of our margin.
While the 150 basis points of interest rate cuts by the fat and marks did have an impact on both that interest revenue and interests margin. The full effect will be realized in the second quarter.
The most significant component of Meditrust revenue and then interest margin that we can most influence is deposit costs were working closely with our depositors to secure and maintain balances, but price appropriately given they almost zero rate environment in which we operate.
In the month of March our interest bearing deposit costs declined to 79 basis points and we believe we can continue to lower our costs over the coming months.
Oh slide 21 fees and commissions were 193 million in increase of 7.4% from last quarter and 20 per cent quarterly year over year, continuing to be primarily fuel by strengthen our brokerage and trading and mortgage businesses.
We generated record revenues in our trading in derivative businesses this quarter with total brokerage and trading revenues eclipsing $50 million.
The majority of this was just drive for mortgage related trading activity with first quarter N.B.S.P.B.A. trading revenue 31.7 million, a 40 per cent increase over linked quarter and at 220 per cent increase from the same quarter a year ago.
While the growth rates here are impressive even more impressive what's that this increased revenue from mortgage trading activity was partially muted by a decrease in the fair value of asset back and municipal securities Doodle widening spreads.
Given the lower rates and higher volatility in the mortgage markets are traders has done a phenomenal job supporting our clients management and repositioning their investment and hedging portfolios.
Mortgage banking saw a significant surge in production revenue this quarter growing 11.8 million or over 46% relative to last quarter in almost 56% from the same Puerto a year ago.
Total mortgage production volume increased to over $1 billion refinances, representing 57 per cent of that volume. Additionally, we increased our gain on sale Marge is by 62 basis points compared to last quarter.
Another success story of the quarter relates to the hedging of our mortgage servicing rides.
Even the speed and magnitude of the decline a mortgage rates the fair value of our mortgage servicing rides to be applied 88.5 million in the first quarter. However, our securities and derivative contracts held as an economic hedge offset 86.8 million of that decline.
The security is held his head is also yielded nitrous revenue a 4.6 million. So the net M.S.R. activity resulted in a 2.6 million dollar benefit this quarter and impressive outcome for this environment.
It is sharing an asset management revenue is down just over 1% this quarter, which might be a surprise to sun. Given that proceed market sensitivity of this segment in reality only about a third of these assets are exposed to equities today, which is added resiliency through the cycle.
Strong sales efforts coupled with this prudent diversification proved out with relatives out performance.
Many of our feet businesses are clearly off to upgrade start this year and once again highlight the significance of the revenue diversity that our company has.
Turning to slide 22, total operating expenses decrease the little more than $20 million down 7% from the fourth quarter.
Personnel expense decreased 12.2 million this border largely due to the combination of a decrease in both deferred compensation and regular compensation of 2.2 million. Additionally, the fourth quarter included approximately 2 million and severance costs due to realignment up personnel, but did not recur.
Employee benefits increase 3.6 million as a seasonal increase in payroll taxes and retirement plan to expenses was partially offset by decrease employee health care costs.
Nonpersonnel expense decrease as well down 7.9 million compared to the fourth quarter.
Mortgage banking costs decrease 3.7 million largely due to the reduction in M.S.R. amortization expense.
Business promotion expense decrease 2.6 million due to the seasonal decrease in advertising costs combined with reduced travel costs as a result of the current endemic.
In addition to fourth quarter included a 2 million dollar charitable contribution to the <unk> Foundation, which did not require this quarter.
S. Steve alluded to earlier, we have taken steps to help maintain lower expense levels for the remainder of 2021st we have put a hold on all planned adds to staff and are challenging all positions that become open before we recruit a replacement.
We will achieve savings in business promotion professional consulting fees and occupancy.
Related expenses in the current work from home environment, and lastly, we decided to delay all notice it until I t. and other projects in this less than favorable operating environment.
Continue to support client facing initiatives, then enhance our customers overall experience and other important projects so supportive infrastructure.
<unk> the pace of less critical projects, it's prudent until the economic picture becomes clear.
Well, our liquidity remains strong given the extraordinary impact of the pandemic on the capital markets. We've taken a number of precautionary measures to ensure nine so including enhance daily monitoring of our liquidity by tracking deposit inflows and outflows by customer analyzing loan advances by Sag.
<unk>.
Optimizing our bar incapacitate the federal home on bank and increasing our collateral at the federal reserve discount window among other things.
As mentioned earlier are deposit balances and ability to gather additional positive deposits have remained strong.
As noted on slide 23, we have over $12 billion is secured borrowing capacity and over 7 billion unsecured and contingent liquidity capacity to support the liquidity needs is a company. Additionally, we're in a position to find P.P. loans now totaling 1.8 billion via the federal reserve.
P P.P. liquidity facility.
Our capital position also remains strong in fact, it was I noted reason that D.O.K.A.S.N.A. The primary source of holding company liquidity had as a rating reaffirmed recently by S. and P.M. Moody's.
