Q1 2020 Earnings Call
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Good day and welcome to the West Banco first quarter 2020 earnings Conference call. All participants will be in listen only mode. So do you need assistance. Please ignore conference specialist by pressing the star T. followed by zero. After today's presentation, there will be an opportunity to ask questions to ask questions. You May Press Star then one or your Touchtone phone.
To withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to John I know. Please go ahead Sir.
Thank you Chuck Good morning, welcome to Wesbanco Inc.'s first quarter 2020 earnings conference call.
During the call today are Todd Clossin, President and Chief Executive Officer, and Bob Young Senior Executive Vice President and Chief Financial Officer.
Today's call an archive of which will be available on our website for one year contains forward looking information.
[laughter] cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings related materials issued yesterday afternoon, as well as our other SEC filings and investor materials.
These materials are available on the Investor Relations section of our website Wesbanco dotcom.
All statements speak only as of April 28, 2020 at West Bank of undertakes no obligation to update them.
I would now you're kind of call over to Todd Todd. Please go ahead.
Thank you John and good morning, everyone Hope everyone is staying safe and these unprecedented times.
On today's call will briefly review our results for the first quarter of 2020.
And more importantly provide an update on our efforts during the current covert 19 crisis.
He takeaways from the call today are we successfully converted old line Bancshares in February and achieved the majority of our anticipated 2020 cost savings by the beginning of April.
We are focused on our current operating environment to ensure a stable and sound company for our shareholders.
While eating our customers in our communities in this difficult time.
We remain well capitalized financial institution with solid liquidity and strong credit quality.
On February 21st we completed the signage and systems conversion of old mind Bank, and our new mid Atlantic market and everything went as planned.
To date, we've experienced good customer and employee retention.
Our mid Atlantic employees remain extremely excited about the opportunities. This merger provides them as well as the new products and services available for their customers.
In fact, we realized strong sequential quarter annualized loan growth of nearly 6%.
We remain positive about the long term opportunities in our newest market.
Well everyone is experiencing unusual times, we are focused on supporting our customers and our communities in many ways and we're fortunate to be in a strong position to provide support to others. During again this unprecedented time.
As you can see in the presentation. We provided last night, we have put our customers are communities and our employees first.
In early March we convened a cross functional team that was tasked with ensuring everyone safety. This team took immediate and critical actions that have helped to protect our employees in our customers.
In addition, we have pledged more than half a million dollars to support various nonprofit agencies throughout our footprint that were impacted by the Corona virus. So they can continue to provide much needed services to our communities.
I am proud to say that the west Banco team has worked tirelessly with more than 2600 consumer and commercial loans to help them meet support the needs of their families and businesses by making modification and deferring payments on $1.7 billion of loans.
Furthermore, dozens of our employees worked around the clock getting more than 2300 loans totaling approximately $570 million approved and funded.
From a small business administrations paycheck protection program net numbers up over 700 million as of this morning.
Our thoughts and prayers are with the essential service providers across all industries as well as with many individuals and families suffering from this pandemic. We're all in this together.
For 150 years, we have been a source of stability strengthened trust for our customers communities employees and shareholders.
Well no one anticipated the current operating environment, we believe we positioned the company well as we had proactively taken risk out of our loan portfolio. During the last few years and developed appropriate long term strategies to allow us to succeed regardless of the operating environment.
We believe these proactive decisions will help to protect our balance sheet. During this current crisis, while allowing us to simultaneously worked with our customers in our communities to ensure that they also successfully navigate these extraordinary times.
During the first quarter of 2020, we reported strong pretax pre provision earnings of $62 million, an increase of 13% year over year, when excluding merger related costs in our key credit quality metrics remained at low levels and favorable to peer bank averages.
In addition, our capital levels are strong and significantly above both regulatory requirements and well capitalized levels.
While we monitor daily deposit flows we've not experienced any liquidity issues. In fact, we report we reported sequential quarter annualized deposit growth of 1.4%.
