Q1 2020 Earnings Call

Good day and welcome to the IMDb first quarter 2020 earnings call all participants will be in listen-only mode. Should you need assistance, please signal conference specialist Palm pressing the star key followed by zero before proceeding. Let me mention that this call may continue forward-looking statements with respect to the financial condition results and operations and business Independent Bank corporations actual results may be different factors May that may cause actual results to differ include those identified in our annual report on form 10-K and Dodge Journeys, press release Independent Bank or cautions you against unduly relied upon any forward-looking statements and disclaims any attempt to update publicly any forward-looking statements weather in response to new information future events, or otherwise, please note that during this call. We will also discuss certain non-gaap Financial measures as we review independent Bankers performs.

these non-gaap Financial measures should

Not be considered replacements for it should not be read together with gap results. Please refer to the investor relations section on of our website to obtain a copy of our earnings press release which contains reconciliations of these non-gaap measures to the Moose to the most directly comparable gaap measures and additional information regarding our non-gaap measures. Also, please also note that this event is being recorded now like to turn the conference over to Chris our listen president and CEO, please go ahead.

Good morning, and thank you for joining us today with me as usual Iraq was on our chief operating officer Mike Ruggiero our Chief Financial Officer. We're also joined by Jerry Nadeau president of Rockland Trust in our chief Commercial Banking officer as with you I imagine where he's participating from separate locations today and keeping a physical distancing guidelines. And before we begin I'd like to extend would like to extend to our listening audience and very best wishes to you and your families during this pandemic crisis. These are extraordinary times. Our first quarter results are reflective of that challenging environment with net income of 26.8 million dollars or seventy eight cents per share which included a sizable twenty five thousand billion.

Loan-loss provision arising out of revised assumptions related to covet our early adoption of the Cecil accounting standard January 1st had minimal impact off this outsides probably just stood in contrast to the net credit losses and a quarter of less than a half a million dollars. Mark will be covering to accuse one a shortly but the bulk of mine and other comments will address covid-19 related matters in our action. But first, these are the basics messages. I really like to lead with you today. We are totally engaged in working with our customers are striving to support them as they deal with the enormous burdens imposed on their day-to-day operations and households. Our business continuity planning has enabled us to successfully maintain high levels of faith and operational continuance from the outset. We focused intensely on the well-being of our colleagues to ensure their physical Financial emotional well-being and they've proved themselves to be resilient dead.

Engaged resourceful and Relentless in their pursuit of providing what our customers need right now and lastly IMDb is a resilient company. We are confident in our ability to meet the same challenges of these stressful times as we have proven as has proven to be the case in the past while this crisis is unique from prior ones in many ways. We feel we have the whole business model of balance sheet to persevere add overtime as the crisis abated subsequently regain our momentum their appendixes at the end of our own is released detailing the many ways in which life support our various constituency, which I'd like to just briefly touch on it also contains details on various loan exposures and four appearances along with the background and see which dealership speak to in a moment. Here are some of the ways of going to supporting our personal customers. We have increased the daily debit card spending an ATM withdrawal limits. We've increase Mobile deposit limits we've waved

Thus far and secure guarantees for approximately seven hundred million dollars in loans and we've accommodated request for for parents including payment deferrals and modifications off rocket trust colleagues. We continue to take many steps to keep him safe. So they continue to deliver exceptional service to our customers. This includes a leadership communicating frequently with a bust real-time information offering support compassion and understanding for colleagues on personal circumstances as they manage family at work-life balance has we've been Chrome education over a proper Health practices or according to the CDC guidelines were supporting and enable significant work from home capability with about 86% of our non-retail Workforce operation. Slowly, of course were practicing physical distancing and safety measures in the workplace increasing cleaning frequency across our branches and offices and we're maintaining full time.

Compensation for employees despite any reduced work schedules and I should know we had no layoffs the data as a result of the Covetous MC likewise. We promptly stepped up our Outreach mobile communities where we have a long history of Active involvement and support this includes donating an additional $500,000 on top of already planned support that key nonprofits meaning urgent need increasing donations to local food banks expanding our online online free access to our popular financial literacy program aimed at school age children with all of these efforts have been accompanied by extensive Communications to all their constituents. In addition to our colleagues across all channels rent videos social media. Our website includes took his insights and access to a portrait of third-party websites an important distinction between this crisis and the great financial crisis of 2008 is the banks are considered the conduits for providing or leave off.

The federal state and local governments are all relying on us to expedite program's designated to help individuals and businesses through this very trying. And we embraced that role we take our obligations G8 our customers and our community during this unprecedented time too hard and we are working tirelessly through all channels.

Our long-standing commitment to customer focus applies in both good times and bad and our customers have come to value our reliability especially in difficult times, which is reflected on our consistently High loyalty and service rankings. And of course our brand is as strong as ever. There's no question that near-term earnings for our industry will suffer during this crisis from a combination of higher credit costs home interest rates cost related to poor parents and dramatically lower economic activity. We are certainly not immune for this. You know, as I said before we are confident in our ability to get through this month. However, as you know, our track record of solid performance when conditions improve we have a strong Capital base and significantly enhance darling, we have significantly enhanced our liquidity position during the first quarter off and I think it is worth noting that similarly the period leading up to the financial crisis in 2008. We have maintained our underwriting pricing and concentration disciplines rather than reaching for vosges.

Our crystal ball is the timing or shape of the economic recovery is really no better than any of our listeners. We obviously can't tell you when the turn comes or whether it's v-shaped or more gradual some other shape. We will just continue supporting all our constituents these in the in the ways. I just described and are confident our efforts and actions will position as well when that time comes I'd like to end by once again extending a salute to all my Rockland Trust colleagues. You've heard me often described my colleagues as the greatest resource. This is being born out throughout. This crisis is the responsiveness to customer needs and keeping our operations going despite. All the logistical challenges is is truly remarkable and on spiring and it's a month to each and every one of them with that. I'll turn it over to Mark Rosario our CFO.

