Q1 2020 Earnings Call
[music].
19 response conference call.
My name is dog and I'll be your operator for today.
Please note this conference call is being recorded.
There will be a question and answer session. After the presentation.
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I will now turn it over to rubber carbon <unk> interim Chief Financial Officer.
Bancorp Inc. mr. garbage or you may begin.
Good morning, I would like to begin by thanking everyone for joining the call. This morning.
And again my name is Bob Carpenter, I'm, I am Big interim Chief Financial Officer Power Bancorp.
Let me begin the presentation I'd like to something remind everyone that some of the comments made during this call might be considered forward looking statements. Our form 10-K for fiscal year 2019, our quarterly reports on forms 10-Q, and our current reports on form eight k. all.
Oh identifies certain factors that could cause the companys actual results could differ materially from those projected <unk> and any forward looking statements made this morning.
The company does not undertake the process to update any forward looking statements as a result of new information or future events or recent developments.
Sorry, Arctic reports are available from the company.
Either online or.
Company's website or via the Fccs website.
I'd like to remind everyone that why we think our prospects for continued growth in performance are good.
And we have to keep in mind to the covered 19 related challenges.
It is our policy not to establish what the markets any earnings margin per balance sheet guidance.
So with that said I now would like to introduce Marianne scaly, the chairman and CEO Howard Thanks.
Good morning, everybody. Thank you all for being on this call. We bring focus we hope at all times right now that everybody is safe and well I appreciate the opportunity to take you through a reiteration.
Some of the value propositions that we stated before as well as to provide you with an overall financial update.
And well.
Updates on our assessment of our readiness for the cause of 19 challenge.
During the presentation that each of you received word so reiterate should or the there always be.
On some of that was related to our size and scale in a consolidating market. Some is related to our presence.
Demographically attractive markets some related to the relatively unique focus that we have on small and medium sized businesses.
Somewhat later to our position [noise].
[music], all those together and started basis without statement.
We have seen continues the linked quarter growth in our commercial loan portfolio, starting 2% see an idea <unk> yeah.
<unk>, Bob will talk about later.
Materially impacted <unk> degree at lunch.
I would draw downs online so represented.
We continued to see that growth funded with transaction accounts, most specifically within the one which was good commercial do yard sticky its form of funding.
If you look quarter, we start funding cost dropping faster than what we also saw some protection for the net interest margin.
Which is on top well.
Just two floating exactly what you said our loan yield provides in a declining rate environment in any case.
So I often quoted trends improving although we've acknowledged as Bob will discuss when he discusses the allowance significant economic uncertainty and headwinds and weird knowledge that with a significant increase in the allowance.
Well remember that we are not a bad it needs to report Odyssey, so basis for two more years.
We came into this with no significant concentrations in October outsized individual customer exposure or highly impacted industries and Randy Johnson Chief Credit Officer will take you through those.
Probably most importantly in this type of an economically stressed environment, we have very strong capital level in excess of well capitalized and believe it or as Bob discussed, but even under various stress scenarios, we remain strongly capitalized.
Can you everywhere.
Strong liquidity on and off balance sheet, which is all the self in a minute we significantly focused on in the first couple of weeks of this crisis.
Well, Chris will talk about the great success that we've had in helping and supporting our customers here. The PPP program and that will provide us with significant see upside input.
It will in turn to help wants to make some of these provisions.
We're showing in our ability to undertake in the first rather PPP funding almost 800 was more than the loan volume originated in all was 29 food that was only down with incredibly strong team work and very specifically in traffic we show the fruit.
Recently, we were not just business, Brent bulky and branch partnership.
We have it all talk a little bit about this says we'll walk taking a very proactive approach first and foremost you're maintaining employee and customer health and safety and as we always do we've been very proactive in supporting the community having announced so slightly larger than $100000 group do you have to say.
Not for profit.
What do you see on page 15 instrument covert like to representation is actually the website that we put in place within a week cobot 19, becoming really important issue for the company and I think that does God as many of our actions and obviously, it's going to God much of our conversation.
This morning.
I've already talked about the fact that we came into their prepared and financially strong and improving earnings outlook, improving yesterday qualities strong capital position customer deposit base very strong at a strong liquidity position and would certainly acknowledge that it's always better to come into this time.
The next Lodgenet shock environment, both prepared and for me actually strong enough contributed to the constant instantly here I'll walk you ahead of us in the next few quarters.
I talk a little bit about the strong capital position since it is important to note.
The regulatory capital ratios exceed all well capitalized standards, our tier one leverage decreased slightly as a result of supply down there. We actually are you did in the first quarter of 2020.
We repurchased $7 million that was the maximum allocated in the last buyback programs and bought a total of 390000 shares were $372 would have done we bought.
In 2020.
And now from a liquidity perspective, obviously coming into this sort of a shock environment. We were working closely at the possibility of deposit draw downs.
Well I'm here since you had a much higher level.
And have seen neither of those happen, but interest in anticipation of out brought worked out from cash equivalents Oh significantly then you see that it was it $196 million at the end of the.
