Q1 2020 Earnings Call
[music].
Good afternoon, everyone and welcome to associate Bancorps first quarter 2020, <unk> earnings Conference call. My name is slowly they'll be your operator today, that's just horrible just concerned to listen only mode.
Ducking your question answer session at the end of this conference.
Copies of as far as it would be refer to during today's call are available on the Companys website. That's true so she the bank dot com.
As a reminder, this conference call is being recorded.
Outlined on slide two during the course of discussion today management may make statements that constitute projections expectations beliefs are similar forward looking statements associateds actual results could differ materially from the results anticipated or projected it any such forward looking statements additional detailed information concerning the important factors that could.
Well, it's associated actual results could differ materially you for me information discussed today is readily available on the FCC website and the risk factor section of associated most recent form 10-K.
Subsequent SEC filings. These factors are incorporated herein by reference.
A reconciliation of non-GAAP financial measures to GAAP financial measures mentioned in this conference call. Please refer to page 21 of the slide presentation. That's appreciate the press release financial tables.
During today's presentation instructions will be given for the question. That's recession I just talked about let's turn the conference over to fill ups when.
<unk> CEO for opening remarks. Please go ahead Sir.
Thank you and welcome to our first quarter 2020 earnings call joining me today, our Chris Niles, Our Chief Financial Officer, and Petty hurt our Chief Credit Officer.
And you can see from our materials associated continued to meet the needs of our customers grow and generate net profit during the first three months of the year.
We continue to benefit from a resilient core funding base strong market presence at a high quality lending portfolio.
But I'll start by discussing our response to the radically changed environment, where now experiencing.
The past two months were extraordinary let me highlight the actions we've taken to help our customers and protect our colleagues.
We closed our branch lobbies on March 17th becoming one of the first thanks to turn to transition to drive thru and my appointment only service our branch operations and I teams have responded wonderfully to meet the needs of our customers.
We began to send people to work remotely on March 13th and now have about 70% of our colleagues performing their jobs from home.
We're continuing to pay all of our colleagues, including those whose jobs were curtailed by our social dispensing measures.
We're also quick to offer our own cobot 19 relief program.
Providing customers waivers of certain fees and deferrals of loan in mortgage payments through Tuesday, approximately 1400, 50, primarily consumer and small business loan customers have been granted some form of payment or feel really.
From a financial perspective, we were ready to meet all of our customers' needs with both lending availability and transactional liquidity as our core deposits increased even faster than loans.
Our loan to deposit ratio strengthened during the quarter.
In addition, since quarter end, we've continued to support our small business customers three D.S.P.A. Paycheck protection program.
As of April 21st we have funded nearly 900 million of loans for more than 3600 businesses.
We are ready to support our customers in the second round or the P.P.P. program and other programs that may come from the fed the treasury or the S. Yet.
We've also continued to support our communities in these difficult times, we continued to donate over $3 million a year to support local housing programs food banks and other essential services. In addition, we recently donated 300000 to the United way and other local cobot 19 relief efforts in our footprint.
Standing up new loan programs and processes, while working remotely it's been hard but we've met these challenges and stand ready to help our customers get through this difficult period.
So now let me turn to the financial results.
On slide four our first quarter GAAP earnings were 27 cents per share.
Driven by resilient net interest income and reduced expenses.
Excluding first on the acquisition related costs, our earnings were 28 cents per share.
We had strong loan growth, particularly in our commercial and business lending portfolio as customers drawing lines of credit for their own liquidity.
The line draws in turn drove increased deposits as customers built up cash positions.
The first start an acquisition, which closed on February 14th also contributed to loan at core deposit growth.
Our net interest margin increased one basis point from the fourth quarter, driven by a lower cost of funds and elevated LIBOR rates the slightly higher margin coupled with loan growth resulted in a 20 million dollar increase in our pretax pre provision income from the fourth quarter.
Our C.T. one ratio was 9.36%.
Giving us ample capital to fund our commitments and support additional loan growth, even after repurchasing $71 million a common stock in the quarter.
We also implemented Cecil as of January 1st, resulting in a onetime 131 million dollar increase to our allowance for credit losses.
End of first quarter provision of 53 million, reflecting our economic outlook going forward.
Average loan balances.
