Q1 2020 Earnings Call
Thank you. Good morning, everyone and thank you for joining us for our first quarter 2020 earnings call.
I'd like to start by saying our thoughts go out to those most affected by covid-19. Especially those on the front lines of this pandemic as we navigate through these unprecedented and challenging times the health and safety of our employees and our customers remain our top priority.
I'll begin today's call by addressing the current covid-19, including decisive actions. We're taking in response as well as discuss first quarter highlights wage, then our CFO Susan Collins will provide greater detail on our financial performance credit quality capital and liquidity profile following our prepared remarks off Susan and I will address your questions.
Starting with slide three. We were quick to respond to the pandemic with new health and safety measures including social distancing appointment Banking and expansion a remote capabilities to help keep our team members customers and communities safe and healthy.
Today, we have the capability of having our entire staff work remotely on any given day as many as 85% of team members work from home.
Importantly, we're also actively assisting our customers by providing short-term forbearances in the form of deferrals of Interest principal and they're asking for terms ranging from 1 to 6 months.
17th we have approved forbearances for loans with an outstanding loan balance of approximately $839 million of which $673 is in the real estate book and 166 million is in the business banking portfolio.
Given the pandemic and the current economic environment. We continue to see demand from our customers for long forbearances. We actively participated in the SBA paycheck Protection Program gaining approval to fund up to $64 million of these loans and expect to continue with the second round of the program. We also plan to offer our customers through the Main Street lending program. I'm proud of our efforts to support our communities by delivering food to Brave health care workers in hospitals on the front lines off texting us all of the protecting all of us.
During this time. We're waiving late fees on loans as well as ATM fees for customers and non-customers.
What's that? Let me now turn to slide for to provide a summary of our first quarter 20 operating results.
Well, the underlying business fundamentals this quarter performed. Well our gaap earnings for the quarter were affected by two covid-19 related non-cash charges totaling $0.38 per share after tax that resulted in a loss of $0.05 per share. The federal reserve's decisive action would cut rates provided the country was much-needed liquidity to help counteract the negative economic effects of the covid-19 pandemic.
as a result
this caused the mark-to-market adjustment.
To our items carried at fair value and are swaps of twenty cents per share after tax.
At the end of the first quarter, we adjusted our economic forecast in our seasonal modeling which resulted in a $7 charge to earnings or $0.18 per month after tax this increased our overall allowance by approximately 30%
Quarter earnings were 5.5 million or $0.19 per diluted share our core Revenue before provision for credit losses and taxes total forty six million dollars an increase of 5% quarter-over-quarter. This increase was driven by 3% loan growth for the quarter and a 16 base Point Improvement in core net interest margin.
Importantly credit quality has been and remains one of our key strengths our non-performing assets at the end of the quarter only twenty-three basis points off.
today
87% of our portfolio is real estate based with an average loan to value of 38% and an average debt coverage ratio of 1.8.
A multi-family loans are collateralized by rent-regulated buildings in the New York City area representing 38% of the total loan portfolio the commercial real estate of polio, which represents 28% of total loans is very diverse with limited exposure to Big Box retail.
Given the current economic environment due to covid-19. We remain committed to helping our communities and customers get through this difficult time. We will continue to focus on what we can control.
Maintain good quality by working with borrowers controlling expenses and managing our net interest margin as previously noted in our March 23rd, press release are pending acquisition of Empire Bancorp has been delayed due to the severe instability and volatility in the US Financial and stock markets caused by the wage in nineteen pandemic blushing and Empire anticipated the closing of the merger will be more likely to occur at the end of the second quarter or early in the third quarter of 2012.
Looking at quarter and data loan growth was strong as major categories of multifamily commercial real estate and business loans showed Improvement.
Sun Loans deteriorated by five basis points quarter-over-quarter
This was more than compensated for by our Improvement in deposit costs these improved 24 basis points from the prior quarter helping to age of that Improvement was a 12% increase in our non interest-bearing accounts on slide six non-performing loans were up about a million dollars off the small base and we charged off a million dollars for the quarter the loan-to-value on real estate dependent loans amounted to 38% as a March 31st off the average loan-to-value for non-performing loans collateralized by real estate March 31st was 29%
While the quarter started off very, well it ended on the cusp of a very significant change in economic Outlook.