Coupled with off balance sheet liquidity.
We've seen significant cash resources available to us we have since the end of the first quarter significant we bought down those cash and cash equivalents, we bolstered our off balance sheet liquidity and we have received approval to go into there So reserve bank <unk> sure.
Protection program lending, that's already which provides us with additional.
Well go according to the 580 million shown on the right.
From a human perspective again in our first and foremost.
[noise] coal was to make sure there our employees were protected and that we could work in an environment that protected our customers.
She publicly can proactively get a very early stage communicated employee and customer health and safety, which underwent began already be clearing procedures provided our employees with P.P.E.
Reiterated and lot of quite health care policies consistent with their CRM.
And we're able to move into an environment, where almost all of our promotional back office support staff began working from home the ability of our technology teams to turn that.
Traditional office environment into an almost exclusively work from home environment should be noted.
We've done a number of things to also award and recognized both our frontline employees those branch important still working at the 12 of our 15 branches that are open but also to with knowledge, but team work available to listen to keep compute elsewhere and so we have announced additional paid time off day.
Provided a very popular get a one off season for all colleagues that encourage them to use take out the Philippines local restaurants, there always seems very good.
Publicity and of course, as we always have daughter, and how would that we have a deep belt and tangible obligation to strengthen our communities and announced in April.
Additional information state budgets total <unk> $4000.
To support a local organization that's focused on maybe give meeting the unique qualities in certain Sydney neighborhood, you were very proactive social enterprise environment contributed significantly to the Marilyn food bank, especially for the upfront, but they've had in supporting school lunches.
For children no longer in schools supported some digital efforts of the eat all kraut free library, including some efforts that they have underway from a P.P.E. manufacturing perspective, and obviously supported our medical community.
We announced our partnership in operation shop, local local small businesses submit direct links to bear no honest central company's website.
Well again this year dark secret local small business program. Yeah, we've been named what state professional services Task Force to your dog recommendations for our government on the Yep Yep returning to work policy. So our community leadership has been outstanding.
I'm going to ask Rob Kearney, <unk>, President and Chief operating officer to discuss what we've done specifically for constantly.
Thank you Mary and so as mentioned we started to recognize could've been 19 as it is a real issue I'm back in February we started to test remote operations, both on the loan upside in our deposit operation side. So we asked people to to stay home from work during those days to test star system to work.
We and then in March as we kind of targeted.
Personally I target March 16th is as the date that we started to see material impact from curve in 19 at that time, we proactively looked for ways. How we can continue to service our clients at a high level without jeopardizing the safety of our employees at that time.
We closed all branches that did not have a drive through week, we did leave nothing for appointment only so people wanted to make an appointment I visit those branches they could.
And then we conducted a all business through our drive throughs at 12 of our 15 branches.
We redeployed the employees from our close branches and established a virtual call center to assist with increased call volume regarding to both loan modifications and information on TPP.
No we built a library of information on our website relating to cope with 19, and the S.P.A.P.P.P. program, where we're able to refer our customers too.
In addition.
We proactively utilized our treasury management team in our client facing group to reach out to customers to educate them.
We'll take advantage of our online banking tools, which had been critical for us. During these times. So at this time, we are able to provide a high level of service to our customers.
Remotely and under restricted access it or a branches.
Early on a more as I said March 16th was the date that the the Governor announced the closing of restaurants, and we can really use that date is the as a single time when we started to see that the greatest call volume coming in for customers looking for loan modifications.
We immediately granted a loan modifications both p. an eye Randy Jones will speak specifically about those we suspended all foreclosure actions.
We waived certain service charges and fees all all in an effort to to help our customers at a time at need.
We began to prepare to participate in the P.P.P. program and Oh.
We took a very consultant role with with our clients and helping them understand the P.P.P. program, we took about Oh hundred and 50 of our poised to your out to 250.
How would that program, which we'll talk about specifically now.
So we began accepting applications for the P.P.P. program on April 3rd and our first loan funded on April 15th.
We received a total of 856 applications, we are able to get 797 of those approved in the first round. The total amount of loans approved <unk> was $185 million or average loan size was 232000, we generated about $5.9 million and fees.
A which is an average fee of about 3.2%. We estimate that we've retained about 18000 jobs for the employees that we supported through the P.P.P. program and I'll note that through this morning, we funded $172 million under the phase one of PPP.
We had as I've mentioned already 150 of our employees working around the clock to assist our clients and this endeavor, we redeploy them throughout into different roles in stages in the P.P.P. program and Weve been approved by the F. RBS Marianne said to utilize the paycheck protection program liquidity facility.
This week, we started on phase two of the program.
We have a 163 applications in our Q1 hundred 42 have already received acceptance is from the has to be a total amount of $15 million.
Said another additional $500000 in fees. So on the P.P.P. program very early on we made a decision as an organization that we were going to use it to support our clients. We thought we did it was less risky than going out and soliciting prospects on under the know your customer guidelines and also just from an overall capacity.