As shown on slide five total loan balances were up 525 million from the fourth quarter as we saw increases in residential mortgages commercial and business lending and commercial real estate.
Residential mortgage growth was driven by solid origination trends and lower payoffs in the first two months of the quarter, while we anticipate payoffs to be elevated in the second quarter due to lower rates. Our pipeline continues to be strong we've taken about two and a half billion in mortgage applications. This year through mid April which is.
About double the pace, we saw over the same period last year.
Growth in our commercial and business portfolio was driven by our power and utilities for vertical.
Additionally, general commercial lending and reach had strong growth in the quarter what customer draws in March contributed to the increase we also had strong pipeline production.
Offsetting these gains were seasonal decline in mortgage warehouse through much of the quarter and the purposeful run off of our oil and gas portfolio. We expect to continue the reduction of our oil and gas book as we pursue additional credit risk mitigation opportunities.
We also saw solid results from our focus on growing commercial real estate term debt, particularly in January and February commercial real estate construction loans also increased as we funded construction loans in our pipeline.
Turning to slide six we show into period loan trends, which highlights activity, we saw in March and April.
In mid March we began experiencing a significant uptick in general commercial lending as customers drawn lines of credit and built up cash.
We also had a large increase in mortgage warehouse loans as lower mortgage rates induced a refinancing wave in March.
In C.R.E. customers increased line draws and delayed payoffs in March and we expect CRD balances to remain elevated through the rest of the year.
Custard customer demands for liquidity and refinancing activity have subsided in April as shown in the right hand graph. This chart also highlights the impact of our participation in the Paycheck protection program that we further detail on slide seven.
We began taking applications for the PPP on April 3rd the first it was offered by the SPX.
Standing up a new loan program is always difficult and this one was made more so by the tight timeline changing guidance and by working remotely through great effort and dedication of several hundred of our colleagues. We created all the forms and processes and modified systems to support the program in a matter of days.
Through April 21, we had funded over 3600 customers for nearly 900 million of loans, representing about 90% of the dollars and about 70% of the loans that were applied for.
We have taken advantage of the Feds PPP lending facility to fund. These loans, we expect our customers will begin applying for loan forgiveness in late June and anticipate the bulk of the loans will be forgiven during the third quarter.
With the expected extension of the PPP program.
We expect to fund the remaining 1300 applications, we received representing an additional 80 million of loans, we've already taken all those applications through the process. So that will be ready to get SP a authorization as soon as their portal opens.
In turn we expect to access the funds PPP lending facility to fund these loans as well.
On March 21st we initiated our cobot relief program by offering loan deferrals and fee waivers to our business and consumer customers.
Through April 21, we've approved deferrals or modifications for over 1400, 50 loans totaling approximately 733 million, which is about 3% of our total loans.
The approved loans included 303 million or about 5% of the commercial real estate book, mostly driven by our hotel and retail oriented borrowers.
179 million or 2% of our commercial and business lending book and 250 million of residential and consumer loans, we hold and our own portfolio.
Additionally, in the first 30 days of our Cobot 19 relief program, we waived a refund at 415000 fees for consumers and small businesses.
We're pleased to be able to help relieve some of our customers financial stress and to be part of the economic solution to this crisis.
Turning to slide eight the current environment has introduced new risks.
On slide eight we've laid out our exposures to several categories of commercial loans potentially impacted.
Michael with 19, and lower hydrocarbon prices these balances represent 9% or 2.2 billion of outstanding loans at the end of the first quarter.
We have increased portfolio monitoring activities across the bank and are proactively working with our borrowers to help them navigate current environment.
Our largest likely area of exposure, representing nearly 5% of loan book is to retailers in shopping centers.
Approximately 528 million of the retailer category is NCR eight.
In addition, we have approximately 453 million loan to predominantly investment grade retailer oriented rights.
We continue to monitor our oil and gas portfolio, which now accounts for less than 2% of our loan book.
The man disruptions pushing the cost of well down dramatically.
We've set aside additional loan loss reserves against oil and gas portfolio during the first quarter, while many of our customers have hedged their positions over the near term.
And it may take awhile for losses to develop we expect a prolonged period of lower prices that will stress the industry.
Our exposure to the hospitality industry is fairly limited with just over 200 million of loans to hotels, representing less than 1% of total loans.