One of growth and certainty to shrinking GDP and uncertainty without let me turn the call over to Susan to provide additional color on our performance and get details on our asset quality. Thank you John. I'll begin on slide seven are solid credit quality metrics have resulted in our coverage ratio increasing to $168.00 as of March 31st 2020 as we entered the Great Recession. Our coverage ratio was 88.2% June 30th 2008. As we remain in these uncertain times our coverage ratio seems almost double from where we started the 2008 financial crisis.
the loan-to-value
Real estate portfolio at quarter-end total the modest 38% and the debt coverage service ratio for the court current course origination of multi-family commercial real estate and 1/2 for family. Mix May. Well exceed 1.8%
Importantly, we continue to underwrite each loan use a cap rate in excess of mid 5% and then stress test each loan.
In order to assist our customers during these troubled times. We've been approved to fund approximately 64 million dollars of paycheck Protection Program loans with over 50 million dollars funded through April 17th on slide eight or charge-offs during the Great Recession. We're significantly lower than the industry as a reminder. We actively manage our loan portfolios to identify and resolve problems recording charge off early in the delinquency process. We are historical seller of non-performing loans.
As we continue to strengthen our balance sheet where you made mindful maintaining asset quality is shown here over two decades flashing his demonstrates. Credit metrics with interesting net charge-off seven times are net charge-off since two thousand of note our maximum charge-offs or 64 basis points in the midst of the Great Recession while industry Peak charge off for nearly five times Thursday.
Slide 9 shows 90-day delinquencies as a percentage of loans originated by year over all our credit quality remains pristine. Our credit discipline has remained strong for the past ten years. I just miss to underwriting criteria back in 2009 as a result in the last ten vintage years. We have only fifteen loans 90 days Plus delinquencies.
Turning to slide eleven as a result of the pandemic and stay-at-home orders. We see increased risk to certain industries in our loan portfolio and will continue to actively manage our exposures this deal with both business banking law and the Tennessee of the commercial real estate customers. We provide detail our exposure and as you can see these exposures make up 26% of our total loans when the 1.5 billion dollars in exposures. 78% is backed by mortgages will 28% is in forbearance on slide 12. We highlight the metrics related to our real estate portfolio to demonstrate off of underwriting subsequent 2009 a particular note the loan-to-value of our real estate portfolio was approximately 48% leading into the Great Recession compared to 38% today.
Continue on slide 13. Our credit portfolio is well Diversified and not overly concentrated with any sector. For example within the retail. There are many sub-segments including shopping centers strip malls and single tenants generally our business banking portfolio is also well Diversified approximately 40% of the business banking portfolio in a secured by mortgages.
To not slide fifteen. We recorder provision for credit losses of over seven million dollars in the first quarter of twenty primarily driven by deteriorating economic conditions resulting from the impact that covid-19. The provision is comprised of four point nine million dollars due to the economic conditions deterioration and 2.1 million for loan growth and the charge off of punishment.
We adopted.
On January 1st 2020 using the then favorable economic environment which resulted in four million dollars being added to the allowance allowance evaluation as of March 31st them showed a deteriorating economy with Rising unemployment and decreasing GDP.
Our calculation usually v-shaped recession six straight line reversion historical losses and we elected The Five-Year transition rule for regulatory Capital purposes. Any change in the assumptions used to calculate the allowance may have an effect on the results are credit discipline has served as well coming into this environment and will continue to stay close to our customers and manage. Kathy including loan forbearance. Appropriate on slide sixteen our core deposits increased 3% quarter-over-quarter and 5% Year-over-year growth is prime driven by money market and non interest-bearing accounts this change in the deposit mix contribute to the reduction of the cost of deposits by 24 basis points quarter-over-quarter.
