Q1 2020 Earnings Call
Thank you for standing by and walk into Zions Bank Corporation's first quarter 2020 earnings results webcast. At this time all participants are any listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one when your telephone.
Please be advised that today's conference maybe recorded should you require any further assistance. Please press star zero.
I would now like the hand, the conference over to your Speaker today director of Investor Relations James Abbott Sir. Please go ahead.
[laughter], good evening and thinking with <unk>, we welcome all new to this conference call to discuss our 2021st quarter earnings.
For our agenda today Harris Simmons, Chairman and Chief Executive Officer will provide a brief overview of key strategic and financial performance.
After which had schreiber, our chief risk Officer will review the condition of the loan portfolio the allowance for credit losses, and the way in which we are engaging with our customers. During this period of disruption.
After Ed's comments, Paul Burdiss, our Chief Financial Officer will provide additional detail on zions financial condition.
Finally, Scott Mclean, President and Chief operating Officer will provide some brief detail regarding RSP lending activities progress on our technology initiatives and other areas of progress.
In.
Additionally, executives with us on the broadcast a day include Michael Morris, Our Chief Credit Officer.
Referencing slide two I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially. We encourage you to review the disclaimer in the press release for the slide deck dealing with forward looking information, which applies equally to the statements made during this call.
A copy of the full earnings release as well as a supplemental slide deck are available that zions bancorporation dot com.
We will be referring to the slides during this call.
The earnings release, the related slide presentation and this earnings call contains several references to non-GAAP measures, including pre provision net revenue efficiency ratio and other terms, which are common industry terms used by investors and financial service.
The use of such non-GAAP measures are believed by management to be of substantial interest to the consumers of these disclosures.
And our used predominantly through out the materials.
A full reconciliation of the difference between such measures and GAAP financials is provided within the published documents and participants are encouraged to carefully review. This reconciliation.
We intend to limit the length of this call. The one hour during the question answer session of the call. After our prepared remarks, we ask you to limit your questions to one primary and one unrelated follow up question to enable other participants to ask questions.
With that I will now turn the time over the Harris.
Thanks, very much James and we want to welcome all of you to our call today to discuss our first quarter results.
I'd like to just start by making.
His comment about extraordinary employees, we haven't this organization.
Oh, it's a course of the past months as we've all been.
Across the industry working from home et cetera Weve.
We've had some oh employees, particularly over the last couple of weeks with this paycheck protection program.
Who've been working nearly round the clock and are delivering great results.
We'll talk about this little later, but weve.
In this first round of a $349 billion or funding we were able to.
Receive approvals for $4.4 billion.
Of these paycheck protection loans for our clients and for others.
And it's over 14000.
Loans that we have approved and we have more to go up and what we anticipate via another round of funding.
And it's been a herculean effort or we are right.
I'd like to the industry in terms of the volume of these deals.
We've delivered and that's way outsized swore size in the industry as you know.
But I think it reflects.
Just a great team and I want to.
Publicly congratulate them to what they've accomplished and what the yet will.
So without a slide three is a summary of several key highlights.
For the quarter, we've anticipated that the usual items, such as loan to deposit growth sort of lesser concerned the most of your today.
Well credit and other issues related to the pandemic or greater concern and interest.
I will cover those in the next few slides.
We I mentioned.
That we.
His process.
14000 at least paycheck protection loans I expect it will roughly double that.
And Oh, we have a lot of volume ready to go when the window opens back up.
Which we hope will be later this week, assuming that Congress takes action.
But it's been a very very busy quarter responding to customer needs.
Slide four shows a time series of the bottom line earnings per share results.
We reported earnings per share a four cents.
As noted in the first quarter 2020, either three items and standouts that a significantly in adversely.
Affected the earnings per share.
Namely the large provision for credit losses.
Mark to market adjustment on the value of customer related swaps.
And a merchant model adjustment on our SB I see investment a portfolio.
Some of the prior quarters also had some notable items as noted on the slide in prior presentation materials.
Turning to slide five adjusted pre provision net revenue was $299 million.
This is adjusted primarily for the unfavorable impact to the derivative valuation gain on client related interest rate swaps of $11 million and the FDIC Oh securities portfolio loss of $6 million.
You can see the outsized provisions relative effect on profitability in the chart on the right.
Especially when compared with prior quarter provisions.
Paul will be addressing our provision at allowance in more detail later in his prepared remarks.
On slide six we highlight our common equity tier one capital ratio, which is strong relative to regulatory minimums.
And also healthy compared to our peers.
When combined with the allowance for credit losses.
That's right stronger than most peers.
Of course several of our peers have not yet released earnings for this make move around somewhat nevertheless.
Point is that we have entered this economic downturn with a robust capital position.
Advancing to slide seven charge offs remained low in the quarter, although we are expecting <unk> an increase in subsequent quarters.
As a result of the effects of covert 19.
Any historical figures on problem loans and losses are less relevant given the sudden and sharp downward shift in the economy due to the pandemic.
It's worth noting that we are headed into this downturn with relatively pristine credit ratios.
Well from an absolute and relative basis.