Both from a total amount of Outstandings did did did a single program and also from internal resource allocations.
[noise], if you take a look at <unk> at our loan portfolio.
You'll see that it that it is well diversified and that within each one of those segments. We don't not have any concentrations ready Jones is going to talk about impacted industries.
During his presentation and I will tell you that up in through till March 16, we're tracking above our budget.
No we're tracking right around a low double digit loan growth through March obviously, a lot of our settlements in March.
Either got canceled or delayed, but we expect those those will come back here and hopefully in the near future.
Merian touched upon our credit line utilization, which we track on it on pretty much a monthly basis, you will note that.
Our average usage of lines are still below 50%, we saw a slight tick up in March but nothing that was out of the ordinary gave US concern I mean, you can see the the amount the total amount of Unutilized lines as of April 24th is $326 million. So our customers have great.
Competence in the bank and our ability to support their needs going forward and I think thats validated by the fact that the majority then did not pulled their lines down in a time of stress.
So with that led to turn it over with Randy and ask him to talk about credit culture.
Sure good morning.
I'm just some opening statements about our credit culture, which have always been in place I believe there, especially partner now given everything that's going on we strive to build a strong credit culture here and that started with a a base a very strong experienced tenure quite a trained loan officers coupled with a very.
Deep bench in the credit field with several new members, having over 25 years experience no one's been through what were seeing right now, but they've certainly been through a other industry.
Moving issues, so I feel like we have an excellent team assembled to address what's coming.
Well I'll focus on tougher longstanding customer relationships, knowing our borrowers very well knowing all aspects of their business.
Underwriting and selection of customers I think we'll continue to serve us well and art and I've just our general underwriting philosophy is I believe well have crept up score.
Able to get through all the issues were saying today and finally, Oh go without a beautiful Miss without mentioning now we do have a very strong a special assets group. This worked a battle tested they've worked through some other difficult situations with other institutions.
And they're focused on wasn't resolving problems and capital preservation and attended to do a good job for us even through these types.
I'm sorry.
Some of those next slide show that we have Maryann mentioned, we were on a trend of improving credit quality again, our groups or to resolve issues and address issues probably.
We've we've seen management of our of our charge offs Oh.
Then reasonably reasonably low we're watching delinquency very carefully.
We're also managing that proactively went out with a loan modifications and I'll give you some more detail on the on the loan modifications, Bob also talk about or or issue or issues with the increasing our allowance and being proactive on that slot.
As a husband previously mentioned, starting and mid March and through through a present date, we've seen a fair amount of a lot of modification requests or these are being reviewed on a daily basis by the senior loan officer a knee.
More approving these based on need an impact of the customers to date, we've modified our over 340 loans.
It was commercial and consumer.
Provide a break out of that most of our modifications.
Slightly more than half of all modifications have been.
Converting amortizing loans to enforce only for a period of time these range from two to six months.
In some cases with more severely impacted industries chiefly the hotels and restaurants other businesses would seem closures. We are granting full payment deferrals again for a period of anywhere from two to six months on the consumer side, we've not seen tremendously heavy volumes were staying abreast with the.
Mystery mandates for what we would have to do for for consumers, but for anybody that's reaching out were immediately providing 60 days of a full payment deferrals, we maybe extending some of those depending on industry guidance I would note that we are very light on FHLB loans in our mortgage portfolio those sometimes.
I have heavier requirements for providing deferrals.
We tried to isolate out well, we feel to be our most impacted industries.
Level of impact can be seen with the modification activity related to those sub portfolios. We've outlined those here on a slide notably we have very light to no exposure in energy travel transportation aerospace and trucking or some other industries that we've seen a other folks struggle with a week.
You have a.
Oh hotel exposure, that's manageable and I think it pretty well position, but you can see for example on that line, we've modified nearly 87% or that portfolio already.
Hotel operators are telling us pretty quickly that they were seeing the reservations decline and their operations that impacted.
But I do believe the core portfolio, there is well positioned for when things resume.
Some of other industries were saying the retail space within our commercial real estate portfolio.
Restaurants in caterers, that's fairly high penetration level there of modifications at 74.7% Arts Entertainment Recreation has a smaller portfolio, but again a lot of those businesses. That's seen mandated shutdowns. We've also tried to demonstrate where the P.P.P. farms from.
First round or how they benefited those particular subsectors.
Based on the P.P.P. program. It is not heavily beneficial to real estate type credits.
Based on a payroll calculation, but it was very beneficial to some of other businesses that are impacted or may see impact. We continue to track those dollars of how they are allocated and how they benefit those particular subsectors.
I'll, let Bob talked about Bob Oh allowance and that's financial aspects.
Thank you Randy.
Well, let's start out just to tell you. If you look on page 21, the graph highlights where we've come from so our allowance has been has been growing gradually from Q1 19 through Q4 19 from 53 basis points to 60 and now we with this large provision we recorded in Q1, it's it's now.
So your 0.76% alone.