We continue to focus on the growth of core deposits with an emphasis on non interest-bearing deposit account, which increased over 22% year-over-year non-interest-bearing deposits of 489 represent 10% of total deposits importantly our liquidity rate strong with Presley, 1.5 billion of available liquid sources.
Moving to slide 17 we provide more details on our liquidity by highlighting are low-risk investment Securities portfolio.
On slide eighteen we highlight our Capital Trend noting that we remained well capitalized and have the liquidity to help our customers and communities with their financial needs during and after this pandemic wage continuing on slide 19, we provide additional details on our earning assets and funding mix. We have the ability to reprice over 70% of time deposits and borrowings in less than a year off also floating and periodic rate loans represents approximately 75% of total loans all this provides helpful background as we discuss our name on the next slide.
Like 20 highlights, the driver's have changed our coordinate interesting come and coordinate interest. Margin overall Arc or increased 19 basis points from the linked quarter Coronet income for the first quarter 2020 with 43 million dollars an increase of $3 quarter-over-quarter continuing on flight 2100. The average interest-earning assets, 6:23 basis points, quarter-over-quarter while the cost of funds decreased 22 basis points.
The core net interest margin was 249 up 16 basis points quarter-over-quarter as a reminder coordinated smart and excludes prepayment penalties recovery of interest on non-accrual loan and the mark-to-market customer on the qualifying Hedges on slide twenty-two. We highlighted strategy build it to the balance sheet. We are using to reduce funding costs to support our new as a reminder. We have approximately nine hundred million dollars retail CDs scheduled to make sure through the first quarter of 2021 at a weighted average cost of $190 that's highlighted on the right hand side current replacement funding costs significantly lower than maturing CD rates and we are using wholesale markets where necessary to strategically reduce the cost of fund.
moving to slide
3-9 interest expense increased three million dollars or 9% quarter-over-quarter and efficiency ratio was 68% compared to 65% Last quarter Gordon on interest expense was I wanted half million dollars in the first quarter an increase of 10% quarter-over-quarter, but a decreased approximately 2% year-over-year excluding seasonal expenses in the first quarter of 2012-13 not interest expenses decreased quarter-over-quarter and year-over-year continue to manage expenses improving the name will assist us in achieving our lower efficiency ratio.
Continue on slide twenty-four the ratio of Nine Inch expense to average assets increased to 1.8% for the first quarter of 2020 in comparison to the first quarter of 2019. The range of non-interest spent average assets improved by 7 basis points, as a reminder seasonal increases in the first quarter include higher expenses due to impact of annual grants employee and direct restricted life rewards. The company has historically maintained a relatively stable ratio of non non interest expense average assets. We continue to look for opportunities in our operations for continuous improvement with efficiency gains expect to gain further efficiencies, given our hands and ability to work remotely regarding taxes for 2020. We approximate the effective tax rate between 22 and 24% off with that. I'll turn it back to John for some closing comments.
Thank you Susan on slide twenty-five. I would like to conclude by summarizing how we can come out of this pandemic in a position of continued strength. I'm incredibly proud of what all our team members have been able to do over the past several weeks. We continue to play an essential role in supporting our communities and customers financial needs our balance sheet capital and liquidity going into this environment where strong and are positive or earnings power provides a good base to absorb future credit losses stress testing indicates our ability to sustain material credit costs over a multi-year horizon if necessary.
A credit discipline is served as well coming into this economic environment and will continue to stay close to our clients and manage that prudently.
Our ongoing focus on developing and maintaining a multilingual Branch stabbed to serve our diverse New York City customers remains a key differentiator off the New York City Market and a strong aging customer base continue to represent a significant opportunity for us over the long term.
The investment in the Universal Banker model in our branches has been critical in our ability to serve customers in this environment.