The result of what we believe a really strong risk management practices.
Moving to slide eight we presented this slide at various conferences over.
Over the years, but I felt it was important at this time to reiterate reiterate the fact that science is generally experienced a much lower loss rate relative to nonaccrual loans at most of our peers.
Like most other banks, we underwrite loans based upon stressed cash flow assumptions, but this is more common with small business lending, we most often secured along with an alternative source of collateral.
Just real estate or other business and personal assets.
We also ask for and often receive personal guarantees on many of our loans and many borrowers have external sources of capital.
It is available to support their investment during a period of difficulty.
Particularly if the problem is considered to be transitory.
We saw a great deal sponsor support for example, during the 2015 16 downturn in the oil and gas industry. That's what wasn't the construction segments or a decade ago well each cycle is different the secured nature of our loan portfolio may once again reduce or loss content relative to some other lenders.
With that a brief summary, I'll turn the time over to at Schreiber cheese, Chief risk officer to provide some additional detail about or credit portfolio Ed.
[noise]. Thank you Harris.
I'll begin my prepared remarks on slide nine shown on this slide slated lists of industries that in our estimation have elevated risk than most other categories. In total these industries accounted for 5.6 billion total loan balances outstanding or approximately 11% of loans. Some of these industries or intuitive such as.
As airlines for card spend data of our customer shows a drop of more than 95% in early April relative to early March.
Categories have some mix qualities with restaurants being a good example, again using card spending data and looking at early April relative to early March we can see that fast food restaurants are holding up much better than fine dining, although both segments our stress.
Not surprisingly payment to for a loan modification requests have been somewhat elevated within these industries relative to other portfolios, although as at the end of last week with a 95%.
The loans within these industries are not currently deferring payment.
Notably lives as they sent increased only modestly within this group relative to that level at December 31st of 19.
Slide 10, it's a brief overview of our loan deferral requests and line utilization.
Hello deferral request information is as of mid April the line utilization data is through March 31st largely because we have seen general stability since the end of March.
I will note some key takeaways here first on portfolio deferrals, only about 2% or the total portfolio has requested and been approved for deferral or modification.
Request for such action has slowed significantly with regard to line utilization rates. The overall increase in line utilization has been very modest up only about two percentage points.
Ranking of industries that have gone on their lines both with.
The covert elevated risk grouping and the rest of portfolio as shown on the slide along with some industries that may be surprising to see that have not at least for now increasing line utilization to a material degree.
Advancing to slide 11 in addition to our covert elevated risk list.
We have an additional 2.6 billion of oil and gas related loans.
The credit ratios looks reasonably healthy, but as Harris noted earlier historical credit ratios are not indicative.
Where expectations given the significant supply and demand shocks to this industry. Notwithstanding there are several risks mitigants to keep in mind, including the presence of hedges on about three fifths of the total 2020 production that is in the mid $50 per barrel oil at a high of two dollar M M Mcf for natural gas.
Yes.
Futures curve has the prices in the mid to high Thirtys and a strong allowance for credit losses approaching 6%.
On the bottom of the slide we've noticed key differences between the downturn in the prior 2014 to 16 downturn.
Slide 12 continues with additional detail about the oil and gas portfolio.
Notably in the bottom right chart.
You can see the re mixing of the portfolio away from the services, which had a net loss rate of 9.4% during the last cycle it towards the midstream downstream companies that a much lower loss experience.
As indicated in the second bullet in the top left if we were to apply the sub portfolio loss rate.
In the prior cycle to the current portfolio mix loss would be about 90 million or roughly half the amount we experienced.
Our allowance today is 145 doing in a reflection of the uncertainty during this timeframe.
<unk> period.
[noise] Fythirteen speak to some of the actions were taken actively managing mitigates the risk within the portfolio. We're approaching the problem process holistically, what the proactive effort to provide the needed and temporary relief to customers.
The cash flows are low it in some cases negative.
We are adjusting our staffing and asking or bankers to work closely with their customers to help find a good solution long hours, our employees are working to help the customers.
Base of more than 1 million is truly amazing thing to watch where kind bars and sponsors each to contribute to the solution. So that we're not the only party, making adjustments and finally, we've tightened our underwriting at this time in part so that we were able to focus on our existing customer needs.
That concludes my prepared remarks, Paul I'd like to turn the call over to you for commentary on certain financial performance measures.
Thank you and good evening, everyone I'll begin on slide 14, with a discussion of net interest income the chart on the left shows the trend in net interest income while average, earning assets increased by 2% when compared to the year ago quarter. The 27 basis point compression in net interest margin by doing so.
5% decrease in net interest income.
The year over year net interest margin change was driven by a 44 basis point lower yield on earning assets, partially offset by a 31 basis point decline in a cost of interest bearing liabilities.
The resulting 13 basis point decline in rate spread was accompanied by 14 basis point decline in the contribution of noninterest bearing sources of funds due to the overall decline in the value of money.
The waterfall chart on the right depicts the element to be bolted in the linked quarter five basis point compression in the net interest margin the lower interest rate environment was reflected in lower asset yield and liability costs.
