Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Bank Oh, CK first quarter 2020 earnings Conference call.
At this time, all participants I know listen only mode.
So to speak of presentation, there will be a question and answer session.
Good question. During this session you want me the pets are one on your telephone. Please be advised today's conference is being recorded if you acquire any further.
To scratch stars there I would now like turn the conference yes, because today Tim Hicks. Please go ahead Sir.
Good morning, and Tim Hicks, Chief administrative Officer Executive Director Investor Relations for Bank goes okay.
Thank you for joining our call this morning and participating in our question and answer session.
In today's queuing <unk> session, we may make forward looking statements about our expectations.
Estimates and outlook for the future.
Please refer to our earnings release management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected Dan or implied by such forward looking statements.
Joining me on the call to take your questions are George Gleason, Chairman and CEO, Greg Mckenney, Chief Financial Officer, and bring in Hamilton, President and COO about real estate specialties group.
Well now open the lines up your questions. Let me ask our operator dwell to remind our listeners how to Q and for questions.
Joel.
Thank you.
I need to ask a question you will need to press star one on your telephone to withdraw your question because the punky. Please stand by what we can probably 20 roster.
And our first question comes from can there be with Morgan Stanley. Your line is open.
Good morning, Ganetespib is good place to start in terms of they are.
Can we can't hear you.
It looks like his line has disconnected.
And next question comes.
Sure Matt.
With Wells Fargo. Your line is open.
Hi, good morning.
Good morning.
Oh, maybe we can start on your commentary that you used.
Sure in qualitative overlays to increase the allowance in excess of them. These methodology or just wondering if you can expand.
What some of those overlays might be and which portfolios they were quite too.
Greg do you want to take they say so question.
Yeah, I'll wheel Dorje morning Timur.
You know as we looked at you I'll <unk> results and we were using the.
The Moody's.
Forecasting published on March 27.
And while Youre a lot of that was around the.
She is around the base case for cash we did look at the alternative scenario spoke more in less severe.
And and as we began to about you wait.
At least I'm certain portions.
Results coming out of the various models that feed into our seasonal engine.
We certainly felt like that.
The the magnitude in velocity deterioration in the economy, we saw.
And the last 30 or so days for the quarter really did not get fully reflected into some of those.
Some of those small result, so.
What we did what we've looked at.
Certain portfolios and we didn't we looked at a number portfolios across the bank but.
We looked at though really get up more severe stress scenarios, we would have taken up.
Yeah, what might that result looked like yeah yeah.
And I.
Sure, but more of a downturn motion beer down or relative to the baseline forecast it was kind of above.
So the base forecast for us.
And what might those results look like that gave us some.
Got a boundaries of where we fall you have some of the outer reaches.
Oh projected losses through the models would suggest overlap portfolios.
And then we we use that to then for various overlays and qualitative adjustments to our model out.
Output.
We.
We.
We ended up with.
Several different.
Several different qualitative overlays.
Over various aspects.
The portfolio and various product line in the portfolio.
George I don't know what you want to comment on any specifically lines of business or or aspects of the portfolio, but we we did feel like if we needed to you adjust where appropriate.
Some of the model out, but really fully reflect the the velocity of change we saw.
You economic circumstances over the last 30 days in the core.
Yeah, I think you did a good job describing it Greg I would comment that two of the over lives there were used to increase the allowance allocations.
Generated by two of the the models.
And then the other I think there were four over lives it might been five it I think it before there were related to specific God.
Subsets of different portfolios within different models. So we tried to try to get it right and they appropriately.
Conservative obviously, that's a very.
Dynamic economic situation, we're in and.
Unprecedented in many respects, though.
The model gas Bill in models I'm sure at Moody's our or.
Striving to that keep up and fine tune those models to me appropriately sensitive and not excessively sensitive to all the economic dynamics. So.
We we took a good look at it I think my to get a set of decisions on how to grow overlay those models.
Okay. That's helpful.
Looking at the deferral activity as of March 31.
It seems relatively in check I'm, just wondering how that's trended post quarter end and if he can give deferral deferrals by category within the hotel the office and the indirect and RV portfolio. Please.
I don't think we can give you a break down on that Bob byproduct gap, we have that information, but I don't have that Dan do you want to comment on deferrals and general and.
Yeah happy to to mirror the a the numbers that we gave in the management comments were actually as at the end of today April 22nd so.
Those are fairly current numbers, so 1675 loans had deferrals totaling $356 million. So.
Roughly 2% of our total loan portfolio.
A good number of those are from our indirect lending portfolio and consumer obviously, it's a consumer portfolio I don't have the specific numbers around those right now, but as far as the count goes.
The largest majority of the cows coming from the indirect portfolio.
Okay, and then last one for me realizing that the ltds across all your different portfolios are quite well.
Matt in realizing that it's the fluid situation, but I'm. Just wondering is there any way to estimate what the LTV could look like in the office in hotel book, specifically and then just going forward with the Cecil implementation know how punitive what would be for future provision if there isn't near term spike in LTV or.
Fair enough flexibility in the model that you can look out longer term.
Brendan why don't you recap, where we are on on LT days on those portfolios based on the most recent appraisals and and then comment on that I might add a comment to that as well, but brand and I'm going under for you All my first.
Response sure sure Tim are good good to talk to you today and you know is because we always do.
Included in our comments a good detail on on where ltvs are across our different portfolios and geographies and those should maintain you know same levels that you've seen.
Recently as it relates to you know what what does look like in the future.
I would just say, it's it's really too soon to know on I mean, obviously would with some of the stress, we'll see they'll be in influence on.
Revenues I'm still be influence on cap rates and those all effect values, but but the degree to which those are affected honestly. It. It really is just to seem to know obviously as well as you noted the models do looked the LTV has a significant.