Despite allowing the run off of certain higher costs certificates of deposit.
We believe our strong capital levels sound credit and our sound risk culture combined with our community first focus will help us our customers and our communities to navigate these extraordinary times.
I'd now like turn the call over to Bob Young our CFO for an update on our first quarter's financial results Bob.
Thanks, Todd and good morning to all of you during the first quarter, we experienced continued declining rate environment with costs in the federal reserve short term interest rate now totaling 225 basis points since last July.
A relatively flat yield curve the continuation of a limitation on interchange fees.
For a large banks like us about 10 billion in total assets the impact related to our adoption of the new current expected credit losses accounting standard effective January onest and the beginning of the cobot 19 pandemic.
For the first three months ended March 31, we reported GAAP net income of 23.4 million and earnings per diluted share of 35 cents as compared to 40.3 million and 74 cents respectively in the prior year period.
Excluding after tax merger related expenses from both periods.
Net income for the first quarter was 27 and a half million with earnings per diluted share of 41 cents.
The year over year decreases in both net income and earnings per diluted share were primarily due to the adoption of seasonal and its impact on the provision for credit losses in the current environment as well as the impact from the limitation on interchange fees.
In order to provide better comparability to prior periods and to demonstrate the strength of our first quarter operations. It is important to review pretax pre provision results.
For the first quarter of 2020, we reported 62 million and pretax pre provision income excluding merger related costs, which increased 13.1% and 9.2% respectively compared to the first and fourth quarters up 2019.
In addition, pretax pre provision return on average assets calculated on a tax equivalent basis was 1.61% in the first quarter as compared to 1.65% for the fourth quarter of 2019.
While financial results for old line Bancshares have been included in our results. Since it's November 20 Soc in 2019 merger date cost savings have not yet been fully reflected.
Our earnings.
Well no unexpected.
Excuse me.
Well no one expected the current operating environment highlighted by the quickly developing pandemic and its severe immediate economic impact we believe our balance sheet is well positioned for the near term operating environment.
During the last several years, we have proactively address our various lending portfolios in order to more properly balanced risks and rewards.
Let me review just a few examples of such portfolio positioning.
In our commercial real estate portfolio, we proactively reduced our multifamily lending and several geographies.
And hotel exposures in the Marcellus and Utica shale region of our footprint.
In our commercial and industrial portfolio, we had right sized several customer relationships that had outsized exposures relative to our comfort level.
Further we have not seen any material change in line utilization, which has remained in the low 40% range as most of our C and I customers are small to middle market size companies and their lines are mostly for working capital purposes, typically collateral based and have limitations on how that.
Can be used.
During the first quarter, we did not see any significant deposit run off as we reported net deposit inflows of 39.3 million as compared to the fourth quarter of 2019, which was driven by strong inflows across demand deposits and savings accounts.
Furthermore, when excluding the strategy driven continued run off of certain higher priced certificates of deposit quarter over quarter deposit growth would have been 7% annualized.
We also proactively increased our liquidity in March as you can see on the balance sheet in our cash and do from banks line.
To support our customers as necessary.
From both additional federal home loan bank borrowings as well as the sale of certain agency mortgage backed securities from our investment portfolio.
We also have significant additional liquidity resources from the federal home loan Bank and Federal reserve facilities.
As well as the expected liquidity from cash flows in our investment portfolio.
And our loan to deposit ratio remains in the comfortable mid 90% range.
In the supplemental presentation, we filed last evening, we provided some details on certain commercial loan portfolios.
Hotels and restaurants.
Sorry, hotels, retail and restaurants and energy.
As you can see on that page, it's page seven in the.
Separate filing.
As you can see across each of these categories. There as good diversification granularity and strong preprint pandemic credit quality.
We have minimal exposure to the energy industry with most loans under 1 million.
The loans in our hotel portfolio, our two well known season to flag and hotel operators across our footprint.
With a pre pandemic average loan to value of 58% and debt service coverage ratio of 1.5 times.