The 13 basis point decline in earning asset yield was more than offset by the 16 basis point decline in the cost of interest bearing funds, resulting three basis point improvement in the rate spread was offset by an eight basis point decline in the value of non interest bearing fun the decline in the cost of fun.
It was largely attributable to the 13 basis point decline in the cost of interest bearing deposits and less reliance on wholesale borrowings.
By way of update for the second quarter of 2020, we expect the yield on earning assets to decline, reflecting the reduction in interest rates observed in March.
As a result, we're continuing to work to reduce our cost of funds. For example, the current cost of interest bearing deposits is about 32 basis point.
This is a 30 basis point reduction from the 62 basis point average reported in the first quarter. The combination of these changes will likely result in further compression of the net interest margin over the course of Twentytwenty as the dramatically lower interest rate environment will result in a decline in.
Earning asset yields which is expected to exceed the decline in our cost of funds.
The one caveat I would attached to this outlook is related to loans generated through the paycheck protection program.
He generated through that program, which will flow into revenue through the net interest income.
And the length of time, those bonds or will remain outstanding could introduced notable volatility in the net interest margin as we consider the 1% yield on the loans and the fees attached to it alone.
Slide 15 highlights the key component of net interest income loan to deposit girl and break some down by both rate and volume.
The chart on the left shows average loans grew 3% over the years ago period and average loans in the first quarter were essentially flat to the prior quarter.
As we have noted previously it it's not unusual to observe a quarterly ebb and flow to balance sheet growth due to several factors, including customer demand the balance of loan growth and pay off and seasonality.
The first two months of the quarter, so very little loan growth followed by draws on existing lines of credit in March.
Just as Scott.
Loans generated through the Paycheck protection program.
And the possibility of the main street lending program are expected to positively impact the average loan growth in the second quarter.
Shifting to the chart on the right and funding average total deposits increased 6% over the prior year period, and 1% annualized growth rate when compared to the prior quarter as I have noted in previous quarters, we do not expect to maintain deposit growth rates in the high single digit.
Turning to slide 16, our interest rate sensitivity has increased relative to the per quarter.
This change is primarily due to lower assumed deposit betas as rates have fallen.
Asset sensitivity was also impacted by the cancellation of $1 billion of interest rate swaps those swaps effectively converted our fixed rate senior notes to variable rate.
We have essentially taken advantage of the very low and flat yield curve to fix the cost although senior notes at the current market rate.
Our interest rate sensitivity continues to be driven by a relatively large portfolio of non interest bearing deposit.
On slide 17 customer related fees were up 17% on a year ago period as the low interest rate environment is contributing to improved sales interest rate sensitive products. Most notably we have seen strength in loan related fees and income of more than 60% from the prior year primarily.
<unk> from residential mortgage related revenue, which is up more than 300% from the trailing four quarter average. We also saw strength in capital markets product sales, which were up 19% from the prior year and wealth management and trust fees, which were up 14% from the prior period prior year period.
As shown on slide 18, the decline in interest bearing expense non interest expense non im sorry, the decline in non interest expense reflects our ongoing efforts to reduce expenses and streamlined operations.
Non interest expense was down $22 million or 5% to $408 million from $430 million in near the period. The most notable reduction versus the prior year period, where in salaries and employee benefit due in large part to the reduction in positions announced in the fourth quarter.
And lower expected incentive compensation payouts and Twentytwenty versus 2019.
As previously reported we adopted the new current expected credit loss model or Cecil.
Accounting standard on January 1st.
Slide 19 highlight the components of growth in our allowance for credit losses, This quarter, which has gone from 1.08% of loans January 1st% to 1.56% of loans at March 31st the provision for credit losses of $258 million combined with $7 million in net charge offs. Good.
Our allowance for credit losses to $777 million, the 50% increase in the allowance for credit losses, <unk> reflects a prolonged recession due to the impact of the co Big 19 pandemic and include prolong stress in energy prices.
When triangulating on the appropriate allowance for credit losses in this very uncertain environment, we considered a wide variety of economic scenarios and also incorporate incorporated our own stress test results.
Importantly, we use a 12 month reasonable unsupportable period to construct our allowance and a 12 month reversion period, we readily acknowledge that's a great cessation of economic activity, followed by unprecedented government intervention deferrals and modification designed to help customers through.
Called environment and substantial activity.
Got a reserve to support liquidity has made life of loan credit losses, and therefore, the allowance for credit losses difficult to establish.
In addition.
We have also adopted the interim final rule, which allow the trends transition adjustment related to the change in the allowance for credit losses to be applied to the regulatory capital ratio calculation the impact on our common equity tier one ratio in the first quarter of 2020 is an improvement of eight basis point.
The complexity and nonstandard nature of the seasonal accounting standard.
Makes meaningful disclosures regarding underlying assumptions difficult given this we are providing the information on slide 20 to be helpful framework, when considering the adequacy of our allowance for credit losses.
This chart compared data in the left hand side of columns, which.
Where are the annualized net charge off rates by major product type during the 2009 to 2010 great recession.