Influence or over the results there I think all I would say there is with our you know very conservative Ltvs, we would expect too you know a show in those models as well as one could again, it's it's just you seem to know how fast and how far and.
And then what recovery looks like.
I I completely agree tamarind, a I would.
Point out that are already S. Ji hotel portfolio is 52% of cost and 40% of most recent appraisal.
As Brian inside that 40% will undoubtedly come up given the stress that sector as spiciness those properties care reappraised.
But.
When you're at 40% wanting to buy you starting out you've got a lot of rent per degradation and still.
Be in good shape, our office portfolio, which I think with together when you imagine.
At March 31 word with 39% or I'm, sorry, 49% of Crofton, 38%.
The price value on the office Morton colleagues so.
Yeah, I would just to echo brents comments they.
Significant.
Oh wait a low leverage points that we're starting out with poor Kaleo gives us a lot of room and that's why we've been conservative and worked really hard to keep those leverage points down as from just the sort of scenario.
Economic scenario that we find ourselves ended I guess with a lot of copper.
Thank you.
Thank you.
Next question comes from cancer de with Morgan Stanley. Your line is now okay.
Thanks, Yes hear me, Okay, Yes can charge, we lost her no no or is it all George when when we think about all the moving parts and they are as she portfolio like specifically loan growth and loan spreads.
The next year, so going to be a net positive or negative froze ARX <unk> in our S.G. versus the trajectory you may have been on your prior to the whole pandemic.
I think I think it's going to be a net positive.
Now we've really.
Saying a slowdown in refinancing activity of course, it's it's unfortunate that.
Part of that slowdown is attributable to work brain stopped on projects temporarily while a lot of cities are in shelter in place. My that's that's a hard on our project sponsors.
But you know it does have a.
Counterintuitive benefit for us and that the loans stay on our books longer so the slower write a pay downs is actually beneficial to us and I a margin and yield.
Perspective.
Clearly there'll be some competitors that have already begun and we'll probably longer term pull back from this by.
But lets us.
Have a little more bargaining power and and.
Structuring transactions and pricing transactions.
So I think those are our.
Positives that outweigh the negatives clearly a credit cost are going to be higher.
I'm not that we feel like they're significant credit exposure in our history poor probably a week, we feel very good about that.
But.
I would say on balance we view it as I admit postured for that portfolio brand and you're you're not stayed at our yesterday as the present their everyday do you agree with that or you have a different no.
Absolutely can I I would I would say that you know as it relates to to the balances and in the growth all as George said as it relates to yield I mean, you're already seeing a pullback a in in the realm of the competition and we're already pressing in.
And trying to gain advantage there by you know not just holding but improving our LTV LTC.
Okay entry points and moving our spread in up in a positive direction. So you know again, a lot lot of things changing rapidly, but as we look forward I would agree with Georgia I see this is a positive.
[laughter].
Got it and then in terms of your deposit costs is there anything structurally dare friend about your portfolio versus someone else's portfolio that might keep your interest bearing deposit costs much higher than peers over the next I don't know say few few quarters you're years, so or is it possible to bring that down much more toward.
For the industry average.
Okay, and we certainly expect a our deposit calls to continue to come down and and I think a Tam commented on that in and has part of management comments document that we expected come down a pretty much throughout the remainder of the year.
And we're working hard to do that you know, our our real estate heavy portfolio.
As a little different than a bike that is oh see an AD driven by you're saying not driven by your borrowers are going to have about as many deposits with you as I do lines of credit loan balances in many cases.
If your eye a real estate driven bankers, we are your depositors are different.
For the most bar thing your customers because you know.
100 million dollar real estate doesn't have project done at $100 million of deposits 100 million dollar line of credit customer my up $100 million deposit. So it's a very different dynamics.
So you know our our.
Deposit book is very much driven by our branch network, which is is a very retail and you know been or bone.
On line competition and local competition and for some customers online competition is relevant rather so it's just local competitors so were driven by that but but we do see our cost of deposits coming down.
Steadily.
If rates stay where they are over the course of the year.
And we've given you guys. Thank God knows and I and the management comments about our C. D E book and how that is a price.
And how that matures out over the next several quarters. So you can look at that.
At some some indication.
Great. Thank you George.
Thank you and next question comes from and second now that's what Citi. Your line is now open.
Thank you I was hoping you could give this a little bit more feel for how.
Your interaction works with the developers on the construction side. When you know there obviously going to be struggling is is they can't can't work on their projects and you know how much kind of cash flow in sport you have from them.
During you know an extended period of stoppage and you know what what kind of actions you're doing to help having worked with them to to make sure that the projects get finished.
Yeah, well Oh of course, everyone.
You know blocks to avoid supply chain disruption in projects stoppage because it does.
Create some inefficiencies and runs up cost and process. They the structures that we have in place with our sponsors include on any project, where we got construction I completion guarantee.
And that completion guarantee you know basically says and in simple terms that they're going to complete the project on time.
On budget and if they're not on budget, if there gaps in the caps back that development cost cost over runs are.
Project delays, but that increase carry and an interest costs that are there on the hook provides so the vast majority of our.
Sponsors are well have the financial wherewithal, we would anticipate to.
Meet those obligations to rebalance. So if there's a couple of million dollars more interest carry or taxes or insurance that occurred while.
The project to stop for 60, or 90 days and before it gets restarted and there's no additional cost incurred in restarting that that is so contracts like an obligation of the sponsor.
And we would expect the sponsors and and the vast majority of prices to manage that.
Without any assistance from us they're also contingencies and finds built into these project budgets that in many cases will cover.
Some portion or all of all of that so you know you. When you start a large complex construction project you assign some things are going to go differently than planned and you Bill some contingencies in the budget.
To allow for that.