Well the common equity tier one ratio at 10.9% well ahead of our internal operating range minimum and a full 390 basis points above regulatory minimums, we are in good shape.
Will also take advantage of the L.C.C.'s capital Phase and plan for Cecil implementation.
And lastly, a word on guidance due to the uncertainty around the severity and duration of the pandemic and its impact on the broader economy, we will not provide them more formal goddess we've given in the past well, we'll leave it with a few thoughts that might be helpful.
Apart from the loan advances to date of 751 million and the P.P.P. fundings at 1.8 million, we expect no longer for the foreseeable future.
Energy deals will likely not be down at current prices healthcare opportunities are generally on hold due to the pandemic and little activity will be present R.C.R.E.N.C.N.I. portfolios. We will continue to originate mortgage loans with a very limited amount ending up in our permanent portfolio.
We will continue to reduce deposit costs, ensuring our deposits are appropriately price be given the near zero rate environment. All in the context of over all funding needs.
We took advantage of the dramatic widening a mortgage spreads in the first quarter to pre invest several months of anticipated cash flows from are available for sale of security portfolio, a significantly advantageous spreads.
After those anticipated castles have been realized we will resume reinvesting your mortgage mortgage backed securities with appropriate spreads and control freak payment and extension characteristics.
Our diversity revenue stream should continue to provide some mitigating impact to overall earnings pressure being felt into spread businesses.
Are disciplined approach to controlling personnel and non personnel costs will continue.
We have no plans to cut existing capabilities are products and although we will slow less critical projects will continue to provide funding for improvements in the client experience.
Technology infrastructure.
We enter this downturn with a strong capital position and do not see a threat to the dividends we pay.
As always we view stock buybacks opportunistically, but within the context of maintaining our strong capital position.
I'll turn the call back to stay Bratsch off for closing commentary.
Thanks, Dave in the first quarter as we described can save some positive operating results no doubt that day to see so provigil was meaningful and we can't predict at this point what subsequent quarters will hold.
We've yet to spend the full quarter in the near zero right environment. This year. So we probably expect that to weigh on or spread businesses going forward that coupled with a self induced economic slowdown took about the spread of the virus will dampen growth for all financial institutions in 2020.
That said there are several bright spots, specifically it'd be okay up, namely in our wealth management, a mortgage businesses. They have every opportunity to out before in 2020.
As always we were taking a measured approached all decisions. We are absorbing the impact of much lower asset rates, while looking for the best cost alternatives and funding going forward, we have strong liquidity in capital. So we have the luxury of making thoughtful changes that won't inhibit our growth opportunities when this environment correct as it inevitably.
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In the meantime, we will continue to work demands expenses were possible, putting some projects on hold and curtailing personnel growth as well as other measures until we see a definite improvement in the band.
I would say that we've added some negative bias since the quarter as we seek to understand the long road ahead for the return of meaningful economic activity.
Can envision a G.D.P. declined and write a lot of pulling the second quarter that is more severe than what we modeled at quarter in but these are uncharted waters or Saul. So we will respond on behalf of our customers. Accordingly, do everything we can to assist them regardless of the near term feature of the economy.
We remain calm that we build our company to before even in times of extreme economic stress.
We have a very experience leadership team, which gives the full confidence or ability to navigate this challenge as we have countless others are time horizon is always a bit longer than most of your case an angel.
Expect us to shine when the history is written on this economic challenge.
With that we were supposed to take your questions operator.
Thinking at this time they'll be conducting the question and answer session, if you'd like to ask the question.
And your telephone keypad.
Timeline to keep their lines in the question can you may <unk>.
Your question from the can participant using speaker equipment, it may be necessary to pick up your handset before person that's tacky.
I first question comes online I've cans.
Please proceed with your question.
Okay. Thanks, I come morning, everyone.
Yeah, how morning.
It sounds like my as a start off with energy I know you said that 95% of your customers have some level of hedging so hopefully new would like to know how much hedging but the real question is you know he's talking about the credit quality of either the energy loans or the borrowers that either don't have any hedging at all or even part of that 95%.
On that part of their production does not had studies that much more at risk. Thanks.
This is stacey I'll speak to the customer hedging over to over three quarters of our current blow weighted commitments are at least 50 per cent heads and 2020 and an average price in excess of $55.
So we feel very good about the level of hedging that we have within our customer base in really that is one of the most extraordinary mitigants the downside and why we continue to point to the time horizon as being the bigger risk than the absolutely price of a commodity clearly as you go into the Psycho week.
Came into the cycle with a relatively good.
Book, we had some sort of customers who had a certain level of weakness, but as we look at that going into this we'd go very good about Matt and I think that that and we position ourselves for the time horizon. We're gonna we're going to be in a shape, it's very manageable for us.
To remind everybody 'cause, we get awfully focused on the spot price and what's happening on the daily ticker.