Our retail loan portfolio, which conservatively includes approximately 250 million of mixed use properties that have some element of retail along with commercial or multifamily tenants.
Also has very strong credit quality and is fairly evenly distributed across various sub categories.
Further within our restaurant portfolio. The average commitment is less than 500000, and we do not typically land to large restaurant franchisee companies.
Consistent with our strong credit culture. During the last 12 months' we have made several enhancements to our credit review processes that put us in an even better position today.
These internally driven enhancements were the result of prudent portfolio management practices as opposed to being driven by any credit deterioration or the current operating environment.
During the first quarter, we completed a larger credit internal loan classification methodology project, which began last year two more heavily weighed quantitative measures in our loan risk rating process in particular debt service coverage. We also implemented a more robust annual review process for commercial.
Loan relationships over 1 million that we'll continue to ensure our portfolio is monitored appropriately.
Turning now briefly to our credit quality measures key metrics, such as nonperforming assets past due loans criticized and classified loans and net loan charge offs as percentages of total portfolio loans remained at low levels and favorable to peer bank averages those with total assets.
Between 10 million and 25 billion.
Now moving to net interest income in the margin as we are seeing across our industry net interest margins are being negatively impacted by the cumulative 225 basis points of cuts to the federal reserve boards targeted federal funds rate since July of 19, as well as the relatively flat yield curve.
Reflecting the significantly lower interest rate environment, we aggressively reduced our deposit rates during the second half of March which combined with our efforts to reduce certain higher cost Cds helped to lower deposit funding costs to 55 basis points for the first quarter, which was 10 basis points lower year over year and eight basis points.
From the fourth quarter.
For the quarter ended March 31, noninterest income increased 0.8% from the prior year to $28 million driven by organic growth and the old line acquisition.
Which were pot, which were partially offset by approximately 2.7 million from the Durbin Amendment to the Dodd Frank Act mandatory limitation on interchange fees.
Net securities gains of 1.5 million increased 0.8 million year over year, primarily due to the sale of approximately $218 million of securities in late March at a $2.2 million net gain to take advantage of market conditions and create additional balance sheet liquidity.
These gains were partially offset by a negative 1.3 million market adjustment in the deferred compensation plan.
I would point out this produces a similar offsetting reduction.
On the employee benefits expense line.
Turning to operating expenses, we were pleased that noninterest expense for the first quarter of 2020 came in approximately $2 million lower than our earlier expectations due to a diligent focus across the company on expense management and some initial old line bank related cost savings.
Excluding merger related expenses total noninterest expense increased 14.8 million or 20.8% to 86.2 million compare to the prior year period again, primarily reflecting the old line acquisition.
As I just mentioned employee benefits were positively impacted by the 1.3 million dollar reduction on in the deferred compensation plan obligations due to market declines.
And we experienced lower pension expense.
Again, I would note that the deferred compensation decreased represents the offsetting entry to the market adjustment recorded in net securities gains.
Turning to capital for 150 years, the banks management as a focused on being a strong and sound financial institution for our shareholders.
While our capital levels remained strong during the great recession, a decade, a decade or more argo. They are even stronger now as we have regularly reported capital ratios significantly above both regulatory requirements and well capitalized levels and we have grown our tangible equity levels.
Regarding our capital management strategy, we remain focused on appropriate capital allocation to provide financial flexibility, while continuing to enhance shareholder value.
Further while we have strong capital levels, our actions in the near term will be made with an eye towards capital preservation.
An update on C. so.
On January the first we adopted the Cecil accounting standard despite the cares act ability to delay its implementation and that resulted in an initial adjustment to retained earnings of 26.6 million after tax.
The corresponding increase in the allowance for credit losses specific to loans was 38.4 million, representing an allowance to total loans coverage ratio of 88 basis points or 90.8 million upon adoption.
Compared to 0.51% or 52.4 million at December 30, Onest 2019 under the incurred method.
This represented a 73% increase upon adoption.