I would remind I would remind everyone on the call today, though that when you look at us relative to peers. The allowance still still is on the low end to the range.
The reminder, here as we do have the fair value marks a related primarily to our acquisition the acquisition activity back in early 2018.
So if you were they include those those marks the allowance at the pro forma allowance with marks it at year end 19 was was 1.11% and now it would be 1.25%.
So just wanted to wanted to highlight that.
Oh of course, the marks continue to run down over time.
And.
Just couple of comments I'd make as we as we rolled into the for a into the first quarter.
Absent some of the events have covered 19, we were in a position where our allowance.
From a cap from an asset adequacy perspective was even stronger our historical loss rates had had continued to decline while we had a large allowance attributable to one credit at year end that that that was that there was resolved and former charge offs and we didnt have any additional specific allocations during the quarter they'll never hand, as we looked at events unfolding.
Very sharply very dramatically yeah looking for instance, the unemployment rate here in the state of Maryland, The general stay the national economy.
Yeah, we felt that it was it was prudent we took a harder look at the allowance.
Yeah, we certainly we certainly are of the view that that you all recession risk has increased.
And now we feel that even with the loan modifications PPP program.
Yeah, we we still think Theres, a likelihood we'll see risk rating downgrades in the future and potential increases our charge offs.
So we increase the allowance on average by roughly 20 basis points through our qualitative factors and it was primarily in two areas our economic condition factors and also our concentration risk factors again, if you look at the potentially highly impacted loan sectors.
Yeah. This is largely a.
Yeah, I'd say, it's a mix of CRT owner occupied not an arts pod and our to see an eye portfolios. So we also did increase the factors based on some proportional analysis of these highly impacted sectors relative to our portfolio as a whole.
So as a result, we ended up a 3.4 main provision for the for the quarter, which resulted not allowance increase of $3 million.
And so again as I said earlier, the bulk of that $3 million, if you would or tribute to various portfolio is able to ban it would've been primarily our CRM ziosk see an eye portfolios.
So moving on if we talk about.
One of things we did.
As we took a look at a stress test and truck gauge our loss absorption capacity.
And and.
What we did is we had our third part of the times longer view services had had performed a capital one an allowance stress test for the bank.
Back in June of 2019.
Obviously some of the data was a little stale, but what we did as we started with the cumulative nine quarter, what was referred to as a severe adverse case loss rate and we added some further stress. So crisis, we took that stressed particular stress test 3.9% loss rate increased about 20%.
4.68%.
We took our pre provision net revenue.
There are 2019 form 10-K, and we reduced after 20%.
And so as we weren't ran their stresses where portfolio or brand or stresses and looked at the impact on capital what we saw was that.
In a scenario over nine quarters with aggregate credit losses of $82 million.
And.
Pretax pre provision net revenues of 47, Mad dog and assuming no tax benefit so try to keep it was conservative as possible. We would still have pro forma capital ratios in June of 2022, nine quarters later that wouldn't be in excess of what I called targets here, which were essentially for tier one in total capital 100 basis points.
Above.
Well capitalized so.
Those results indicate that we can maintain this capital ratios an expert in excess of well capitalized even in a stress scenarios like this.
Needless to say, we will overtime continue to further stress the portfolio.
As we get more intelligence.
And I'm just wondering I should just again remind everyone on the call. This is a stress test on like it's not a forecast up future expectations work.
Net interest margin trends or are certainly Oh, a challenge in the in the at the rate environment, where we're we're currently at Sally <unk>, if you're looking at last five quarters, and then interest income yeah. It's essentially.
A flat line.
And during that period of time, even with growth in the balance sheet.
Our net interest margin as a percentage has declined from 3.64% a year ago.
It's a 3.34% here in the for the quarter ended March 31 of this year.
And he and what we see is loan yields certainly have driven a lot of that decline.
We've been fairly aggressive in terms of four I'm actually not not really got we've been very aggressive and lowering our deposit rates, especially with the feds actions during the first quarter. We've we've taken the rates a lot of cases that as low as we can go.
So so anyway, the other point I'd make here as we talk about net interest margin trends is we have in previous presentations shown the impact of our of our.
You know their purchase accounting adjustments and and that's a continuing downward.
Impact on our net interest margin.
So for instance, if we were to look at that in the first quarter of last year.
There's there's ah.
There was adjustments added 10 basis points to the net interest margin and that has now declined here in the in the first quarter. This you're down to five basis points and certainly that trend that trend will continue.
[laughter].
The next talk about our.
[noise] [noise] I just want to what we have what we car, earning snapshot and I just shortly before we get get too far into this just remind everyone that the core net income many P.S. section at the bottom of the page. These are non-GAAP measures and we disclose on page three in this presentation the usual caveats around to.
Non-GAAP non-GAAP measures.
Yeah, maybe if we look at our reported results as we talked in the in the earnings release.
Our our S.
We know is down a four cents per share from from same period, a year ago up and we had a couple of big drivers in the first quarter results. Obviously, the increase in the provision for loan losses.