You know all prices collapsed and <unk> from $141, a barrel to $34 a barrel in a short period of time.
In 2014, we saw another oil price collapse from $105, a barrel to $26 a barrel in a relatively short time.
During that period of time natural gas was also under a significant amount of pressure pressure.
In the five year period, ending at the end of 2019 are cumulative losses from the last co ops over a five year period was $89 million.
We don't know the length the duration of disciple, but we do know that we've done a good job historically of underwriting energy credits and so we feel very confident in our ability to work through and manage this but our focus is not on short term pricing, but on the long term curve because we believe that's more indicative of of Howard.
Customers will perform over time.
Mm.
Can this mark on I'm, just going to add one quick thing to this is that.
Even today looking at the the forward curve, we need to keep in mind that it's highly contango, it's very steep so even if customers even after looking at the last couple of days. If you look at even later this year in into 21, you were seeing prices that are.
Reaching $30 are over $30 a barrel.
So there is opportunity on those customers, who are not heads that they have opportunity for us too.
Work with them to identify ways that weekend enhance their overall quality up there cash flow by taking a look at hedging opportunities and working with them in that way.
Okay that that's helpful. And then news is the second question.
So you mentioned a library spend a big driver of why your names held up as much as it has if and when live or does start to normalize relative to fed funds cutest helpless quantify like how how meaningful is out to your portfolio. What's that mean for margin how much is exposed to live or versus prime for example, thanks.
Sure can this is Stephen now.
Yeah libel were has has held up out of 40 to 45 basis point advantage relative to its historic relationships, it's actually come in about 10 or 15 basis points over the last week.
That's someone meaningful because as you know 75% roughly of our loan book is variable and I would say the majority of that is like more based and so we have gotten some advantage from that spread.
We do think it will come in overtime, and you know without giving a specific a dollar amount or percentage impact. It will have some narrowing impact on our margins going for it if it if it reverts back to them more historical position.
Alright, great. Thank you and this is stacey the the one thing I might add there is we certainly have benefited from the the slope all of why bore.
It's really given this time in our deposit base to focus on a higher rate deposits in managing three that if we look at we have about $4 billion of what we call exception price deposits. So that we're kind of higher rate than the standard pricing, we've moved that down over 90 basis points.
Since the end of February through the Middle of April So, it's not who there's multiple sides to that equation as we think about the margin going forward clearly we benefited from whiteboard, but as it's been slow to fall. It's given this time to kind of right size the pricing on our broader deposit base, which we think will help us as a counterbalance there.
Alright, great I appreciate it thank you.
Thinking our next question comes from the line, Yeah shot with Wells Fargo Security.
Question.
Good morning.
Morning morning, maybe sticking with credit.
<unk> share with us what level of deferral activity you've had in the specifically in the at risk portfolios Oh energy on health care.
<unk> that are sort of under the Kobe umbrella.
But but not necessarily costs by just two years at this point.
Yeah, just mark them on I can give you that I mean on the energy side, we've actually had zero deferrals at this point in time.
And our overall deferral owned the commercial side is around 3.7%.
With the higher level of that is in the health care space.
On the commercial real estate side, it's running about 8.2%.
Total dollars that these are dollars outstanding.
As I've and I've I've looked at surveys of our our peer groups. We are running on the lower end of the percentage of dollars being deferred across all those categories.
Today.
Okay. Thanks, and then specifically on the energy side, what's your forecast for oil prices as your determining this current users. So when you're looking out at the you know once we get past that 12 month period, where are you looking at oil prices and I guess, it just going back to first quarter of 2016, the allowing.
<unk> was 3.1% on I guess I'm just a little.
Juice on how the lounge could be lower now given you know the broader for for the broader move as well as the impact of C. So.
Yeah.
Well a couple couple of comments on on the price forecasts, we follow the forward curved on the price deck that is publish on a regular basis, we set our price deck at the first day the each month based on the most recent changes.
The price that are the recent price deck for five days preceding that beginning of that month and then during the month, we will assess whether price declines are sufficient to justify reducing that price deck. During during the the month at this point in time, our price deck for April is pretty consistent.
With the exception to the spot price, which we don't focus on we focus on you know first we throw out the first month and look at at the price deck beyond that in our price deck for April is consistent with what the price forward. Curb is is as up this morning. So we're we're still looking at.
Habit and kind of the opening.
The first first year running around.
$28. The second then from there growing to about $40 by 2023.
The second part of your question, what's more on the reserved size for energy or $100 million reserves is Stacey noted compares very favorably to our charge off performance of the past five years, it's up $52 million from 12 31.
You know it peaked in 2016 at 101 million.
Ah and midstream made up makes up a little bit bigger piece of that today, which has a little bit lower reserved.
Occasion, then it didn't 2016 the same time, we're you know.
