Q1 2020 Earnings Call
Ladies and gentlemen, the operator chase cost discount to begin momentarily.
Until that time Airlines will get replaced some music cold.
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Ladies and gentlemen, thank you for sometime and welcome to the M. P Bank first quarter 2020 earnings call.
At this conference this line journal listen only mode.
After the speakers presentation, there will be a question answer session.
Christys question during this session you'll need to press star one on your telephone keypad.
I'd now like how much appreciate the director of Investor Relations Don Macleod. Please go ahead.
Thank you Brent Randy and good morning, everyone I'd like to thank you for participating in and then piece first quarter 2020, <unk> earnings conference call, both by telephone and through the webcast.
If you have not ready arranger basically issued this morning, you can access that along with the financial tables and schedules from our website www dot MTB dot com and by clicking on the Investor Relations link and then on the events and presentations link.
Also before we start I like the mentioned that comments made during this call might contain forward looking statements relating to the banking industry and empty Bank Corporation.
And then he encourages participants to refer to our FCC filings on forms 8-K, 10-K 10-Q, including the form 8-K filed today in connection with the earnings release for a complete discussion are forward looking statements and risk factors.
Now I'd like introduce our Chief Financial Officer Darren.
Thank you Don and good morning, everyone.
Before we start I'd like to take a moment to acknowledge the extraordinary effort put forth by him and he's employees in response to the cobot 19 pandemic that over the past few weeks has impacted virtually every aspect of our economy.
I'd like to share a story about our branches.
When I first heard from Washington, D.C., but one I have since heard multiple times from across our footprint.
In mid to late March all of our relationship bankers began reaching out to customers to ensure they had appropriate access to their money with a particular focus on customers, who infrequently use mobile and web banking.
At the end of one such conversation our bank or ask the customer if there was anything else, we could do to helper.
The customer said I.
I need food.
My husband passed away.
Lost my job and I have no food I'm hungry.
Natalie quickly brought this to the attention of her branch manager who in turn shared the story with the rest of the team and they decided to do something about it.
After closing the branch for the day team went shopping and on their way home delivered a significant supply of groceries to help our customer to her difficult time.
Having previously managed the branch network I can assure you. This procedure is not covered in the branch operations manual.
Next I'd like to share some metrics that we believe highlight how women tea is operating in the current environment, well practicing say, social distancing, helping customers and enabling commerce.
As of last Friday, 708 of our 733 full service domestic branches are open and operating with a few restrictions.
Drive through Windows, an ATM our operating normally.
And branch lobbies are unemployment only basis.
For commercial and consumer customers.
Committee has provided a host of relief options, including loan maturity extensions payment deferrals fee waivers and low interest rate loan products.
Our mortgage servicing group.
It's worked to help customers seeking payment really for loans, we own or for those we serviced for others.
So far we've provided assistance silver 70000 customers, whose loan balances total some $13 billion.
Just under 90% of those balances are serviced for others.
In total Weve assisted on approximately 10% of the mortgage loans we service.
Similarly for customers with other consumer loans auto and recreation finance credit card and home equity loans, we've provided nearly 17000 customers some form of payment relief.
These customers hold balances of over $500 million and represented just under 4% of our consumer loan portfolio.
And then team has been helping small business customers to access the government's paycheck protection program or PPP.
This program offers loans backed by the small business administration intended to sustain monthly business expenses, such as paychex for employees, who would otherwise be laid off rent and utilities.
In total M.T. associates helped a total of 27711 clients get approved for P.P.P. loans.
Totaling more than $6.4 billion.
Over 2000 empty bankers worked around the clock to make that possible for our customers.
[noise] those companies collectively employ more than 600000 workers.
If additional funding is made available we have a backlog of additional clients. We are ready to help get approved.
For other business customers large and small and who entered the pandemic in good standing we're offering short term payment deferrals or other modifications to their existing credit agreements to help them manage short term cash flow challenges.
So far we've provided modifications to nearly 6000 businesses with an aggregate principal balance of $11 billion.
And last week, we began receiving funds from the Treasury Department store deposit of cobot, 19th stimulus payments into our customers accounts.
We know there will be more to do in the coming weeks and our team stands ready to be a source of strength for our customers and our communities.
Let's look like next let's look at the financial results for the quarter.
Diluted GAAP earnings per common share were $1.93 cents for the first quarter of 2020 compared with $3.60 in the fourth quarter of 2019 and $3.35 in the first quarter of 29 team.
Net income for the quarter was 206 $9 million compared with $493 million in the linked quarter and $483 million in a year ago quarter.
On a GAAP basis Energy's first quarter results produced an annualized rate of return on average assets of <unk>, 0.9%.
In an annualized return on average common equity up 7%.
This compares with rates of 1.6%.
And 12.95% respectively in the previous quarter.
Included in GAAP results in the recent quarter. We're after tax expenses from the amortization of intangible assets amounting to $3 million or two cents per common share little change from the prior quarter.
Consistent with our long term practice.
M.T. provide supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions when they occur.
Seventys net operating income for the first quarter, which excludes intangible amortization.
Was $272 million.
This compares with $496 million in the linked quarter and $486 million in last year's first quarter.
Diluted net operating earnings per common share were $1.95 cents for the recent quarter compared to $3.62 in 20, Nineteens fourth quarter and $3.38 in the first quarter of 2019.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 0.94%.
And 10.39% for the recent quarter.
The comparable returns were 1.67% and 19.08% in the fourth quarter of 2019.
In accordance with the Fccs guidelines. This mornings press release contains a taboola reconciliation of GAAP and non-GAAP results, including tangible assets an equity.
Recall that both GAAP and net operating earnings for the first quarter of 2019 were impacted by noteworthy item.
Included in that quarter's results was in addition to our legal reserves of $50 million relating to a subsidiaries role as a trustee for customers employee stock ownership plans.