And there will be some requests that we will get problem sponsors where they are they will ask us and we will fill a capable of doing so to accommodate their request to Ah.
You know help them with some cost and Oh.
Terry for period of time, when their operations are shut down or the construction. It shut down we'll do that in a very.
Judicious manner, we're not going to do a modification that we think in anyway jeopardized says our alone and we're going to expect sponsors to.
Come to the title and that participate.
And Oh, those request as well so that you know, we're just not providing that carry for the delay period or something so it's I, it's a very.
In 10 subject of negotiation in discussion, but our sponsors understand their obligations and honor them and we don't really.
Say that is probably in many cases, if any resulting in a a problem for us.
Thank you know that's very helpful.
I I like the the disclosure you put enough that those will have on page 22, the hotel portfolio looks like the bulk of these are you know LTV below 60% looks like all but one you know maybe you could talk a little bit about the support you're seeing from your hotel sponsors in.
The <unk> you know I guess like that the real risk here is that it in case the theory value falls below mid just give the keys back to your you know that that would be I suppose the biggest risk that you're at such low valuations there it seems like a pretty low probability event.
Maybe just talk a little bit about the hotel portfolio.
Well, we share your point of view that that's a that's a low probability in most cases because of the a significant.
Sponsors equity contribution and the significant appraised value beforehand.
We.
Also acknowledge that that sector is a long with everything in the travel and leisure sector is pretty hard hit right now and and.
Most of these properties you know if you're if you're completing a property today.
You're probably not starting operations are probably just mothballing that project for a month or two or three.
Ill economic conditions become battered restarted and a lot of sponsors who.
I'll start it operations, where the project and we're a few months into it.
We're still incurring operating cost in excess of revenue and just elected to shut down and will restart that was projects in a few months when conditions normalize so.
You know there there are issues there that will push those loan to values up because you'll have a.
A period of restarting operations, but again, we thank all that is is that.
Pretty manageable with are very low leverage almost portfolios the quality of the projects and the quality of the sponsor, but a lot of these costs will be starting over their ramp up and business build up.
To a point because I can stabilized property it at a kind of a full stabilization right revenue and.
Got to an optimal permanent exit part Brandon you you're close to this every day you might want to add some comments or do you have any additional thoughts on my.
No I, what I would I would just echo and emphasize you know.
Our entire portfolio was really built for times like these and we've we've kept our our leverage you know below 40% on <unk> earn or hospitality portfolio and.
You know we've got.
Cross border really strong sponsorship and and then that influenced behavior with the amount of equity that we've got in these deals and supported that would.
I'll, let you know structuring George mentioned completion guarantees earlier and those sorts of things there there will be some challenges here at roughly roughly half the portfolio, though is.
Still under construction and you know one could argue that having not already spent those ramp up dollars in the past they've still got that isn't the budget and prepared very well there and so one could argue that those that have an open yet or.
Our it somewhat of an advantage from from that point of view, but in any event I I've I would echo what George said, it's where we're in a good spot right now we're we're hopeful about what it looks like going for there'll be some three ramp time involved, but but we're very well positioned and a very close contact with all these sponsors to understand the issue.
She's as we go forward.
Yeah, and I would add one final comment most of our hotel credits art to people that are established veteran hotel operator.
And that is that's not all of our customer, but it's a it the vast majority and I think those guys are going to.
Handled this a current situation and I no business as usual sort of a crisis management situation, but a lot of those guys. It operated hotels thing 911, <unk> operated hotels through Hurricane Ike operated hotels through a plug and play box operated out.
Tells through a recession.
Including the great recession. So you know if you.
The hotel business is a business that is subject to.
Quite a bit of volatility and the.
The veteran operators.
Are going to I realized that they need to continue to support their project and stick with it and that they value. It's not gone even though their hotel might be shut down right now and they'll get that built back enough in a few quarters.
You know when they get to resume operations and began to ramp up occupancy and.
Revpar and so I think the fact that we're dealing with that quality or sponsorship on the vast majority of these projects is a big plus.
Thank you Josh.
Thank you next question comes from Jennifer Demba with Suntrust. Your line is now open.
Thank you good morning.
George just wonder what you're seeing and in terms of deferral requests or other trends in the marine an RV portfolio today.
A you know bad as we've talked a lot about that portfolio being a high quality portfolio and we have had a number of request there, but it's a it's in the single digit percentages of the portfolio Tim do you have that number.
Yes, I do <unk> from a dollar perspective about 3.7% so the indirect portfolio as they are currently has a.
Furrow as a as of today.
You know we've been.
We've been we share a lot of data with peer banks and so forth and we've done I ask a bomb.
A lot of people that are it's been commented to us that our.
Deferral rates seem to be lower than what other banks are experiencing and you know, we're certainly honoring deferral requests per the federal biking guidelines for customers, but Oh, you know where their businesses shut down or are there a like lost employment or otherwise.
Our adversely impacted by the company had 19 pandemic.
But you know we.
We feel like our portfolio that.
That portfolio relative to other Sam Moore Marine RV portfolios, the already S.G. portfolio.
Whatever portfolio, you're talking about we feel like we had maintaining a conservative level of underwriting.
That you know has us with borrowers in most cases, who are capable of withstanding these sort of turbulent times and don't need.
Deferral assistance to do so so I think that's why our long deferral rights from better I think we just got a relatively.
Good portfolio as it is consistent with our historically better than average.
Credit performance.
Compared to the industry.
Thanks George.
Thank you.
Thank you.
Our next question comes from Matt on me with Stephens. Your line is now open.
Hey, great. Thanks for taking my question.
Hey, Matt.
On the deposit cost the the commentary mentioned there were two public fund entities that were placed at the end of the quarter.
For a much cheaper deposit.