We're in April and we were doing this as of March 31st are based on the information we knew at that time, I won't say that there won't be opportunities to build reserves as we move forward and watch what happens in our market what happens with our customers and what happens with energy prices.
A general but at the base you know two or three weeks post the OPEC plus changes the reserve makes sense based on that and based on our history were comfortable with it is as it is today and we will evaluate it going forward and make the appropriate.
Reserve a expectations during the second quarter.
Yeah, and then a couple of things I might add there you know when we peaked in our reserve for energy as a percent it really peak because we had pretty dramatic energy paydowns occurring. So we had over 600 million coming down and we you know had the allowance and we weren't.
Using it to the extent that that we get provided for it. So that was really a kind of a denominator effect that rose that percentage up I think the absolute dollar amount that mark alluded to it is a more fair comparison there from from my perspective, I think you Mark Martin touched on this but clearly trying to peg.
Anticipated future losses around any of the portfolios really but energy, particularly is a very difficult thing to do and we'll continue to evaluate over time I think the key for us to understand is we have a extraordinarily strong mix of the revenue and we have a very high level of <unk>.
Tax preprovision revenue such that we have the flexibility to continue to add to the reserve it pretty material levels without ever impacting capital and so we're well position for the future, but we will continue evaluate as things change to ensure that are provision remains output.
Okay actually I just finally for me on on the capital last quarter. You would you know talk felt a desire to bills Capitol.
Levels, obviously, there's been a.
<unk> dramatic changes in first quarter, but I guess, how long do you feel comfortable with a yeah with an elevated total capital returned.
Ratio at this point before we I guess worry about the other cat selections to to help grow capital.
Yeah. This is Steve and now you know I'm very comfortable with the level of our common equity to your one at that 2.98%. If you compare that too many peers. It's it's well ahead. So I think we've got good capital flexibility as I mentioned in the comments I don't feel like.
There's any threat you know at this point in time on their dividend.
And I think they'll stay opportunistic I, you know I <unk> I don't want to say will suspend.
Today, any buybacks I want to stay optimistic, but all in the context of that strong capital position. So let's let some you know time go by here and see see what occurs I agree with <unk> comments, we've got tremendous preprovision or.
Net revenue generation, we got good revenue diversity.
So we've got we've got plenty of strength in terms of earnings power. We've got you know a very adequate reserve and a a very strong capital position. So I think we've got good opportunity there to.
To continue paying dividends and you know be opportunistic as we go forward all by that.
Thank you.
Thank you are next question comes from line of Michael sometime in James, especially with your question.
Hey, guys. Thanks for taking my questions I, just wanted to close circle back on the energy portfolio <unk>, maybe when I think I'm hearing you say.
Is that based on what we know now because my look at your downside case, it's actually above the 12 months trip as it stands you know to Danny So <unk>, what I think I hear you, saying is that.
With it you know assuming we end the quarter near these levels and with borrowing based redeterminations going on and barring basis, obviously going to come down you would expect that to have another resort built for the energy book in the second quarter is that the way, we should think about a mark.
<unk>.
Well I think we will you know.
We have to factor in the edging dibona too as part of the borrowing base Redetermination season, we have you know substantial hedge, but but certainly you know right now the the forward curve the price deck that we're using is going to be based on the forward curve and it it it's likely will.
Borrowing bases down we've completed about 25% to date.
So we will take a look and see what the appropriate reserve level will be once we get through that spring determination season.
And what's the average reduction in the borrowing base that that 25 per cent that you've got through.
At this point time, I think we're in the 10% to 20%.
Range.
Okay. That's a that's helpful and and then maybe just a round out on on energy tied up.
What is different you know this energy downturn versus you know the 14 to 16 period and then the Oh nine period it would seem from.
From the outside looking in that study in peace would be more at risk disco around just given constraints on liquidity and very little access to capital outside of a bank lines. So maybe you can just you know give the puts and takes on on what's different this time. Thanks.
Well I think the biggest thing that's different is the the level of hedging it is significant and as we've looked at work mentioned about a quarter of these it's it's been pretty impressive to see the level of hedging and how that has helped buoy. The the barring base and we see customers you know making decisions that around production.
Around drilling much more quickly this time, even to shut in Wales at some level much more quickly this time than we've seen historically and that will have a pretty.
Big supply effect, but it will take some time for that to play through.
Clearly the demand impact from Kobe 19 is the wild card here when does the economy began to rebound when do we get planes in the air which are large users of oil through jet fuel when when does the demand return I think you know to me at this point. This is really a demanding ways in less than a supply equation I think but.
Applies going to come down and it's going to come down a relatively quickly.
But the the wild card from my perspective is is the demand question how quickly that comes back.
You had demand issues as well Oh wait on nine price decline from the broader recession and so it the end of the day you have imbalances in supply demand that have to be work through and I think that you'll see the market do that and it has historically done that but it takes time generally 12 to 18 months for it to find some.