A recent expansion of our digital capabilities has also been critical in this environment and will enhance our footprint and allow for deposit gathering at a total cost cheaper than bricks-and-mortar while enhancing the customer experience the business and consumer clients.
despite
With the current economic environment due to covid-19. We have a long history and Foundation built upon disciplined underwriting good credit quality and a result of season loan portfolio was strong asset protection as restrictive economic environment eventually begins to lift. We will have a Workforce that is more faith and dynamic as a result of this experience coupled with a customer base that is highly attuned to our online and Mobile Banking capabilities off in conclusion. We will remain focused on preserving capital and liquidity maintaining asset-quality controlling expenses and managing our net interest margin to get through to the other side of this pandemic the stronger company.
With that we will now open it up for questions operator. I'll turn it over to you.
Thank you. Ladies and gentlemen will now be getting our question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset. I'm pressing the keys to withdraw from the question queue, please press star then to our first question comes from Steve, of G research, please go ahead.
Hey, good morning morning, Steve.
So I wanted to start with deposit pricing like it was down pretty materially for you guys in general maybe kind of talk about what you're seeing from competitors so far and then have you kind of continued to see this this slide in pricing through quarter-end.
So we did have as noted in one of the slides in the investor presentation. We did have a pretty significant opportunity on the back on the Seedy side with uh in total over nine hundred million dollars coming coming due through the first quarter of 2021. So we do see a continued opportunity going forward. I think it has taken time for some of the larger online banking institutions like
Perfect example Marcus to come down and rates we're starting to see that now, so I'm expecting we will continue to see the opportunity to bring down bring down our cost of funds and the next next few quarters.
Okay, very good. And then it kind of more holistically on the loan side. So corneum was a pretty substantially but a lot of that gain was offset and then Thursday by the hedging marks. So given that rates have been lower. Would you expect Nai growth in queue or or would the hedges marks income in again? How does that sort of play through?
Excuse me, Steve, the the hedging marks would come into play again. Everything being equal. We would expect net interest income to grow or stay stable going forward, We expect to see the dramatic decrease in the swap rates that we saw from 12:31 to 3:31, you know, the the rates dropped over a hundred twenty basis points for the tenor of swaps that we have them. So I would expect to see that again. I guess the other the other factor is we're close to you know, the the FED is is operating at a 0 to 25 basis-point projection in terms of in terms of the rate environment and chairman Powell has you know publicly come out and talk about the inappropriateness of negative rates for the for the US. So there's there's not a lot of room to come down that hundred, you know, another hundred basis points of birth.
In that in that in that rate in in the rate environment. So unless there's a change in terms of fed policy and said look, these are the negative rates. We think that any further drops are going to be muted. They were clearly may be based upon shape of the curve etcetera etcetera, but we think given the given a level they're probably going to be a little bit more muted.
Okay, and just wanted to clarify Susan when you said all else equal does that mean no asset growth? Either know? I'm sorry. I would want to say that was talking about the economic environment and and the right and right staying where they were. Thank you for letting us clarify that okay. So that includes growth or or is John said I'm prepared remarks. We're not expecting really a lot of asset growth as we work through this pandemic situation to help our clients and focus on asset-quality Capital and maintaining a margins.
Okay. Okay, I see so so there's not expecting much a second. Okay, I get it now. Okay. Just just one more for me talk to about finding mobile capabilities, you know increasing increasing Digital customer reach maybe just a little more color on sort of like what the new features are what the uptick is and life who who you guys have been working with sure. So we've been working with Q2 cynic Ron and wage. Let's see the mantle and what we've been able to do is reduce the Fallout from our account opening. So, you know, we had found we had a fairly old-fashioned and cumbersome account opening process a lot of the account number.
opening had to go to a
Emmanuel review in order for us to deal with our fraud fraud issues or fraud our abilities to to stay away from fraud from these particular vendors have provided a much more than a flexible environment and in terms of process, we now are able to run through a larger number of the account openings without manual review. So where we had a drop-off rate that was significant because customers just didn't want to wait now we have something that's much more aligned to what people's expectations are with respect to the amount of time it it takes to respond to an account opening request page.