We also carry approximately 100 million in loans to restaurants, and other food service companies.
Beyond that we have limited exposures with just one customer in each of the casino movie theater or fracking sand mining business.
Turning to slide nine we've outlined the banks transition to Cecil in the first quarter, we implemented Cecil leveraging Moody's baseline forecasts at both the beginning at the end of quarter. Our day, one allowance for credit losses adjustment came in at 131 million, which was reserved as of.
January onest, the higher level of day, one adoption relative to our prior guidance was largely driven by an increase in identified probable troubled debt restructurings in our oil and gas portfolio and the fracking signed mining company.
With respect to our provision for the quarter, we leveraged the Moody's March 27th baseline forecast and identified additional probable tdrs in the oil and gas book given changes in price and the dynamics in the industry further in response to the overall economic environment.
We also added additional reserves for our key commercial loan exposures, which we highlighted on the prior slide and bolstered our unfunded commitment provision by 16 million.
These factors drove the majority of our $53 million provision for the quarter.
Our net Q1 reserve build a 40 million reflects the provision net of charge offs and changes in our Cecil modeling along with the increased expected prepayments on mortgages.
In aggregate, our total allowance for credit losses on loans was 394 million at quarter end.
As compared to 223 million at year end.
We believe this $171 million reserve build a 76% increase adequately reflects the life of loan risks in our portfolio given the economic outlook at March 30 Onest.
Our current allowance levels also cover over 65% of our potential losses as produced in our last internal severely adverse stress test scenario.
64 million of the reserve build was specific to our remaining oil and gas portfolio and we ended the quarter when they see Ll reserve of nearly nearly 17% against oil and gas.
Our overall blended a CLL represents 162 basis points, a total loans with nearly 2% set against our CRT exposures and just under 1% set against our predominantly first mortgage consumer loan portfolio.
Turning to slide 10.
Prior to the outbreak of Cobot 19, the credit environment remained benign outside of oil and gas given the sudden economic downturn in customer leave programs, our credit metrics outside of oil and gas remained relatively steady.
During the quarter potential problem loans increased 73 million to 234 million driven by a few CRT credits along with some additional oil and gas names.
Non accrual loans saw an 18 million dollar uptick with 5 million coming from oil and gas and the majority of the remaining increase attributed to general see an eye and residential mortgages net charge offs were 17 million with about half coming from oil and gas and the rest in general Cnine.
To address the disruption brought on by Cobot 19, the company's taken a proactive approach to monitor customers impacted.
Loan officers have reached out to their customers to understand their capital and liquidity needs. This outreach has been an essential component of the company's relief programs as we support our customers through this turbulent time.
Along with our customer outreach, we've undertaken a deep examination of our loan portfolio to identify industries with additional risk exposure. We continue detailed monitoring of these specific industries. In addition to the overall portfolio as we analyze delinquencies and deferrals as leading indicators of credit issues in the.
Valving environment.
Turning to slide 11 average deposits were up nearly 190 million from the fourth quarter. The average deposit balance growth was driven by the first started acquisition, which added about 440 million of deposits in mid February.
Our end of period balances increased nearly $1.9 billion, including 1.6 billion of low cost demand and savings deposits that came later in the quarter as our customers built up cash.
These inflows resulted in a beneficial mix shift and low cost deposits made up 58% of our overall deposits at the end of quarter.
Turning to slide 12, the inflow deposits has also enabled us to maintain strong liquidity.
Our wholesale funding ratio has remained stable demonstrating our continuing ability to fund most of our loans with deposits.
While we expect to continue funding loans with deposits, we have $11 billion of wholesale funding available, including 6 billion of capacity at the FHLB in Chicago.
These figures do not include the additional liquidity that's available to us through the Feds PPP lending facility.
Our loan to deposit ratio was 95% well within our historical range, which gives us flexibility to maintain deposit pricing discipline.
We expect to maintain this ratio below a 100%.
Turning to slide 13, our net interest income was 203 million an increase of 3 million from the previous quarter and our net interest margin was 2.84% up one basis point from the fourth quarter.
There were several factors that drove the modest increase in Eni Ana and NIM.
On the asset side, one month LIBOR remained significantly elevated over fed fund rates, particularly in March positively impacting seery and commercial and business lending yields.