At March 31, 2020, the allowance was 114.3 million or 1.10% of total loans. A further 26% increase which also includes $5.8 million of purchased credit deteriorated loans from old line.
An additional allowance for loan commitments totaled 5.6 million at quarter end up from 0.9 million at year end and 3.8 million at Cecil's adoption.
This is accounted for and other liabilities excluded from the allowance for credit losses and related coverage ratio, our fair market value adjustments, mostly representing initial credit marks were prior acquisitions, including old line, representing an additional 49 basis points of total loans.
These fair market value adjustments will mostly be recorded in the future through net interest income, but they do serve to reduce a loans cost basis in case of future charge off.
It is also worth noting that we completed a sale of certain commercial loans from old line in March consistent with our practice in prior acquisitions the loss attributable to such sales accounted for through goodwill.
However, if those loans had remained in the loan portfolio. They would have added approximately 19 basis points to the reserve at quarter end.
The increase in the allowance and related provision for credit losses was related to the significant deterioration and macroeconomic forecast in late March primarily driven by the negative forecasted economic impacts of cobot 19.
Our forecast obtained from Moody's analytics was based on their March 27, Cobot 19 baseline as adjusted Judgmentally for consumer and business assistance provided by the extraordinary government and federal reserve stimulus and loan programs.
With the unprecedented environment in which we are currently operating which seems change almost daily it is difficult to provide meaningful expectations for the rest of the year.
That said I would now like to provide some limited thoughts on our current outlook for 2020.
As a slightly asset sensitive bank, we are subject to factor is expected to affect industry wide net interest margins in the near term, including a relatively flat spread between the three month and 10 year Treasury yields and a continued overall lower long term rate environment.
Our GAAP net interest margin for 2020 may decrease by two or three basis points per quarter due to lower purchase accounting accretion from the 22 basis points recorded during the first quarter.
In addition, reflecting the 150 basis points in total fed rate cuts implemented during March.
Partially offset by the aggressive pricing actions, we took on our deposit cost we anticipated our core net interest margin, excluding purchase accounting accretion to declined from 3.32% during the first quarter by approximately 20 to 25 basis points over the course of the remainder of the year.
I would add that this expectation does not include the impact from the ESB days PPP loan program.
We should produce a slightly positive benefit on the net interest margin primarily over the next couple of quarters.
We will continue to maintain our focus on diligent expense management and delivering positive operating leverage.
While we still anticipate typical midyear merit increases for our hard working staff, we expect to delay the implementation of up to $2 million and planned 2020 brand awareness and other marketing expenses into 2021.
Furthermore, FDIC insurance expense will increase from 2019 due to a higher assessment rate associated with our larger asset size as well as last years $3.1 million realized assessment credit from the FDIC, mostly in the back half the year.
As a reminder of the anniversary of the impact from the Durbin Amendment on our electronic banking fees will occur during the third quarter of 2020.
Diesel calculated provisions for credit losses will depend upon changes in the macroeconomic forecast as well as various credit quality metrics and other portfolio changes and I would note the forecast as of mid April has changed to include expectations for higher unemployment for the remainder of the year.
Lastly, we currently anticipate our effective full year tax rate to be approximately 16% to 16.5% subject to changes in certain taxable income strategies and that rate now includes the state of Maryland in our total state income tax provision.
We're now ready to take your questions. Operator would you. Please review the instructions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys.
So if you all your question. Please press Star then to at this time, we'll pause momentarily to assemble roster.
And our first question will come from Russell Gunther of D.A. Davidson. Please go ahead.
Hey, good morning, guys.
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I wanted to follow up on the commercial loan sale during the quarter from old line. If theres any additional color you could provide on types of loans and whether we should expect.
Continued.
Loan sales in the future.
The answer no each each merger that we've done since I've been here in the last five or six years crowd before that as well we've looked at those loans and acquired portfolio that we just didnt think fit the profile that we wanted and we did the same thing here with old line. Some of these were performing loans, just we looked at constant.