Kind of equilibrium, which is why we continue to focus on that time period as opposed to the absolute what we see today.
But we're we're you know we think the markets have responded appropriately, but we think man there. The the primary risk as we look forward here is really around the demand impact and how quickly back can recover once we get a resumption of of some kind of business activity.
Appreciate other color guys. Thank you.
Thank you I next crossing Pennsylvania, Peter we do with what the security, especially with your question.
The morning.
Oh warning warning.
I just wasn't.
We've been could you put by some color and the second quarter outlook on some of the income businesses had great quarters.
Quote or in a brokerage firm, creating a mortgage and I'm just wondering if.
That level, it's going to be sustainable and if you could just talked about some of the other businesses.
Yeah, I can do that Peter you know, whether it's sustainable I mean, the environment is is really on an odd environment. So it's hard to say I think what I said in a kind of limited guidance that we gave is that I do feel like the brokerage and trading in the mortgage business would clearly be supportive and additive.
Who revenue streams to help offset some of the pressure that will feel on that interest income and then interest margin. So my expectation is they'll stay strong the the environment is you know it's volatile.
It it does provide us opportunity on the trading side to help our clients position hedges to position their investment portfolios certainly the the mortgage activity as up today continues to be very very strong.
We did a really nice job I think of improving margins in our mortgage business up 61 basis points I believe.
And that that will continue so I I think there'll be very supportive in the second quarter as they were in in the first quarter now to what level.
<unk>.
Don't go there, but certainly I think it'd be very supportive.
Oh, and just one or the other like the the payments business.
Well it's management.
Yeah, My like Stacy and asked her on the the transparent payment businesses.
Sure. If you think about the payments business I think.
As we as we go into April.
We certainly saw decline in the A.T.M. and debit activity related to that business [noise].
We also have seen more recently pick up an activity as those stimulus checks have arrived I don't think it's a dramatic slowed down but I think it is a modest slow down on the the the payments side of the business as we look forward that that businesses.
Awfully stable in in good times, and bad times, but but on a relative basis I think you'll see the impact of slower consumer spending broadly in the second quarter in in our payments business.
Yeah. The Peter This is this is Steve Brad show I think on the wealth management side, we would expect to see some improving flow. There. There are some of our businesses like corporate trust that we think will grow in this current environment. We also are seen inflows.
On the equity side as we are seen that people.
Feeling that there was the bottom has been raised in many cases, so we're seeing some blow.
Out of cash a into equity and obviously, we're seeing a lot of reposition on a fixed income side that was a big driver in the first quarter don't see anything as we sit here today that was suggested that that has a baited any so I would I would expect that area to continue to steven's point to be strong and they.
From opportunities to grow even in this challenging environment.
Yeah.
Then just on the credit fun on.
<unk> play the senior housing.
I'm just wondering if you can take down a little bit deeper in terms of well what cosine with the crow bit.
Impact from credit quality standpoint.
Sure be your this is Stacey I'm I'm glad to handle that I think there's there's three sectors that are impacted in the health care space hospitals.
If you're a rural hospital today. It this is going to be very could be very devastating impact for you. We don't have rural hospitals in our portillo that has in a particularly in our foot print were largely most of the states have not hop it into the affordable care rack.
Real hospitals have already been under significant pressure and that's not been an area of business development focus for us.
A hospital systems that we have have been impacted by really multiple things the delay of elective procedures, which is a higher margin business for them as well as frankly people not utilizing the facilities in some cases, when they need to because of fear of people being there who are coded positive.
And and contracting that.
Those are are very high in hospital health systems, they have large endowments and they will be able to whether that we've we fully expect to see more liquidity needs from that health systems group as they are likely I'm likely to want to sell out of their endowment in a depressed and securities pricing environment.
So they're going to you won't be more likely to use my wines accredited things like that so we expect some increases from that portfolio, but we really don't see material credit risk at all in that health systems group.
When we acquired Kobe as they had a really strong and robust medical and positions large practice group and that as the area that we've seen the larger amount of request in health care for deferral request and that's really because these are especially style practices that had been impacted most.
Bye.
The the the for all of elective procedures and so our view is that we would expect that to be relatively temporary and <unk> have have doctors specific doctors, who are guaranteeing the facility. In addition to the to the corporate entity and so there may be some timing there may be some classification.
[noise] overtime as we get financial statements there.
I don't see that as a a significant risk of loss.
Today, although if you know we have a long period of time without access to those types of facilities that could certainly change.
In this in the senior housing space. That's we're certainly people have been most focused around credit risk and risk of loss.
I think that.
It's important to understand we have in excess of 350 skilled nursing facilities that are a part of our portfolio. We alluded in our our earlier comments that we prefer a multiple facility operators because of the diversification.
We have around 5% of are skilled nursing facilities have reported at least one case of coded so in the broader scale, a relatively small, but but there is a lot of a government support that will go into both the health systems and the skilled nursing.