This benefit was offset by a decrease in long term interest rates, resulting in elevated refinancing in the residential mortgage book and the payoff of higher coupon loans in March.
Additionally, this increased prepayment rate drove accelerated recognition of deferred origination costs further reducing our mortgage yield.
On the liability side, our total interest bearing deposit costs decreased 19 basis points as we reduced pricing across our full suite of deposit products total interest bearing liabilities decreased 17 basis point.
Aided by a beneficial mix shift toward low cost deposits and reduced wholesale funding costs.
These factors were most pronounced in March resulting in a NIM for 2.89% for that month.
Looking ahead, we expect the commercial loan yields will continue to benefit from elevated LIBOR rates in April and at least somewhat into may.
We anticipate the LIBOR fed funds spread will normalize later in 2020 as economic conditions become less uncertain.
We also expect our deposit costs to continue to decline in the second quarter as we benefit from CD run off and a full quarter impact from our reduced pricing, but note that our month to date April cost of interest bearing deposits is already running at approximately 36 basis points.
Turning to slide 14 first quarter noninterest income of 98 million was up 5 million from the last quarter and up 7 million year over year. Our insurance income was seasonally higher as we receive property and casualty contingency fees in the quarter and our capital markets groups saw revenue lift store.
Given by market volatility.
We also benefited from $15 million of gross mortgage banking revenue in the first quarter, but that was partially offset by a $9 million MSR impairment, resulting in 6 million of net mortgage banking income.
However, most other fee categories were softer in Q1 due to.
Due in part to our Cobot 19 relief program and lower market levels impacting assets under management and investment activity. These declines and other fee categories were largely offset by net gains resulting realized on the further sell down a prepayment sensitive mortgage backed securities.
Moving to slide 15, noninterest expense of 192 million was down 11 million from the fourth quarter.
This decrease was primarily due to lower personnel costs as we have reduced expected incentive compensation had less hiring in response to the current environment and are seeing the benefits of the restructuring done in fourth quarter.
Business development in advertising costs were 2 million lower during the quarter due to less business travel and the planned reduction of advertising spend.
Technology costs also decreased 2 million from the reduction of third party consultants, which took place at the end of last year.
Turning to slide 16, we look at our customer activity as you'd expect branch traffic is down since the pandemic began with April branch transactions about 17% lower than January.
We also saw 32% drop in ATM transactions, where the sign same time period as our customers increasingly chose to stay home.
However, with the significant investments we've made in digital technology over the last several years, our customers were able to shift their activity from our branches to online and mobile we saw an 86% uptick in mobile sessions since January and an increase in the use of our you open application, which allows customers to open accounts online.
Line or from their mobile devices call Center volume has also increased 32% as we move communications with our customers into non branch channels.
As shown on slide 17, our regulatory capital levels remained strong and we have sufficient capital to support further loan growth if our customers continue to seek liquidity.
Hi, everyone was 9.36% at the end of the first quarter and we anticipate it will build through the remainder of 2020.
We repurchased 71 million of common stock in the quarter, but suspended our repurchase program on March 13.
We expect our repurchase program to remain suspended for the remainder of the year.
On slide 18, we discuss our outlook.
Given the extraordinary economic uncertainty our previous quantitative guidance should no longer be relied upon.
However, we like to provide more general expectations for the remainder of the year.
While we have ample liquidity and funding sources, we expect to be able to fund loan growth with deposit growth and expect our loan to deposit ratio will remain under a 100%.
Given the lack of attractive investments for our portfolio, we're now targeting and investments to total assets ratio of 15%.
We expect our mortgage banking business to continue to do well, but it will likely be offset by lower service charges as we provide relief to our customers. We will also faced headwinds in wealth management due to lower market valuations.
We often speak about cost as being one factor that we control. We will continue our disciplined approach and expect our expense run rate for the rest of the year to be in line with that of the first quarter.
As mentioned, we suspended our stock repurchase program on March 13, and expect that will remain a suspended for the remainder of the year as we build capital.
With that I'd be happy to take your questions.
At this time, we will be conducting a question answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation Tony will indicate your line is in the question Q.
Chris start to if you would like to move your question from the Q for participants using speaker equipment. It may be necessary to pick up your handset before Christmas dark needs. One moment, please while we pull for questions.