Ration levels and things like that.
That we prefer to have not had a couple of those so.
We loop that altogether and did that sale at the ended the quarter.
But as you guys know line is very very clean bank very solid credit quality. So there wasn't much there to sell but we did lead to take advantage that the ended the quarter don't anticipate anymore loan sales from the old line bank portfolio with at this time and its again very consistent that we've done in our prior mergers.
Got it okay. Thanks for that Todd and then.
Following up on on some of the expense conversation Bob Thanks for the the comments there just curious if you could help us think about a two Q run rate.
Considering some of the dynamics in the first quarter as well as.
Any potential offsets, where we might expect to see from pressure on fee income in the second quarter.
Bob as you go head to handle that.
Sure Todd.
So if you add back the deferred comp loss of 1 million three which is an employee benefits expense side come up with around $87.5 million net of merger related expenses as the core run rate in the first quarter.
That I believe is a million to to less than what we had guided to.
Here back in January and.
The lower run rate is created from lower marketing expense and control of discretionary expenses.
Obviously things like TNT and some general administration.
Areas would have seen cobot related reductions.
And there are other categories, where we applied some discretionary.
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Judgment or cost savings opportunities as well aspect those to continue as long as we continue to have restrictions.
On travel and meetings and conferences attendance things like that and the aforementioned marketing adjustment that we talked about.
During the scripted portion of the call. So that suggests to me that.
Good day, count wise, a little bit more in the second quarter right around that 87 half 88 million.
In the back half the year, we typically.
Have our merit expense merit increases in the middle part of the year, but should also be seeing some cost savings from old line kick in to offset that to some degree and.
And so.
That does in my mind suggest a lower run rate than what we had.
Discussed back on the January call overall.
Okay. That's very helpful. Thank you and then I had a bit of Ticky tacky question in terms of whether you could quantify what the fair value marks were that.
We mentioned in the release within mortgage banking and I believe swaps.
Go ahead Bob.
Yes, Russell so we really had a very good quarter in mortgage banking before.
Quarter end.
GBA hedges and we will we hedge our pipeline like many banks do.
And our.
Mortgage commitments also saw loss so the combined amount of that.
Loss recognized at the end of the quarter or some of this is the lower value of mortgage servicing rights and we do sell servicing released.
Net loss was $2.8 million against fees of 4.1 million. So a very nice increase in mortgage banking income but.
Because the market volatility that Rick that.
Unrealized loss at the end of the quarter.
We do expect in the second quarter mortgage banking income to be impacted.
By the lower realized sales into the secondary market that but in effect, we pull that forward.
Here at the end of first quarter in accordingly in accordance with accounting guidance.
A similar 2.8 million on the swaps book, we have a notional balance about 512 million thats up basically double over last year at this time and again the market volatility and lower interest rates on the front end of the curve impacted the existing swaps book.
It was almost offset entirely by fees of 2.6 million.
And that those are accounted for in other banking so.
Swap new swap fees 2.6, mark to market 2.8 negative.
Those amounts.
Compared to.
Losses in the first quarter of last year of 300000 per line.
In mortgage banking and in other banking, so a pretty significant swing, but we were pleased to see.
How much we realized in mortgage banking income as.
The pipeline increased substantially in March a lot of that from refinance and then.
As you can imagine our customers are interested in locking in longer term rates on the commercial side and we saw that as well hopefully that's that's helpful. That's part of the reason Russell why we ended up.
According taking advantage of market opportunities in the mortgage backed side to offset a portion of that with the gain I mentioned to 2.2 million in selling over $200 million of security. So one should look at that as somewhat of an offset.
Absolutely not I. Thank you for that Bob and then guys sorry to jump around but I just wanted to circle back to the loan growth result, so.
As a strong result in the first quarter, particularly adjusting for those commercial loan sales I'd imagine visibility is a bit challenging on core organic growth for the rest of the year, but any general thoughts you could share there in terms of expectations.
