Q1 2020 Earnings Call
Welcome to the Community Bank system first quarter 2020 earnings conference call. Please note that this presentation contains forward-looking statements within the provisions of the outfit security litigation Reform Act of 1995 other based on current expectations estimates and projections about the industry markets and economic environment in which the public company operates such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and 4 a.m. Okay filed with the Securities and Exchange Commission today is called presenters on March's landscape president and chief executive officer and Joseph Sartorius Executive Vice President and Chief Financial Officer gentleman, you may begin
Thank you. Grant. Good morning everyone and thank you all for joining our first quarter conference call in addition to Joe and I have also asked Kingsley and Joseph to join us on the call this morning.
This is clearly a different and challenging environment for all of us. Let me start with our covid-19 as early in March. We mobilized the pandemic response team consisting of senior leadership across the company name is was and continues to be the health safety and well-being of our employers employees customers and communities. We began execution immediately by limiting travel and meetings instituting system policies and enhancing cleaning protocols and all company facilities or the following week. We close Branch lobbies instituted work from home separated are critical operating functions into multiple different facilities, utilize shift work and instituted social distancing and all office spaces. We've been operating with this environment for over a month and all the less efficient. Our operational Cadence wage quite stable. We're prepared to continue as we are until such time is safe for our people to resume normalized operations at this juncture in New York and Vermont. The governor's stay-at-home lawyers extend through maintenance.
Steam in Pennsylvania that date is it?
30th we will remain abreast of circumstances and react accordingly in the best interest of our employees customers and communities also in March. We announced the Scott Kingsley. Our chief operating officer would be retiring for Community Bank system effective June 30th, 2020 Scott served in that role for a year and half after having served as Chief Financial Officer since 2004, Scott work side-by-side with me for nearly sixteen years and the company will miss his energy passion and talent at that same time. We further announced the Joe survey was appointed to the role of Chief banking officer Joe began his career with Community Bank in 2008 in previously served as Executive Vice President and chief credit officer, Joe will continue to bring exceptional leadership to our company for the benefit of our stakeholders. I will make only a few comments on q1. It was pretty good absence. The code would related allowance build earnings were very strong. I think a couple of pennies better than wage.
See reporter the total loan book was down much less than seasonally expected and we had organic growth in commercial and deposit performance was also written for her are non-bank businesses had a great quarter the pre-tax earnings of our wealth management business was up 12% benefits was up 9% and insurance was up 2%
with respect to the acquisition of Steuben trust company that we announced in October. It is proceeding albeit at a somewhat slower Pace. We continue to be hopeful that we can close in the second quarter but have not yet received regulatory approval on the remains uncertain read Around the ultimate impact of covid-19. Jo will provide a little more color on the quarter, but they're obviously more significant matters to discuss with one of those I wanted to touch on was Financial stripe and severe circumstances of Economic and financial distress. There is no substitute for earnings liquidity Capital asset quality core deposits in Revenue diversification. When I look at the fundamental Financial strength of our company, I'm highly confident. We're as well prepared for whatever the future may bring as we possibly can be Joe. Thank you Mark you good morning. Everyone has Mark noted the earnings results for the first quarter of 2020 or solid in spite of birth.
Is related to the covid-19 crisis the company reported Seventy-Six cents and fully diluted gaap earnings per share for the first quarter excluding a penny per share for acquisition-related expenses fully diluted earnings per share for $0.77 for the quarter. These results were four cents per share lower than the first quarter of 2019 due largely to the covid-19 crisis and its related to impacts on the company's operations in particular the company recorded five point six million dollars in its provision for credit losses in the first quarter of 2020 reflective of expected credit losses due to rapidly deteriorating economic conditions. This amount exceeded the company's net charge-offs in the quarter of one point, six million dollars or nine basis points annualized by four million dollars by comparison in the first quarter of 2019. The company recorded two point four billion dollars in the provision for loan losses and net charge-offs of two point six million dollars or Seventeen basis points annualized in addition. The company is dead.
income was negatively impact in the quarter due to
Significant rapid decrease in short-term interest rates during the first quarter of 2020 the company adopted the new seasonal accounting standard this result in a one point four million dollar or two age seven percent increase the amounts for credit losses from forty nine point nine million dollars prior to adoption to fifty one point three million dollars after adoption due largely to the expectation of increased credit is due to the covid-19 adverse impact on Economic and Business operating conditions. The companies allows for credit losses increase in additional four point four billion dollars for 8.6% at the end of the first page two fifty five point seven million dollars. The total increase in the allows for credit losses was 5.8 million dollars or 11.5% between December 31st, 2019 and March 13th, 2020 the allowance for credit losses to Total loans outstanding and March 31st, 2020 was 0.81% which represented over eight times the company's trailing twelve months and not charging.
As Mark know that we believe the company's Capital reserves. What are you profile Diversified revenue streams strong credit record and experience management team leads as well prepared to endure the impacts of the covid-19 crisis by the company's net tangible Equity. The net tangible assets ratio is 10.8% at March 31st, 2020. This was up from 10% at the end of 2019 and 9.8 pigs from one year earlier earlier. Similarly. The Tier 1 leverage ratio was 11.1% at the end of the first quarter, which is over two times the well-capitalized regulatory standard of 5% off during the first quarter of 2020 Cheryl does Equity increased a hundred twenty one point four billion dollars or 6.5% this including nineteen point three million dollar increase in retained earnings and a $93,000 increase in accumulated other comprehensive income net of tax due primarily to an increase in the value of the company's available for sale investment securities.
At Marquette December 31st, 2019 the company's tier-1 risk-based Capital ratio total risk-based capital in common Equity Tier 1 Capital ratios for 17.2% off percent and 16.1% respectively reflective of the companies lower-risk asset-based and high levels of regulatory Capital. The company has an abundance of liquidity resources and job position to fund future balance sheet growth including his current loan pipeline potential advances on hundred lines of credit and pending paycheck Protection Program loans. The companies funding base is largely comprised of low-cost or deposits at March 31st, 2020 checking and savings accounts represented 68.5% of the company's total deposit based on the company's cash and cash equivalents in reserves talking 458.9 million dollars at March 31st, total borrowing availability at the Federal Reserve.