Thank you, Chris. I will now cover the first quarter results in more detail Gap.

Income of 26.8 million and diluted EPS of seventy-eight cents in the first quarter of 2020 reflected decreases of 43.7 and 43.5% respectively from the prior quarter's results driven primarily by elevated provisioning expense and response to the covid-19 pandemic regarding provision expense the company adopted and implemented Cecil effect, January 1st, 2020 resulting in minimal changes to the allowance upon adoption. However, the $25 billion dollar provision expense for the first quarter reflects, the estimated impact of the deterioration in general economic conditions the bulk of which is obviously being driven by the covid-19 pandemic appendix C to the earnings release lays out the underlying assumptions off first quarter Cecil model, but in summary the provision level leverage the moodies s for economic forecasts which includes the following assumptions,

Not the covid-19 Chrysler will persist and continue to meaningfully impact the economy unemployment rate Peaks at 16.9% in Q2 20-point and remains elevated throughout. The remainder of the Year. Fifty percent of Industries will be on lockdown throughout q220 creating additional downward pressure on spending no sustained economic recovery expire until Q4 21 in federal funds rates will remain at or near 0% for the foreseeable future.

In addition to these macroeconomic assumptions appendix he provided with the earnings release shows the loan amounts within industries that are heavily impacted by the stay in place orders government shutdowns Thursday as such we also laid in a review of these higher risk Industries as well as a review of our largest customer relationship balances to assess potential future exposure given the current environment these analyses help determine a qualitative overlay of additional estimated loss that was not deemed to be captured in the initial quantitative results of the model.

From a capital perspective the company elected not to take advantage of the regulatory Capital defer release associated with Cecil impact as we felt it prudent to align regulatory Capital ratios in a manner consistent with how we would manage our capital and run the business. I will now turn it over to Jerry at this point to provide some additional color over the commercial loan portfolio and he will be followed by Rob to cover the consumer side. Thanks, Maya. Goodmorning is you know, we provide additional detailed information in our Commercial Banking portfolios today. So I'm just going to limit my comments first to a brief summary of how we've managed our business for the last twenty-five years, excuse us some comfort in this channel environment and maybe just give it a few observations on the current situation as well.

For those of you who left familiar with our approach to the commercial credit business. It is based on a foundation of constructive contention the credit approvals with the balancing of credit.

Viewpoints or needs with the heaviest some on the credit scale. We also continue to prove all new business relationships exposure greater than four million dollars at weekly launch month, which we feel provides us greater insight into our portfolio as well as the ability to Pivot quickly both to threats and opportunities.

We practice our growth on a Model that to to 4% annualized organic growth rates are acceptable when the economy is growing at a similar Pace off. They trying to achieve outside growth rates is simply us taking more risk, whether it be credit pricing than we're comfortable with loan sizes are average loan size and our commercial real estate portfolio is approximately 1 million dollars. You're not seeing I put folio $141,000 have a high level of loan diversification across over 500 Industries the 6-digit in a slump. We benefit from a very seasoned long-tenured team of commercial Bankers professionals whose incentive compensation includes measures from Faith folio quality and compliance in addition to the usual growth calls.

Despite occasional protest for Mark and his predecessors. We have maintained a fully staffed work out team that has led by a career-long workout officer whose first experience with all credit goes back to the late 1980s when I also was first exposed to loan workouts.

In addition to our internal long review process. We have also maintained a thirty year practice of engaging it outside Loan review firm to examine our commercial loan portfolio achieving annual 56% penetration rates. These practices have benefited the bank and the downturn since the late 1980s would better than Phi jobs nanak rules and delinquency rates. All that being said though. We are not immune to this pandemic and we will surely suffer losses and quite possibly in credits. We had not identified to be a risk not surprisingly review page tell restaurant personal services Healthcare amusement and entertainment segments to be most at risk with a prolonged shutdown Hotel operators for the most part of Place hotel properties into what I call government induced Comas cutting staff to be a bomb levels preserving cash and have sought payment deferrals from their lenders restaurants, which include full service.

Restaurant bot small takeout Dunkin Donut franchises ice cream shops, et cetera. I've also except for those who take out have done the same thing put the Tacomas and wait for them when they can open up again.

Another group worthy of commentary is our automobile and RV and boat dealer customers would floor plans. We have followed industry practice to fir off of inventory is a practiced essentially as you start to pay down inventory that sits on floor plans because in Massachusetts most all of those products have been closed.

with respect

And payments we have approximately 1 billion dollar the principal balance loans where clients have soft deferrals not surprisingly the largest number come from hotel food service and entertainment package like with the balance coming from clients that have more specific issues whether they might be a supplier to businesses on the the islands, which have largely shut down all construction activity or we have, is the service restaurant industry like commercial lending companies to provide tablecloths aprons, et cetera and some retail landlords who have you know, everything from barbershops beauty shops. Just wanted to medical professionals that have been forced to close their doors.

Customer sentiment based on my conversations with cross of wide swath of them have reflect a largely optimistic Viewpoint. It's probably wedding own businesses. But nonetheless Hotel operators properties in vacation areas and that represents just a bit more than half of our portfolio of them for the most part. They're in the Massachusetts and New Hampshire and Cape Cod. They really feel that local travel will restock belong to Justin options as consumers will be reluctant to fly a travel too far from home. But nonetheless, they're anxious for change of scenery wage. Also hearing from them that they believe that many former Airbnb customers who were been upset by their cancellation policies and also fears over how well cleaned the properties are they drive for business back into traditional hotels.