You see we had an a onetime item related to the cost attributable to the departure of our former CFO.
Which we estimate is three cents a share every one of the beneficiaries as a result of the cares act of a pretty significant one time tax benefit.
Essentially the ability to carry back our net operating loss.
It was generated in 2018.
That created a $1.2 million tax benefit or or six cents a share.
As we look at our core income it's important that we've made one of the adjustments. We've made for this reporting cycle and we will continue to do this through the remainder of the year is we have taken out the impact of the performance of our mortgage banking activities.
And and we have and I have slides a few pages later, when we talk in more detail about that.
But what we want to try to do this show our performance, especially going forward.
Hi, lifting those impacts out of our results.
And so when we look at the results for four for the first quarter.
14 cents a share compared with same quarter. Your go to 23 cents a share.
Again, the provision is is the bulk of that story.
And looking for fourth quarter.
Again provision is a is it is a big chunk of that story as well.
Yeah, one of the things. We noted is are we we've seen some stress in our noninterest income.
And and some of that is some of that his cousin 19 related yeah. We've certainly seen some lower volumes in our interchange income some other NSF and overdraft charges.
And I'm expense side, we are trending we are we are trending downward relative to both same quarter your goal and the most recent quarter.
On a core.
Our ratios on page 25, we talked about our profitability matters.
As long as several banks have done the we were reflecting our pre provision net revenue.
And and again the impact in our reported basis is driven by the large provision for loan losses in Q1.
The up on a core basis.
On a core basis.
Our core basis, our pre provision revenue.
It is is is trending favorable to to Q4.
Down a bit from Q1 is 29 team.
Our efficiency ratio, we we've made a little progress relative to Q4 were a little higher than Q1 of last year.
And you can see our average return on average assets. We show listen I think this is not think this is consistent with what we've done a previous presentations. We showed a return on average assets.
And then we adjusted for the effect of our core deposit intangible expense that doesn't change much I had to about nine basis points to the our away when we look at it on that basis.
Now one of the balance sheet comments I was going to make have Marianne certainly mentioned as we talked about liquidity, we had that large build up our cash and cash equivalents and again, we're working that down as we speak.
We did during the quarter, we did increase our securities portfolio by over $60 million ER and the offsetting funding was our.
Thank advances.
We are very upset continued to increase our contingency.
Funding or off balance sheet funding capacity.
Rob mentioned some of our some of our loan growth, but just kind of reiterate somebody key key takeaways there over our loans increased by roughly 16 million that was a 3% annualized rate in the quarter and was driven largely by our commercial portfolio and commercial real estate.
We did see a decline in our residential mortgage portfolio certainly some of that was a two factors number one with the exit of the mortgage business one of our sources of new loan originations, yes. It has obviously diminished.
And then secondly, we did see a pretty significant run off the portfolio because of the lower rates and a lot of refinance activity during the quarter.
The our deposit transaction accounts or which we saw some some growth there.
And we're still in a great position, the 45% of our customer Cup total customer deposits in the form of those transaction account balances.
Book value per share.
Increase from the fourth quarter.
And our tangible book value per share.
Also up.
$12.91 at the end of quarter, Maryann mentioned that completion or the buyback program.
I could talk a little bit better mortgage banking activities and as a and again the good news as we kept substantially completed the previously announced exit of those activities during this quarter.
The the mortgage pipeline has been process and funded a we still have a few remaining loans held for sale at the end of the quarter that would be was that we're going to be that others have been results here in the month of April there are no remaining employees in the business.
And.
For those who have looked at our 10-K, we had a we had a node in the a in the energy in the 10-K that talked about our mortgage bank <unk> banking activities.
And the numbers were breaking out.
To adjust to our core earnings are consistent with that tabulate disclosure and in in in the 10-K.
So.
As we would have expected with the exit of the business a very de Minimis contribution to two the consolidated earnings in Q1.
But it's certainly grosses up both our noninterest income in our noninterest expenses as you can see there roughly a million for gross up of each of those can't we strip that out of our core presentation.
By comparison the business did contribute three cents of earnings three cents per share of earnings in Q4, 2019, and and yeah. There's nothing in Q1 now as we look ahead or the impact of the mortgage business. In Q2 of last year was was about four and a half since a share and about a penny and Uh huh.
For share in Q3.
We have.
At the back in our appendix, we have a lot of detailed financial information, we have our our GAAP to non-GAAP reconciliations.
Hopefully help walk down all the adjustments so that we have made to those two this quarter's results.
And with that I'll turn it back over to Marianne.
So I'll conclude recently said that we can open up for questions again, we think that one of the one of the strongest on value propositions that we have is the markets that we operate again.
Small and medium sized commercial focus that we have experienced in terms of the breadth and depth of our team in handling that type of portfolio, you know consolidating industry, where it has become very apparent to us with the can compete program that didnt.
Small and medium sized businesses are continuing to <unk> knowledge that they need a local banks in order to have the responsiveness and flexibility and the individual they shouldn't that those decisions.
For the balance sheet.