Bank was 260 point four million dollars in total borrowing capacity of the federal Home Loan Bank was one point three billion dollars the available for sale investment secure secure a car was valued at 3.14 billion dollars 1.5 billion of which was available for pledging if needed in total these sources of immediate liquidity exceeded four billion dollars.
We close.
First quarter of 2020 with total assets 11.8 1 billion dollars. This was up three hundred ninety-eight point seven million dollars were 3.5% from the end of the length of Port quarter of 2019 with 892.5 million dollars or 8.2% from one year earlier. The increase in the cord was largely due to a net inflow of the positive seasonally anticipated year-over-year increases in total a light bulb third quarter 2019 acquisition of Kinderhook inorganic growth average earning assets for the first quarter of 2020. 10.04 billion was consistent with the fourth quarter 2019 with 664.1 million dollars or 7.1% from one year prior to the both the kids are hooked transaction and organic growth average loan balances in the first quarter of 2012 or eighteen point eight million dollars or 0.3% compared to the link fourth quarter of 2019 and up to $603 or 9.6% But compared to the first quarter of 2019 dead.
On a link order basis the average outstanding balances and business lending consumer mortgage and consumer indirect portfolios were up slightly, but we're offset in part by decreases in the consumer direct and holdback portfolios the increase in average loans outstanding on an annual quarter basis was driven by the Kinderhook acquisition as well as organic long growth ending total loans were down on a linked quarter comparative basis twenty eight point five million dollars a 0.4% s easily anticipated exclusive of walls acquired in the Kinderhook transaction transaction ending total loans outstanding increased 174.1 months or 2.8% from a year prior.
At March 31st 2022 carry value of the company's investment Securities portfolio is 3.19 billion. This includes net unrealized gains of 155.5 million month from 33.1 million dollars in that unrealized gains at the end of 2019 and 7.9 million dollars in that unrealized gains a year earlier. The effect of duration of the company's investment Securities portfolio was 3.6 years at March 31st, 2020 average total deposits were up six hundred fifty one point five million dollars or 7.8% from the same quarter last year about 45 million dollars or 0.5% on a link order basis the increase year-over-year was driven by the acquisition of 561 million dollars of the pilot liabilities and the third quarter due to the fact of transaction the company Savage cost of deposits was twenty five basis points in the first quarter of 2021 basis-point lower than the length fourth quarter of 2019.
The company reported total revenue of 148.7 billion dollars in the first quarter of 2020 and increase of 6.1 million dollars or 4.3% over the prior Year's first quarter off that interest income increased 3.2 million dollars or 3.7% to 90.1 million dollars due to a $666 4.1 million or 7.1% increase in average earnings assets between the. Offset and part by a 15 basis-point decrease in entrance margin.
non-interest Revenue
Use increased 2.9 Million dollars or 5.3% Between comprable Borders due to increases in banking and non-banking revenues offset in part by a small loss on Equity Securities interest income and fees on loans increased 4.9 million dollars or 6.6% over the copper bowl prior-year quarter due to an increase in average total loans outstanding offset by 17 basis point decrease average loan deal as previously reported. The first quarter 2019 average loan email was favorably impacted by 6 basis points due to 1 million dollars in one time loan fees.
Interest income on investments decrease zero point five million dollars or 2.9% between the first quarter of 2019 and the first quarter of 2020 and tax or equivalent average yield on investments. In fact in cash equivalents decreasing 2.58% in the first quarter of 2019 to 2.45% in the first quarter of 2020 reflective of lower interest rates interest exchange was 1.1 million dollars higher than previous year's first quarter driven by a for basis point increase in the cost of interest bearing liabilities in a 446.1 billion or 6.9% increase in average interest during liability balances.
Employee Benefit Services revenues for the first quarter of 2024 twenty five point four billion dollars this represents a 1.3 million or 5.5% increase over the first quarter 2013 revenues. The Improvement of revenues are certain by increases and plan Administration Actuarial record-keeping fees as well as increases an employee benefit trust transfer agencies, the company reported a point 1 million dollars and insurance services revenues during the first quarter of 2028 zero point two million dollar or 2.5% increase in one of the first quarter 2019 results due primarily to an increase wage for medical and Property and Casualty Insurance revenues manager revenues for the first quarter of 2020 for 7.1 million dollars or zero point eight million dollars or 12.4% off the first quarter of 2019 due to both Acquired and organic Grill.
Banking and non-interest revenues increased zero point seven million dollars due primarily to an increase in Mortgage Banking revenues during the first quarter of 2020 the company increased its commitment to sell secondary Market eligible rep, which drove an increase in Mortgage Banking revenues from zero point two million dollars in the first quarter of 2019 the 0.9 million dollars in the first quarter of 2020 Dodge Journey recorded ninety three point seven billion dollars in total operating expenses in the first quarter twenty-twenty this represents a five million dollar or 5.7% increase in operating expenses over the first choice or 2019 salaries and employee benefits expense increase 4.9 million between comprable quarters reflective of the increased payroll costs associated associated with the third quarter 2019 Chef position related pay increases and increase in employee benefits of including significantly higher medical costs, total data processing and communication expenses. Increased $1000000.
10.8% between comprable
Planning quarters drove by a higher payment processing and telecommunication costs occupancy equipment expenses increased zero point five million dollars or 4.4% between the Furious to largely to increase the wage associated with the Kinderhook back position. These increases were partially offset by 0.5 million or 11.2% decrease in in intangible asset amortization as well as a zero point seven dollars or 6.4% decrease in other expenses, the effective tax rate for the first quarter of 2020 was 18.8% up from 18.5% in the first quarter of 2019. The company record a lower amount of stock-based compensation tax benefits in the first quarter of 2020 as compared to the first quarter of 2019, exclusive of stock-based compensation tax benefits. The companies effective tax rate was 20.9% in the first quarter of 2020.
From a credit risk and lending perspective. The company is taking actions to identify and assess its covid-19 related credit exposures based on asset class and bar or type. No specific covid-19 related credit and paramours identifying within the company's investment Securities portfolio during the first quarter of 2020 with respect to the company's lending activities the company implementing customer payment deferral program to assist both consumer and business partner may be experiencing financial hardship due to covid-19 related challenges through April 15th, 2020. The company granted came into Pro request for up to three months for 3234 consumer bars, 1018 business bars, representing five hundred eighty seven point two million dollars of the companies. Mom balances the company anticipates. It will continue to receive covid-19. I need to a hardship payment deferral request throughout the second quarter of 2020.