In terms of Medicare Medicaid.
Enhancements as well as additional funding to help with funding these enhance controls around infection and funds for additional purchase a protective equipment et cetera that portfolio is holding up well it will be it will take time, that's not a portfolio that.
We're going to know you know.
Today, what exactly the impact is it's going to take some time, we're obviously, having conversations with our borrowers understanding how they're impacted and what they're doing but might get said roughly 5% of the facilities in our portfolio have you have reported case. So we certainly understand that could change over time.
But as things begin to stabilize I feel pretty confident about the skilled nursing a portfolio yeah, we won't be perfect, but I'm I'm not have a lot of concern there.
Right.
That's a lot for the color.
Thank you.
Thank you I next question comes from line.
Piece for some of your question.
Hey, Thanksgiving when I guess.
<unk>.
<unk> I had a question on the energy hedging you know the the energy markets has acted so squarely. This week when you saw the price of the May for contracts go negative.
I was just wondering if that isn't impacts at all to the hedges. The your energy companies have I'm not sure if they use the for contracts hedge and there's basis risk their of those hedges not worked in the way that they're supposed to or if they had <unk> via some other means.
This is stacey, but I mean, the you know that that's part of the noise. It comes around everybody watching the spot price you know if if we had been able to do that I think everybody in Texas, and Oklahoma would've filled up their swimming pools with oil.
To be able to get paid to do that.
They the.
Borrowers really the hedging works on kind of an daily average basis for the 20 trading days prior to the closing the contract so that that.
Anomaly around we saw with the closing of the May contract was was really not particularly impactful to the hedging.
And in you know certainly crates noise and and a lot of headlines, but he's not meaningful to the actual settlement of these hedges.
Okay, and then on the expense side, Yeah, you had a decent stepped down.
The compensation expenses I've heard you say some of that is related to set up calm, but it on your fees did really well and cop went down normally those kind of move together that that maybe the.
Just help size it out and how how do you as we look for the second quarter. How do you think that that complying. We'll try to is is one q. what good run rate or how much of that was kind of a one time in nature benefit from the decrease sensitive com.
Yeah <unk>. This is Steven I would say roughly $8 million of that step down was related to deferred compensation that runs through that line item and I would not expect that to recur.
So that's that's a reduction this you know in the first quarter that that won't recur Ah, but everything else I think is pretty good you know we were we looked we stepped down a little bit on our personnel are a regular and part time salary I think that will continue with some of the efforts that we're taking on <unk>.
And and certainly open positions a replacement up positions.
Slowing some of our project costs and down a little bit. So I think with regard to you know looking forward that one item of about 8 million million would be something that I wouldn't consider not to recur.
Okay.
So for me just on the net interest part you know, Steve and you're saying, we're not going to see the full impact until the second quarter in like the you know the magnitude of how much the margin could decline into killing one q. was down I think seven or eight basis points that how much do you think it could be down into cue.
Well I think there's too many moving parts I mean, you've got a significant advances on your loan book, partially related to coven, you've got P.P.P. loans that are on the balance sheet now you've got funding costs related to that you've got significant in flows of deposits.
It's impossible to tell you the exact magnitude of what the new M. will look like but I'll tell Ya and I'll reiterate you know what Stacy said earlier the biggest thing that we can do is really controller deposit costs and we are we are working very very hard. He gave you. An example of of about 4 million of of exception price deposits that we.
You have moved down significantly.
I think our March interest bearing deposit costs was 79 basis points and I expect that to to migrate significantly lower over the coming quarters. So that's going to be a nice you know benefit to help support.
Then interest margin, but clearly with the decline in the huge decline in race that we saw it kinda early to mid March just going to have an impact.
On them and there's just a lot of moving parts to consider so I I'm not going to step out and say, it's gonna be x. number of basis points, but it will it will be lower than the 280 that you saw on it for for.
Yeah, that's fair. Thank you guys.
Thank you I next question comes from the line.
<unk>, especially with your question.
The morning.
Help us right.
Just one comparison that that investors may be looking at it matters, but yesterday comerica recording.
Before energy reserves bones about 10 per cent person here 2.42, 0.5%.
Okay can you find that out for US and also could you just talk about how you stressed talk about the energy books typically in terms of a longer duration for this my were well <unk>.
<unk>.
Jeff or this Mark <unk>, let me touch on framing against <unk> to be honest I don't know their portfolio. So can't really assess how they're coming up with their particular numbers, but I will say that in the 2015 to 17.
Downturn, we saw a number of banks that stepped out with significant energy reserves early in the process, we tended to be at the lower end with some other banks that are very active in the energy space We base.
Are.
Energy reserves on you know what we're looking at in terms of that are portfolios characteristics are.
Based on what we can assess from the <unk> the structure of the there.
They're engineering, we have 16 engineers in tax on staff. So we feel you're doing a very strong analysis of what the not only what the price deck impacts are but understanding exactly how the well production and performance of those wells will be.