Building on very tangible well.
In D. I would just primary funding mechanism that we looked after differentiated product and are seeing eye portfolios in our commercial real estate portfolio, We announced just earlier. This week that we were able to successfully very experienced commercial real estate officer in the core.
Are you to Washington area. So we continue to make progress on strategic initiatives as well and I mentioned earlier that we organize business banking branch partnership and again those concretely demonstrated their value.
And the ability to outperform our deposit market share fire multiple was over to indicating that was strength that we have in this market. We believe that were really very well prepared from a capital perspective liquidity perspective, the trends that we received.
Going into did not to mention the breadth and adopted that team for this once in a century shore and do believed that there will be not only challenges for us that opportunity.
We've tried to take out and watches in ways that was previously present in our income statement by subtracting the mortgage operation. So that people can look at the trend over the last few quarters, Oh, the core commercial banking operation.
And we're able to retain reward our employees and again. It's this most recent new higher on top of some of the hires that we announced in the fourth quarter show that we're tracking not only new customers, but new talent, which in turn will lead to more customers. So well obviously.
Very focused on asset quality very focused on the significant economic challenges that we have well be working very hard to continuing to make sure that alco portfolio risk draft that we're prepared to react but I would say that we're very confident about our ability to not only.
<unk> proactively take advantage of some of these opportunities in the marketplace and with that.
Well open it up for any questions that anybody might have on any of the presentations were anything else that you've seen in the financial.
Thank you we will now be conducting a question answer session. If you'd like to ask your question you made press star one on your telephone keypad, a confirmation trying to indicate your line isn't a question to.
You May press star too if you like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset, but for Prosigna Starkey.
Our first question comes from the line of Brody Preston with Stephens Inc. Please proceed with your question [noise].
Good morning, everyone. How are you.
Good morning, good morning.
Welcome Bob.
So I appreciate all the detail you guys gave in a in the deck, particularly around the a the impacted industries.
Just wanted to ask a question, though to see our either residential rentals that you called out those or are those wonder for family rentals.
Those are mostly multifamily.
Okay [noise].
Okay and are any of those or are those mostly like rentals to long term tenants or any of those driven you know.
Hi, Air B M B.
No no were being B.
Got it all those are all traditional rental contracts roby.
Great. Thank you for that and then are taking up the provision increase was the result of adjustments to the qual factors just given a net charge offs are still pretty benign.
They will absolutely well it was 100% qualitative factors because again as I mentioned, our loss our historical loss rates actually trended down roughly four basis points quarter over quarter. As we have we factored that into allowed so that people to exclusively a qualitative factor bill.
[noise], So I guess, just thinking about the provision as we move forward into Q.
You know obviously the economic scenarios is kinda worsened and the data that we got yesterday on GDP was worse than expected. So should we expect another elevated provision in twoq just given some of the worsening economic data should support even higher qualitative factors.
Well, it's not one thing I would point operating in terms of time to the allowance, but the timing and the magnitude of allow it to leave attributed to the first quarter was obviously colored by what we were seeing in April of 2020 years made those decisions. So.
It would not have reflected just what was known in March but certainly reflected what is known in April and we'll continue to watch the portfolio and see Rodrigo additional qualitative allowances that are married.
So Randy and Bob noted, yeah, we do expect to see individual life stress in the portfolio. So there may also be certain specific allocations in provisions that we need good night.
And we think that the next quarter, we'll see some combination of the two it does but I do want to stress that. The addition that we made to the first quarter numbers was certainly informed by what was happening in April.
Okay, great. Thank you thanks for that detail.
The line utilization.
The chart that it's trended down post quarter, just wanted to better understand style that borrowers paying it back sort of on their own or did did you work with some of these borrowers to maybe provide deferrals. So they wouldn't.
He paying the bank back with line Dropdowns as we move forward trends here.
No I classify that as ordinary business, you said that none of that related to any type of deferrals or anything like that.
The Okay, you saw Brody im not even though.
First quarter, they're a modest uptick again nothing like we saw at some of the larger banks was reflective dishonesty I've a couple of borrowers doing what I'll call prophylactic use each of the lines, where they drew down I'm, just sort of concern for what licensee.
No and kept the funds in the demand deposit balances. It was about $7 million I think that we've just slows down and then and then we pay goes back on their own one day not unlike off in terms of our initial concerned about like we've seen gen deposit withdraw.
I didn't see this drop in their businesses.
They say expecting too so those couple of borrowers so.
The long he seems oh isn't though in the first quarter and then when they paid its backlog of like back down again in April.
Okay all right.
Nobody has a bank.
As I was a long long composition is very different than second the larger reporting as we don't have a lot of unsecured lines of credit. We don't have a lot of lines of credit that aren't tied to borrowing bases and conditions for borrowing and so I think the size of our customer.
Our baby and the structure of their lines of credit is one of the reasons why did you see it about our saw a very different utilization picture in the first quarter and you get some other reporting back.
And Brody I would only add to that that going into this pandemic most of our customers.