And March 31st 2029 performing loans increased to 0.46% of total laws. This compares to 0.39% of total loss outstanding at the 1st at the end of the first quarter of 2019 and 0.35% at the end of the length fourth quarter of 2019. The increase in non-performing loans is largely attributable to a single line of credit that protrude on December 31st, 2019 allows sitting balance of 9.9 million dollars total the liquid walls, which includes non-performing loans and Loans 30 or more days to Lakeland to Total loans outstanding was 1.11% off at the end of the first quarter of 2020. This compares to 0.8% at the end of the first quarter of 2019 and 0.94% at the end of the linked quarter fourth quarter 2019, the delinquency status for loans on payment deferment due to covid-19 financial hardship were reported March 31st, 2020 based on the delinquency status at month.
20 of 2020 the stupid acquisition is scheduled to close later this for however due to the covid-19 crisis and pending regulatory approve of the ultimate closing date may need to be adjusted off as a reminder. Steuben trust is a 14 Branch franchise operating in six-county region of Western Europe with total assets of approximately $560 Community Bank currently serves the counties within students current footprint and the other two are contiguous to our markets the company expects this acquisition to be approximately eight to nine cents per share reduced to its first full year of gatherings Thursday 9 to ten cents per share creative to cash earnings, excluding one-time transaction cost operationally, we will continue to adapt to changing market conditions in immediate near-term. The company will remain focused on a string of time. We enter mediation of the positive response assisting bars that experience financial hardship with payment relief closing and funding PPP and other loans and maintaining service standards dead.
And our financial services businesses.
Based on the current market conditions We Believe certain aspects of the company's operations will be more adversely impact in the second quarter of 2020 than they were the first quarter of 2020 home and auto sales home considerably which has reduced the demand for new consumer mortgage and consumer installment loans, although business lending activity increased in April due largely to the PPP program the effect of Elon the TTP significant lower than the company's first-quarter average earning asset yields, which may negatively impact the company's net interest margin in future periods deposit other banking fees including part related interchange wage were expected to decrease due to declining levels of Commerce higher levels of unemployment will affect as far as ability to service debt which may increase the level of expected loan losses potentially resulting the company reporting significant Provisions off the future. The company's wealth management reviews will likely decrease in the second quarter consistent with a decrease investment asset values Insurance Services may be negatively impacted by lower sales activities.
And although the company's employee benefit service business is largely driven by participant headcount levels is employee benefits trust operations will likely be negatively impacted by decreasing underlying plan valuations off the company's dividend capacity remains strong and full year 2019 dividend payout ratio is 47.5% accordingly the company expects to continue to pay quarterly dividend consistent with past practice am undoubtedly the covid-19 crisis has changed the near-term outlook for society in general as well as expectations around economic conditions first and foremost. We remain hopeful that the effective treatment is on the near-term Verizon and the vaccine becomes widely available later 2020. Like the disease is specific Acuity. This crisis has in our employees and their families are customers communities and share Home Society in certain with that said we intend to support our stakeholders and thoughtful discipline and compassionate manner believe the company's well prepared to endorse in tax. Thank you now. I will turn it back over to Mark's dead.
Before we open it up for questions is I sent in the opening. I asked. Kingsley to join us to say a few final words to the group that he had the opportunity to work. So closely with the past sixteen years Scott. Thank you Mark to our investors and analysts. I wanted to take this opportunity to say thank you for your continued confidence in support of the company and myself over the past sixteen years your engagement and effective challenge have been critical in our strategic decision-making and supportive of our continuous Improvement objectives as I prepare for my retirement from the company. I am both humbled by choice and proud of what our team has been able to accomplish and pleased to have been a small part of that. I'm also supremely confident in our team's ability to continue to provide a differentiated level of customer community service and supply for shareholder returns again, thank you.
Thank you, Scott. Thank you for sixteen years of tremendous service to Community Bank system and we have our entire organization. We wish you and your family the very best for the evening. Thank you very much with that Grant. I would ask you to turn the line over for questions.
We will now.
Begin, the question-and-answer session ask a question. You may press star then one of your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, press * then two at this time. We will pause momentarily to assemble our roster.
Our first question comes from Joe finish with over to group, please. Go ahead.
Morning, everyone Morning Joe Good morning, Joe. Hey, guys, we've we've seen some other companies before just to see which Provisions here in the first quarter to build reserves, you know, some of them sight of employment data and projections. They used I guess from his late as April 12th. I know you guys generally are very conservative on credit. So I wouldn't necessarily expect the same Reserve bill, but just curious what metrics do you specifically to determine the reserve built and the first quarter and giving your comment in the release about and on the call here about the increase in payment deferral request you expect in the second quarter whether that means the big rebuild might be pushed out a quarter or two for you for you all or if you feel like you mostly accounted for that with this one Q provision allocation. I'll take that one Joe Thursday. We we as you know, we adapt at the Cecil model in in the first quarter and when you the model is kind of comprised of really three significant components the quantitative dead.
Launch the non-economic qualitative adjustments in the economic qualitative adjustments and in the economic qualitative adjustments. We use forecasts provided by off by Moody's and we use those forecasts. I think the update we use was through March 27th. So effectively that was the latest and greatest information we have from from from off lease. And so we used that in our Cecil model, you know, I guess the best way to describe the economic forecasts is kind of a Nike Swoosh kind of Shack in a sensitive significant significant drop off and the in the second quarter with some recovery and later quarters. And so that component of the model largely drove the adjustment in in the first quarter with respect to the to the second quarter, you know, we'll we'll reevaluate the model which will include also the economic qualitative Factor adjustment dead.
But also we're going to be evaluating, you know, sort of observed data with respect to a Lincoln's delinquency and migration of you know, risk life and those type of factors. So it is possible that in the second quarter. There will be additional additional Reserve build based on the based on the factors were observing in addition to changes in the economic Outlook.
Okay.
That's helpful. And then with respect to the decline in oil prices, you know you all in the 2015 2016 cycle markets got I got I remember having some tangential exposure the lower oil prices. They're wound up getting really no discernible impact to you as far as I can tell but maybe just update us on what you consider your exposure to be to these records oil prices. Yeah. I think we have Joe pretty limited. It's Josh or exposure mostly to uh, the fracking industry but in in northeast, Pennsylvania, but I'll let Jose Servin comment further on the schedule. Our our exposure marks not only to fracking but we had some pipeline contractors are in the portfolio. Our our overall exposure is probably somewhere that I've forty million dollar range and you know, we monitor if we monitoring quarterly obvious a lot smaller wage.