I'm curious, what what kind of rates, where those entities, receiving a and when would they replaced just trying to better idea of.
Sapiens between those entities and the FHLB that was added.
The they were replaced.
Gosh, Tim do you remember with that like February early March or somewhere in there right right right at the end of February Okay into February and.
Those are deposits were expensive deposits and.
Really they their replacement was not so much related cost as it was to concentration if you look at our 10 largest depositors now.
In the buying that I think that number is probably an aggregate less than 10% of our total deposits. If you go back a year year and a half ago.
The largest deposit customers 10 largest deposit customers were high teens a percentage so we basically cut our.
Concentration among our 10 largest deposit customers a in about half and gotten that down to I really got core group of customers.
So this is this has been one of the goals that we've had internally.
As to a really reduce concentrations of deposits and.
Diversify our deposit funding sources much more broadly, which we've done to add some duration to those deposits just to take out periods of volatility and and in deposits. If you've got big chunky deposits and somebody decides.
It is to move or you don't want to pay the right somebody insist on getting paid then that you know it leads to a a noticeable shift in your deposit balances. So we really wanted to get that but much more diversified then add some duration to just add a lot of stability to it.
At the same time that we've been increasing our cash positions and investment security positions and a liquidity position. So.
Now, we're much more liquid and much more diversified on the deposit side than we were two years ago or a year ago and we view that is positive we spend a little money to do it that's a slowed our right of decrease and deposit costs in some cases, but we've gone.
And several instances for qualitative factors over over margin improvement in the short run and I think that will serve us well on the long run.
Okay. Thank you for the commentary and then on the a investment security side. It sounds like you were opportunistic towards the ended the quarter can you tell us more about what you were buying the average yield and where are you buying these at a at a discount thanks.
You know, we Oh, we found.
A situation there was very short lived and short lived girls Federal Reserve did a great job of repairing the plumbing of the financial markets really quickly with a lot of a liquidity an asset purchase program, but yeah. There was a situation that developed where a lot.
Out of a tax exempt a mutual funds money market funds deadlines whatever.
Suddenly, we're having a calls.
And had to liquidate their assets. So they were liquidating because they needed money in market was disrupted they were liquidating and lot of cases their best quality shortage duration securities that I could liquidate and.
You know, we really bought two categories of assets and these opportunities are long gone as I said, they had a fixed the market so quickly.
We really only had about less than 10 days they are actually look at opportunities and harvest them here.
So what we bought was really two things.
There's a variable right demand market, that's the sort of modern day replacement for what a decade ago was auction rate securities and it's much more.
Protected market, then auction rate securities, but because these money funds were more liquidating assets like we're pulling out of that so you had a situation where really quickly bonds that should have been trading. It you know 2030 40 basis points and yield went to a.
567, 8% and yield but they were it's per week at a time.
So we made several hundred million a purchases in that market.
Those things that have worked their way back down to pretty much market appropriate rights now so that was a short lived phenomenon. The other area that we had a chance to pick up and we picked up about 400 million or so of really short doubling and tripling communities that are super.
Hi, quality and majority of those who have already been pretty rebounded so they're they're pretty ready and treasuries with the trustee waiting for that died that I can be called.
So these are bonds from a few months to you know probably the longest or a couple of years, but most of them are within 18 months, and then or a year in hand, and you know so you basically got Treasury U.S. Treasury securities backing they double wide AAA rated muni and.
These are bonds that wouldn't normally trade you know around a 1% level or slightly above or slightly below and that market's back then you could buy those bonds. It.
Two two and a half three three and a half I think weve involves finding the force and yields fire. So you know their short term.
Bonds and a highly liquid super high quality pleasurable at the federal reserve pledge to pull to federal home loan Bank pledge, both took a lot of state public funds entity. So using a you know seven or $800 million of our cash to buy they didnt.
Impair liquidity at all because they're highly liquid and pleasurable and all sorts of a different places for a advances.
So it was a it was a pretty.
Easily.
Decision to make to do that and you know that that will help our.
Our margin little bit calls, we took that out of money that after the fed cuts was sitting in our that account at 10 basis points.
Earning jailed and put that in something yielding quite a bit more even if just for a a short period of time, so kudos to the fat on doing an absolutely marvelous job of fixing the plumbing of the financial markets. So that was only up.
You know less than a 10 day opportunity and darden them for doing it at same time, we would have enjoyed continuing to.
Harvests I was opportunities that the market stay disrupted a little longer.
And just to clarify George when you say either short term opportunities are these security substantially still on the balance sheet at the bank or have.
Now moved on yeah, yeah, but they bearable right man notes it largely returned to normalized yield level.
Just really as of this week like they've kind of been drifting back down to what would've been an appropriate level. So you know will make a decision if we want to stay in those longer.
Carl you have a there there are one week commitment at a time that's about half of what we bought the other half is is a stop there will roll off over the next two years and most of it in the next one year.
But it was but.
Yeah.
And I know you know we've talked to them.
A bad about our desire to maintain more liquidity and higher quality liquidity and certainly a we've built that up over the last year and quoting the last quarter.
So we could have gone in the markets were disrupted farther out in duration and on bonds that were not pretty refined it but still high quality bonds, we could have gone out farther and duration and little farther down the quality scaling probably really captured some some very profitable opportunities buyer.
But we tempered our.
Ah capitalizing on this opportunity by our desire to really keep a lot of liquidity on balance sheet and really short high quality liquidity that you know we could look what five several different directions. If we did take.
All that's just an appropriate response to the a turbulent economic conditions caused by the cope at 19 pandemic.
[noise]. Thank you.
Thank you.
Thank you Sir our next question comes from Michael Rose with Raymond James Your line is housing.