Impairing those to the updated composition of the loan portfolio at March 31st Twentytwenty circled in Red our some of the major changes in loan portfolio component. If one were to assume that the current economic downturn. It equally severe to the 2009 to 2010 timeframe in each of these component categories.
Our loss rate would be lower by about 30%, which were which would have resulted in net charge off of about $890 million.
This simplified analysis considers only changes in portfolio concentration and does not give any credit or the changes we've made to upgrade our risk management, including the use of stress testing to identify industries or borrowers that contribute disproportionately to credit losses in times of economic stress, we are not claiming that the up.
Coming economic environment will be worse, the same or better than the last recession, but we do believe this framework is helpful to understand the adequacy of our allowance for credit losses.
On slide 21, the impact on diluted share count of the 29 million warrants outstanding is shown as a reminder, these warrants expire on may 22nd 2020. The warrants are a key determinant of the difference between basic shares and diluted shares.
This chart shows the dilution relative to the share price.
At the current stock price.
In the high 20, there is no dilutive effect on shares outstanding.
We have comparison.
In the first quarter of 2021 increased diluted shares by about 5.5 million shares ultimately design common share price in the month of May will determine the permanent dilutive effect from the Diane W. warrant.
Lastly, given the uncertainty in the economy due to the Koby 19 pandemic, we have temporarily withdrawn our financial outlook, we look forward to reinstating the outlook as economic condition, including the impact of government intervention becomes more clear.
I'll now turn the call over to Scott Mclean, our President and Chief operating Officer.
Who who will report on the status of a few key programs and initiatives.
Thank you Paul and good evening to everybody I'd like to highlight some of the successes we've experienced in 2020.
At the top of Slide 22, as Harris noted in his opening remarks.
We highlight gaming SB I approval of approximately $4.4 billion best be a paycheck protection loans.
For more than 14000 customers science ranked nine by dollar volume of all the participating financial institutions as cited by the us be I'd like last week.
Our volume represented about a third to a half of the unit and dollar volume of the top three banks.
Consistent with our small business customer base, the medium sized loan was a bit below 80000.
And about 20% of the loans were less than 25000, with our smallest alone being $500.
Additionally, our share of the $350 billion SP TPP program.
It was approximately three times our share of deposits in the country.
To put this volume and perspective processing 14000, small business loans and less than 30 days is a significant multiple of what we would normally process to make this possible. We redirected the efforts of over 2000 colleagues combined with the outstanding work of our automation and technology team.
James to respond to this unprecedented volume.
Our colleagues welcome. This offer this unique opportunity to help our small business customers with as much needed liquidity.
We've also been putting in some serious overtime in mortgage you can see the numbers I'm on slide 22, I won't read them to you, but the production statistics there are quite meaningful certainly much of this is the result of the decline in interest rates, but another very important key to this volume as the development of our digital customer facing technology.
Takes a largest customer pain points out the application process as we have automated the IRS tax information requirements.
Ointment verification and bank statement retrieval.
Our residential mortgage financing products continue to be strategically important to our role as a community bank, serving small business customers and consumers on local basis.
Regarding the status of our technology initiatives, we continue to make progress on many fronts.
Our future core phase three the replacement of our deposit system has experienced some delays related to cope with 19.
Although we remain confident and the rollout of phase three beginning in 2022.
While we continue to have a solid reputation with our business customers regarding their perception of our digital customer facing technology, we anticipate a replacement of our online and mobile banking platform for consumer customers later this year.
And small businesses and 2021.
This system is a workforce for our company as it is utilized by about 60% of our consumers and 60% of our business customers.
Finally, the investments we've made and <unk> robotic process automation are continuing to have a meaningful impact on improving the customer experience and creating operational efficiency.
The institutional knowledge, we have developed on this topic in the last couple of years has proven to be especially helpful. As we've ramped up to handle the significant volume of loans associated with speed program.
That concludes our prepared remarks, and we will now take your question.
Yeah.
Lets people throw back to you.
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Please standby we've compiled the couponing roster.
Our first question comes from the line of Brad Milsaps Piper Sandler Your line is open.
Hey, good afternoon.
Hi, Brad right, having a good he pause curious you I appreciate the detail you gave around on the spot rate on on the deposit side of the interest bearing deposit. He said 32 basis points I'd be curious if you might also have the spot rate on you know the on on the other side.
Balance sheet, the yield on earning assets D.
So kind of disclose that.
Well as you know as it relates to deposit us, especially the nonspecific maturity deposit Oh, we have the ability to control those pretty readily on the earning asset side largely apart from the fixed rate pieces, the variable rate stuff well as you know largely with prime or LIBOR and so.
Given the different times of the month that they change and things like that I, just I don't have that Ah I don't have that figure nor do I think it would be particularly meaningful today I think the key takeaway is that you know it just by way of her view on February 29 of the target rate was when 50 to 175 base.
That's fine and so.
It really wasn't that long ago, a and just within the last kind of 30 to 45 days that we've seen interest rates fall so much and so it's going to take a little bit of time, but that to flow through a the earning asset yields which is why I said I fully expect the earning asset yields default pretty significantly in the second quarter, but I didn't quantify that.