Our first question comes from Casey Haire from Jefferies. Please proceed with your question.
Sorry about that yes, thanks, guys.
I guess focusing first on the.
The.
The energy reserves to 17% sounds like you guys do present.
We expect prolong depressed pricing here can you just start just give us a little bit more color. There can we expect more.
More reserve build or you do you feel like you have adequate reserves at 17%.
Pat you want to take that question.
Sure So I think.
General time will tell what we end up doing is that as the year goes on we feel like we're adequately reserved right now however.
With the kind of unprecedented environment, we're dealing with oil and gas. We're just we're going to follow this closely as we get into the second quarter right now our oil and gas portfolio has been reduced almost 40% from a year ago.
And as we mentioned that now represents less than 2% of the total portfolio.
The portfolio as it sits today is about 60 40 oil to gas.
And we feel good about the fact that about 70% of the portfolio was hedged for 2020, and almost 50% hedged for 2021.
We're just kind of starting into the spring Redetermination season, right now we've got about a third of.
Our.
Loans have been they've got results on that Redetermination.
We're seeing some reductions in borrowing base of about almost 20% to 25%.
Average loan commitments have been reduced by by about 20%.
So.
Okay very good and.
On the on the Forbearance front I think you mentioned are the deferral 733 million.
Apologies if I missed this in the script, but it is that is that still trending up or is that.
Has that stabilized just getting some color on the pace there.
There's a there's theres more to come clearly that those those are the deferrals that we've already granted there are some more to come.
They're not going to go at the same pace I wouldn't think that we saw over this past four weeks or so.
Okay, Great and just a couple of more follow ups on the NIM.
A LIBOR disconnect with fed funds.
It sounds like you guys expect that to sort of.
Normalize I guess, a little bit towards the end of this quarter.
Just what is sort of baked into your your guide.
I was just for that for the quarter here. So we can just track that.
Yes, so clearly was elevated in March it stepped down that Delta, which was north of 80 basis points step down to 60 basis points and we havent stepping down the the long term average is closer to an eighth one extra is going to get to an eighth necessarily much before the end of the year, but we certainly would see it getting down in.
To that much narrower range as we move to the end of the third quarter.
Okay, and just last one on the.
The deposit costs. That's at 57 in March how much more how much from more Romney you have going forward from that level.
So we mentioned that fell into the Thirtys in April and it will probably likely fall further slightly given CD rollovers and other repricing dynamics.
That will contribute to that so probably be.
Less than.
It'll be in a thirtys.
In the second quarter, and falling and likely less than that in the third quarter unless the environment shifts.
We slashed our deposit pricing at the same time that the fed took their last big whack at at rates and so you'll see the full impact of that as we go through the quarter, but even.
As early as we are today in the second quarter, we've dropped another 20 basis points overall.
Gotcha, Okay. Thanks very much.
And our next question comes from Scott Siefers from Piper Sandler. Please proceed with your question.
Good afternoon, guys. Thanks for taking the questions and Scott.
I guess first a question I wanted to ask was on the reserve too.
Sort of stress losses, I think Phil you said, 64%.
It is obviously a pretty healthy number I guess, if I back into what the reserve is.
Relative to the last time, you guys said publicly.
Disclosed.
Stress test it would've been closer to 55% and also very healthy, but just curious if you guys can maybe walk through what has changed in the either the portfolio complexity and loss assumptions, what what have you that would allow.
That reserve to kind of look look better these days.
Sure Scott. So I think you can do the math and in for yes that our total stress losses in the severely adverse scenario from our last public disclosure to our last internal run did come down several hundred million dollars. The drivers of that as Pat mentioned, a little bit in part where the more than 400 million dollar reduction in the oil and gas book.
And then the general mix of our portfolio, which has become more overall mortgage centric, which has a lower loss content in our models in general and the continued low levels of risky asset classes in the severe scenarios.
Thats a single family.
Construction lending a for sale housing construction lending and condo related activity now our models were obviously geared and tied to the realize outcomes of the prior results. So what will be the outcomes next time can shift but based on the models that we've had those numbers as we continue to mixed the portfolio away from those higher risk.
Passes and to steadier loan categories have moved the total expect loss potential loss down and obviously, we moved the reserve up.