Completed as part of that engineering process and then we like you know we also comeback continually to the the hedging concept is that that is is price protection. It helps us not just look at at what the current price deck is so we think we take all of those things together and we evaluate.
Based on our past history too we've been we've been consistent that we've had sufficient reserves more than sufficient reserves throughout cycles in energy to cover our.
Ultimate losses, and we will continue as we said before to evaluate on an ongoing basis to see that we have the appropriate reserve.
With regards to the stress test.
You know we tend to run it about 20% as I said earlier, a discount to our existing price deck, which you know in the crude oil side rented from 23 early in 2020 up to.
Kind of topping out around 33 or little plus on that and then natural gas in $1.52 growing to about dollar 92 over a five year period.
Stress test is done on without hedging basis as I said earlier right now that stress test is you know still reflective of what the forward curve is it's well below what still at the 20 per cent below roughly of where the forward purpose today and so we take a look at.
Take a look at the hedging that's associated with the individual customers determine where our highest risks are we had a very small a number of customers that continue to not have sufficient hedging and those are the ones. We've identified the rest of we had already identified as criticized loans and we're working with so it wasn't me <unk>.
Annual increase the number of customers that we think are higher risk and that's how we looked at the stress test.
And I I won't speak to a specific other entity, but I just broadly speaking week, we are in the control c. for 69% of our energy relationships, whether the lead as the syndicating agent as this maybe it's a single bank facility, but.
I think that that really helps us as we work through this to kinda help navigate and work through any issues that may come up in this environment.
Thank you that's all very helpful.
When you pointed out that more pandemic sensitive industries casinos restaurants hotels et cetera.
Deferral right are you, saying among industries from outside.
Oh.
Actually I don't know that a habit specific for that broken down by industry.
I go back to the fact that are almost all of those are in R.C. and I portfolio. A we're running about 3.8% total dollars I would know that we have had some the pro requests on on the casinos because they are completely shut down how are those are mostly tribal.
Casinos, almost all of them, which have pretty substantial liquidity.
Ah reserves and in a lot of cases are maintaining their employment and that is one of the reason I sat there asking for for modifications, we really haven't had any.
So to speak significance in the convenience store specialty stores.
Hotels, the colleges and universities are airlines yet.
The restaurant side, we have seen some that is sizeable portion of that is franchisee finance.
However, with very large brands very well known brands and so while we're hearing sales are down 20% to 30%.
We know that they're still able to do drive through and curbside and delivery.
And the brand names are supported being supported by the franchise or in a lot of cases to provide longer term support should just carry out farther.
And as you know Jennifer. These are these types of areas are ones that we materially underweighted over a very long period of time it be okay financial. These these types of businesses you know have a harder time sustaining through a downturn and so we have historically not been a significant lender in this space the other.
Area that we have been underweighted in significantly as any kind of leverage lending mark and his credit thing would that are really good job managing three that where we have a large level of kinda cash flow only as our source of repayment. So we feel pretty good as it relates to those or high risk segments.
The spectrum.
Okay.
Can you talk about Mr unique aspects of that casino.
Oh yeah.
Seen okay.
And how severe the losses today.
And how recourse works for that for those types of credit.
Well.
I'll talk I mean, I'll talk about the the way, they're they're they're structured I mean, they are <unk>.
Direct there to the casino operations of the individual tribes.
We generally as you know cannot take mortgages on casinos because of the sovereign nation status, but all the nations have waves or bring immunity on this and the way recourse would work is we take over the cash flow associated with with the casino.
As I said these you know.
These casinos are shut down for now however, they have strong liquidity have substantial cash balances. So we don't see significant risk of loss as we would expect when the economy reopens that these facilities will reopen as well.
It's hard to assess depends again, how long before they reopened we're comfortable that you know there they've got cash reserves on the most on the the large vast majority of this this portfolio that will support it through a reasonable.
Closure period.
Jennifer an interesting side note on that is as the stimulus payments began to to roll out we saw a large optic in our.
Gaming segment of our our debit card as well so it it's hard to assess there's gonna be some offsets. There. These are very strong gaming operations in tribes that are behind them. So it should be a very good portfolio.
Thanks, so much.
Thank you <unk>.
Not only with keeping he's pretty with your question.
Hey, things come morning, She wanted to go back to the discussion around energy hedges and and once we move beyond that 12 months time frame can you give it an idea or just a more clarity on how much that hedge production declines.
Yeah. This mark.
We have about our customer base about a third of our oil weighted customers have more than hit 50 per cent of their average price or their their portfolio has an average price of 52 Bucks.
<unk>.
<unk> through 2021.
The gas is about a little bit larger more like 36% hedged at an average price it to 63.
Well, what I wouldn't know is that we are still seeing people.