Okay, great. Thank you understood. It just as my follow up I think you mentioned that.
Admission that three fifths of D.
M.P. book is hedged through the end of 2020 I'd be curious.
If you had the number that's hedged through the end of 21 and then.
To the extent that you are hedged who will you require those customers to pay down principal or we love allow them you the excess cash flow to you know that potentially do other things or just kind of curious what your plans are around some of that excess income maybe half any hedging make they have in place.
Brad the Scott I'll, Scott Mclean I'll take that question.
You know the hedging in 21 is.
Both for oil and gas is about it the counter that 30% plus or minus level little higher for gas right about 30% for oil.
And.
The way that.
The borrowing bases redetermine.
I mean, it's very very much dependent hedging has a lot to do with and so we you know we anticipate that.
Our borrowing bases here in the spring Redetermination, which were very early into you know may decline in the 10% to 20% range.
But that given the amount of discounting that we do and the math behind calculating the borrowing base I. It should be manageable, we will certainly see some reserve based credits.
Variants.
And stress, but but we do anticipate this spring redetermination to be a pretty manageable.
Great all back in queue. Thank you.
Thank you. Our next question comes from San asking of Jefferies. Your line is open.
Okay reputed lost their line, we're going to the next question that comes from Ken Zerbe of Morgan Stanley. Your line is open.
Great. Thanks.
I guess, maybe starting in terms of corporate line drawdowns. It looks like years were a lot lower than other banks you just talk about sort of the characteristics of your borrowing your customer base like are they why are they borrowing or drawing down to realize less than some of the larger banks I'm sure how stupid the large.
Versus our customers, but I'm trying to understand the dynamics. Thanks.
Yeah, Michael you want us.
Sure I'll pick that one her us thanks for the question.
We have been in a high state of monitoring for mostly defensive draws.
And so the bigger drawdowns that we've seen we.
I understand them well.
But profile or wholesale clients.
It was more.
Operating a utilization than it is obviously capex is down so there isn't a lot of.
Indeed, and borrowing on revolvers today with respect to our wholesale customers or small business customers that have drawn down quite a bit here and there.
As you would expect no reasonable a restaurant portfolio dentist other kind of critical industries, where they have completely shut down we've seen higher utilization.
Right I think it's the fact that we you know we aren't huge wholesale lender.
We have some private equity firms that have asked their portfolio companies to draw down but oil and gas.
Is really one of the larger P E.
Upsets about portfolio and we have seen higher utilization there, but we don't have a lot of private equity, where we're seeing a the portfolio companies.
Do more of a defensive draw and kind of a scenario.
That's helpful.
Got it notice it as thank you and then just to maybe as a follow up question.
In terms of expenses, obviously, you guys did a really good job keeping expenses low this quarter.
Is this a level of expenses that is sustainable on a go forward basis or were there any adjustments they made kind of bounced back and to cure the rest of the year.
I think it can.
Oh head to head here sorry.
Sorry, I can the Oh, yeah, we specifically withdrew guidance because the environment is making a sort of the trend lines and all of these key categories.
So difficult to predict we're really proud of the first quarter, but given everything that's happening over the course year you know you've got a range of offsets for example, travel expenses down but we've also got additional expenses for example related to the a paycheck protection program that will be up a in so it's very difficult at this point.
And that all of those things out as we think about the next several quarters.
Okay, great. Thank you.
Thank you. Our next question comes from Dave Rochester of Compass point.
Question. Please.
Hey, good afternoon guys.
Yeah.
Hey, I appreciate all the detail on the the cobot expose loans was just wondering if he can speak to the reserve ratio is perhaps on some of those portfolios segments.
As you did on the energy book and then just real quick on energy I know you said you were early in that borrowed redetermination process.
But you still bumped up that reserve pretty materially. It was just wondering if if you finish those are as you finish those.
If you're expecting to see another pretty happy bump up or if you feel like you've already captured that because you're a student your seasonal assumptions.
Oh, well, maybe I'll take the energy question first then.
No naturally the answer is we'll we'll watch the.
Spring Redetermination closely but.
But just as we did in early 2000 late 2014 to fourth quarter and the first quarter second quarter 50.
We've demonstrated a willingness to.
I'd be very conservative about this portfolio and and we think by increasing it the way we did.
We've taken that into account I would say, though just in general about energy I mean.
The [laughter] these are unprecedented market conditions.
That over the short run are going to be driven by a totally on seen before shifts in demand.
And so there's gonna be grading risk for the next six to 12 months in the energy portfolio and then and then there'll be a new normal for supply and demand on a global basis, probably down certainly down from from where it's been at about a 101 million barrels a day.
But I think it isn't despite what we saw the day in prices.
It is important to note the Nymex still in the low twentys ramping up into the Thirtys and Fortys.
And as you think about our portfolio again.
Oh the vote most vulnerable part before was our our energy services portfolio, which is now less than 20% of the total and term loans, there less well less than $200 million. So.
The most vulnerable part is really quite small now.
The reserve Port Reserve base portfolio, which we talk about frequently and was asked about a bit ago.