This amounted to $37 million after tax effect for 27 cents per diluted common share.
Turning to the balance sheet and the income statement.
Taxable equivalent net interest income was $982 million in the first quarter of 2020 down by $32 million from the linked quarter.
This comes as the result of a lower level of average interest, earning assets combined with a nearly stable net interest margin.
Margin for the past quarter was 3.65%.
Up one basis point from 3.64% in the linked quarter.
As we indicated on our January conference call, a more favorable mix of earning assets, including a lower absolute level of average funds on deposit with the fed combined with a higher proportion of loans provided a benefit to the margin of an estimated 11 basis points.
Further declines in interest rates cost about three basis points of pressure to the margin.
Relatively modest decrease helped by 11 11 basis point decline in the cost of interest burning interest bearing deposits.
As a result of higher forecast and prepayments.
Accelerated premium amortization on residential mortgage loans acquired in the Hudson City acquisition and on mortgage back securities accounted for another four basis points of pressure.
Several other factors combined to contribute to a net three basis point.
Margin reduction.
Those factors.
Include the lesser day count in the quarter compared with the prior quarter.
In nonaccrual loan interest, which includes the change in the recognition of interest income on acquired loans as a result of our adoption of seasonal.
Average interest, earning assets declined by just over 2%.
Reflecting a 31% decline in deposits, but the fed.
And a 9% decline in investment securities.
Partially offsetting those declines was a 2% increase in average loans outstanding compared to the previous quarter.
Looking at the loans by category on an average basis compared with the linked quarter.
[noise] commercial and industrial loans increased 3%, including growth in dealer floor plan loans.
Commercial real estate loans also grew by 3% compared to the fourth quarter.
Residential real estate loans, which include mortgage loans acquired in the Hudson City transaction continued to pay down consistent with our expectations.
The portfolio declined by more than 2% or approximately $400 million.
Consumer loans were up nearly 1%.
Activity was consistent with recent quarters, where growth in indirect auto and recreational finance loans has been outpacing declines in home equity lines in loans.
On an end of period basis, commercial and industrial loans increased by $2.4 billion for more than 10%.
We estimate that draws on previously Undrawn contractually committed lines accounted for nearly $2 billion of that increase as the cobot 19 crisis led many customers to access funding sooner rather than later to manage their own liquidity.
Average core customer deposits, which exclude deposits received at empties Cayman Island office and Cds over 250000.
Declined less than one person or nearly 630 million compared to the prior quarter.
There were multiple factors that drove the change.
Lower average mortgage escrow deposits a decline from seasonally high commercial deposits in the fourth quarter and time deposit maturities.
Those factors were partially offset by draws on credit lines being immediately deposit back into customers operating accounts.
Lower levels of off balance sheet sweep activity by customers as lower rates have made sweeps that's attractive.
And a moderate flight to quality as customers view funds on deposit at Mt as safer than other alternatives.
On an end of period basis core deposits were up 7%, reflecting new inflows of mortgage escrow deposits as well as the Redeposit of line draws.
Lower levels of off balance should balance sheet sweeps and the flight to quality issues I just mentioned.
Foreign office deposits decreased 3% on an average basis and nearly 28% on an end of period basis.
With sweep rates.
Nearing historic lows, we expect to see less on balance sheet sweep activity by commercial customers consistent with our experience during the zero rate environment over the first half of the prior decade.
Instead funds would likely remain in their operating accounts, either D.A. or interest checking.
Turning to non interest income.
Noninterest income totaled $529 million in the core in the first quarter compared with $520 million $21 million in the prior quarter.
The recent quarter included $21 million, a valuation losses on equity securities largely on our remaining holdings of GFC preferred stock.
Well 2019th final quarter included $6 million of similar losses.
Mortgage banking revenues were $128 million in the recent quarter compared with $118 million in the linked quarter.
Residential mortgage loans originated for sale were $919 million in the quarter up more than 25% from $727 million in the fourth quarter.
Total residential mortgage banking revenues, including origination and servicing activities were $98 million in the first quarter improved from $91 million in the prior quarter.
The increase reflects the higher volume of loans originated for sale combined with a stronger gain on sale margin.
Commercial mortgage banking revenues were $30 million in the first quarter compared with $27 million in the linked quarter.
And the comparable figure in the first quarter of 2019 was $29 million.
Trust income was $149 million in the recent quarter down slightly from $152 million in the previous quarter.
Results for the first quarter were solid through the first two months, but were then dampened by the March collapse in equity markets.
Service charges on deposit accounts were $106 million compared with $111 million in the fourth quarter.
The decline from the linked quarter reflected some normal seasonally lower levels of customer activity. In addition to the cobot 19, driven slowdown in payments activity.
During the first quarter of 2020, M.T. received a cash distribution of $23 million from Bayview lending group.
MTS results in the first quarter of 2019 included a similar distribution amounting to $37 million.
Turning to expenses.
Operating expenses for the first quarter, which exclude the amortization of intangible assets were $903 million.
As noted 890 $889 million of operating expenses in the first quarter of 2019.
Included the $50 million addition to the litigation reserve.
Operating expenses for the recent quarter included approximately $67 million seasonally higher compensation costs related related to the accelerated recognition of equity compensation expense for certain retirement elds retirement eligible employees.
The HSH contribution.
The impact of annual incentive compensation payouts on the four one k. match and FICA payments as well as the annual reset and FICA payments and unemployment insurance.
Those same items amounted to an increase in salaries and benefits of approximately $60 million in last year's first quarter.
As usual, we expect those seasonal factors to declined significantly as we enter the second quarter.
Excluding those seasonal factors salaries and benefits were little changed from the prior quarter.
The year over year increase reflects the higher headcount as we've been deepening our bench of talent, which as we've previously noted has allowed us to reduce our reliance on outside contractors and bring new products and services to our customers more quickly.