Contract is the same job sites be reopened and the calling back laid off staff, which we're going to need to follow new safe. Social distancing rules. Another interesting area has been our new home builders Choice testing Lee they they still see strong demand. In fact this week. I was talking to some building they have open houses going on have never missed and with off as being presented as there's still pent-up demand a new page one interesting observation though from across the board and this is fear is that it will be hard for many Industries to bring back furloughed workers. As long as the federal government is subsidizing unemployment payments to where as many furloughed employees and now making more money collecting unemployment than they did in their previous position.

In summary thinking heads with a somewhat hazy windshield that I see we see potential to some benefits coming from this position which those which are followed every downturn in my thirty-five years. I believe that pricing terms and structure will approve a new credit as other Banks step back from the market. There will be an increased demand for working capital from businesses who have depleted their resources. They need to breed ramp up a business and lastly the opportunistic investors out seeking to buy businesses and real estate from those either unable to open or to continue to sustain their operations, but for the needs we will continue to be vigilant in monitoring risk, listening and questioning our customers, but new issues and developing work out strategies for those borrowers who become troubled credits now grown now, thank you Jerry. Good morning.

As mentioned like many banks. We are doing our part to provide much-needed relief to all of our customers.

In regards to our consumer lending customer base. We have halted foreclosure proceedings. We are waiving late fees on delinquent loans, and we have introduced a streamlined 90-day deferral process.

Not surprisingly there was little noticeable deterioration in either our mortgage or home equity portfolios through March 31st, of course with mass closures of business office is during late March and then the need for Relief programs like these became readily apparent as of April 17th, 8.8% or 390 of our mortgage customers have requested loan payment relief in addition 1.7% or 284 of our home equity customers had requested the same.

With 650,000 jobless claims in Massachusetts since mid-march. These numbers are neither surprising nor unmanageable.

Many of our payment deferral requests coming from self-employed individuals who may also seek relief under the paycheck Protection Program a program Mark will discuss in more detail in a moment.

If warranted these relief programs may be extended should the pandemic indoor.

The underlying quality of our consumer real estate portfolios, as of March 31st was quite healthy with an average FICO and average LTV of 749 month 58.1% for Mortgage in an average FICO an LTV of 768 and 46.9% for home equity only 4.6% of our accounts or 9.2% of consumer real estate portfolio balances at a current LTV of greater than 80% as of March 31st.

Mark back to you. Thanks Rob and continuing on with credit asset quality metrics remain strong as non-performing assets remain consistent with the prior quarter approximately $48 million or 0.4% of total assets. And as Chris and Jerry alluded to in comments regarding the anticipated payment for requests those loans that were performing prior modification will not be reported as tdi's delinquent or non-accrual and accordingly. They will continue to accrue interest during the deferral periods. As Chris noted. We participated in the same Protection Program under the care of that stimulus program to date we successfully approved and obtained SBA guarantees for over two thousand nine hundred loans, totaling approximately $700 off balances. The loans are at or anticipated to generate approximately twenty million dollars in processing income net of agent fees, which will be recognized and interest income over the life of the loan.

Oh now provide a bit more color over the first quarter results specifically during the first quarter the company experienced loan growth in several categories as strong pipelines at year end resulted in another solid quarter for loan closings, which see it. I in commercial real estate loan growth offsetting declines and construction balances and although the full impact of covid-19 is yet to be determined the company ended the first quarter with improved commercial pipeline of two hundred and fifty million dollars and we continue to see opportunities to close deals despite the current economic conditions on the consumer real estate side the overview reduction and balances continues to primarily reflect the fact that the majority of the company's mortgage production is being sold to the secondary Market while home equity line usage in New Deal for June and July's increase of 4.4% you know outstanding balances for this portfolio in terms of mortgage origination activity after a significant rate driven refinance wave mortgage.

Application activity has moderated significant.

Fortunately, this allows much needed time to work the existing pipeline given necessary procedural changes related to such things as appraisal and employment verification and although the home equity pipeline is also elevated recent home equity application activity has begun to slow on the deposit side the company experienced strong growth of 2.9% or 11.8% on an annualized basis during the first quarter core deposit growth was exceptional across all categories with with the deposits leading the charge with 8.55% growth for the quarter consumer deposits up 1.5% in Municipal also up over 15% for the first quarter offsetting the core deposit growth direct deposits decreased by 9% driven primarily by the maturity of brokered CDs cost of deposit stayed flat at 48 basis points for the quarter is March deposit wage.

Decisions will offset by purchase economy adjustments in the quarter further rate adjustments already made should drive Q2. And cost of deposits down into the high 20s this point range by the end of the quarter with the average for the quarter being slightly higher from a funding perspective in response to the significant decline in overall economic conditions, the company purchase additional Federal Home Loan Bank borrowings of three hundred million dollars during the first quarter to proactively enhance on balance sheet liquidity with a historical track record of minimal wholesale funding as a March 31st. The company has immediate access to two point seven billion dollars of liquidity through various channels should additional funding be needed these off-balance-sheet Avenues detailed an appendix G provide more than enough liquidity to cover funding for the aforementioned DPP loan demand as well as to absorb the temporary cash-flow reductions associated with customer.

Question covid-19 payment release lastly in conjunction with conjunction with the additional borrowings the company also entered into a $1000000 hedge in an effort to pre-fund the future of Charities of higher-cost time deposits at a much lower fixed rate.