It's built to expand on contract happy to talk about that more later, if you have a question about it but it is absolutely built to expand that contract.
And the midstream portfolio, you'll read more about midstream being under stress.
I believe between now and the end of the year, but they they have some really big cash flow levers both related to distributions and the capital expenditures that they can pull.
And and just generally allows them to keep their debt service coverage ratios in pretty good shape.
And this is kinda over Oh, sorry go ahead.
No go ahead go ahead, Paul Yep.
As it relates to the launch of credit loss on the rest of the portfolio.
Yeah, we provided a little incremental disclosure on the part of the portfolio that we think will be particularly adversely impacted by the cobot endemic but as you can imagine going back to the end of March.
You will recall that economic forecasts were changing very rapidly and so there is a very large part of our allowance for credit losses, but qualitative.
Keep in mind. This is a 50% five BOE, 50% increase in our loss for credit losses, and so outside of energy, we have not disclose kind of the specific components and where they belong but we do believe ER and as evidenced by that incremental page that we showed comparing the composition of our portfolio to the left you can.
Downturn, we do believe there are lots for credit losses is adequate and so we haven't disclosed a lot beyond that but but I guess the point is that we considered a lot of economic scenarios.
And we considered a kind of different break down and cross sections of our portfolio to come up with that alone for credit loss of $777 million.
Got it thanks to all of these guys are the maybe just a follow up I know you said that you considered a lot of different scenarios and whatnot. Maybe if you just talk about a couple of the key drivers I would imagine unemployment in GDP growth or contraction and then maybe just in terms of those two key factors.
What do you guys factored into the seasonal marks.
First quarter.
You know I. The reason that we provided that view of our portfolio composition was specifically because I don't think it's super meaningful for us to get into the details around what our path for unemployment.
<unk> GDP growth might have been in what I, what I can say is that as a as many banks have we've taken stress test models, we've developed and apply those to be Cecil Island and in so doing a we looked very closely at the Moody's S. Three an S. Four Uh huh.
Economic scenarios, which I think everyone sort of familiar with now and overlaid on top of that kind of multiple model runs related to the the cobot pandemic scenarios that were coming out about a once a week or at the time. So those are the most of the economic forecasts are and the and the model that we used.
To develop the Hcl and then I would also you also asked you to remember as I said in my prepared remarks are reasonable supportable period is 12 month and our reversion period is 12 month, so you've got kind of effectively an 18 month.
Forecast before our allowance process reverts to the average long term losses hopefully that's helpful.
That's great alright, Thank you guys.
Oh.
Thank you. Your next question comes from John Pin car of Evercore ISI. Please go ahead.
So then [noise].
Hi, John So.
Paul I know you just you reiterated together you do you view the few of the reserve is adequate and I just want to get a little bit more into.
The through cycle loss assumption that you baked in and arriving at it I know your latest company run stress scenario that you perform and do you really resulted in about a two and a half billion through cycle loss content. He goes for your 2018 company run and that's about 5.8 per se.
<unk>.
But your reserve now is around 730 million or 1.6%. So could you talk to me about you know at that level about 30% of that level.
How do you view that right now as being a fair amount given that context.
Yeah, John I think we'll have to compare notes on the 2.3 billion or the number that you quoted that wasn't my recollection of the published stress test results for the bank stress test last year, a which by mek by my recollection, a were about a $1.1 billion.
So I'm going have to go back and check the number that you're referring to it because that that isn't that the top of my head.
Okay, Yeah, no no problem. So I guess in terms of the the adequacy of the of the reserved at the 730 million level. You mentioned you factored in the the Moody's data that does reflect the latest version of the movie theater that came out.
Out.
Towards the end of the quarter as well.
What we did was we use the Moody's scenarios.
From earlier in the quarter and then overlaid those scenarios with result that came out of the subsequent <unk> scenarios. So we in other words, we didnt use one scenario and say this is what we're basing our allowance on a we used a series of scenarios and compared those resolve to try to.
Again triangulate on a number that we thought made sense for the portfolio.
Okay, all right got it and then lastly.
<unk> from a capital perspective.
Just wanted to get the I'm, sorry, if I missed it earlier thoughts around the.
Dividend here, given I know, there's some questions around that.
I mean is here if I can maybe speak to that.
You know I think we expect the you know given what we know now we think its dividend to secure we come into this with a with a very.
Healthy capital position in the <unk> as we've said Oh.
Highly collateralized.
Portfolio and.
And so.
You know and and we also think that's the only cup government stimulus.
The Paycheck protection program, it's gonna help a lot of the small businesses.
Our.
And are important to us.
It's it's obviously a quarter to quarter or something that the board is gonna be looking at we will not be expecting to be repurchasing any shares and this kind of environment, but we believe that the dividend at its current level is sustainable.
Sustainable at the present time.
Got it alright, thanks Harris.
Thanks.
Thank you. Our next question comes from Jennifer Demba of Suntrust. Your line is open.
Thank you.
You mean I'm paraphrasing question for you.
Hi.
Harris, what do you think about the reopening of years lie in that manner.