Other cost of operations for the past quarter included a 10 million dollar addition to the valuation allowance on our capitalize mortgage servicing rights.
Recall that there was a 16 million dollar reduction in the allowance in 20 Nineteens fourth quarter.
The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 58.9% in the recent quarter.
Compared with 53.1% in 20, Nineteens fourth quarter and 57.6% in the first quarter of 2019.
Those ratios in the first quarters of 2019 and 2020, each reflect the seasonally elevated compensation expenses.
Next let's turn to credit.
What had been a relatively healthy economy at the end of 2019 and early this year has deteriorated faster than most of us would've expected.
While the first quarter 2020 changes in nonaccrual loans and net charge offs were still fairly benign we're preparing for the likelihood of increased credit costs as the economic impact of the pandemic and the unprecedented stimulus programs unfold.
At the end of 2019 in accordance with that then prevailing incurred loss accounting standard.
EM and Ts allowance for credit losses amounted to $1.05 billion or 1.16% of loans.
In connection with the adoption of the current expected credit loss standard empty added $132 million to the allowance, reflecting higher lifetime loss expectations under Cecil.
Those expectations included certain assumptions, such as economic growth unemployment and other factors.
The provision for loan losses in the first quarter amounted to $250 million exceeding net charge offs by $201 million and increasing the allowance for credit losses to $1.4 billion for 1.47% of loans.
The allowance currently reflects an updated series of assumptions, reflecting a more adverse economic scenario.
Those assumptions include a significant deterioration of future macroeconomic indicators used in our reasonable insupportable forecast, including an unemployment unemployment rate approaching double digits and a significant contraction of GDP in the second quarter.
The assumptions reflect a moderate recovery in the second half of 2020.
Non accrual loans amounted to $963 million or 1.06% of loans at the end of 2019.
In connection with our adoption of the Cecil accounting standard on January 1st 2020.
70, reclassified $171 million of loans that were previously acquired at a discount as non accrual loans.
Non accrual loans as of March 30, Onest amounted to $1.1 billion, an increase of $99 million from December.
Thus, except for the accounting reclassification nonaccrual loans declined during the past quarter.
At the end of the quarter nonaccrual loans as a percentage of loans.
Just 1.13%.
Net charge offs for the recent quarter amounted to $49 million.
Annualized net charge offs as a percentage of total loans were 22 basis points for the first quarter compared with 18 basis points in the fourth quarter.
Loans 90 days past due on which we continue to accrue interest were $530 million at the end of the recent quarter.
Of those loans 464 million.
Or 88% where guaranteed like government related entities.
[noise] turning to capital.
And he is common equity tier one ratio was an estimated 9.2% compared with 9.73% at the end of the fourth quarter.
In which reflects the net impact of higher loans and earnings net of dividends and share repurchases.
During the first quarter empty repurchased 2.6 million shares of common stock at an aggregate cost of $374 million.
Now turning to the outlook.
[noise] start.
It goes without saying, but I'll say it anyway that the outlook and any forward looking statements. We made on the January earnings conference call are no longer applicable.
As far as the balance sheet goes our liquidity assets short term investments and the deposits with the fed will be somewhat fluid as shorter term deposits, particularly from servicing operation expand or contract with refinancing activity.
We wouldn't expect to make any significant purchase of investment securities in this environment.
Future balance movement will be impacted by the pace and breadth of the economic restart once the pandemic is believed to be under control.
Holding government programs aside for a moment.
Average loans for the year will expand so much faster than previously expected as the line draws at the end of the first quarter roll into the average as well as the impact of any principal deferrals.
As showrooms are mostly crew closed around the country.
Automobile sales and inventory our stalled.
As our those of recreational vehicles, although to a somewhat lesser extent.
Focusing on government programs.
And their impact on the balance sheet, the most certain as the PPP program.
While the balances there will be added to our balance sheet are known as is the yield.
There is a great degree of uncertainty as to the duration of these loans.
These are extensively to your loans, but prepayments and forgiveness will result in many loans being on the balance sheets for less than that time.
Introducing uncertainty into the size of loan portfolio and the net interest margin in the coming months.
The details of the main street lending program are still being finalized and as such our level of participation in the program if any remains unclear.
Fees held up well in the first quarter. However, we're closely monitoring trends in interest rates equity markets and pandemic responses to assess their impact on our businesses.
Residential mortgage applications continue to be very strong with rates as low as they are.
Trust income will be impacted by the state of the equity markets by a likely resumption of waivers of money market Mutual fund management fees, while the zero rate environment persists and the potential for an extended slowdown in debt capital markets activity.
Payment volumes in aggregate are down slightly.
And we're offering fee waivers to our consumer customers.
Certain industries, such as restaurants travel and other leisure activities are being more heavily impacted by locally mandated social distancing lockdowns.
Lower payments activity will likely persist while those restrictions remain in effect.
We expect the seasonal salaries and benefits search we had in the first quarter to normalize as it does every year.
We have certain significantly curtailed hiring in this environment and have been actively redeploying team members around the bank to address shifting business needs.
[noise] like other businesses around the country shelter in place mandates will impact other aspects of our expense base, such as the use of contractors and travel and entertainment expense.
Credit costs are difficult to predict but as mentioned earlier, we're preparing for a challenging environment.
While our consumer customers navigate through the forbearance period, and our larger commercial customers work through a period of temporary debt restructuring.
The ultimate impact of recent events on credit will not likely be clear for several months.
Turning to capital.
The current environment has not caused us to reconsider our longstanding capital allocation philosophy.
Our primary use of capital is to support the economic activity of our customers, while serving as a source of strength in the communities we serve.
We will maintain prudent levels of capital to support that objective.
Of course as you are aware our projections are subject to a number of uncertainties in various assumptions regarding national and regional economic growth.