Turn into net interest income the net interest margin for the first quarter 16 basis points to 3.74% reflecting the full quarter impact of the 2019 fourth quarter of a partial impact of additional Cuts made during the first quarter in a 2.6 million or 10 basis-point decrease in Lone accretion income when compared to the fourth quarter off shifting gears to cover some highlights of non-interest items deposit service charges ATM and interchange fees. We're down quarter-over-quarter due to typical seasonality combined with a decreased overall customer activity due to the covid-19 pandemic Mortgage Banking Mortgage Banking and come declined sharply quarter-over-quarter for two reasons first a $900,000 swing in the value of our servicing asset as a result of a rapid change in prepayment speed expectations as well as a reduction in Lone sold servicing retained and secondly wage.

dislocation in the secondary Market

For mortgages the hedging model that has served us. Well broke down in the quarter is valuation changes in the TV a market. We're not offset by actual gains on sales to aggregators off whose demand was outstripped by Supply in addition Poulter rates became much more difficult to predict when realizing the disconnect we began to move to a best efforts delivery messaging a move which should improve results in a second cold water Investment Management income was significantly impacted by the market conditions brought on by the pandemic as assets under Administration dropped by 12.5% do just under four billion at quarter-end. However, early rebounds in the market in late March and subsequent to quarter-end if sustained would further complement the anticipation tax preparation fee increased typically experienced in the second quarter.

Mon level derivative income increased to 3.6 million as demand for interest rate swap products remains elevated and lastly a reminder that other income in the prior quarter included the recognition of a three point 1 million dollar insurance recovery contributed to the to the decline in that category during q1 regarding nine interest expense despite reduced were schedules for much of the retail Network do to reduce Branch service levels. The company maintained full pay for all workers as reflected in the flat salaries and benefits expenses quarter-over-quarter off with other relatively small changes in various expenses, quarter-over-quarter overall, not interest expense was in line with expectations and decreased slightly from the prior quarter.

The lower tax rate for the first quarter reflected a 4.7 million dollar discrete tax benefit associated with net operating loss carry-back Provisions included in the cares in particular a net operating loss available through the Blue Hills acquisition is now eligible to be carried back into previous tax years at higher statutory tax rates resulting in additional tax benefit to be recognized excluding the impact of this discreet benefit. The tax rate would have been approximately 25%

Lastly from a capital standpoint despite the large provision charge in the first quarter tangible Book value increased by $0.35 in the quarter bring in the March 31st, 2020 tangible value per share to $34.46 representing a 16% increase over the prior-year level the stock repurchase plan that had been approved by the board in October of 2019 was finalized in early April with approximately 1.2 million shares purchased during the first quarter in the remaining three hundred thousand shares purchased by April 7th. There are no current plans to seek authorization for any additional repurchases. The company is actively deployed Capital stress testing scenarios incorporating adverse assumptions specific the current environment with each of those scenarios supporting the completion of the previously announced buyback plan. In addition these analyses will continue to guide our assessment and ongoing management of Kaepernick.

in summary

The tangible Capital ratio of 10.01% as of March 31st 2020 provides a strong Capital base from which to operate within this uncertain environment a typically concocted my comments with updated guidance given the profound uncertainty as to the economic Outlook customer and packs. We cannot constantly provide comprehensive forward-looking guidance. I can however provide some near-term insights into a few key areas.

We estimate the near-term core net interest margin to compress further, assuming the following full impact of the March fed Reserve rate cuts to be partially offset by deposit rate of wage adjustments consistent with previous guidance. No further adjustment to the Federal Reserve target range for the compression of the 1-month Libor index throughout the quarter.

Loan accretion income to be fairly consistent with q1 levels, but stay below last quarter's guidance of 2 to 2 and 1/2 million dollars per quarter and on balance sheet cash position to bring assistant with the first quarter and levels. We also want to note that this margin guidance does not incorporate the impact from the PPP program given the uncertainty over how much of the volume will qualify for. Forgiveness and Trigger acceleration of the processing fee income versus how much will be retained on the balance sheet to be repaid over the 2-year term. We anticipate overall expenses is Charles raise the tax rate to normalize back to approximately 25% and lastly we are certainly aware of the intense interest of the investment Community wage and you got work for loan loss Provisions in the banking industry first quarter amount addresses the harsh impact of the covid-19 demek based on the assumptions enumerated earlier this would obviously affect

Good situation provision for loan loss and the coming quarters will be highly correlated with any further deterioration of economic factors in excess of those used in the March 31st assumptions off as well. As any increased perceived loss exposure inherent in the company's portfolio. That concludes my comments. We went out open it up to questions before questions mark them a little static on the line when you were talking about the Hedge. I I heard it is just want to clarify. It's a 100100000000. Yes, one regular one hundred million dollar hedge. Great. Thank you. Okay, Jason ready for questions. Thank you to ask a question. You may press * then 1 on your touchtone phone. If you use any speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two.

The first question comes from Mark Fitzgibbons from Piper Sandler, please. Go ahead.

Hey guys, good morning. First question. I had was for Mark and I apologize if I missed this on the margin. I I heard heard, you know, the various puts and takes there but did not give a number in terms of your guidance for the margin. And if if not, I'd be curious if you could provide a little color. I know it it'll likely be lighter. But is it maybe sort of down in that 3:45 to 350 range and into age? All right, Mark. I did not give a specific number. But if we what I alluded to was essentially following guidance, we provided typically in the past regarding a monthly basis point cut and as you know, we had much more than that partially through March. So if you apply that to the hundred basis point but that we received towards the end of March wage that would essentially get you in that range. We're talking about the one caveat that that we're certainly monitoring is the 1-month Libor index. It's surprisingly held up. Well through the first round of cuts off.

and the first quarter it has

Started to drop back down to levels that we would expect given with the FED funds Target ranges, but certainly that could add a component to Q2. Margin that that creates a little bit of volatility but should the the 1-month Libor index continue to drop to the levels. We'd expect I'd say that that range you just talked about as as a reasonable assumption. Okay, great and then a couple of questions for Jerry Jerry, I think in the press release you you disclose it about 13% of your loan book has or will be modified. What do you think that number looks like maybe at the end of the second quarter? Is it likely to change dramatically or you haven't you know early in the second quarter lots of requests for forbearance, etcetera. Well, the forbearance require have slowed so I think it's it's sort of the first round was the obvious industries that have been directly impacted Wichita sounds like yourself. I'm sort of curious to see what happens. I think it'll really depend on Thursday.