Hey, guys. Thanks for taking my questions I'm just wanted to touch on the commentary in the prepared remarks around the dividend on office has touched on already but it's said you may not look to increase that you guys have been obviously, a you know good stewards of capital over time, keeping high levels for these periods.
Stress here, just talk about saltzman dividend potentially a buyback sometime down the road and.
You know how you would expect could deploy some of that capital in the other side of this thanks.
Tammy you want to talk about that.
Hi, I'm happy to thanks, Michael for the question.
Yeah, obviously, we've got a very strong capital levels, our capital, but if you look at tier one leverage our capitals.
If not the highest among the highest as a 331 was the highest says at 12 31 of the largest 100 banks in the U.S.
Obviously, we've got strong earnings core earnings as well.
Weve increased our dividend every quarter for last 39 quarters increased our dividend every year since going public you know really what we said in the call in my comments Michael was that.
We may continue to increase it.
But if we do we would expect their board to Ah to slow the rate of increase from our you know track record for the last several quarters, which has been a a penny increase every quarter or the board. We'll just have to evaluate situation is or at the time and make a decision.
You know whether they want to increase then bye bye what amount, but our core earnings and capital levels will support.
Yeah, certainly support our current difficult didn't level and certainly some level of increase from there.
Okay.
One one follow up question I. This is always when my favorite charge them on 21, you have the table the ARIA see bosses overtime.
On the one hand, you know the loss experience has been really good. We obviously know that appreciate all the data you guys have provided over the years on ammonia costs and loan to values.
But I guess the push back would be you guys are doing much larger loans than you did you know back when ARIA. She was was getting going to during the last.
Oh, you know front during the great financial crisis, George can you just kind of help US you know again I know you've done it's not pass one but help us feel comfortable with the quality or sponsors and how that.
Translates to you know maybe some perceived risk around you know size of exposure by like let it. Thanks, Yeah, well again, you know the a sponsor who's going to do a.
A billion dollar project or a six or 700 million dollar project or a $2 billion project. That's kind of result on alone you know a couple hundred million 300 million 400 million five six $700 million.
That was sort of projects are done by sponsors who have.
A substantial experience capabilities. That's been demonstrated on smaller projects are real estate developer doesn't come in and typically start out with a billion dollar project and then you sort of have to grow your way into that capability. So.
The the projects that we do that are much larger projects are typically done by your most sophisticated most capable.
Even sponsors they tend to be the best quality assets and calls.
Fewer banks or other lenders are capable of doing those projects with with excellence it tends to narrow down the competitive failed.
To do that in and our expertise.
In commercial real estate lending the.
<unk>.
Distinctive capabilities that we have in that regard are worth.
Enough for our sponsors to call on us to do that was sort of projects, where we feel we get the best sponsorship the best assets and the best deal structures and you know that's pretty evident in our if you look at another table in the slide deck, where our.
Loan to value as shown by project have a bigger projects typically you know we tend to get a little bit lower loan to value on those projects for example, our.
Our largest project is a in the book is 43% of cost and 39% of reprice by so.
We think those were our best assets best structured a best leverage and in many cases or in the portfolio.
As far as that being a large concentration for us what I would tell you is is the day the largest single loan we got its about.
80% of our legal loan limit.
More or less that's not an exact number but by the close approximation and then you get down to you know 70% sort of for the next one.
If you go back to 2008 2009.
2010 time period, we had a number of loans that were at our you know within a couple percentage points being at our full like a loan limit.
So our concentrations of while they seem like big numbers now because our capital is multiple times what it was many multiples <unk> point it was a decade ago or 20 years ago.
We've always done large loans relative to our capital account and we're actually more diversified less concentrated now than we probably ban at any point in my 41 year history.
Being chairman and CEO the company.
So we feel very good about those loans and you know, we we think the quality of those credits the quality the sponsorship quality the assets the structure and leverage on the transactions will.
Prove overtime, what good projects and good investments they are far so we feel very good about it.
Brandon you at this 0.1 thing to that since they're all year long <unk>.
No no you you hit the nail and ahead I think you noted the quality that sponsorships and the structures and in that low leverage you know brings in more often than these big deals.
Second really material.
Capital source in the Mezz loans that are behind us and I don't know call. It a third of our of our loans. So that would be the only thing I'd add is that you you kind of get up the two for one in those situations of really.
Strong very well capitalized groups that that that add a lot of credit quality in our opinion to do those large loans.
Good point.
One one just final quick follow up you.
Let me think about our you see any other side of the pandemic at some point.
Artist is historically been a very high growth business for you do you think it structurally changed where you know we're not going to need as much space going forward and we're not gonna have to build this much stop acts population growth I just have the dynamics of the business changed enough, where this becomes a very mature business or is there still enough on the.
The side of this you, saying that this will be a an elevated growth driver for you guys. Thanks.
That's a really good question, Michael and I'll give you my answer and let brand and weigh in on his perspective on that but but you know clearly you have periods and are they see ari cycles or.
Environment, where you have more need for product and then you have periods, where you have.
Less need for a product and you know I think gets very likely that in the aftermath of.
The.
Pandemic care that you know will have a period, where there'll be less need for all types of product.
And then economic conditions will evolve and you will suddenly have situations, where you you need more apartments, you need more hotels, you need more office, then and it it may be different needs.
Than existed before but you will you will have an eight.
And it also against that backdrop, you know people are going to continue developed properties because properties age and become less desirable unless obsolete and people can build a new product.
But has a modern fresh amenities and features to it that makes it more desirable than the old style product.
That you know is out there and you know that's one of the keys of our Ariyoshi business is a lot of times you know you're you're building a financing an office building or hotel or apartments.
And they're already office building hotelzon apartments in that market, but some of those would become less desirable calls there date it in their sale and you know the features they amenities the.
Look in condition to those properties are no longer desirable. If you if we were a permanent lender.