Significantly smaller than it was back in 16 and 17 in the the clients in the portfolio by and large or very strong very liquid and right now being dead so they're not working which is good. But there's we don't we don't have any concerns at the moment with respect to that portfolio.
Okay. Thank you Joe. And then on the outlook for m&a, you know you all were already in a choir of choice in the market. I'd have to think the resiliency is a stock here through this makes even more of an acquirer of choice. If one of your choice targets marketing to you during this. Would you feel confident enough to move forward and announce something during this time, or is it just too much uncertainty at this point. I haven't really given much thought to that hypothetical question. My initial answer would be that we would take a look at it. You know, I think if you look at the financial strength of the the company, you know as as I suggested in Joe talked about in a little more detail. I think we're pretty well-positioned for whatever the future is going to wage here in terms of you know, economic distress and ultimately, you know, potential uh credit losses. So, uh, I, you know clearly I think the evaluation log
Delta you know gives us you know, potentially that opportunity with that said I would think you know, most who are thinking about being sellers are not going to be thinking about it for some time. So I think you know, we're not going to see the whole lot of you know activity, but I think you know, certainly if we have the opportunity to have a dialogue with a life ugh the high-value partner right now, uh, we certainly would entertain that
Okay, and on the the Steuben Transit pending deal that you have it just sounds like I mean, correct me if I'm wrong. It's just sounds like more of a processing issue may be given everything The Regulators and others have on their plate right now dead. Yeah, it's just everything's moving slow. As you know, Joe, you know, we are us the Steuben folks are core processor. Everybody's working remote key that you know creates its own challenges and we're trying to work through those The Regulators are working remotely. So everything's just moving slower, you know, where we announced that transaction. I think I said we expected to close in the second quarter. And as of right now we still are planning to do that. But uh, you know clearly the future Direction, you know, and the environment, you know will will dictate that potential.
Okay, and then last one for me, you know Mark your feet businesses and the controversy.
And they're give you diversity of your earnings stream. There's not many of your peers have but the closure of the business is really didn't occur until the middle of last last month of the quarter right in March and you walk us through your initial thoughts on how you expect your various feed businesses to fair with what's going on. Sure. I think the start with the obvious the wealth management business. I think that business will probably be down we estimate somewhere in the 15% range and revenues in the second quarter. The earnings just won't be down quite that much because there will be some offsets in terms of commissions and the like, uh, but you're probably talking to double-digit decline in business. I think the the benefits business and insurance business will be slightly less affected and we would expect a single-digit reduction in revenues and earnings wage.
And those businesses for the second quarter job.
Okay, that's it for me. Thanks, and then Scott really enjoyed working with you and and all the best. Thank you so much Joe.
Thanks, Joe.
Our next question comes from Alex Florida with Piper Sandler, please. Go ahead. Hey, good morning guys.
First off congratulations on the great career good luck with your retirement and you're certainly going to be missed wanted to start with the PPP program. Um, and just you know, in in terms of the fees that are expected from the 350 ish million dollars of loans. Are those going to be pretty much reflected in the second quarter or there's going to be capitalized over the life of the loan kind of how did how should we think about sort of how those balances are actually going to impact the balance sheet. That's a good question are like we intend to hold those for investment and therefore recognize be over the life of the long and at this point, you know, as as the the second round gets funded there's additional funding will continue to evaluate, you know, walk around that but but at the current time we're planning on holding those for investment.
Okay, so the and it would we is there a way to sort of sort of guesstimate with that? And is it going to be in comfortably or through the margin and it should we assume these are all kind of the 5% loans or or a way to kind of clarify that a little bit more know it will come through the March and is is how we will account for it with respect to you know, the the bulb weighted-average see we have not we're not very yet relative to making that determination. But I think there was a one three and five percent level. So it's you know somewhere between those years between those amounts, but we don't have we don't have that pin down just yet. We will shortly.
Okay, and then in terms of the margin, is there a way you can kind of help us get a little bit better sense for the moving Parts in the margin. Obviously it gets moving Parts. Anyway seasonally in the second quarter wage, but just given the PPP program expected durations of those loans et cetera plus other things in the balance sheet. You know, how how should we be thinking about the margin from here in the in the second quarter, So that's a very good question Alex with with respect to the loan portfolio. If I can start there, you know, we had a decrease in in the prime rate kind of late in life in the first quarter. The full impact of of that decrease is not been, you know recognized if you will in the first quarter, so we'll feel a little bit more impact on the loan yields side, Um, you know, just from the decrease in the short-term interest rates as you mentioned. Also, you know, the TPP owns will go on at a lower effective yield. So the overall loan yields are expected to be dead.
We threw a slide in the investor deck.
So two shows the the history of short-term interest rates as compared to our compared to our loan yields. And and you know, we we've have effectively maintain long yields of 4% through, you know, kind of the last ten years or so that will be a little bit more challenging with you know, the PPP months depending on the volume. So I would expect phone deals to drift down off the second quarter. We have made some changes on the funding side relative to our cost structure. If you recall going back to late 2015, our total package deposits was at 10:11 basis points range were sitting at twenty five basis points. Now, I would not expect us to get back to 10 or 11 basis points certainly in the short term, you know, because we've added a different, you know, we've had the Kinderhook balances as well and it's just a little bit higher cost structure relative to our cost of deposits. I I potentially could see in the second job.
For the cost of deposit stripped out a few more basis points in the in the quarter, you know the investment Securities yield at least in the uh, in the short-term. I would expect to be 15 and kind of that to 40 to 45 level and you know, the cash equivalents that were carrying on the balance sheet at the end of the quarter. It's likely that there they will be tested in the event in the fall portfolio. So I would expect those, uh, you know those to come down which ultimately will help our help our marginal income. So, you know, all of those things considered, you know, I I think it's fair to assume a decrease in the margin by you know, five six seven basis points in the in the coming quarter. The only the only thing is as it relates to the fees on the PPP lounges. Yes, we are going to amortize those as you suggested over the potential to your.