Which other industries that you know is obvious might be some relief, you know, whether you know, there's a large-scale tenants not paying their rents. For example, that hasn't been the case in a residential tenants. I mean has it been the case but you know depending on delays and people getting unemployment et cetera. So at the moment, you know knock on wood they have slowed but we'll see where it heads off. Okay, and then line utilization rates surprised me. They had to take that war. Do you think that's because you know borrowers are digging into their own Pockets or they're finding, you know funding to the PPP program or or something else. Well, it's interesting. We we actually saw of initially when when the crisis first hit they picked up they spiked up a little bit and then quickly came back down and I saw a lot of cash build on our clients deposit accounts. And what I think happened is very interesting. The timing of this was somewhat ideal cuz most of our clients make live just dead.

Transfer tax and personal distributions in April and because of the crisis hitting when it did in March many of them pull back, so I think they ended up having more liquidity than they might. Otherwise. I just by the grace of God that's a timing was before that important date. Now the federal government's not getting those tax payments, but right now they're using that for working capital. Okay. And then lastly I Mark I'm curious. When do you test for Goodwill impairment? You do that in the third quarter. We typically do on a on a formal perspective Mark. We have wage. I'm done an analysis over that given the current environment. So we did take a look at that and the first quarter and continue to feel comfortable about our Goodwill levels. So we think it's prudent in this environment to continue to analyze that on a quarterly basis.

Great. Thank you. You're welcome.

The next question comes from David Bishop from d a Davidson, please. Go ahead.

Yeah, good. Good morning gentlemen morning. I'm curious in terms of the the PPP program. What are you all assuming? I guess in terms of maybe a weighted-average servicing the origination fee and in terms of you know duration ugh these of these loans on balance sheet.

Yeah, I think the interest in Dynamic there David will be the obviously opening up of the second round and we like many other banks have a month a backlog of applications that we were not able to get completed to the first round but through the through the the first round and the amount we know we have already successfully took the number that I mentioned in my call approximates a little under a 3% yield essentially bought for the the processing the component is if as you know, the home radon ones at 1% in that will be over the two-term should the debt not be forgiven or pay back but the fee income on the first round was a little under 3% on average depending on the on the on the pipeline we have now those average loan sizes are much lower. So should yep.

Be successful and how much were able to get guarantee when the second round opens up that that rate could go up a bit, but it's on a much lower. But as the pipeline sits today, but the the interest in part were rarely be the timing of it all David, you know as as we still are wait for further clarification over exactly how debt forgiveness will be determined wage and Hall from an operational perspective battle flow through the system. It'll be interesting to see how many of these loans actually achieve forgiveness and inner off the books by the end of the second quarter, whether that'll Trail into the third quarter and how much of that fee income will accelerate as a result of that. So that is why we say the margin guidance for Q2 is really a bit of a sort of a wild card because this program could have a significant impact on the margin in the second quarter.

Got it, and then just remind me Mark and in terms of the impact for over 25 basis points with the previous guy. Yeah, we've been guiding about six basis points drag on the margin for each month.

Got it.

And in terms of some of the deposit cost Dynamics, you mentioned some hedging activity in the like a noticed if I'm reading it right a little bit an uptick and in time to pause the cost there. Maybe just talk about some deposit cost Dynamics border. Yeah, that's the time deposit uptick is primarily a function of some purchase accounting noise. To be honest. We you recall when we closed on the Black Hills acquisition. There was a a fairly sizable fair value mark on their CD book that essentially adjust the the rate on that to a lower yield and wage coupon is the the matching of that timing of the fair value Mark to the actual maturity is of those deposits was not aligned perfectly so that the benefit of the purchase account and had run off at the end of the E still have some of those higher costs time deposits on the books. So that was essentially a a timing difference that caused about a four or five beers.

Point disconnecting the cost of deposits in this first quarter. So if you if you strip that out the the rate

Have decisions that we did make during the first quarter would have brought in the cost of deposits down by about four or five basis points and we'll we'll continue to make more decisions as I mentioned, you know, targeting wage cost of deposit in the high twenty basis points range by the end of the quarter.

Final question you gave a good color in terms of your assumptions and the Moody's S4 scenario. Just curious is that the the worst scenario up there in terms of economic forecast you're using or it was there is yeah movies has been sought you mean to interrupt you David. Was it more to the to the question? Yeah. I didn't know if that was like the most Thursday forecast in terms of their their package there or is there even a more like an S5? That's even more Draconian in terms of the economic impact. Yeah at the time right up until pretty much March 28th is when we were continuing to monitor the Moody's forecast. That was the most conservative forecasts. So we will continue to monitor that going into into cute too, but that was the most conservative at the time.

Got it. Thanks Mark. You might just hit a highlight again that the additional sort of qualitative overlay on top of the conservative movies forecast. Yeah, I I I think it's important to note in terms of how the model is is working those forecasts options specific data points over economic factors. We've caught stated many of those factors do loss assumptions at a portfolio level and just to give some color as to the q1 number by implementing that Moody's s405 forecast that essentially drove the quantitative number of the model up by about eight or nine million dollars. So the $25 billion dollar provision in level that we did recognize in the first quarter. A lot of that was rarely driven off of qualitative factors some of the analyses I talked about in terms of looking at the high-risk Industries looking at the largest exposures wage.