You have to worry about the fact that you're a your assets are constantly becoming obsolete because wireless constantly changing if your construction and development lender. We just got to make sure that our sponsors are building products, it's going to meet the evolving expectations needs and wants.
Of users with that product going going forward or so our product is always the newest precious best in the market. If if our sponsors are building right product. It's our job make sure we don't finance them and if they're not building product, but at the high market acceptance.
You are permanent lenders on the other hand or the gas it had the challenge of Wow.
This was a this was a great product.
A decade ago or two decades ago, but it's become obsolete and you know weve.
And.
And one of our recent experience is a that then well publicized shopping center in South Carolina.
You saw that that was a situation, where we had a permanent loan and that property just became functionally obsolete calls from changes in retail space. The.
90, something percent high 97% of our yesterday's portfolio is is construction and development loans and those are all fresh stated they art properties. So I think where I think we're extremely well positioned for an environment where for a few years you might have.
They need for far less new product I think the other dynamic that's going to play into that is I think a lot of thugs could have gotten into the CRT space and enhancing.
Going to a decide Wow. This is not as easy as the R.E.S.J. bank as he came made it look.
Maybe a maybe we shouldn't be doing that and I think you'll have some folks back out of spice permanent language, which will.
Let us get a bigger share the path.
With less competition.
Great. Thanks for taking all my questions guys.
Thank you.
Thank you.
Next question comes from Brock Vandervliet with you'd be a your line is open.
Oh, thanks very much.
You guys are to be congratulated in your deferment policies I think to many of the banks have just kinda airdrop these things.
That's good to see.
A lender who is more judicious.
Uh huh.
She is.
Issue I feel like.
No I get the stoppage construction stoppage and the care in New York State. They stopped all construction doesn't seem like it's a big deal at all it seems like the ultimate pain point, though is takeout financing.
Where you know to your point George.
Yeah, no longer terms some of these things may not be viable but.
I wouldn't worry about you know projects that are coming.
In the near term.
Did those pencil anymore for the takeout financing if they've got.
Big slug of retail or or even office.
It seems like so much of the world maybe somewhat changed can you talk about.
The risk to the risk to the take out in the near term. Maybe this is question for Brendan.
Well Brandon you want to take yeah, Yeah, let me take that brought good good question and you know somewhat tied it to the previous question and answer which still felt like George.
Did a good job of hitting on that I think as prognosticators, sometimes we.
We look out at a change in view it to positively or negatively in.
You know with or without Cove. It you you've got you know the risk of changing taste and preferences and the aging of product et cetera et cetera, but.
With the rate of innovation or you know the markets are increasingly efficient it it seeing you know adapting.
Two required change and the finance markets follow and.
I think.
Obviously as it relates to retail we have overtime.
Drastically reduced the is the amount of exposure that we have and in that property type.
Thank God, we're down to 0.6%.
In our in our retail portfolio and Ah you know, there's there's obviously some in are mixed use portfolio, but much smaller more amenity type.
Situations, you know in and in the office market you know.
Yeah as long as I've been in this business 30 years now beat people have been having.
Different opinions about you know what what's the right configuration is and you know how how much should we have should we have open space and those opinions are always changing and people are trying something new and it in it and it results in a new direction, but.
The the fact of the matter is I think that you know people are going to need office space. There. There is the time required for can conversion the to the latest and greatest.
Need and and and you look you know in the past few weeks the the the CMBS World has obviously had its its struggles but it's it's showing signs of life and in folks trying to do the issuers trying to do deals. So there's no question that ultimately that permanent finance will.
The our take out but but you know this this is really reminiscent of the great recession, and where we weren't as George noted. It was it was it a different portfolio you know there there were smaller projects, but but a lot is similar in as much as our leverage was leverage bizarre.
Right, then it's phenomenal now and and and you know our ability to to wait till those markets recover which we believe they ultimately will.
We actually view is as.
You know.
Potentially positive with respect to balances on both longer.
And you know all that all the things that we've noted numerous times before with respect to who were doing this business with and you know there they're inclination to protect their their significant equity position and plus the fact that they're just good people that do the right thing.
We feel like.
Sorry, if you get have you disclosed.
I wonder if of completions.
What we should be kind of having our eyes on here.
I don't believe we've disclosed anything with respect to that Brock.
Right. Yeah, you know we have a lot of completions you can you can look at the cadence slide that we got in our you know this shows originations and payoffs and you know.
Most of the 2017 originations a large percentage those are either recently completed or will complete you know this year. So you can look at that and and for a pretty good estimate of completion, but that's not the real question. They are.
The question is is the quality of those assets and and the viability of those assets I've mentioned earlier in response to an earlier question you may or may have been in Q and not heard it but you know I was asked the question is on balance.
Do we think this environment is good for our U.S.G. or are bad priority as Jay and I said on balance it's it's good because.
We like keeping loans on the books longer we would we would.
You've heard us complying over the last several years about the fact that the velocity of payoffs got faster and faster and faster and that was cutting into our returns on on individual loans. So if the a secondary market has disrupted for.
A few months or a few quarters or a year or tight and those loans stay on the books a longer term, where we're fine with that because.
We've got very low leverage on those loans and we've got very good rights on them. You know we've got the construction loan right. So if you can have construction loan our construction loan leverage roughly 50% of cost or 51, whatever it is for low fortys of appraised value on.
On an asset and keep it on the books for an extra six months or year 18 months I doubt, we'll get to keeping them 18 months, but six months or a year extra and earn our construction rights of interest on that that's really good because the permanent lender that will take them out well.
Charge, a much lower right and we'll give them one and a half to two and a half times as much leverage.
As we have on the asset so if we've got 100 million dollar, allowing the permanent long is gonna be out and 5200, 225 250 million and at a lower right. Then airlines, so if that market's disrupted and that lets us our in our interest for another 612 months, that's that's a positive.