Relative to the rest of the U.S. baseline on.
Statistics of cases in death, so far and what do you think of long term implication to the shut down I'm going to be on the bank.
Well, it's it's not feel great great question, it's a it's a big question.
I think it's <unk> as a general.
General statement I think is [noise].
True is that.
For the most part of the West has for probably a little better than than.
The east has.
I mean, the state of Utah, which is still a really important HM.
The largest single.
Piece of our businesses as markets go.
That's come through this and quite a lot better shape so far.
And.
So in terms of.
In terms of the death rate or the the just the number of cases et cetera, I think a Utah has been kind of ahead of the pack and I think that positions the state.
Reasonably well, but I I that well and the same with the same is true up in a variety of other markets and Arizona.
Colorado has been hit a little harder certainly up and.
On the West coast or are they started off reasonably heavy but I did I.
Seemingly.
I've dealt with this HM.
In Uh Huh.
And probably more effective way than we've seen say in New York.
I'm hopeful that that will.
Offer some opportunity to maybe get a little ahead of the game.
But I I clearly also think you know.
I put I know it was what we all know it's what's coming from.
The people, we're all watching this week.
For here at home all day.
TV so the background, it's it's it's going to be.
A function of testing and a contact racing and and probably still quite a lot of the social distancing that's good.
Be part of the.
Background of how we all operate in some way or another for the next.
Perhaps few quarters.
And.
Tend to believe it until we have a vaccine or nothing will get quite back to normal although clearly.
I think we'll probably learned as a society to deal with this and the way that allows.
More normalcy, but not a not not quite what we all have been used to until until we see.
You know a vaccine and people, particularly particularly older.
Populations.
Comfortable and getting out and about so.
Your your I guess, maybe as good as mine, but that's kind of how I would read it.
You think will the banking industry will end up.
Having more employees working from home on a permanent basis.
Well you know I think that it's probably going to frighten us all to be we're flexible and how we think about this but I I Uh huh.
I.
I was on the I was on a little video conference with one of our employees a couple of hours ago.
Uh Huh. He was asking me what are we going to get back to work. He said I can you know I Miss Big in the office with everybody.
I I think that Uh huh.
I I think that it will probably teaches also new skills in terms of being able to <unk> to work remotely but.
But I do think Theres, a lot that you gain from being a face to face with people and meetings and always et cetera. So I you know I don't think we're going to turn into Oh.
Hermit economy here all of us working from home.
But.
It'll it'll certainly change.
Our ability to do so if it's not our determination to do so.
Thank you.
Yeah.
Thank you next question comes from Steven Alexopoulos of JP Morgan Your line is open.
Hi, everybody.
Good evening My my my first questions for Ed I wanted to follow up on the distressed sectors that you're calling on slide nine.
Specific to your exposures what do you see is the most vulnerable portfolios that you're calling out maybe can you comment on where you see collateral collateral protection being the strongest.
Well without thanks to the question without going into great detail on that or we could do that as a.
Got it additional discussion, but that aside I mean, most of the industries that you've seen in the press.
Whether that's airline industry hotels et cetera are the ones that you would think of that come to mind anything to do with travel and tourism.
Et cetera, so our exposures and we've talked about that foreign Michael I'll, probably have you.
Add any additional comments here, but the restaurant seem to be <unk>.
Hit pretty hard and our exposures to that.
Yeah, we divided those up between full service restaurants in fast food, if you will restaurants and.
Those are all reasonably managed without going into great detail on the exact.
Let them we've identified as you can tell on nine some very key ones that are there.
And at this point.
We're not seeing anything out of the normal, but I do believe and most people would that I'm right now you're seeing stress, but there won't be till a couple of more months before you actually sees some things really fallout or come to fruition.
Michael you want to add any additional comments.
Well I would add a commercial real estate in the retail sector is getting hit pretty hard with a renegotiated leases.
By small tenants and even some of the credit national.
Tenants in our Retrading, we're trying to Retrade ER.
Lease agreements, so scary retail or you know yet to come but.
As far as commercial.
Real estate investment property, that's that's number two behind hospitality.
Hotels, but it is a secured.
Asset class.
Dental is getting hit hard as our.
ER physicians, who are the ones that.
Provide elective.
Surgery in elective operations, hopefully that get stood up so medical office buildings.
Are starting to see a little stress.
And those would be those would be the primary no consumers. Obviously is unemployment goes up we expect our deferral activity to increase we expect.
Oh default rates to increase a secured and unsecured.
But you know, it's just a matter of the shape of the recovery.
To see those yeah right size, it's her said.
The secured portfolio across the company and every industry.
Should give us additional protection, albeit at a discount on the loan to values for for the time be.
And nobody really expects.
Net operating income and investors CRT to come back.
Quickly.
Especially.
The hospitality sector in ER and convention.
And ER and leisure and business. So you know there are lot of different.
Speculations around.
Oh recovery for all the various industries that are on or watch list.
Who comes out first when do they get back to.
Close to historical EBITDA, and ER and the in Hawaii.