We're experiencing record profit years and to the line utilization.
We're also has been down significantly over the last few years typically those line utilizations put jump hired about 60%, but because of the cash flow that these companies are generating now we've been seeing lower utilization over the last 18 months.
Okay, Great and then on expenses you know I appreciate backing out the mortgage related expenses, but just from like a a core run rate perspective, maybe first salaries and what not just where where's the bulk of the mortgage expense.
Within the income statement.
It was heavily if it was heavily in the in the compensation and benefits area as well as.
And Oh the line item that we call, let's see here just to double check sort of must be a loan production expense.
So, but it's not quite heavily on the comp topline.
Okay, Great and then my last one on the margin I understand you said you sort of brought deposit cost down as as long as you can sort of put demo what is the incremental cost of deposits right now and well see incremental.
Yeah.
Okay.
So when you say incremental you're talking about the marginal dollars in terms of what it cost in just the funding and liquidity or are you talking about some of the opportunities that we've seen where more extensive cds are going to roll off and those customer deposit.
Costs are going down dramatically youre.
What about some combination of the two broken.
Yeah like the combination of materials, where it's like just a role on roll off a you know from a cost than they had a loan yield perspective.
So we have bought maybe able to quantify we haven't number of C. D. Yeah war for higher rates CB <unk> put on the books when rates were right thing in the early part of 29 can either late twenties.
And those are rolling off so you have Cds that my again.
Cost after of one and a half for one or no corridor. We have no special is right now I'm missing so you're looking at at a fairly significant drop off in those those maturing Cds.
Yeah, Hey, Breo and another thing that I would add to that as part of the P.P.P. program. We required all of our borrowers that received funds into that program to deposit the proceeds into a separate D.A. account opened with US we did that for a convenience factor for them, both and trying to track the.
Oh, the proceeds would be used but as you know those maybe you don't know those loans are funded 100% day, one so as we've settled those hundred and $72 million, we've seen our noninterest bearing deposits grow by that amount and we expect that that'll kind of come down over the next eight weeks as those phones are utilized for payroll.
Okay, great. Thank you for taking my questions.
Hi, sorry.
Our next question comes from the line of Stewart lots with KBW. Please proceed with your question.
Hey, guys good morning.
Oh boy.
And I welcome to the team Bob.
Ready [laughter] as the fair amount of my question, but maybe maybe just one follow up on the margin for Bob How are you thinking about where the NIM can kind of bottomed out.
As we adjust for you know lower for longer bar.
You know coupled with Accretable yield run off.
You know what he was lower this quarter and that you expected to continue trailing off I'm.
I'm, just trying to kind of zero in on where you see could you know that margin can look like at the bottom up sometime this year.
Any color there would be would be helpful. Thanks.
Well I think it's fair to say that we are we're going to feel some of that we're going to have a couple of dynamics here number one the deposit cost will continue to trend downward.
As as as some of those higher rate Cds do roll off and replaced at lower rates. So that's that's a positive on that side.
On the other hand, we're going to see some continuing you know the challenges we face as I see it is with.
We have that the situation, where now again not knowing how much cover Nike and one package, but to the extent we continue to see for instance, raz mortgage prepayments and a lower rate environment that that'll have that'll that'll continue chipping away at the loan yield.
Yeah, but right now if I had to call. It I think what you're going to see is the net interest margin percentage is going to trend downward a bit in the second quarter and a little bit more in the third but should I think it will level off at some point late in the year, assuming that the market, but the market rate environment remains a remains unchanged.
Yes.
I think one of the.
The dressing is sort of a normal union Yang of the portfolio, which we're going to $485 million and we're booking loans.
Getting approval for London, TPP too so that number is going to be well over 200 million dollar yen in one for Scott Levine.
Those loans or are quickly forget when I'm done we're not going to see that have any sort of an impact on the margin Yep yep.
10% to 25% of those loans don't seafood forgiveness, then you've got a fairly low yielding after that.
Portion and and we're just not going to know that out for another six or seven weeks. The good news is well pretty clear picture there.
By the time, we report on the second quarter. So we're looking at that kind of net utilization. That's obviously also going away. That's how quickly does that was 6 million plot in sees that we're anticipating or a lot to be accelerated and bought into the income statement one though on the.
Positive side, though the other thing that I would note here is that we we talk about how we immediately not knowing what.
To do from a liquidity standpoint boosted our on balance sheet cash.
And goes were Oh the minimum its.
Given that some marginal cost and in many cases to fund those my bad.
Anywhere from 65% to 1.2% and so it's those cash balances held work their way down when you look at the yield on earning assets not just one year olds, you'll see that yield on earning assets improved simply because of the.
Lack of drags on.
Good good spread from having a hard cash balance those cash balances that we showed on the liquidity.
Wants to buy are less than half of that level. Today. So you know you've got you've got some positives in terms of customer deposit costs. You've got some are now in terms of how much I guess PPP balances end up being two year old loans, rather than waiting for given loans.