Good for us at our leverage.
Got it got it okay.
All right extra color. Thank you. Thank you.
Thank you. Our next question comes from Stephen Scouten newspaper San <unk>. Your line is now open.
Hey, Thanks for taking my question guys I say Oh.
Well I'm just curious quickly I know you talked about some of your peers, maybe thinking your percentage of deferrals were less than than theirs and I'm. Just wondering how much of the deferral process was you all do in outbound calling versus customer request that were inbound it seems like some of the higher numbers. We're seeing from banks are due to a lot of.
Outbound calls attempting to put loans and deferrals that makes anything.
Oh, we have we've not engaged an outbound call and we've been responding to customer.
Customer inquiries.
And you know as I said earlier customers lost their job or their business has been shut down or otherwise legitimately than.
Affected by the cobot not team situation. A you know were very receptive to within the the guidelines established by the Federal Bank regulators, you know being a common data to help those guys Oh.
With the payments over the next few months.
On the other has you don't want to do that unless there's a legitimate need to do that because.
The reality is if you if you're a if your interest right say is 5% on alone and or say at 6% and you're deferring six months' time as.
Well, that's a two and a half for 3% increase in your alone.
Amount, that's a modest increase and your credit a exposure profile, but it isn't increasing your credit exposure none of them last so you you don't want to do it unless it sort of jet in my case to do it because otherwise it just slightly the grades.
Your credit quality profile.
Yeah makes sense I'm I'm curious you guys, obviously over over time done such a great job to take advantage of disruptions in the market and obviously you talked about the Muni investments that we're you know unfortunately, or Fortunately I guess the markets take a short list I'm wondering what else you guys are seeing in terms of opportunistic ways to deploy.
The capital that you all the probably rightly been holding for we're just such these opportunities.
Well I do think a a lot of business opportunities in the already S.G. world are coming back our way.
We are in a situation where in most product types were able to get better pricing now that better pricing is is simply a reflection of the fact.
That we're having to put up more credit reserves, you know using Cecil and applying say solana very a difficult economic environment is has resulted from the cope at 19 pandemic.
Are you just you know you you're going to put up higher reserves farm, we saw that.
Materially in the quarter just ended so you've got to get your a loan pricing up to reflect the fact that to you that.
You are having to post higher reserves on all of these credits. So we have a we've done that they market conditions have allowed us the opportunity to do that.
Hopefully some of these reserves that were posting in this environment will ultimately you know and.
Future year proved to not be needed and weekend recapture some of those but right now you're having to oppose the reserves farm. So you've got to get the pricing for that so you know I think we're already seen some element of pricing come back our way.
Some element of business volume come back our white in some areas.
You know that the counter to that is.
In other areas were saying.
Folks that have continued to a amp up the aggression on price and quality to the point that were out of the market such as our marine RV business, where the competition has just gone to point that we can.
We can't we're we're pricing deals there, but we're not in the market and we can't.
Get our risk adjusted returns based on where our competitors are flying so.
You know where sidelined in that market for all practical purposes, but for what I suspect it's going to be several core.
Got it and then maybe just last thing I'm I'm curious if you could give some detail and they said pricing is improving a little bit like you said some of that due to credit.
Build up it has to occur, but kind of where you're able to put LIBOR floors on new production today versus maybe where that is on the unfunded book, even just to give us the field for if those funded loans will funded similar rate to what's on balance sheet now and then any color you can give to that already SG pipeline into Twoq you you intimated that it was still pretty strong.
Wrong, but may weaken in the back half the year. So just wondering if you could frame that up at all yeah, well, let me take you to figure 14.
The management comments document, which is a hats off to a J staley worked on as far as how about Jay did a brilliant job and depicting.
Where our floors are on all of our loans here and how they respond in an up and down environment. So.
53% of our funded balance are at their floor, 65% of the total commitments or had their floors as of March 31, now a couple of things that I'll give you a little color on that will help with that is.
A lot of our R.S.G. loans, I think Tam or brand and would probably to you about 65% more or less than on site two thirds roughly over our U.S.G. loans are.
Monthly adjustable as opposed to daily adjustable so those.
Loans worn in their floor on March 31, but probably hit their floor.
On.
April one when the monthly adjustment a card so that is a but as a little.
Explanation that probably needs to go with it but you can say an down 25 dip environment, 59, and 70% respectively would be at their floors and again part of that is due to not just the timing of those adjustments on the already I see loans thing.
Predominant play on the first of the month.
But the other factory as lie bore kinda player about in March which was helpful to us and will be helpful to us throughout the month of April.
And then you've had a lot more coming down a recently.
You know pretty nicely every day, Unfortunately, and that will cause us to trip more of those floors, just as lab or just without any further movement in another market right, but you can see where the floors Rs is a rights rise.
I think that table is very helpful. If you studied it just a little bit I thought.
Jay did a great job and putting that together for us.
Yes.
Yes for sure in it and as it pertains to framing up though the twoq pipeline, maybe various versus other quarters.
Well the pipeline is very good going into Q2, and as we say in any quarter, you've got to get it you got to get it that closed and and booked but we're feeling pretty good about that pipeline going into Q2.
They there's it's hard to know what the second half the year looks like we do expect.
Some of the prepayments that we would have expected in first half a year to occur in Q3 in Q4, because I think some of the.
Permanent lenders, who pulled back a white from some Dale.
In Q1, just kind of in shock and awe what was going on we'll get there bearings and market and those guys are not going to you know these are.
[noise] big companies in Big.
Investors and they say our east based on a on a fairly continuous basis I think they just pull back to us.
Temporarily to get their bearing so we expect will have a.
More significant payments light in the year, particularly probably in Q4.