When those things start getting forgiven, we will accelerate the recognition of the associated fees the rails loan. So it's going to get messy. I think to make judgments forward-looking about what the actual reported margin might be. I think looking at the, you know, expected fundamental margin relation to the loans and deposits off know is is is reasonably straightforward, but there's going to be a big uh variable here as it relates to the acceleration which we would expect to see that these things get forgiven and we accelerate the, you know, the fees associated with it. So I just throw that out there as well for consideration.
Okay, let's helpful and then just final for me. I was wondering if you can just kind of run down the hot-button loan segments and just kind of quantify your exposure to things like lodging restaurant retail CRV things like that off. Yeah l so I'll okay. So let me start out with retail retail trade.
representative
About 4% of our total exposure. It's about $260 lodging and was interested in that represents about 3% of our exposure.
Health and Social Services and social assistance is 2% of our exposure construction 2% Unfortunately, a Dairy Farmers represented a 1% off unit Food Service 1%
Furniture stores and we pulled those out because we have a couple of larger furniture stores. We pull those out there represents 1% manufacturers, I think after 2% off
We pulled out casinos as you probably know we do business with a couple of casinos here in Upstate New York. So the pull those out that's just less than 1%
I guess Transportation would be the last one which is disgusting 1%
or total loan outstandings
Great, that's extremely helpful. Thank you. That's all my questions for now.
Thanks a lot.
Morning guys, I could start with maybe a couple of follow-ups on that trip and you noted that you approved just about 1,400 loans. I'm curious how that compares to the number of applications you received and then secondly since the program ran out of funding late last week, have you continue to accept additional applications? And do you think if the the second round of funding comes through will you be able to to process and fund all of those additional applications? I'll take that one. So Thursday, it's been fast-paced.
So yeah, the expectation is that they're going to appropriate additional dollars. Hopefully, you know upwards of two point five billion dollars. We have continued to process or or rephrase continue to validate the applications dollar request. So we'll continue to do that with the expectation that is going to be additional funding come in the middle of this week what we get through all of our applications. That's the goal and we've thrown we thrown a lot of people at it. We probably have somewheres around rough numbers off or twelve hundred applications that we're working through that did that did not get processed with the first go-around. So the expectation is we'll work through those there'll be additional funding and we'll take care of as many clients as we possibly can.
It's been a team effort. I can tell you that.
Great that that's helpful. And then just to make sure I understand kind of switching to the the current credit situation. If I look at the 90 days plus delinquent and still accruing bucket that increased from 5.4 million to 12.6 million. You mentioned that delinquencies are reflected as of March 20th. So am I right does that assume that there was kind of a pre covid-19 increase in that took it and if so, what was what was the driver credit that has matured and ten million dollars part of a bigger dog in total relationship is somewhere is around fourteen thirteen fourteen dollars. We have two loans that are current in a line of credit that it is. It is the tour and Thursday. We're working with the client internet for to Renewal come up with a solution. Well, it was pretty cold. So this was this was not not a result of ac1900.
The business is the r in retail certainly is going to be impacted post see nineteen and it's there in the retail sector off. Like I said, it's a line of credit that's matured that we're trying to work with a client to get a solution and resolution.
Were you able to talk about the particular industry or retail that they serve?
No, just he's in the retail sector.
Great. Thanks for taking my questions.
Our next question comes from Russell Gunther with the Davidson, please go ahead. Hey, good morning guys morning. I just wanted to follow up on the exposures that you provided. I appreciate the color there. I just want to make sure if it's fair to have the right characterization. So this is an attempt to sort of ring fence or quantify of your exposures that are most at risk in in the near-term from covid-19. So just to confirm that please and then if there any material shift either way with us to ban or any of their exposure that would be worth calling out as well. So so your commentary was correct its sectors that we've seen that would be most impact nineteen. The percentage of total loss did excuse me total owed outstanding and and we'll continue to evaluate that as we as we wage.
Play this out when my as an example one might fall on the ad when my wife we drop with respect to what respect to the dead stupid portfolio. You know, they have they have some exposure to to a certain industry similar cars that we that we've done them in this high-risk save a little bit of logic. They got a little bit of AD. They have a little bit of health care. I don't see any of it and it's not that big of a portfolio took it would be sufficient enough to move the needle any one of these categories on ballistic basis.
Okay, great. And then are there any portfolio characteristic that you could share whether it's a weighted-average LT or get service covering ratio to jump in textual. Is this a bit more? That's that's a little bit of a challenge. Right? So our portfolios are are are rather season and that's a result of values particularly. The the the appraised values are dated and they were determined during different economic Times. So I don't think necessarily fair to throw a month would be have any meaning but I I would share with you is some of the the guidelines are veterans that we that we underwrite against as an example are loan-to-value is dead. Target is anywhere between seventy and 75% is that they may have sold it go beyond that sure, but but our Target is to come in and it's 70 and 75% appraised value and we yep.
We underway for the 10 / 20.
Amortization and we typically come in with that coverage somewhere between 1.1 to 1.2 x all those are kind of the things that we that we underwrite try to do. We have some they said that we have some that that might go beyond the supervisory limit of 85% We do reports. It's not a very big bucket at all. So I had to take the dog out there. I have to stick to throw a debt, just because I don't necessarily meaningful at this point in time, you know, what's going on in the economy, but just have a sense of the way we underwrite took me 5% or less tend to ten year term 20 or Ram you like personal guarantee still get recourse, but it kind of things that that might have more value to
No, it's very helpful. I appreciate the reminder of those targets. And then I guess just stepping back kind of a bigger picture and attempt to quantify what the you know, potential loss could be. When is it a useful exercise to think about a d fast severe or um, you know, uh materially adverse scenario is that is that something you have have contemplated performed internally from a stress stress testing perspective just curious as to your thoughts there. Yeah. Well Russell, we're not home, you know, we're not at the size limits for for DFAS. So we we had started the defense process back in 16 and 17. Ultimately. There was a change in the regulation that would exclude us from from the DTs process with that said the call us the collective intelligence. We gained through the defense process we used to log.
An internal Capital stress test model and we do that on an annual basis. We just completed one in December and include the scenario, which is severely adverse which banks are charged off levels. I know very sort of pessimistic Outlook and you know apply to factor multiple factor to those charged off levels along with other assumptions relative to us. You're really adverse scenario. And we you know, we so we pushed the limits relative to that stress test and and all instances. We were able to maintain regulatory Capital levels. Well above the the required regulatory Capital standards and even our own internal Capital standards, which are higher than the regulatory standards.