Okay perfect. That's good color I appreciate that and then just wanted to ask one one.
Good question just on capital so common equity tier one is still very solid and then I guess, what's a little you unique about the way this cycle seems to be panning out is whereas Tc ratio was like the all important ratio last time around presumably this time, it's got to have much less weight given that you would get penalize them.
The Tc for PPP loans, but those are kind of invisible from the standpoint of regulatory ratios I guess in your guys might houses how does the TCV.
Factor into your thinking in the way you you sort of manage things this time around.
Well, we've we've always said that we wanted to keep it at about seven or above and as you'll recall as we were building toward Cecil implementation it run up.
So we expect to see so we had first on coming.
What we Didnt expect is to have a billion and a half loans flow onto the balance sheet at the end of March so that took it down to the 6.9 that you see but.
Right.
If you exclude the PPP loans that will be sitting here, although they're completely funded by the fed.
It should creep up from here.
With PPP, if you leave that in of course, it will be lower because we'll end up with we've got I mean, we have funded 900 as we sit here today.
We have about another hundred.
Can you give or take and we've opened up our inquiry page already in anticipation.
Of.
Congress and the president signing the extension so.
I don't know where it'll end up it will be.
Higher.
Yes [laughter].
Okay perfect. Thank you guys very much.
Yep.
And our next question is from Terry.
Hi away from Stephens. Please proceed with your question.
Thanks, Good afternoon.
First our homes are entering.
I'm just wondering are you seeing that experiencing higher modification activity and drawdown activity among those commercial portfolios that you highlighted in the present to the presentation today.
Sure so.
The.
The reeks have drawn.
They're backup appliances as you know.
I'm, just trying to get to that page during its steps except the sick.
It's page eight so.
Yes, so the Reits have drawn.
And.
Kind of just general Cnine not necessarily called out on page eight Terry.
Has drawn some.
And of course, we had a run up in mortgage warehouse, but that to be expected.
So Terry I guess I would add and I apologize I was looking at page six because the Phil's comments. Just now you can see the general commercial loans is where the dry and the mortgage warehouse in the right. That's the all at the end of the quarter and since then which is what we tried to highlight on the right hand side of page six we really haven't seen incremental activity. So the.
Drawdown and liquidity driven activity, we saw in the last three weeks of March really abated. When we move past April Onest, and we really haven't seen any further that activity here in the second quarter.
And then just as my follow up question do you have any sense for the average fee on your PPP loans. It looks like you're kind of average size is skewed a little bit larger than others, which.
Could impact or what impact that fee.
Yeah, I think we're we're figuring its a.
You know.
3%, plus we've got a lot of smaller stuff in the Q.
Like a lot of banks.
I mean, we we process the loans on a first come first serve basis.
But a lot of larger companies with professional finance staffs, we're ready to go up front. So it tends to skew larger at the beginning and as we wound it down leading up to the money running out.
The loans tend to get much smaller and whats left in our Q.
And whats coming in now tends to be smaller as well, so it'll probably be like.
Three three ish three plus.
Okay that makes total sense great. Thank you.
Our next question is from Jon Arfstrom from RBC capital markets. Please proceed with your question.
Thanks, Good afternoon guys.
Hi, Jessica.
Back on slide six.
Just following up on Terry's question.
It's probably a good sign that you haven't seen.
More line dramas.
Curious how long you expect some of those draws to hang around.
See those come back down your thoughts on that.
Yes.
We generally feel that that a lot of these draws were just companies wanting to ensure their liquidity in the face of turmoil, so things havent calm down yet they've come down some all of the fed actions have certainly helped a lot in the capital markets.
So it's very hard to predict what's going to happen, but my guess would be.
That as this quarter rolls along as things continue to stabilize you'll probably see some of this money.
Come back just because.
People won't necessarily feel like they've got to be sitting on.
On a ton of cash but.
Again, it's a little hard to predict the fact that we didnt continue to get draws past quarter end to any great degree.
Feels like there was a little bit a window dressing going on.
For some of some of the folks who drew these funds.
On slide nine.
It's it's a good slide I haven't seen.
Sure Mike this mechanical.
I think I understand the ruminant embarrassing, but the two negative numbers.
Good morning.