Changes in interest rates political events and other macroeconomic factors, which may differ materially.
From what actually unfolds in the future.
As we've just learn.
Now, let's open up the call to questions before which Brandy, we'll briefly review the instructions.
Thank you. Another reminder, Kathleen audio question, you will need to press star one of your telephone keypad.
So to your question first town key.
Sam I always abolishing roster.
Your first question guys and Ken Zerbe of Morgan Stanley.
Great. Thanks, Good morning, guys. Good morning can.
So it sounds just in terms of your Cecil assumptions that it almost sounds like you're you're using the Moody's baseline from the end of March which I guess is gone materially worse.
Since the end of March could you just talked about what you might expect for provision or how you're thinking about that because we go into second quarter.
Sure.
If you look at the Moody's, which we do look at their various scenarios, we consider a range of their scenarios the baseline as primary but if you look at this quarter I think it's there as it yes. Three scenario was also a considered in our in our thought process. When we were thinking through.
Through the assumptions in the Cecil and.
You know I guess I'd, just remind you that is the the economy and the expectations for the future are certainly influx and we looked at those and considered those when we were going through our work or at the end of the quarter at that point, we're probably expecting a a sharp turned down and maybe a sharper recovery than what would it.
Year to be the case today, but as we go through the next 90 days, we'll know more.
And we'll see how things unfold, how how quickly the restart happens or doesn't and how those effects the future projections both from what we're seeing and what Moody's is seeing a as we go through the quarter and as we think about things are at the end of this quarter.
Gotcha, Okay, I didn't know I understood. That's it does help I guess, maybe it and easy question just given what's happened is rates and I know you talked a little bit about the margin and the factors that affected this quarter, but how are you guys thinking about margin going into two too.
Well, it's a it's our expectation that the margins probably moving down in the quarter. When you look at the well libraries held up well the.
It did move down at the end of Oh, well as we went through the quarter and it's important to keep in mind when pricing changes happen in in the loan portfolio.
So.
Well the benchmark rate or the reference rate gets updated usually in the first few days of the month and so any changes in that later in the month don't get reflected until the following and so as you look at what happened this quarter with the drop of 150 basis points coming after the first week in March most of that will start to get reflected.
In April and through the second quarter, you know the only other things that I just remind folks as we think about margin in the second quarter is the PPP loans are going to have an impact on on the margin.
At 1% those are low yielding loans, although they carry a zero risk weighting the though that's a substantial portfolio that will that will come on stream in the next several days the mall will have a material impact on the margin. So you know what to try to think about a little bit of both in terms of the margin but also.
With focus on net interest income and the dollars of net interest income and how those are likely to unfold over the course of the next.
369 months.
Perfect and then if I understood.
Mr.
Hey, good morning, guys.
Good morning.
Right back in March you guys gave some disclosure on some of the loan buckets are watching a little more carefully you just give an update on the reserving you've done in those buckets, maybe some of the credit metrics around those I know you mentioned Ltvs and your hotel book of about 54%, but if you could just talk about the 6 billion. So you haven't senior housing or assisted living centers that made.
For the 7 billion retail just trends you're seeing there how you're thinking about reserving.
Great.
Yeah, I guess, if you look at the at the various portfolios.
The ones that <unk> that we're paying a lot of attention to hotel.
Retail restaurants, leisure and ER and to some extent the health care facility, what we're seeing so far it's still early in terms of their economic performance and when when you look at so we don't have first quarter financials, yet when you looked at where things were at the end of last year, they were still pretty strong and.
So to see a change in the portfolio. This early doesn't really happen, but as we look at the at forbearance and payment relief a lot of those industries are places where there they're getting some some help and when we look at some of the underlying trends in.
In terms of.
Loan to values Theres still solid I think it will take awhile for loan to values to adjust as well because a lot of times, though the value is a function of the cash flows.
And it remains to be seen what the ultimate long term set of cash flows are with many of those industries hotels being being an obvious one.
And so it's still little early to say that we're seeing you know severe challenges in those industries per se, but as we talked about when you look at the reserving.
We've increased the reserve pretty substantially since the end of the year and that's the whole idea of Cecil as the start to account for or the impact of changing economy on a on various industries.
No. The other thing to keep in mind, which is which is still hard to really assess is how the stimulus package, which is really unprecedented might impact into these portfolios and in particular the PPP program.
As a result of that you know many of the industries that we are concerned about have accessed the PPP program.
And you know for our customers there should be receiving the funds started over the weekend, a and should happen through the end of the weak and that should give them some liquidity to help get through the next two and a half months as the that's the program was designed so no no material risk rating at this point as we.
We just spend our time actually working with customers and calling them and making sure that we we understand their situation and figure out ways to help keep them operating.
Perfect I appreciate that detail do you happen to have the size of the restaurant book in the Leisure segment, you mentioned or maybe just the overall portfolio of the segments you mentioned, the who sells everything combined.
Yeah. So what's the total is yep when when you look through a that the 10-K tables five and six outline a lot of this stuff you look at hotels.
I'm doing permanent and construction, it's just about $4 billion.
Retail you you mentioned was about 6.3 that covers a broad range of industries. I guess, you know a couple of things to keep in mind and retail is when you look at CN I retail a lot of that is multi unit retail and convenience stores it to associated with gas stations and so those.
As of an essential and those have been open although I'm sure operating at a lower volumes and much of the retail book is actually associated with multi storey buildings in Manhattan and retail happens to be the first floor, but the way it gets coded it gets cold as retail.
A if you look at a restaurant and leisure or segments that are individually big enough that we call them up separately in those tables.
Together they are about $2 billion. So I I give you that there they are contained within the other and some of the other line items, but but collectively there are there they are relatively small and the grand scheme of things.
Okay, maybe just one last one on the assisted living center piece or the senior living center.