But you've also bought some some uplift on a partner, earning asset side because of all while oh, okay, but in some cases might have even had a negative carry so those gal when you're right in an environment, where the stat is saying that they're gonna do whatever they need to do that.
The economy likely that you're gonna have some pressure on their and as Bob said, we expect that pressured in the second and third quarter, but flattening out, but we thought we think the pressures wanting to be.
You know fairly insignificant and I'd just point out or you know the fact that we maintained get better than most people expected in the first quarter, even where some of those earning asset pressures.
Okay and.
Stuart if I could just add I just want pick up on what Marianne was mentioning about the the P. Paychex protection program loans, Yeah. We've we've modeled those out you heard the number earlier in our presentation $185 million of loans average fee roughly 3.2% of a loan amounts now again those processing fees, we know under generally accepted accounting principle.
Those will be deferred and amortized as a yield adjustment over the life of those loans. So one of things. We did we modeled that out based on forgiveness ranges from 100%, which is our aspiration within six months to zero when they become too you're amortizing loans. After a two year 18.
Amortizing loans after the <unk> after the initial six month period.
And so one of the positives you would see and by the way when I talked about our net interest income net interest margin was before the impact of up up up up about the PPP program. We in fact, even at a zero even at a zero forgiveness, which we think it's highly unlikely.
We're looking at a yield of through almost 3.5%.
If they're forgiving within six months that yield number pushes closer in that six month period to 7%.
And you know that takes that we fund these through the payroll protection program blending facility 35 basis point cost of funds.
So I just wanted to so again when I talk about margin, it's before the effect of that and what we will do is make sure that we can isolate the impact of PPP program. When we talk about our margin.
Going forward.
Oh that color was super helpful. Thank you guys.
I guess my last question just.
I appreciate the additional color.
On the income statement, specifically with the within expenses.
You know as we back out the them and you guys provided then the deck as well, but as we back out.
The the mortgage expenses and then also just any other cost efficiencies.
Given the work from home environment. How are you. How are you guys thinking about a run rate and if you're providing any specific guidance on ER, where you'd like to end up in the second quarter.
No I think and then also if you if you back out obviously be.
800001 time and payments related to the former CEO. So.
<unk>.
Any guidance for for a core run rate in second quarter. Thanks.
Okay. So Stuart I think the last time I checked to die for modeling something in a 12 eight to 12 nine afford or range for a run rate.
And and I think that that's probably a good number again, that's the first quarter numbers were inflated not only by those one time expenses, Oh God to see ourselves costs severance costs, but we're also influenced by the fact that the mortgage operation.
Back office.
President on financial statements for a little bit longer than we had anticipated when we talked about the exit of the business in the fourth quarter.
And I bought clearly laid those out you can see what those cost. So I mean, we felt like yeah, maybe three to four weeks of those back office costs as we work through loans. It has been originated we ended up and then just like you know eight or nine weeks of those costs.
So it was important they you understood that.
And and we know the first quarter is always a heavy quarter when usually talk about that in terms of some benefit because of higher paid employees and went back I'd like to cost in the fourth quarter.
But on the other than we had probably some lower marketing costs in the first quarter, partly because of coaches night human we might see going forward. So no I don't want a I don't want to overly predict you know what goes up in Dallas might be though we follow what you predicted and we're not uncomfortable with problems.
Some of the number that you thought in there.
Right Yeah Merian. Thank you very much for that I'm, sorry, just one more the tax benefit that was realized this quarter current there's currently no anticipation that you'll you'll see that again.
This year or is there a possibility that we could see additional benefit in twoq.
No that that is the extent of it that's the carry back about 2018 net operating loss to tax years 13 through 50 that's.
Absent any any new change in tax law rising from cares actor that is that it took its purely onetime.
Great. Thanks for taking my questions guys.
Sure.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Personal we want to thank everybody. We know this is a really stressful time for all of you as well it's for us.
He's got the seasonality of earnings season on top of all the pressures that we're all feeling inside our companies in our family. So we're actually grateful for their be attention paid to list I'm. We also always ready as you work through on your questions, whether they'd be as investors or analysts.
To take any time dare to work through specific line items.
We apologize for the noise in the statements that are happy that gone with the approach that we've taken to move out mortgage that it will give you a clearer picture of what those core run rates really are.
And what core fee income really looks like I'll note just as a very minor point back first quarter of 19 fee income was unduly impacted by a prepayment penalties that we received said that that makes the pressure that we're seeing on the fee income side or possibly go away.
Little greater than it is although we do anticipate the consumer behavior, it's still effect interchange income and merchant acquiring income, but probably not as dramatic was off and now that that first quarter 19 to honor the comparison when you count.
We're feeling good about our capital position feeling good about the allowance you know feeling good about our ability to handle and even greater level of threats as Bobby [laughter] Jude.
Sure.
So.
As confident as she can feel in this type of a once in a century we advance.
We're feeling confident in the fourth strength that didn't happen again, I can't really overestimate the opportunities that we're also seeing coming on this.
So thank you.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.