So we're expecting to see significant Improvement in that, uh in that ability to open accounts more timely totally online wage, uh without manual without manual or with a very very minimal amount of manual intervention in addition our opening our home. Um bill pay has been enhanced and we also have considerably considerably improved opportunity to make changes to the web environment that do not have to go through programming that are that are managed that are managed by our biomarker people directly. We've improved mobile as well. So the mobile capabilities are much stronger and we have a game.
Some some additional capabilities for businesses and those will improve in coming releases that'll take place over the next the next several several months. So considerable Improvement in the online environment. It came at a very fortuitous time for us and we expect to be able to leverage that very well in the coming in the coming months.
Okay, very helpful. Thank you.
The next question is from calling Gilbert of ktw. Please. Go ahead.
Morning, this is Chris filling in for calling. So where to start out, I guess in the operating expenses. I know you have a number of seasonal factors that come into play in the first quarter of that don't necessarily, you know, stay in there in the second quarter. Maybe you know with the Assumption, you know, excluding the Empire deal or with the assumption is closed in the third quarter. Um, you know, can you just talk a little bit about maybe where the compensation line? Um, would Trend towards in the second quarter and uh in the same thing with other boxes
I would expect the compensation line.
To try and more closely related to the fourth quarter of 2019 for the second quarter going forward with about a 3% increase their as we did give our employees raises during the during the year and the other operating expenses again, that should be flat to where to where it was in the fourth quarter of nineteen.
Encore expenses
got it. So so less of a decline in the in the compensation line than you would normally see. Well it it there would be a big decline most of the three million dollars that is same expenses is related to compensation.
Got it.
Okay, and then and then I guess you know in terms of the loan pipeline. I mean, it looks really strong here again going into the second quarter off. You just talk about a little bit maybe on the composition of that versus the pipeline at 4:19. And I mean it looks like the loan yields held up extremely. Well given birth and raised here where I think is it for ten Now versus 4:18 or so last quarter. I mean is that is that current with all the you know with all the movement in fact fed funds and and and rates coming down over the quarter. It just seems that's how the really really well.
Yeah, so I think that the the structure of the portfolio similar to you know, the structure of the pipeline is similar to what we've what we've had in the past. I will note clearly. There has been a Slowdown in the in the closing of loans, you know, the the availability for uh, the answer very organizations like lawyers the the county Etc have not been as readily available so long we haven't seen a lot of a lot of that start to come to fruition. We started to see a Slowdown in loan closings probably about the middle of the middle of March.
Got it, that's helpful. And then moving on to credit, you know, a couple of more specific questions and then you know, we can move a little bit more broadly but it's a slide fifteen you mention that you're using a v-shaped recovery, um wage and I guess it seems like maybe that you know by all accounts is not going to be the case. It's going to be you know, a little bit longer or a little bit slower than the original kind of Vichy. I think, you know people are thinking kind of in late March here. Um, so do you see another significant uptick in the in the reserve, you know related to, you know, updated economic forecasts as of today if that were to you know, hold true until the end of this quarter.
So as you said Chris.
And I look forecast would greatly influence the amount of the allowance of you know, I can't make predictions as to where we're going to be at June 30th. So these were our estimates faith in our allowance and you know, we'll all watch the economy play out together.
Okay, so I guess said another way. I mean it says that the forecast. We used was 2/4. So is that mean you were only going in to 3 to 12 a.m. For the forecast using the model?
That's correct. We were looking out two quarters with the with the downward economy in our model. Yes.
Okay, and do you guys know which model you're using know a lot of you know, you know a lot of. I'm using have been using kind of the moodies models for for the Cecil. We were not using Moody's.
Okay. Can you say what can you just goes which model? Of course? I forget I forget the name of it from my ex was the was the service provider with the same models with that? They buy is somebody else's and I forget the name out of it, but it is the prime attics is the calculator model. We're using for our seasonal calculus.
Got it. No problem. And then you know on that slide, it seems like the provisioning this quarter for a loan for loans that were booked up. This quarter was around seventy five basis points are so um vs. Uh, you know, where the reserve stands around 47 basis points. Is that somewhere where you know, maybe we could reserve Trend to if you know the current economic environment kind of stays as it is. Well remember we had a charge off of a little over a million dollars. So we needed to replenish that as part of the general as part of the provision the 19th. Peace.