Now so so the timing of that sort of moved in our favor, but but I think we still got a lot of prepayments in the back half of the year and then originations you know.
It's hard to now you you've seen on the one hand sponsor pull back from projects because of uncertainty or they're concerned. It you know they can't make their equity returns that they want and they are new economic conditions and at the same time, he's saying a lot of competitors pull back.
So we've had calls from people that we lost business to other competitors based on a significant write differential there Collin and sign you know our lender dropped to send the grace the week before closing or the closing table and.
You know, we've still got our equity intact, we want to go forward with this project. We believe in it. We know we turned you guys down on your quote, but we'd like to come back and revisit that issue. So.
You're saying that some projects get put on the shelf, you're saying some projects come back our way from competitors and that's why we.
We pulled our long guidance.
For the rest of years, we're just not sure how that plays out with everything else that's going on in the economy, but we're we're hopeful.
It's too soon to ER.
Really call how that plays out in Q3 in Q4.
Got it really helpful color. Thanks.
Thank you.
Thank you next question comes from Evan miles with Janney Montgomery. Your line is how open.
Hey, good morning, guys. Yeah. This is that an entre Brian Martin This morning.
Glad to have you EM.
Well I'd be or I'm, just a couple of quick questions for you I think firstly focusing on your Ah Pvp loans.
I know you gave a little color on the number of funded loans in the balance just was curious looking forward what quarter do you expect to realize its numbers.
That's a good question I don't I don't know that we know that you know that's how they paid program as a.
Come about really quickly and.
When they buy launched it with quite a bit of unanswered questions and it took a few days and over the weekend or really got get enough of those questions are answered for most of US banks do I feel comfortable going forward with program.
You know the second phase of that's probably started today I don't know it might have started already whenever they get.
President assigns bail in and yes, big I opens up there a trend pipeline again, we've got another.
Almost 2000 loans that are fully documented and papered and ready to submit and there are our labs a.
Famous belt I.
Submission piece of software that will allow us to love those loans in about two to three minutes age as opposed to or.
What normally would be 60 to 90 minute process for loading those loans on the the S.P.A. system. So.
We realize it's kind of bigger rice for our customers to get the final dollars a in that so we're working really hard to.
Make sure that we execute really well, but it's important for our customers that's important.
For our community so we really want to.
Do a good job for them and that when they actually get forgiven in pay doll.
You know that that's anybody's guess, it's gonna be a huge.
Process and.
You know we we thank a lot of those might get I dolphin.
Pretty short order, but it's it's going to.
Yeah, we've never done this before so we'll we'll see how it works out.
Okay Nice yeah. That's helpful. I guess next shifting to the margin I was just curious about how much that emergency caught in one Q was reflected in the reported margin.
Given that LIBOR get ensuring aligned with fed funds throughout much of this quarter I guess.
When when do you expect the full cut to be reflected.
I think a much of it most of it was reflected in you know our last month of the quarter's numbers I think you know you it'll pretty much all get reflected Dan.
To a few too.
And I want him to comment on this he may have a little bit different perspective in color a with that said, though it's going to take us really through the end of year and probably through the.
First quarter of next year to get a you know substantially all of the deposit cost cuts in there the.
The Feds really fast fashion, you know like a 225 basis points in three quarters in 150, Bips I've it in short order here and.
In March.
We could not adjust deposit cost nearly as fast.
As a loan yields went down so I think you'll see it pretty much all get by tend to.
Loan yields in Q2 was not already baked into Q1, but it will take us.
You know three the ended the year to get most and then substantially all of it through the end of the first quarter of next year on the deposit side damage that is that you're.
Same view on that or do you have different color on line.
No I agree with that George and I Oh.
And then I'll point, you to to a figure 40 I'm on page 32, we mentioned earlier in the call that will give you some.
Ah break out of our CD book by by quarter and buy buy rate and so obviously, we've got a good opportunity to a.
To reprice that book down significantly and and that will help drive or some of those deposit cost decreases in Q2, three four and in into Q1 of next year.
Alright. Thanks, Yeah. That's helpful. And then on I guess fine just last question for me you know earlier in the call you touch briefly on the indirect RV in Marine book, given that that isn't shrink mode are there any sub segments that are you more concerned on from a credit standpoint, or any color would be helpful. There.
No. We're not you know we the the past dues in that portfolio and all are continuing to behave very well.
Obviously, it is consumer portfolio and when you have I don't know what are we at close to 30 million a national jobless claims in the last.
Six weeks and you've got a you know.
Thousands and thousands and thousands tens of thousands probably hundreds of thousands of business that shut down across the country that we'll have some impact on a.
Consumer portfolio, but our decision to a light that market just move away from us on pricing and credit has not a result of any conditions and the existing portfolio. It's just a.
Mathematical back that with some of our competitors being very aggressive on price now, they're being very aggressive on credit.
We just didn't feel like we could be competitive at risk adjusted returns, but that you know had us in the game. So we price the poor pricing the products. The way, we think it needs to be price, but that's got us out of the market. So.
Hopefully the market will come back our white, we've got a great team there we feel.
Super confident in our team's ability to.
Execute our business strategy, if competitive conditions will allow us to base out. So we're hopeful the market will come back our way over the next few quarters there.
Okay Awesome and then just circling back to my first question on the PPP lines, just a housekeeping item.
What's a good average rate to use for fees on that.
Probably in the a and the threes.
Okay Awesome all appreciate the color and that's all for me.
Right.
Thank you.
Thank you.
I'm not showing any further questions at this time I now like to tend to call back to George Gleason for closing remarks.
Thank you guys all for joining the call today, we appreciate great questions and your continued interest in bank I was a guy we look forward to talking with you in about 90 days Stice I stay well have a good rest of the day. Thank you that concludes our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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