And then the other is prepayment driven but can you can you just kind of address those two.
Yes.
You are correct area in both cases, so any day, one seasonal adoption the negative in the commercial and business lending excluding oil and gas is adjusting for the fact that that we have tend to have considerably shorter loan terms a lot of 364 day type facilities et cetera, and therefore, our day one adoption was.
Reduction in the allocation of reserve to those given the term based nature of Cecil.
And similarly, but for different reasons as we move through the quarter and refinance rates fell and therefore prepayment rates expected prepayment rates increased the average life of the expected mortgages at the end of the quarter.
Was and is expected to be shorter than it was at the beginning so that resulted in a net release in the mortgage line, which is why you had a net negative reserve build.
With that helps and then.
Next one is.
This is trying to give to sort of you Chris will be much remedies.
Okay.
Early Tonight.
Second quarter loan loss provision.
What are you watching.
You know kind of what are the nuances.
Associated what are the things that might be a little different about how you will walk you through.
The level necessary in terms of.
Recorded provision.
Yes, it is going to be hard to get that I'm on the Packers sports like you know the draft pick I can tell you if you really want it.
Sure.
[laughter] now we need to do partner.
Yep.
Obviously, we're going to be looking at.
Well, let me think about that so a lot like let's think about hotels you know almost all that's been deferred now so that's probably not going to drive much in the second quarter.
A lot of our oil and gas buildup, we use the probable troubled debt restructuring concept, which I don't think a lot of banks have used as much which was embedded in Cecil. So if we go through continued redetermination periods and we see continued market.
Deterioration in collateral positions.
You could end up with some more probable tdrs and see some build there.
What else would we be watching obviously delinquencies and such that we havent deferred for one reason or another and a change in the overall macro environment right. So our view at the end of the quarter for seasonal has a certain macroeconomic outlook and.
Our internal discussions that had a fairly high and robust level of.
Recessionary outcomes.
20, plus percent type or 20% GDP type drops et cetera, and its plausible that you know two and half months from now that environment will either be.
Perhaps different and more positive or possibly.
Worse as we work our way there now I would I will remain optimistic than say I'm, hoping that things get better for the country and for all of us in which case I think theres room that the economic outlook is a positive. In addition to the realized outcomes in our portfolio, either an oil and gas or hospitality or otherwise.
The last thing I would say as it certainly is more likely than not that there'll be reserve build in the second quarter just given.
The environment here in the second quarter the continued.
Unemployment claims that we saw this morning et cetera, but fortunately PPNR looks pretty strong at the moment. So I think we've got plenty of.
Of ammunition for that.
Okay, yes, thanks for the whole but for sure.
Yep.
And our next question is from Markel Young with Suntrust Robinson Humphrey. Please proceed with your question.
Hey, Thanks for taking the question good evening.
Wanted to.
Just ask just on kind of balance sheet management and growth from here, how you're thinking about that are you sort of hesitant to go out and make new loans to new customers at this point and really focus more internally and how would you look at maybe mortgage in this environment, putting that on balance sheet versus selling.
Yes. So the first part of your question, Michael We are absolutely here to support our customers' needs and we are well positioned to do that we'll continue to do it.
The second piece.
We are generally in a position where we're going to move the flow of mortgages and that's what we're doing now.
Up to two Fannie or whomever, so we're not putting a lot of mortgages on our balance sheet on purpose, that's not necessarily because.
Of the run up in loan Outstandings. It a lot of it has to do what you're really not encouraged through the seasonal methodology to build up a lot of mortgages on your own book. So we'll be in the mode generally speaking of originating and and selling those mortgages and retaining service, which is pretty much been.
Our standard model.
Okay, so with higher prepayment speeds, maybe on the existing book on the.
Oh on.
Would you expect I guess those to those balances to decline.
And the or would you look to replace those to maintain.
The overall waiting.
No, yes, I would guess that our mix I mean, our mix already shifted quite dramatically at the end of the first quarter. So I think you could expect the mix of our loan book to be less mortgage more see an eye more see ari as the year progresses. So we're not going to do anything extraordinary too.
Maintain those mortgage balances because they are being offset by.
By other by growth in other categories.
And actually strategically we had talked about this before that we felt like our mortgage book was creeping up to a too high of a level against our overall loan book in and as things have turned out that's changed rather more rapidly than we thought it would.