We felt it prudent to to understand inherent loss expectations as best we can gauge them at this point that that would not necessarily have been captured and the quantitative piece of the model. So what will be interesting going forward is as losses stock to materialize and net charge-offs start to materialize. It could provide a component where the model from a quantitative aspect will capture that and we would need to gauge how much of that qualitative away could be relieved to offset. So so just want to provide that bit of color in terms of how much of an impact that that Moody's forecasts had versus how much of a month sort of qualitative analysis drove that provision level.

I appreciate that. That's great color. Thank you.

You're welcome.

The next question comes from Lori hunsaker from compass point, please. Go ahead.

Thanks. Good morning. I just wondered if we could go back to the deferral details because I think I missed some of that. I heard 390 on mortgage 284 and home equity loan know. What what was the number for commercial?

Hi Lori, so in terms of number of units of deferral and just a reminder, this is what's been requested. We're still working through those requests. So this has not been reflected in the March 31st numbers yet, but these are the the data we provided is what's been requested by our customers. So just referring to appendix F in the earnings release a commercial and Industrial requests. We're at 306 commercial real estate for 72 in construction ten small business to 74. So I'm kind of in those four categories that if I'm doing the rough math in my head. It's about a thousand requests through that commercial in small business Channel and then there's about seven hundred plus page on the consumer side.

May. Between residential home equity and other consumer. Oh great. I'm so sorry. There. It is. Appendix problem rate also and I really appreciate all the details that you provided here on the commercial really really helpful. I'm just a high-level. I want to check a couple of things oil and gas you guys are zero. Is that correct? That's right.

Okay, and then as I'm looking at your at your C and I book.

You know roughly a billion for how much of that is leveraged Lending.

Oh gosh, baby.

I'm going to guess maybe a hundred a hundred and half maybe at the most and most of that is secured by business assets. But because of the purpose rules even if the collateral we put it in as leveraged loans.

Okay, okay that puzzle and then most of my family under that's been running around five six hundred million. Just wondered if you had an absolute balance. And then what the LTV was on that?

I think we'd have to give I don't think we ran it for today. And I think we do exactly it's fairly. I'm going to guess it's probably somewhere in the 60% range.

Okay, okay. Okay, that's helpful. And then last question if you could just talk more generally obviously, I'm very very tough time. So you're sitting here at two times book. You have one of these strongest currencies and in all of the north east in terms of of your stock currency, and obviously m&a is just fallen off, but, you know, probably there there might be some banks that want to raise their hand. Can you just talk a little bit more broadly about how you're thinking about m&a is as we go through the cycle life thinking about trying to understand a balance sheet of a bank that you don't know through the cycle or just how you're looking at it. Thanks.

Laurie would not be a complete conference call with out.

Question. So thank you, you know quite quite frankly. I have not really thought a lot about m&a the last six to eight weeks. We've been so heads down with all the the programs have just talked about the the little bit we have thought about and talked about it. I mean it is I think it'd be worth of all we're always interested in conversations. You know, what I've said in the past calls that it's very opportunistic were and in banks are sold not bought but thought I would imagine that if sort of at this. If you need a little bit of time for the the balance sheet implications and the private book implications of sort itself off I would be reluctant to you know, somebody said sort of a were to sort of approaches I'd be reluctant to to you know engage in the usual robust wage.

That we would have in the past. I think probably everybody else. Anybody who is contemplating could of this thought. Probably is it a busy with keeping your customers satisfied and doing all the things that we're doing but I also my observation would be that after we get through. This should have said that sort of happened yesterday when we needed a a bit of a recession to clear out some of the underbrush and some of them when I thought were aggressive lending practices now that we're having a and we don't know what what would bring on a recession now we know something right out of left field, but I suspect that as we sort of work through this over the next couple of quarters, the Integrity of home loan books around the region will become more apparent and and that'll certainly be useful and thinking about the valuations so lower. That's that's what yep

This is off top of my head. But I that's the the best Jerry or Market everything to add to that.

I don't Chris like that's the spot on I think you summed it up Chris. Thank you. Thank you.

The next question comes from calling Gilbert from KBW, please. Go ahead.

Good morning, everyone. This is I appreciate the call. You guys are giving on the on the loan details side super helpful. Just a couple questions their first in the one point two billion or so that you're getting in terms of loan modification requests. Do you know what percent of those might be also then categorized in your sort of 1.6 billion of exposed in December?

Yeah, this is Jerry. So the just to give you kind of a breakdown on the majority first of all into the hotel. So they saw the follow just as you might think our services is being second.

It's

Then it sort of falls into the mix bags which combination of Health cloths some some golf courses. They can open some like a hockey rinks. We have some bowling alleys so it's a real kind of cats and dogs. Once you get Beyond hotels and restaurants. Do you have a few with daycare? So it's it's really almost all those that have been forced to shut their business but the hotels and the restaurant industry probably more than I'm guessing probably 45% of the total within the rest all being no more than 5 to 10% Does that answer your question? Okay. Yes. That's great. Thank you. And then just curious of the of the hotel exposure and it might align just where your general exposure is and you sort of touched on this in the initial comments, but how that would wear these socialize relative to you know, where you guys did on Martha's Vineyard and Nantucket or are much of those hotels or maybe what percent of the hotel.

Modification request should come off of the island. That's a good question interestingly enough. Probably this half of them had not made a request for modification on the island. So I'm not sure what to read that. Maybe that will follow the certainly the cape. We've had those requests and then in a traditional footprint. So just on the hotel business we suck. It's really intrigued about about 54% of it. I would say is in vacation areas, you know the cape Islands New Hampshire Etc. And the balance is in more of a Suburban locations around Boston in the Gateway cities one in Providence. And so the request from them, I think at this point, I'll be off a little bit. I think we've had requests around 75% of the portfolio so far on hotels, so there was another 25% as yet haven't asked.