Thank you those clients are they starting to see any customer attrition due to concerns around the virus at all or at least maybe reduce interest in new sign ups and then what general breakeven occupancy or what's the general breakeven I can see for those.
So it's still early in the process than we havent heard any any mass defections I think most of the time people have chosen to stay in place and try to isolate themselves within the facilities and many the owner operators are are taking measures to help care for the.
The the residents by separating them by floors based on whether they're a they've they've tested positive or not but there's there's really no. Other place in many cases for these folks to go.
And so they they stay where they are and so we haven't really seen any a any material change in occupancy rates as a as of last week.
And then in terms of how how.
Pool, they need to be and were to maintain profitability any sense for what that breakeven is.
I think you know it's hard to give an exact number because it varies by by facility type <unk> and by geography.
You know the one thing I guess, we do know as we've seen it an industry level some of the occupancy rates come down just as new new Newbuilds came online, but that's an industry where those those rates.
Move up and down and the operators are pretty savvy about being able to absorb capacity. So we haven't seen anything yet where there is an issue with the the facilities ability to maintain a occupancy rates above their breakeven.
Great all right. Thanks, guys appreciate it.
Your next question comes line of John Pancari of Evercore ISI.
Morning.
John how are you.
All right I'm just regarding the the reserve in the and the addition, you made this quarter can you just give us a little bit of color on your through cycle loss assumption that you baked into come up with that addition to the reserve I know the fed has you had about 6 billion or 6.7% no 2018 D.
SAS Your your company run was about 3.7% or about 3 billion. So how do you. How are you thinking about that what's it's fair to recycle loss number and if you run your 2020.
Analysis yet.
[noise] Oh, we haven't run the the 2025, our updated it since the since this the stress test in the ER and the C CCAR submission.
If you think about the Cecil and how it works you've got a reasonable supportable period, right, which is a couple of years and then after that you revert to the long term average of the portfolios and so there's a little bit of the difference between Cecil and its calculation of losses versus what the.
Stress test might be in addition to the assumptions made in the stress test about.
Well, one how severe it is and how long it is that so far the assumptions and Cecil would have been almost a severe although not quite but certainly not as long and so there. There's a change that that may or may not happen, depending on how the economy restarts I guess.
We'll see as we go.
But those would be the big factors that would be a different between those two I guess the thing that we focus as much or more on.
What we know to be the quality of the portfolio and the quality of the credits that underlie it and when you look at the C. CCAR results you look at our de fast, which you mentioned, we are lower than the fed under stress or in our actual losses in the last prices were lower than that.
And you know when we think about our reserving no. We're obviously adjusting it and are taking into account the latest information about what's going on in the economy, but we're also looking at the portfolio and what's happening in the portfolio and it's so far very very early on to understand how the impact of the.
Stimulus is going to work how the how quickly the restart is going to impact the portfolio, but you know just looking at loss coverage.
Over the average of the last five years loss coverage in the allowances seven seven times, what the charge offs event.
And you know our peak losses as a percentage of loans in the last crisis was 1% and so there's lots of different ways to kinda triangulate and figure out whether or not a you feel reasonable with the reserve and based on the assumptions. The that we used to be felt felt comfortable with with the.
The combination of those Moody's.
Scenarios that we talked about a we looked at the quality of the portfolio and how it's performing so far and the history.
And looked at the ratios along a number those dimensions and based on where we sit right now we feel feel comfortable with it and.
If the outlook changes then we'll update that at the end on the next quarter.
Got it okay. Thanks, Darren and then my follow up is just around on the capital side in a more specifically if you could just talk about the sustainability of the dividend here.
Do you how do you how do you look at that these seekers.
Extends the likelihood of of the Cod or do you think it's fair where it stands right now thanks.
Sure.
It's interesting how Ah how are conversations about our dividend change through time no. It wasn't that long ago that 33% payout ratio didn't seem like very large then we kept saying one day you know the world will change and it'll be good to have lower payout ratio. So we start from a good spot in terms of the payout ratio.
When you look at the PPNR two assets the ratio PPNR the that we generate compared to the average is at the high end if not amongst the high end certainly amongst our peer group.
And ER and we expect that to continue in the short term.
And our capital ratios even at 9.2%.
Assuming we don't do any repurchases is only going to go up and we have 220 basis points of distance between Ah between us and where we would believe we would be under the stress capital buffer a framework and so.
For now we we we feel pretty good that the we're generating earnings and have the capital that we need to to be able to support lending to credit worthy customers and in our community and so for now we feel like it's sustainable and no remind you that we worked really hard to make sure. It was sustainable through the law.
Prices as well.
Okay got it thank you.
Your next question comes online and Frank Schiraldi of Piper Sandler.
Good morning, I Frank just.
Curious about the the levels of.
And if you just talk a little bit more about the levels of deferment, a you're seeing.
Specifically on the commercial side and.
And if you think about some of those buckets of concern like restaurant.
Just curious where where a restaurant and hold and your hospitality.
Who is in terms of told the for my sense is [noise].
Yeah.
Yeah, just kind of get a little more detail on and then if I got to fight industry.
[laughter].
[noise] so when I look at the work that we've done so far as you might expect that the deferral.
In the in the commercial book first they skew towards a small business customer just because of the numbers and when you look in there it's disproportionately restaurants.
Hotels and.
Parts of the economies that are related to activity and people being out and about.
The other thing, though that's important to keep in mind is when I also look through the distribution of industries that were accessing PPP and were funded through the PPP broke program. It reflects a very similar distribution and in terms of the types of customers that are that are receiving.
That are receiving funds under that program you know it would skew towards restaurants, it would skew towards hospitality and hotels and ER and the like as well as well some of the construction that's been shutdowns and so.
When we look at the deferrals that have happened so far what's interesting at least to me is that there's lots of folks both in consumer and commercial who have asked for deferrals, but have not actually exercised it.