Yeah, but I'm talking about the one point two million which is net of the charge off. I guess on the 159.8 million Crow.
I would expect our allowance to stay in about the ballpark. It is as a percentage of gross loans giving are low loan-to-value in the real estate portfolio and the results of our stress testing.
Okay, and then as far as exposures go, I mean, you know granted that obviously there's it's just you know, an unprecedented home activity right now, you know, so there's going to be you know, a lot of the four appearances and your percentages similar to peers but I mean, how are you going to guess about the retail shopping center? I mean that 51% number kind of jumped out on flight eleven and and and you know as we move through this. Um and and you're kind of you know, looking at the light at the end of the tunnel, I mean how confident are you that those who get back to you know cash flowing, uh, you know, how long as they were before in a in a timely manner?
so
Let me make a brief comment about that and then I'll turn it over to our head of real estate lending who can provide a little bit more a little bit more color. You know clearly. We're we're dealing with some with a retail environment where if you're running a multi-tenant and shopping area of any type of that you're going to have tenants that are that are either not paying or out of business or or seeing their businesses businesses corrupted or disrupted and clearly these are these are definitely the people who need to need to have some for Barron's at this stage of the game. We do feel confident faith in some respect that landlords are not going to be looking to kick individual individual businesses that were functioning and we're profitable
But in fact would make adjustments as time went on and we got to a little bit of a more normalized environment, but I'll turn it over to Frank was a coincidence our head of state and he can give you a little bit more color into the into the portfolio itself.
Golden Krust, you know the overall character of the portfolio that we have. They're generally smaller centres usually have some type of key anchor of whether it's a grocery store or something like that or generally well located intersections, whether they be in the city or in Nassau or Suffolk County. So I think the key to Revival of the operation of the center's evolves around people getting out again and traveling going to and from work and going to places where they normally would go and you will begin to see some of the month smaller stores in these centres begin to operate many of them are nail salons hair salons pet grooming facilities and and small businesses such as wage as those types of businesses. So we we we do expect that once people get out. We'll start to see a return to these shopping centers.
Great, and then last one and then I'll step out but you know, we've kind of heard of why they're right off of information from peers on this to just curious on what you guys are hearing. Um, given how close you are to the you know, multifamily Market in New York. Could you guys just give some color on maybe where you're seeing, uh, rent collections come in for multi-family and then I guess I'm sorry.
Sure, really don't have any hard facts relative to collections activities. We expect to start seeing some more data as we progress through May. We do have conversations with our customers from time to time as well as some Real Estate Management firms that we conduct business with as as you may have heard March was a very good collection for excuse me, the multifamily
April started off and and a a fairly good pace and seemed to have slowed up a little bit. No one's really giving us any guidance on terms of projections butt Shack. In fact that the majority of our our housing is in the affordable Arena. We are not seeing or not hearing of collections that are below fifty percent. I think with most of the operators we've dealt with have been long-term operators very concerned about the residents that they have in their buildings and are taking action to help people get through this particular crisis. The retail is a little bit more of a challenge obviously businesses have been disrupted. What we have noticed is the local businesses seem to responded better in terms of rent payments then maybe some of the national tenants it's easier for these it's not as cumbersome for the smaller tenants who maintain its operation as it is possibly for a job.
Tenant that has National exposure multiple locations large fixed operating expenses. And as Mister Burns pointed out earlier. We are noticing that landlords are not doing their best to work with their tenants so that when things do open up they can get back into the game.
great, appreciate all the information about things
Sure, no more questions. Thank you. I would like to turn the conference back over to John Bjorn for closing remarks. Well, thank you very much. Thank you all for joining joining the call and all of you and your families. Please stay safe, and we're all confident. We'll get out positively on the south side of this. So thank you again for participating. Thank you.
This concludes today's teleconference. You may now disconnect your lines and we thank you for your participation.