Okay. Okay. That's great. That's really helpful. And then maybe this is a question for you mark That's so interesting that the detail you offered in terms of the the quantitative Reserve their build relative to the qualitative one. That's interesting. Do you also perhaps have so the $92 million or so that you guys have now with on reserves what percentage that would be if you looked at kind of under D fast severely stressed lost scenarios what that relationship would be. Yeah, we haven't matched it up to a specific device out an area to be honest calling. I I think a lot of this was really leveraging just the the close relationship in in lender expertise that we have throughout the week at work trying to get a handle over the the current situation a lot of what Jerry has been talking about which Industries primarily being affected by wage.

Shut down policies and really just trying to apply some level of probability of default lost given default assumptions on top of that. So we haven't run it through a formal scenario. Say we we booked out macroeconomic level assumptions and a couple scenarios using National Data, but we really wanted a compliment that as best as best. We could our with our strong knowledge of our customer base and the industries that we know are are often affected by the impact and that was rarely what we thought was pregnant to to come up with that qualitative overlay.

Okay. Okay, that's help.

Cool, and then just in terms of the name Mark while we're here. Um, so indicated that the accretion would likely be lower in the in the second quarter or comparable to the first month, but lower than we were prior guide. Is that or the the Slowdown of of payoffs? Do you think it's more of a of a Covetous you or is there some other Dynamic going on with the Blue Hills look? Yeah. No, I'd say I merrily just Jerry I think aptly coined it the the the comer of the economy and just the slow down and overall activity in in the portfolio that we do not continue to attrite just because of normal pay down is on the residential side. And if you recall that is the portfolio in terms of the Blue Hills acquisition in particular where we actually had a premium valuation on a lot of that book versus a discount. So as that book pays down it does potentially create an actual negative impact to the margin off.

And and previous quarters. We've seen the pace of commercial paid out and significantly over take that residential impact and that's been really the driving factor of of the elevated accretion income wage. I think from a conservative perspective. I would expect to see similar payoff activity of what we saw in q1. And again, it can just be you know, as we've owned now removed almost a full year from the acquisition. There are less individual credits with with sizable mocks that can move the accretion income. So I think we'll start to see somewhat of a month normalized level may have still one off here in the air that that could create a little bit of volatility from a quarter-over-quarter basis, but I think the combination of wage residential book reduction in likely some slow down and and full payoffs on the commercial side. I think we'll landed in somewhere probably in between where we were four Q. Waja.

And in the previous guidance, we had been given.

Okay. Okay, great. And then just on the I just want to clarify so the deposit cost number that you had referenced. I think you said in like the 20 basis-point Ranger. So at the end of the March quarter, does that include that hundred million of Hedges at the end of the second quarter? We would Target a high 20 basis-point. So just to confirm the Hedge was actually on on the bombings. So the 1 million dollars and maybe this was where there was static the 1 million one hundred million dollar hedge is on our fhlb offerings where we effectively lock in pricing there. The deposit has no hedging associated with it. We primarily Target that that high 20/20 basis point range based on leveraging at deposit rate, you know in previous years understanding the mix of deposits. We currently have on

In the books, we we do have a bit more of a time deposit mix than we have in previous years. So based on what?

What we think we can continue to do on on rate cuts across the board on deposits. We do feel comfortable we can get down into that range by the end of the quarter but it will take a little bit of time throughout Q2. So the average will likely land higher than that high twenties. Okay? Okay good and then just lastly on the seaside town, you know, you had indicated that that applications within the resi mortgage book have slowed. Obviously the movement here are you know this quarter on the on the mortgage servicing side, but just can you frame out a little bit louder? I mean in terms of where you sort of see kind of a normalized level of mortgage Revenue shaking out. I mean that's always kind of it's kind of been a key business line for you all sort of sort of how you would probably see that

You know the activity kind of shaping up to the rest of the year.

Sure, you know I'll let Rob provide a little bit of guidance there and I'll add on if if needed after Rob if that's okay. Are you calling about the pipeline is still quite significant calling as we ended the third quarter application volume slow towards the end of the first quarter and into the second quarter here and as Mark mentioned in his comments, we did shift or begin to shift the pipeline to a best efforts delivery to help lock and gains and not be subject to the volatility of the secondary Market in the fourth quarter of last year. Our average gain on sale including the Hedge was north of 102 this quarter, you know, we would just slightly under 101. So significant difference on a net basis as we move to a best efforts wage.

Delivery and we'd expect to be somewhere between 1 and 1 and 3/4 and probably one or two in terms of projecting what that means for Mortgage Banking income, you know, it's obviously somewhere between this quarter and the fourth quarter given the significant pipeline. We still have I don't know that it's in the middle of that range, but it should be nicely improved certainly from this quarter.

Okay, I think just add to that. Probably we talked about the large hit we took on the mortgage servicing asset and with rates that have had come back up from from that low point during the course are and ideally stabilize over the second quarter. We would expect to see the mortgage servicing asset value stabilize as well. So that should be again wage move towards a more consistent and stable environment. We would not expect to see that same impact on the mortgage servicing asset. And you said that was nine million this quarter is that right? The data was sucked in in terms of direct people, right? So we had actually a gain because we were selling more servicing retained in the fourth quarter and that that as well as the actual impairment of the asset charge that we had to take this quarter that created a quarter-over-quarter change of about 900000.

Okay, okay.

Okay, very good. I will leave it there. Thanks everybody.

Thank you.

Next question is a follow-up from David Bishop from d a Davidson, please go ahead.