And it will probably continue to evolve at a much slower pace throughout the year.
Thanks, and one last one maybe just on loan to values I think thats something that a lot of other banks have brought up relative to their CRM book and I guess trying to give confidence to investors that they don't see a lot of loss content. There do you have any of that level of disclosure maybe by sector or anything like.
That.
Sure I think I think the number that you'd be most interested in.
If you go back to slide eight where you see our exposure to retailers.
Which is our our largest.
Sector of interest the loan to values in the the term book for retailers and most of it as term is 57%.
Okay and would that be consistent though when I guess other other areas will be higher maybe 70, 75%.
Any color, it's going to Japan.
Yes, it would depend very much on that on the individual categories, but you know on this on this page where we called out.
Industries, which have been impacted by cobot, 19, which are 9% of our total loan book.
Almost 3% of that is in the category I'd, just just talked about obviously retail rates are different animal because they're all a basket of.
Projects, so the LTV, there isn't as Germain oil and gas is.
Ill.
Depends on their Redeterminations and then the rest of the Ics exposures get.
Pretty limited in a hurry so.
We focused in on what's the LTV on on these retail oriented commercial real estate projects and and it turns out its pretty reasonable.
Okay. Thanks.
Sure.
And once again, if you have a question you mean always press star one on your telephone keypad display you will be placed in the question Q.
Our next question is from Chris Mcgratty from KBW. Please proceed with your question.
Hi, good afternoon.
Nothing Chris.
Hey, Chris.
Looking at Slide 18 on the guide on on the fee income.
You know isolating the mortgage.
Component can you.
Probably a little more perspective on the magnitude of pressure from some of the actions are taking.
[noise] to waive fees and also kind of the market impact on your on your wealth business.
Sure. So I mean, the issue with wealth asset under management, we disclose that number and you can see it on page three welfare U.M. came down by more than 15% from for year end to the first into the first quarter. So that will have a drag on those fees as we move through the year now some of those fees are on a lag.
So they will basically take effect here in the second quarter based on the threat downdraft, we saw in the first quarter. So it's going to be an impact.
With regard to the waivers and fee charges, we partially disclose that on the slide with the Nymex for doing for our customers and that's already over 400000, and it will likely become more as we continue through the quarter as vast earlier, we would expect there to be.
Probably additional request for waivers.
And such over the course of the quarter and so that will likely increase.
Now there is the potential that a lot of this maybe all of it will be offset by the fees. We ultimately collect from the PPP program.
Depending on what those turned out to be.
I mean that they're likely to be.
Somewhere in the range I'm guessing a $30 million to $40 million fees that of course, we had.
They weren't weren't even a figment of our imagination started the year so.
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That should offset I'm guessing quite a bit of our concern about wealth as well as some of the waivers and just for clarity for geography, those fees will show up in net interest income.
Over the course of the next six months likely assume loans come off not in fees just for clarity you got it got it.
Maybe maybe one more if I could so.
Obviously dividends are a big topic, Europe, and making sure where did you ask your payout ratio not blaring. When you know it's about 60% just thoughts on a dividend sustainability given this given the search engine America.
Sure. So I'll give you that Jamie Diamond answer which is.
We we fully expect to continue to pay our dividend, we feel comfortable that we should be able to but if we end up in a severe prolonged recession.
You know almost anything is on the table for almost any company.
Great. Thanks.
And we have reached Andrew My question and answer session and I will now turn the call back over to look Flynn for closing remarks.
Great.
I appreciate you all joining us today I do want to take a moment because I know a lot of my colleagues listen to this call too thank them for the extraordinary job evolving doing during this difficult period.
People have gone above and beyond whether its processing, two and a half a billion dollars more than twice.
What we had this time last year.
From home.
Standing up the PPP program, three or 400 people spending enormous hours, including all night to get things through the SP. A portal, it's been an incredible effort by everybody and I just want to tell everyone. How much I appreciate it.
I mean I'd just like the finished by saying that associated remains strong and stands ready to help our customers through these challenges ended the recovery that is certain to follow.
So we look forward to talking with you all again in July you have any questions in the meantime gifts call and as always thank you for your interest in associated.
This concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
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