Got it. No that's very clear relative to the position of strength that you guys are are operating in today. I guess. I was just trying to get your thoughts around. You know, what the potential lost content would would be and how you're how you're thinking about it from an order of magnitude perspective. It's Mark. That's a really good question that you actually spent a fair bit of time talking about that. I mean the real challenges, you know, the focus initially was on, you know, some of the commentary mean in battle question. What's your last name portfolio? And you know, this this month the potential loss scenario has expanded Way Beyond logic. I mean, it's a little of everything. I mean if you look at you know, Joan talked about some of those kind of what we would consider higher, you know, risk potential twenty credits in the business lending portfolio of of three billion dollars. We also have a two and a half billion dollar mortgage, you know Residential Mortgage.
How's that going to be impacted when unemployment could potentially go to 20% How about the auto lending portfolio? That's a billion dollars?
What happens to that one unemployment is 20% So I think the challenge around this is really just that there's so much uncertainty going forward as to what those you know what that loss of ten is going to be. You know, I think that if we if we have any reason to think it's going to be a lot higher than you know, where we've kind of provided in our Reserve, you know, you look at our Resort what $55 we would we would have provided more. I think, you know, we're prepared to do that when there's any level of kind of forward Clarity or indication right now. It's just such a claim epis who you know what the ultimate loss content is going to be on really any portfolio. It's not just it's not just commercial. So it's it's been a real challenge kind of an interesting exercise, you know to go through. Um, I, you know, if you look back to the 09 crisis, you know, our losses didn't even blip. I don't even think they were wage.
They weren't even the standard deviation Beyond. You know, what they historically is that I think it could be a little different this time just because it's a different, you know, it's a different problem. It's God more widespread. It's not necessarily just Regional so I would expect that there's potential for somewhat greater losses, uh than there was relatively to the the credit crisis no eight no nine, but I think trying to determine an order of magnitude on that at this juncture just really it's it's really too soon and hopefully we'll have a little bit better Clarity is the noise the second quarter unfolds and at least the phase-in of the, you know, return to normalization, you know commences and we get to see a little bit more money, you know evidence of what what the future might hold and will happen to think better understanding than to make, you know, better informed judgments.
I really appreciate your comments there guys, and what's the very challenging and and fluid situation? So thank you for taking my questions in stock to graduations and best of luck. Thanks so much. Thanks Russell. Thanks.
Our next question comes from calling Gilbert with KBW, please go ahead.
Thanks. Good morning. Everyone morning Mark. Thanks for that color on you know, obviously we appreciate your position and this is not easy. But if I could just walk in a little bit and making sure I understand kind of the movement within the reserve that occurred this quarter. So Joe, I think you would said so one point four million of the increase in the reserve from the fourth quarter was related to age and I thought that you all had said that that that increases maybe because of the 5 million in the past if if if that correct and then just wondering, you know, maybe what you ended up seemed especially given what was going on. I would have I would have thought that that would have been you know, the Cecil component would have been certainly higher than maybe what you would have thought at the end of fourth quarter, We have given kind of a range of estimates in some of our previous. Uhh
discussions and and we had initially, you know kind of in the in the third quarter come out with a little bit of a higher expectation and
The fourth quarter when you know, obviously before covid-19 had kind of lowered our expectations as we refined or model and came out with an estimate that would potentially be in the range. It was very similar to our wage loss model. Ultimately when we you know, refine arrested and came up with a final determination or you know, the the post adoption number at one point four million dollars higher than the 12/31 numbers. So effectively, you know, we're running an incurred loss model came up with forty nine point nine million dollars running a Cecil model, which is a completely different different model. If you will it came up with the fifty one point three million dollars doesn't have any reason is 1.4 million due to do the conversion and then with respect to um, you know as the uh, uh, excuse me covid-19 is unfolded in front of us, you know, we had to uh a test their model right out of the club.
And we did that and we largely relied on the economic qualitative back to adjustments in our model to kind of give the the forward-looking expectations, you know the observed relative to delinquency a risk rating changes really wasn't there at the end of the quarter it simply had uh, you know developed yet. We do expect however to see some developments on you know, delinquency and risk ratings in the second quarter that will potentially create the uh, the need for additional additional Reserves.
Okay. Okay, that's helpful. And then just to sort of frame maybe again what you sort of dunno so that the deferral that came in this quarter. I think it was like $587 million in total. Did you have are you setting aside or is your intention to set aside a reserve allocation for those deferrals with the expectation that maybe they could be you know challenge post covet or how are you thinking about kind of the reserve on that? Five eighty seven? And then also too and in that slide back you guys put out like, you know that one point five billion of potential exposure, you know, just and I know it's hard as you said Mark like trying to gauge with a lost content is is it's really a challenge but just curious as to maybe what you think the reserve add each of those two types of you know exposures could be roughly or how you're thinking about it.
I mean that's a very fair question that we've had similar dialogues internally about you know, do we do we have a adjust the The Reserve or you know something different payments and you know and and specific concentration wrists over and above what our you know, our model would allow us to in this point. We we deemed it a little too speculative because we you know quite frankly we didn't know we don't know the outcome. We still don't know the outcome of relative tell quickly, you know light will resume but we're aware that we were going to need to evaluate that in the second quarter and with respect to the Deferred payments if we wind up with a second round of deferrals for a lot of these customers, we're going to have to evaluate uh, both of those for the overall, uh, you know, risk associated with that second round of the boroughs, but we did not make a separate adjustment in the first quarter for for the deferral to keep in mind. We we all dead.
Providing that deferral number through April 15th, you know the facts were a little bit different on March 31st. Okay. That's a good point. Okay. Okay, okay.
That's helpful. And then just on the the the so let me just pick on the loan book. So you have indicated here again where you guys listed the pleasure that like the remaining availability within each of those segments. I guess if they do threw down their line, was there any accelerated line drawers that happened in the quarter or you've seen happen poem order end with in some of these credits? So
there's actually the interestingly enough this actually meant very little movement going back almost nine quarters. Now, you could look at utilization of the lines over that nice quarters in the high point was $5,453.54. A low point was forty-seven Forty-Eight percent and were sitting right now at about $49 off last night. It really hasn't been much you can't do any run on the line that said we had one client who has a sign a credit to elected to draw down on it highly liquid firm that quite frankly didn't didn't need to draw on it. But but I'm not on the list that would be the only outlier that took place on the light. It's been very consistent with like I said over the last nine quarters.