Oh, so those would be the real challenges really trying to predict specific recoveries by industry.
That's very helpful. Thank you for that.
Maybe as a follow up for Paul.
What's the funding strategy for the PPP loans as a balance is fairly substantial and then what how do you think about a net yield including the fees you'll receive and then obviously you need to fund these thanks.
Yeah. Thanks, a question as it relates to funding. We you know our deposit have continued to grow nicely.
We don't anticipate a funding stress due to P. P. P. Yeah. The federal reserve has set up the.
P.P.P. liquidity facility or lending facility, which which we could use.
And we may tests, but probably won't use as a matter of course, because we have enough on balance sheet and off balance sheet liquidity to be able to support continued growth in that PPP program. As you think about the yield a as you know all the loans are set at 1% or and then the the fees are a basic.
We capitalized against alone and taking into net interest income over the life of alone which is two years to the extent to guarantee is realized on those or they pre pay a than that capital I see it would be taken into taken into revenue. So when you think about the all in sort of yield if you will attached alone.
It's going to be heavily dependent on a the sizable them because you know as you know its that's sort of a a metered fee program, starting at 5% and declining to 1%, but also the length of alone or the the amount of time that the loans outstanding will determine the speed with which that fee rolls into rather.
You know I, and therefore would impact the yield so there's so many variables to it I wouldn't want to venture a guess as to what the ultimate yield will be but I think hopefully have provided at least a little insight or flavor into the key components and what will drive the yield.
Yep.
Appreciate all the color I have a good night.
[laughter], Hey, Letif a this is James we are close to the end of our time. So we're going to go what we call the lightning around here and we're going to try to be quick with our answers and we'd ask the questioners a the remaining ones that we'll be able to take a to b just limit their questions to one question just fine. Thanks.
Thank you. Our next question comes from David Long of Raymond James Your question. Please.
Thank you good afternoon, everyone. So just as a follow up to Steves question can you share with us the level of fees that you will generate through this initial 4.4 billion or maybe the initial percentage Oh sees patient at 4.4 billion of loans.
Yeah I can this Harris Simmons I'll I'll tackle that the initial the phase of this it's about $118 million.
But theres also is has been noted I mean, there's gonna be some cost of tenant to that and it includes including some overtime and some bonuses that were going to pay for people who are working.
Seven days, a week or 18 hours, a day kind of kind of schedule. So.
There's are gonna be some costs there.
And.
We have not determined the amount yet, but I expect it we're going to take a piece of this.
And turn it back toward the community through a donation to our charitable foundation.
So I mean, we have another round of this to go Oh, we don't know quite how.
Uh huh.
That's going to play out, but I expect that.
The 218 becomes a larger number we we do expect will take a piece of that.
I sort of expect will be between 10, and 15% of it and turn it into a charitable contributions. So I just do that it's up for you.
Got it thanks for the color here species, yeah, all right.
Thank you. My next question comes from Brock Vandervliet right.
Yes. Your line is open.
Oh. Thank you Scott this one's for you talked earlier about the Redetermination process.
[noise] dropping the borrowing fox, 10% to 15%.
Just on the reserve based loans, it's it sounded like a pretty low percentage given the amazing dislocation we've seen in the commodity.
[noise] Yeah, we've we've got about as you know.
About a billion dollars and.
Outstanding.
That are reserve base.
And.
And that that that's the portfolio I'm talking about there's about 75.
Reserve based loans in that portfolio.
And so that that's the group that goes through the Redetermination [noise].
Midstream and energy services that don't have those kind of those portfolios do not have that kind of a calculation and one of the recent again why it doesn't drop.
As much as you might think is is because of the hedging.
Certainly has a meaningful impact on it.
There are other regions as well.
Okay. Thank you.
Thank you. Our next question comes from the line up.
Erica.
No Jorion of Bank of America. Your line is open.
Hi, Good afternoon, just one last question for me I just wanted to confirm that the data that you presented on slide 20, when you're applying he global financial crisis law richer current portfolio that 1.8 over nine cornerstone with a cumulative loss [noise].
[noise] that was the cumulative loss rate right.
Great. Thank you.
Jay when at 1.8, I I actually I was gonna they the 1.8% as an annualized loss rate I'm just to just to be clear so.
In the global financial crisis. It was it was that the 2.5% on the left hand side. It is you'd have to.
You more than doubled that to get to the night, our worst nine quarters and then you would do the same thing with the 1.8%.
But because of the way it wasn't a luxury it was a loss rate over that nine quarters. So divided by nine to multiply by four things, what you're saying, yes, yes exactly thinks there.
Yeah, sorry, if I wasn't clear.
Hi, Thank you.
Thank you.
Thank you at this time I'd like to turn the call back over to James Abbott for closing remarks, Sir.
Thank you everyone for joining the call today. We appreciate your attendance there were a handful of Oh that we're still in but due to time constraints, we're going to I will take those calls offline in the order in which they were coming in and so.
So standby phones, and and I'll be beauty shortly and any other questions. Please feel free to reach out to either myself or others.
Company Im happy to respond to them as quickly as we can.
And you again for your time this evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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