And so just to give an example within the mortgage portfolio about a third actually made their April payments.
No when we look at some parts of the real estate book and the multifamily space, our customers are reporting that anywhere between 75% and 90% depending on the type of property of the rental payments were made by customers in a in April and in many of those would have sought.
Some kind of a deferral and so.
A lot of these programs were implemented and mandated by various state authorities.
And people took advantage or at least took the time to colonsay I want to I want you to know that I've been impacted by coal that so that if they choose to take advantage of the deferral or the payment relief that the there okay doing it in there won't be any issues with the credit reporting in the like but.
But in the first month, we were quite.
I'm pleased in pleasantly surprised with the the number of payments that were actually made.
[noise], Okay, and just as a follow up on the on the Pvp program, just wondering how how you're thinking about that from in terms of.
Customers versus I mean, I'm I would imagine you guys have your hands full with you know prioritizing customers, but if there is a second round would you open that up.
So non customers as well if you could just maybe talk about how you're thinking about that.
Sure thing I know, we're hopeful that there'll be a second round because obviously it was it was in high demand bye bye business customers around the country and a very helpful program.
Where we are in business to help all the customers and our communities whether they are actual customers today or or future ones. I think one of the things that maybe is a little misunderstood around the industry.
With relation to whether you look at customers are noncustomers wasn't to say, we prefer customers over non but more to be able to get the money in the hands of folks more quickly because of a MLB essay and new your customer processes. It was much easier to expedite your existing.
Customers because those checks for already done and that you'd already done those verifications and therefore, you could process them more quickly and had a better chance of helping them get access to the PPP early on and if the if if the amount or I guess increased or or Congress passes and additional amount of still.
Yes, I suspect you will see that.
More non customers might or might look to excess funds around the country.
But but I think the the the the S.P.A.N. and the fed did a good job setting up as many banks as possible to be able to private provide access for their customers.
Yeah.
Okay and you have any expectation just final question on how much of the PPP a would be.
I will ultimately be forgive him in the you know over the next couple of months as opposed to remaining on the books for for a longer period of time, perhaps two years.
[noise] Frank that's the million dollar question.
You know its I think.
I guess I've, we were pleased that the the way. The program was set up provided an opportunity for there to be forgiveness and that it was designed in a way to keep as many businesses as possible open and running and with people employed.
And so I would expect that that has many companies as could demonstrate that they met the criteria for forgiveness that they would choose to try and prove that and take advantage of that.
How quickly they are able to do it.
I can't handicap, but it seems very unlikely to me that.
A significant percentage will last the full two years.
How many will will prepay or or seek forgiveness. After three months six months nine month, I think it's really tough to handicap, which is part of the reason why forecasting balances going forward and forecasting the margin going forward so difficult just because.
It's really tough to to figure out what what might happen, you know and again, depending on where those customers worth which parts of the country and how quickly those parts of the country restart I think we'll have a big impact on on what percentage of those customers seek and receive forgiveness and over what time period.
Thank you.
At this time, we ask that you. Please limit yourself to one question. Your next question no sign of Steven Alexopoulos from JP Morgan.
Hey, there and good morning morning, Stephen I went to issue on the margin. So just given the sharp move down in interest rates, we've seen what's the new money yield today on loans and securities and loans will be X P. P. P.
Well it so the <unk>, while the rates has come down what you've seen as spreads have widened and so when you think about the cost of funding for the banks, while it's down in absolute the spread that we have to pay is a little bit higher so when when you think about yields you're probably.
Seeing.
A little bit of an increase in the spread to the benchmark or the reference rate.
Probably in the low two hundreds you know high one hundreds or as we entered the year, you're probably seeing things in the range of 50 to 70 basis points wider on on new money coming in right now, but obviously that varies a lot depending on the the collateral.
And then the loan to values and the industry, but but the absolute yield for the customers you know from their perspective, even though the spreads might be a little bit wider certainly coming down.
And what about securities.
Oh well securities are a are you know whatever market is very we don't anticipate adding a lot of securities in this environment just because of the the impact of that can have on a on on AOCI I as rates go up and when we look at the.
Yield we get holding it in and at the fed it's not much different than what we can invest and then and so just given the uncertainty of the cash flows and how long they might be around will will tend to hold them more overnight, while we wait for things to settle down.
Okay.
Thanks for taking my question.
Your next question comes line of Bill from catching from Euro.
Hi, Good morning, you guys disclosed that a 90% of your commercial loans and leases were good at the end of last year can you discuss how you're thinking about the value of the underlying collateral today relative to history, given the unique nature of the.
More specifically I'm curious whether you can frame how sensitive you think collateral values would be to either more extended period of social distancing or just just what that sensitivity is any color on that would be great.
Sure I'm you know obviously the in many cases the value of the collateral is directly a function of the underlying.
Business operations right. So if you think about a hotel and the value that the the property. It's a it's as much a function of its ability to generate cash flow from from occupancy and so.
The value that collateral in the short term drops.
But if its ultimate long term value will be a function of how that particular geography rebounds from the pandemic and how quickly the occupancy rates come up and and the other thing that you'll find is.
And we found in the last crisis is when these value start to drop and people are stressed new money comes into the or into the system and buys up those properties. You know many of our customers are sitting on cash and hoping that some of these property values come down because you'll see it as an opportunity to get good.
Quality assets at a low price and so that does tend to be a bit of a floor on on many of these things, particularly the real estate assets and so I.
I guess the thing that is is tricky is in the short term third there could be an immediate reaction.
But in the short term people have cash will problems. It takes a while to burn through their cash and then you know like we said they access these various programs to bridge them and get them through and then we see how quickly they come up and what we need to do to keep them keep them going and so what we stressed the portfolio will stress LTV and see.