Interesting. Okay, that's helpful and they just on the expense side. So I know going into this I think you know the guidance that you guys had offered last quarter was that to them? Um, it would be like, I think you said 93 94 million or so a quarter. In fact, is there anything covid-19 that's going to materially change kind of your expense Outlook off from that Baseline. So the there will be additional expenses related to you know, just for example, you know some of the cleaning activities and the lights are off or increasing the other side of that is, you know, there's less business travel and you know those types of expenses. So I think the net net relative to coding Spence not really off of a second too much the the trajectory of our of our operating expenses.
Okay, that's helpful. And then so just a detail. It looks like other facts dropped a fair bit this quarter. Was there anything in there that was unusual that cause that and I thought maybe that's the outlook for that line going forward.
I would say nothing unusual in in the corner, I can get back to you on that specifically, but there was nothing that that jumped out at me as they usually on the quarter. Okay? Okay. We just had we've had some a couple of quarters where we had some you know other expenses that we were kind of like a painting. We booked him in the corner. And this is a more normalized quarter for us. Okay got it. And then just one final question on the T program the what percent of the applicants that you're seeing are and approvals are current customers.
versus non-customers
all of them
all of your customers. Okay, are you getting requests for non-customers or we've had a few limited? Oh, okay. That's that's all I had. I'll leave it there. Thanks guys and Scott all the best to you and your retirement and hopefully you'll be able to get out there and travel and enjoy postcode.
Our next question comes from Matthew Breeze with Piper. Jaffray, please go ahead good afternoon. Everybody. Just curious on the on the $580 million of loans that were granted deferral. What was the asset class breakdown of those loans and was there any overlap between this bucket and the the PPP bucket off? Just give me a moment so
The couple of things. So first of all the the
The deferrals NPP. I guess not surprising percentage of deferrals and percentage of PPP apps the majority of those came from from New York and the percentage of PPP dollars is about two-thirds by the way of of both the federal and PPS that that came out of New York State wage and the same thing with with the the percentage of PPP dollars as well as the percentage of deferrals also came about to Thursday by the New York versus versus Vermont Pennsylvania retail trade lodging manufacturing construction and Healthcare wage represented about 75% of the PPP activity.
Referral site and Joe may have mentioned this earlier on the deferral side much of what we did early on on the consumer or the mortgage of what we were doing. We're 30-day deferrals both p and I and as a result of people paying attention to the Evening News came to realize pretty quickly that it wasn't going to be over and Thursdays and so the back at us again looking for some more looking for some more deferral days, which we we have and will continue to Grant up to 90 days and total in the commercial World Thursday. We are we are actually having some success in getting just the principle deferrals only and and we're making interest payments again as they watch the evening news that came back at us and looked at as a Thursday to do both principal and interest of which which we also accommodated and I would say and you probably all know this but you know this was it in concert with our regulator they dead
Well aware of of the approach that we took this is set to be a deferral theater for sure the people deferrals in adoration that we were running the fact that we didn't need.
Which rest of us creating the fact that we didn't need to worry about the tdi's or or government structures.
Right and then and then maybe just one other measurement as we think about the number of consumer and business deferrals the $3,200 and then the Thousand business customers wage percentage of of both of those buckets in terms of total consumer really consumer accounts and total business accounts, did those makeup?
Could you clarify the question a bit, please? I'm sorry. That wasn't yeah as we think about the number of consumers that were granted deferrals the 32 the 3274 and the business deferrals 2018 what percentage of total consumer account to that make up what percentage of total business accounts in that? Make up? You know, we have we have we have 40,000.
installment loans I couldn't tell you the number of Home Mortgage accounts we have but if we got 40000 installed, you probably have a similar number and I
commercial Austin small business in from account perspective
we might have upwards of six thousand small business customers and
You know what? I don't I don't have the specifics regarding but it just seems to me if you could you could kind of get a an answer is it's not answer directly to a question just by and I think the 3.8% so you've got there the percentages of portfolio outstanding so we granted deferrals to 4% of the outstanding balance of our consumer mortgage portfolio. Right? Right the same in terms of customer, I would say it's probably the same for installments 2.7% So we granted deferrals to probably about you know, 3% of our installment customers absolutely and worth mentioning that if you kind of come across there met the consumer install then, you know, let you the 2018 loans, um, you know on an average balance basis up to $16,000 a month in terms of granularity jump up to Consumer and home-equity. You're just around a hundred dead.
Thousand dollars and that's all so to Mark's point. I think that's going to be the same number of customers and outstanding on the consumer side, cuz our average mortgage portfolio is about $100,000 mortgage and you know, our average outstanding auto loan or indirect auto loan is under 20 grand or a little I think we were maybe a little bit surprised that the the consumer request for the Pearl writer just because of the acceleration of unemployment. So I think hopefully we take that potentially it could signed are you know in our in our markets? Um, but that could also accelerate dramatically, you know that can double or triple or you know more over the course of the next 60 60 to 90 days as well. But I I think we expected it would be a little bit more of a race for deferrals on consumer side than what we experienced. Right, right. Okay, and then my last one, you know one point of conversation I've had.
is whether or not a a
In this environment a bank is is better to be, you know, have a more rural footprint or more Metropolitan footprint and I wanted to get your thoughts and whether or not you feel like the rural footprint you operate in life is to your advantage in this environment or disadvantage.
Well, I think it's it's certainly been a productive business model for us for a long time. I would say if you look at the you know, the the disease itself off and where are the greatest areas of impact are not just from a health perspective, but potentially also likely from an economic perspective is probably the more, you know, Urban markets wage. Uh, so I would I would say from where we sit right now and what we know it's we're probably somewhat it's more advantageous for right now to be uh, you know, in a in non-metropolitan markets and so I my senses are going to open up faster which should ultimately mean, you know, less economic impact in those markets and you know that may work to you know to our advantage possibly here going forward.
And now I'm sure they say that our customers in those non-metropolitan areas have certainly not enjoy a lot of asset acceleration in terms of valuation change, you know consistent wage going any deeper into the last crisis, you know, it's not like the cost of housing is moving up 12% a year in both of our markets or 15% a year now. So the underlying asset values are not correctly different than what they probably were when we were underrated alone.