Increasing their hedging activity into 2021 based on the curve price, especially a couple of weeks ago. When you were still looking at $40 plus oil in 2021. So we would anticipate that hedge activity will start increasing or the ladder half of this year as well into that 22.
21 year.
And in fact over the last couple of weeks, we have seen significant hedging that's not reflected in these numbers you can hedge 2021 at $33 a barrel I've you know eight o'clock. This morning, 2020 to $36 a barrel so they're still ample opportunity for for hedge has to be layer Dan.
A lot of these companies will have you know, maybe 18 month rolling hedge programs and things like that so I think the 2021 number will continue to improve is over the course a year.
And I think one thing I should add is that at this kind of price levels, we don't need a return.
250 dollar even 40 dollar a level to see improved cashflows significantly for these companies in an environment, where there are discontinuing their drilling activity. If they if we see a couple of dollar increase because of their operating expense leverage.
In this kind of environment. They will have a dramatic increase in their overall cash flow and significantly reduce the potential risk loss associated with these.
Particular loans in this portfolio that is because they're not having the expense of trying to use existing production to support cap x. expense.
That would change if drilling increased but at this point time, given the current environment, we don't anticipate any significant thrilling activity.
Okay. That's that's awful and can you talk more about.
Counterparty risk within the hedges are these hedges going through be okay, or or someone else is trying to figure out what entity, it's holding the wrong into that hedge.
Well these are done <unk> a lot of them are done through an exchange so you've got.
The exchange counter parties and hold more posts margin in the credit risk on that exchanges is really very small we have some number of hedges that are done with single counter parties, who were high investment grade rated but with very low credit lines bilaterally and so.
Oh, there's cash exchanged on a daily basis to settle any differences between the credit line provided and the the changes in the price during that period of time. So there is a modest amount of kind of county party wrist there, but it is Barry swipe at this point much much different than it was.
In the Oh wait on nine time period, where where most of his trading was done with single counter parties at credit limits much higher than what we use today.
[noise], Okay. That's helpful. Stacey that's all from any thank you guys.
[noise] thinking I final question, if money crossing the line.
Even sometimes especially with your question.
Thanks, guys. The morning had a couple of questions first is on the retail commercial real estate portfolio about $775 million you highlight about six so five of that I'm not quite a bit 19 impacts slide <unk> <unk> areas, maybe that you did not include.
Oh that's life.
Well all that Stacy touch on the C.R.A., but I want to be clear that <unk> 19, slide that retail is in R.C. and I portfolio that if not part of the.
See already retail portfolio.
Yeah, it's outside of the results right.
Portfolio.
That's correct yeah.
Okay.
The retail theory portfolio is is very well position I alluded to Canada average debt service coverage. We had at the end of 19 for that portfolio. When I fail to mention was that one and a half times was based on a kind of a stress that we do it at this k. six and a quarter rate I'm at 25 years I am so it actual debt service.
<unk> will be much lower but much better than that.
But we look at it on a kind of to try to normalize rates and things like that as we look at that portfolio.
Okay, and and so since you mentioned that this is <unk> is from that.
Wholesome original trade portfolio is the other $1.4 billion or that 2 billion dollar.
Segment is that all wholesale true.
Where's or other retell segments with that.
No. That's the 605 is the full amount of our retail exposure.
The rest of it would be in the wholesale side.
Okay.
You and then just ask one more question on the energy front.
Trying to square the dynamics, we saw in in M.P. space last year. When we're you know <unk> crude was over 50 for them during the year and we still have ruined levels of bankruptcy to show as we're this you know this year and looking for.
You know even with a portion of the production hedge.
You $2, obviously, the unhedged portion brings down.
Kind of the weighted average price per barrel. That's the producers would would be getting a and then if you hedge going forward you know in the 30 or low thirties over the next couple of years that would seem to still <unk>.
Generate a lot more vulnerability for the for the <unk> producers or the or the or the borrowers relative to.
What were we saw that come out of your price last year can you help me swear that again, yeah I think the piece that you're missing is total that so the common denominator in the increase in bankruptcies is largely unsecured capital markets doubt that that they can't roller refinance not the not not nearly as much on the.
Senior secured.
We and blending related to the revolver you know, we've got borrowers who are in or a contemplating bankruptcy, who we would expect to be able to leave on a cruel because the issue is not the bank debt. The issue is the unsecured bond DAT or or debt outside.
Of the bank facility that they can't refinance or repaid and so you're having a restructure that happens around those bondholders, becoming the equity holder and having to go through a bankruptcy process to do that I think that's the that's doing that in your analysis is is not as private.
One is probably it should be.
Okay.
Thank you maybe sometime in that concludes our question and answer such kind of my documents you know for any final comments.
I. Thank you. Thanks again, everyone out for joining us today I. If you have any further questions. Please call me at 918595, 303 zero or you can email us at I.R. at B.O.K.S. Dot com have a great Dag thinking.
Thank you need some time in the space program, you mean, just connecting lines and thank you feel party.