What happens with a their cash flow and the impact that has one LTV and will stress their debt service coverage ratio and we'll we'll look at how far their income has to fall where rates have to go up or any of the above to look at their debt service coverage ratios.
And then when we.
We put those two together and historically when we've looked at the portfolios and we put those two things together, we found that a very small percentage of our customers and ER and outstanding dollars or are are really challenged and severely stressed when both of those things happened together and so.
You know we've got certain parts of the portfolio that our that are impacted more than others based on the pandemic and then within that there's different geographies or that are impacted differently and then and then customer specific situations the that are impacted.
And so it's always a.
A work in progress to figure out what the what the loan to values might be at any given time.
The good news is that.
It takes a while further losses in for these challenges to emerge and so you know what what's interesting is the pace of information around society is as it has gotten really fast, but the pace of change in terms of how these things flow through the economy in impact businesses isn't quite as fast.
And so it's going to take awhile for this to work its way through a the system and through the portfolios before you get into a situation, where you're really relying on collateral values to to try and bail you out but as you've heard from us before when we look at many of our statistics about loan to values in.
Our commercial portfolios, they're very low when we look at lone that value to the bone they get even lower and so from where we sit today, we feel like we've got a lot of room to be able to protect ourselves, but really that's the last resort. Our first resort is to work with clients.
To keep them in business 'cause that's that's the best outcome for everybody.
That's really helpful. Thanks, so much for taking my question.
Your next question comes from Peter Winter Wedbush Securities.
Hi, Dan.
Peter.
You were talking about the margin you expected to be down.
In the second quarter, but strong loan growth as well. So you think net interest income.
Would it would grow over quarter levels.
You know it's.
The I'm hesitating, Peter not because I'm dodging the question, but more it's the the impact of PPP and how that offsets the the impact of the decreased.
Margin against the loan growth right and so some of the loan growth. We thought the ended the quarter was was really nice we'll see how long those lines remain drawn but those will create some net interest income or in the second quarter compared to the first maybe help.
Minimize some of the the decrease and then the other question as those PPP loans, you know, adding $6.5 billion of of principal balance is is.
Helpful to net interest income I mean, even though the yield is low there are some other fees associated with it and then we get to the question of how long they state a and then we'll have a full quarter impact of LIBOR or on the other side and its impact so.
You know absent PPP net interest income is is probably moving down although not quite at the same rate as a as margin might be just because of the loan balance growth and then you add on the you know whatever your estimate as of PPP on top of that and how long those loans actually stay on the balance sheet.
Your next question no sign of antenna Rajan at Bank of America.
Hi, Good afternoon My question [laughter] Nancy Thank you.
Thanks Erica.
Your next question comes line of can you kind of Jefferies.
Hey, Thanks, Darren too just one on the fee side can you just talk about doing two things within that first of all how do you expect the residential mortgage business to act relative to the commercial business in terms of you know this new environments in terms of you know revenue generation and then secondly can you detail for us.
What fee waivers might look like in terms of the trust business and what magnitude that might have as an impact. Thank you.
Sure.
No I should have wrote the step remind me your first question again.
Oh, well residential <unk> residential versus commercial mortgage banking yep Yep. So residential is going to see more activity I think the the commercial business you know a lot of the way. It works is the pipeline take awhile to build and so that's the second quarter pipeline will be or fees will be a function of how the pipeline was bill.
For the economic activity slowed down in the state home orders are shelter in place orders came into effect.
How quickly things start up how construction comes online or how many people try to take advantage of the rates will be a function of where they are in the in the back half of the year. So I'd expect the commercial business.
From a mortgage perspective to be a little tougher probably won't be near what it was last year, which you know the third quarter last year was it was a record quarter for us.
On the consumer side, you know I think the refinancing activity continues, especially with rates, where they are you haven't seen the rates come down for customers as much as they have in the market just because many of the servicers.
Struggle with a with adjusting the underwriting and staffing to to meet demand and so a lot of times. What happens is the the price gets impacted a lot to manage demand and so you'll see a little bit of benefit in gain on sale. There. The other thing that's a little bit of a question is how many people or in some kind of payment.
Ferola payment relief or because it be tougher for them to qualify for refinance when there are under that situation and so that will take some people off the table right away.
But it will keep the mortgage servicing business, a little bit longer and so I would think that overall the cash flows there would be more secure and potentially have some more upside as a as people look to re Fi and ER and you get the gain on sale component of that and you know I would expect that the the gain on sale margins will stay.
Elevated for at least a little while longer or just because of the ability to get folks.
On the phones and able to handle the volumes coming in.
When you get to the trust lines or some of the other fees.
When you look at some of the other fees and kinda like the service charge category.
The impact of interchange ER and slower economic activity there as people are out doing less things and drawing on their account less often a you'll see the instance of NSF come down a that tends to be an activity driven fee and see a decrease there.
A and then you've got the impact of the equity markets on assets under management and those fees and then a depending on how long rates stay low you've got the impact on the.
The money market mutual fund fees, and and not charging a there and subsidizing that so on a on the funds, maybe it's $10 million a quarter kind of impact. If you look at equity markets, maybe same kind of thing and then when you think about the other.
Other fees you probably in 15 millionish of quarter 20 million quarter something like that.
Got it thanks, a lot there.
Your next question comes from Brian.
Okay.
Hi, I'm I know you said it was early on credit so I want to recognize that and I Wonder if you could just speak to geography.
Unfortunately, New York City in Westchester kind of ground zero for the virus in there to pay market for you.
If you look out over the next year and again, recognizing the uncertainty, but but do you expect that materially different [noise].
Credit performance here in New York versus the rest of your footprint.
Sure.
So I guess, if you look at New York City, we got to break down the different components of whats sits in New York City, and what percentage of the portfolio with it you.
You know if you look in the hotel space.
It's not 20% of the.