Right. Okay. Thank you Scott. Best of luck. It's been a real pleasure working with you over the years and I think we've all benefited from having you as a resource. So, so thank you and be well, Thanks, man.
Our next question comes from William Wallace with Raymond James, please go ahead. Thanks Scott. I'll go Matt's comments and just just thank you for holding up over the years and years, but she walked in their retirement baseball. I wanted to just back up a little bit, too.
You mentioned the accrual of the fees over the two-year life of the loan. Is there any reason why we wouldn't expect that the very large majority of these loans wouldn't be forgiven over the next 60 days. No, I don't think we have any reason to believe that's not true at all. So and so it's likely which is why I just wanted raised the point that if you're thinking about the margin going forward, there's going to be a dead potentially material impact on the margin in the second quarter and and in the in possibly the third quarter as well. So that's yeah that I would hope hopefully, you know, the majority of these borrowers will get forgiven and that means they're spending money for the right thing so that I I would expect there's a going to be a fairly sizable except. The only thing that I question is
the capacity of the SVA to actually
Process all of those those forgiveness requests that that is that is going to be interesting. So I think there's as much risk there is anything we've seen in this program is just the sba's, you know capacity to to to process all those those requests because you can start you know in what probably seven weeks or so, they'll be Bank starting to request the processing of of forgiveness. And that's going to be an interesting exercise is to turn that in terms of the you know, the the ability to excavate it turn those around Timely.
Yep, the great. I'm sure it won't be without its hiccups. Just like the the initial launch of the program itself and in in trying to kind of maybe get a sense of what a second-round might look like for you age. As you mentioned. I think twelve hundred applications are are currently in process that were not closed before the sended. Can you give the dollar amount of those and then maybe give us a sense as to what percentage of the applications that you did process were approved. So I don't know specific dollar amount. But if you make the assumption that the the average loan size, which is what we did was about seven thousand dollars. You have to come up with the number that we may need to those that we haven't we haven't process. Well repeat the first part of the question though.
What what percentage of the of the applications that you did process were approved for the program? We had we had very few very few thousand applicants that did not get approved.
Okay, thank you. And then I'll just one last question. We haven't we haven't talked about loan growth for for a reason. I assume there's probably not much new loans being put into the pipeline that makes a little bit of activity or maybe I'm completely wrong. I'm wondering if you could help us think about loan activity and and then the rate of pay offs vs835 given that the the non-bank winning sector is now shut down. So just trying to get a sense is what the portfolio might look like over the next say quarter or two off of the yeah, you're right the installment portfolio the installing portfolio a particular the indirect portfolio. The activity is. I'm just reaching out very slow as a result of the shutdown of many magnet. All of the car dealership, so that's that's slow and
Continue to be for a while and network pretty good clip every single month. So we won't replace that the wrestling mortgage portfolio the pipeline there hanging in hanging in a not that far off from where we were this time last last year and you know given rates you think it'd be a little bit more accurate, but it's not at the moment. Okay, the refund the refi business is a little bit more effort than the than the uh, purchase it on the commercial side. We're just working through Thursday. They already committed and in progress fundings of construction loans, there's not a lot of activity coming back into the into the into the pipeline at the moment it partly because of the economy partly because of the distraction are people are focusing more on ppp's and and deferrals and birth.
Yes, the retail folks as well as the commercial folks. So I would I would suspect that.
The outside of the growth in will report as a result of the PPP loans, the the core portfolios will be a little softer.
And and what about what's coming do that? Normally you would expect my might go to another financial institution or are you guys refinancing that or are you are finding that there's liquidity existing some accessory balance sheets already to pay off interesting. So so those that we want to keep reflecting the key and and those that we'd love to put off our balance sheet on somebody else's a little less successful doing it at the moment. So we have no choice but to work with the client and and and and mediate the rep as we can.
But it has there has been a lot of activity in the last 30 days in the credits. Typically don't start to come up for extensions renewals off till June July August. So there'll be more activity at that point.
Okay. Thank you for that.
thanks for calling
Our next question comes from calling Gilbert, please. Go ahead get along. Just just two more quick follow-up. Do you have a number in terms of loans that have been asked for forbearance post 331
This is through April. So April through April fifteen.
Which is in the deck that we had sent out situational 15th. It was 4292 loans that were deferred for five hundred eighty seven billion dollars. That was okay.
Okay. Sorry, I should have seen that and then just finally just got another question kind of around Reserve. You know, if we look back I mean you're lost content historically has been off basically non-existent. But yet, you know, it looks like I think your Peak reserves kind of goes around the crisis was like at 1:40. I mean there's our Dynamic that have that are occurring within this book that would point to you guys being able on this go around to carry a much much lower reserved than when you picked at 1:40.
Call Miss. That's a good question. I mean, you know looking forward with you know, the impacts of covid-19. That's really a tough. Boss this point to determine what the you know, what the future reserves will hold. I know that I'm looking at some some, you know, reserves relative to our larger Brethren and you know, they do make a little higher total Reserve but they also fire loss content. So, you know, we're sitting at the 81 basis points right now as a percent of loans, um, you know, it's hard to determine at this point. You know, how the Provost crisis will unfold and whether that moves closer to to 1 or if it stays in its current, you know, its current levels. So that that is a very difficult question to answer at this point in time given the facts that we you know today
Joe's Inn
Is it possible that some of the purchase loan accounting right for you today differential? It's possible. I mean it gets pretty complicated. But I think there's a possibility that that that has had some impact over time.
Yes, for sure for sure. Okay. I will leave it there. Thank you guys so much for your time.
This concludes our question-and-answer session. I would like to turn the conference back over to mark for any closing or miles. Great. Thank you grant off. Lastly. We typically have many employees and directors who listen in on this, I just wanted to take the opportunity to thank everyone of them for their understanding and the rep for their engagement and their support. It's been a difficult and demanding time for all of us, and we really have risen in the team to our status is essential most important. I want to thank you for caring caring about our customers our communities our shareholders each other. We are not in the banking business. We're in the people business and I cannot be more proud to work side-by-side every day with 3,000 colleagues that make Community Bank system the organization that it is. Thank you all again for joining and uh be healthy be safe, and we will talk again next quarter. Thank you.
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