Yeah, thanks for taking the question. Yeah, just a quick follow-up was curious. I think Marquis you noted in the the Preamble that you know, I didn't think this word would probably be coming up this month or just given the pandemic here but uh actually sounds like you guys had a a pretty decent commercial loan pipeline just curious in terms of of where that's coming from and you know, is that month, you know symptomatic of you gaining some market share for maybe some dislocation from people dissatisfied with some of the the bigger guys and Market. They're just curious what sort of driving that that played Wonder Woman

Yeah, I was just going to give a very high level and and let you provide some color on the details, but I will let you lead off great. Thanks. So as of 21st, we had an approved pipeline of about 220 million dollars and we went back out and to check everything over a million and half just to see take the Pulse on it. And it at that point. How did the end of it was absolutely on track fifty or so was still going to happen but be delayed for obvious reasons appraisal problems, you know, getting inspections done things like that and then interestingly only ten million has been withdrawn which I was quite surprised. Very small number.

But I think that kind of tells me people are viewing. This is is somewhat of you know, a temporary know maybe they're going to be wrong but it said so little to be withdrawn but then go to the other part of your question. We have had new request even the last few weeks had a loan committee and what we're finding is not surprisingly. There's a lot of banks. Looking in new business at all. They basically for whatever but maybe they focused on p p p or something else. I don't know. I'm so it's given us really some nice opportunities to Better Price and structure new deals. So we'll do that last night. I don't know but the the moment it seems that the the ties of maybe in our favor just a bit. Is that help?

Thank you. I appreciate I appreciate that feedback. You're welcome.

The next question comes from Bernard horn from Polaris Capital markets, please. Go ahead.

Good morning. I just want to make sure you understand appendix G correctly on the PPP program. So I see the twenty million of processing fee income. Does that include any potential interest income as well? And are you apparently there's a funding mechanism associated with this program. Are you also taking advantage of that? And if so what I have on the estimated income you present the appendix? Yeah, good good question that the twenty million dollar does not incorporate the actual interest on the loan. That is the processing fee off depending on the size of the loan. So so that does not incorporate additional interest that we would earn should the loans stay on our books for a certain period of time and from a funding perspective. We are we're continuing to evaluate all of our options. We are preparing and and going through the the paperwork to to take

essentially got

Qualified for the federal liquidity program directly associated with however we do continue to believe there's um just as equal in Georgia. Um, I'll turn it over funding scenarios that we are already utilizing we continue to have significant availability just throughout our typical fhlb borrowing capacity. So we have not essentially committed to using any sort of Avenue directly for funding PPP loans. We have very good on balance sheet liquidity at this point that we can absorb a decent amount of this first round and should we need additional financing will will make the decision depending on all of our Avenues. So we are we are doing the paperwork and could access that that Federal line that's become available, but we'll we'll make that decision. Um, depending on what we think would be the best answer for for the company.

And just out of curiosity. What what are you looking at? As far as a rate on that Federal funding source, is it much better than your existing borrowers? It's a little bit better. But I think either through our swap Market or just through the fhlb Barnes on a short-term basis to be honest that the differential is not all that compelling. So that's why you know, we obviously want to have it in in the toolkit app. We want to access that but but the cost I believe is 35 basis points in in is not all that much different than what we think we may be able to get elsewhere off.

Okay, and then the I know it's a bit early days, but to the degree that some clients have not been able to obtain funding from this and you know, there's another truck coming through are you able to I mean, obviously the terms of this are quite attractive but if a client does not participate in it, are you transferring that into our other potential business prospects?

Yeah, in terms of if we're unsuccessful and being able to secure the guarantee.

Yeah, I mean, yeah, I mean we use an option that actually not even pay the money back so that that's kind of hard to make a loan on those terms. But but if you have a client that doesn't qualify or dead you can't get it because the funding ran out. Could you help them otherwise, and is that potentially generating more business longer-term for you?

Yeah, I think it'll still to be determined in terms of that aspect of how much of the of the customer inquiry that we would not be able to successfully get into the program. I think we would have to just you know, we we do know these relationships. We know these customers and we would continue to look for as many ways as we can I help that customer. We are working very very extensively over the last week. We've dedicated additional resources and continue to prioritize the customers that we were not able to get successful guarantees through the first round. And so we we feel pretty good about when the the round two opens up that we can work the existing line and and and try you know, really just get them into the program as fast as we can. The the concern is every other bank that is participated in this program is likely doing the same.

and we do know that there is a lot of

A lot of pipeline that was not able to get successfully guaranteed through the first wave so it'll be it'll be very interesting to see how how quickly the additional funds off get depleted because many banks like us geared up the pipeline and already to go for when those doors open. So we we'd love to get the the remaining existing demand in there. If for some reason that the clock runs out and we and we not able to do all of it. We would continue to work with those customers to help them as best we can and that may be other programs that we know have become available continuing to to look at where those may be helpful. But but these are all these are all existing relationships that that we can be very much for and we'll and we'll look to help as best we can okay. Thanks. And then the other sorry back to the first part of my question if the interest income is not included in your $20 fee and wages.

what would we assume for an interest rate on that $700 million and if

you know and and the funding cost so if it's 35 bucks, let's say a funny cost. Yeah, maybe we could try to understand the net interest margin on that rate is a stipulated 1% so that the program rate on this on these loans is off 1% So it'll be a a fairly immaterial impact. I think in the in the queue to which is why we provided the guidance over the the fee piece of it. I think the rates may not of the funding costs will likely not make too much of an impact in terms of overall March. It'll dilute the margin to a degree be just because of the 1% rate. Okay. Thanks. That's that clears very much. You're welcome.

There are no more questions in the queue this concludes. Our question-and-answer session would like to turn the conference back over to Chris Gleason for any closing remarks. Great. Thank you very much, Jason, and thank you everybody for joining us on this morning, and we wish you the very best of the next three months and we hope when we talked to you again, and July. Things will be much improved. Stay safe everybody. Goodbye.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.

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