Of the portfolio and obviously, it's completely shut down and there's not a lot of tours a half tourism happening there right now.
But if you look at those properties and the the value of those properties, a we would expect those to to hold up pretty well through time.
When used <unk>, they might drop, but there's there's but the likelihood that they dropped below our loan to value for any extended period of time, we don't we don't see as a high probability right now.
When you think about the multifamily portfolio I'm a go back to where we talked about payments that were made by by renters and in April and the rates of people paying their rent were quite high you know from kind of 75% of the.
Payments coming in and maybe our our average building in terms of quality viewers pitch it that way and the higher end buildings, a we're seeing payment rates of more than 90% range and so we would expect those.
Folks to stay in good position you know we've mentioned a number of times just about the relationships. We have in New York and how long they are and how liquid those customers tend to be but those are the ones that oftentimes in these environments would see.
Opportunity as much as they see risk and would look to be buyers are as opposed to sellers.
And then when I mentioned some of the retail in New York City, you you see in retail probably be the hardest hit there and that the the rental rates.
For High Street properties, you know on Madison Avenue, and if that.
They've been under pressure for awhile and so this is probably reset those rates lower but in many cases, when we look at our properties in Manhattan, where it might get classified as retail because of what those rates had been many of those if not all of those properties have.
A couple floors above the the first floor retail space and they would have office or some residential or mixed use and and the cash flow that comes from the upper floors is enough to sustain the property. If retail is is they can or is challenged and so.
We feel pretty good that we've got the cash flow covered at least in the short term and.
Totally understandable why a new York City is a question obviously, given our position there we pay a lot of attention to it and are in constant contact with the.
With the customer base.
And that's because of that that I was able to close some of those numbers, but the rent payments that were seeing and so we're on top of it and based on what we can see right now are confident that the portfolio will be a well be solids like we saw in the last crisis.
Your next question comes from the line of Gerald Kathy RBC.
Hi, John are you.
Doing well you Gerard.
Thank you.
Obviously.
Many of US had been around for a while summary this industry.
Recall back in the smell crisis that the government gotten involved.
Hi, good facilitate.
Solving first being acquired by healthy savings things, which ended up turning into a disaster for those savings means. We then of course, the TARP no Ito, knowing where the government changes the rules on paying back toward having to raise capital.
What can you how can you reinsurance if you can the government's not going to change the rules on all the blending programs next year sometime.
Actually worked against the banks some shape some form I know its nobody is planning on that but can you put in safeguards to try to insulate himself from something like that.
Oh boy.
Voyager are your dark today.
[laughter] [laughter].
They did grow OCC or something.
You know I guess.
Right now our first priority is trying to help customers and make sure that we use the programs as we believe they were intended to try and put put the money in the hands of our customers to try and keep them open and running and to help keep employment as high as it can be or paychex flowing and to help stimulate the economy to them to make.
The impact of this this pandemic as low as possible for our customers and our employees and our community.
If you look at the programs that are out there are many of the programs are repeats from last time.
If you look at the tell program or you look at the commercial paper program or you look at ended the other program. They are repeats and have a outcome. That's known so far we haven't heard anything about TARP or the likes of TARP and I think if you look at the outcome of the last crisis and you look at the stress tests and you look at the cap.
Little levels in the industry and amongst us in the peers. We're all starting from a great place. When you look at liquidity, which you know banks. Its banks are not that difficulty either fail or survive because of liquidity and capital until capitals and a good place and liquidity. So far is in a good place and when you think about the moves that everyone is making to pay.
Reserve, both liquidity and capital I think we're starting from a good place and so the industries need to rely on some of these programs like we had two in the last crisis or some of the other ones that you mentioned is a little bit less you know I think.
As an industry as these programs are being developed by Congress and by the fed we're being asked for input and we're trying to help provide input to make sure that programs are structured in a way that make them most beneficial.
To the to the customer and so that we can help facilitate them.
I think this PPP program with no other than some of the operational procedural hiccups that happened.
It's actually a really good program and that it was thoughtful and that it was designed.
To be relatively low documentation, but you had to show that you were covering operating expenses. So it was designed to keep you in business you know with the FDA guaranteed behind it its that should be helpful them and then with the forgiveness for the outside World you know I guess, probably the thing that if you if you were going to be cynical and worried.
You would worry about the documentation aspect of the PPP program and whether there's a change of heart and how that looked at you know I think you could argue that you know some of the F.A.J. programs and documentation became a bit of a bugaboo for the industry last time around.
But I think Thats also partly why you saw some banks US included I'm not rush out when the program became final on Thursday night that Thursday, but go out on Monday, So that we could take the time to make sure. We had a very good process, where we could put the documentation in place and one of the keep components of that was B.S.A.M.L.
And so I think theres a lot that the industry's learn to try and protect ourselves from from those types of things. We're in a better starting place and you know at this time. This isn't a financial crisis. This is this is driven by something else and so hopefully some of the the relationship we'll call it between the banking.
System in Washington isn't.
At a place that it was in some of those other circumstances, where you'd see a change of heart.
But I don't want to be overly pollyanna and say that a change in administration in November could change all that too. So it's something I think we all got to keep an eye on but I think we're we're starting from a better place and a and are in a more thoughtful place than than we would've been as it and industry going into the last crisis.
Thank you that does return.
Sure.
In closing comments.
Real quickly add one question email to me asking about the bifurcation of the allowance at March 30 Onest.
Consumer versus commercial I believe that the Oh, the number we disclosed that with the adoption will cease all was 55% commercial 45 consumer.
Would it be little couple of maybe one or two points higher than that today, but not materially different.
Again, thank you offer participating today and it's always a clarification of any items on the call or the news recent necessary. Please reach out to our Investor Relations Department at area Code 71684 to five one threeeight, Thank you and goodbye.
Thank you that does conclude today's conference call you may now disconnect.
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