Now I'll answer that when it's really hard to tell obviously, if you take the PPP.
Loans, the ramp up and ramped down that should occur with that set that aside.
For a little bit.
We're still seeing some activity we're still seeing.
Loans being requested from customers unrelated to to any of the to covert 19 activity. So there's still some some activities going on out there, but I would tend to think.
Depressed from what you would have expected otherwise.
We didnt experienced the same kind of line usage drawdowns and maybe the larger larger national Trillionaire writ large regional banks did because that's just not our type C and I customers Bob mentioned during his comments, so thats still holding steady.
Around 40% to 43% actually dipped under 40% here in the last week or so I think as some of the PPP money started to started to show up.
I would still say longer term, we think low to mid single digits, our where we think we're going to we're going to be.
It's nice to see some of the growth in the.
Maryland markets are really good leadership team over there that never missed a beat.
Through the whole merger and conversion process and everything else, so hats off to to to Jim Cornelissen Mark some money in the lending teams over there for what the for what they did.
So the next 12 months, just it's really hard really hard to estimate what's going to happen, but longer term. We would we still think that the low to mid single digits is where we.
Where we ought to be and I'm really glad we took some of the steps that we took over the last couple of years you guys member, we really shrunk down our indirect portfolio by several hundred million dollars over a couple of your time period Deemphasized hotels in shale related areas.
And also deemphasized.
Brought our percentage of capital on multifamily down significantly over the last couple of years and it took some loan growth away, but we didnt anticipate this kind of a have a downturn happening so quickly but.
I'm glad we made those steps and took those steps when we when we did but that's kind of the thoughts on loan growth.
I appreciate that ties guys. Thanks for taking my questions and for all the granularity in the supplemental deck I'll hop out for now.
Our next question will come from Steve Moss with B. Riley FBR. Please go ahead.
Good morning wouldn't see.
Oh, just wanted to start with the seasonal reserve here using the late March.
Economic forecasts, just wondering if you'd use the April forecast what that how much higher the provision would have been just kind of get color for expectations going forward.
Bob lunch, we handle Cecil questions.
Sure.
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It's hard to say, Steve because we would have layered in some some adjustments related to the unusual government assistance that I mentioned.
Additional folks that are eligible for unemployment, we think that Knox appointed two off the real unemployment number.
And actually get beyond.
10% the models really havent been tested for any of us.
Since the highest.
Amount of unemployment that's been experienced in the last 20 or 30 years was during the great recession at just under 10%.
So as you know the April update from Moodys anticipated a.
12.5% unemployment rate here in the second quarter, and then coming down.
Throughout the rest of the year.
We have not run that at this point in time.
We had planned on staying on incurred loss and then.
Towards the ended the quarter.
Both from a peer perspective as well as.
The way that the FCC was interpreting the cares act, we pivoted back to going to incurred loss and quickly had to catch up with with where unemployment was at that point in time.
So obviously, if you just plug that and it would create a higher number.
I think it's too soon to say whether that.
Unemployment rate would still be there at the end of the second quarter.
I think it's fair to just say in mid April a 12.5% unemployment rate is what the forecast would be at the end of June so.
I.
Don't have a view on what that number would be as of the end of the second quarter. When next we look at this.
It it you could argue that it's going to be higher than what the expectation was on March 27th.
But I could also argue that the extraordinary government assistance is still going to provide us an opportunity for.
And adjustment in what that.
Forecasted rate is at that time.
Okay. That's helpful. And then I was just wondering if you could provide color around the loan modification into full process.
Was it just.
Blanket 90 day acceptance of requests or just kind of how to think about what occurred and what your plans are going forward.
Yes, what we did was some had chance to get on phone early with you guys know the.
As CEO of Ocean Oceanfirst I got on the phone with him actually probably early March to find that how they handled hurricane Sandy and I've got a really good insights for him in terms of what they did how they approach to it and successfully went through that so.
I asked me if I can steal his program and he said yes. Sure go ahead. So we went ahead stopped at something very similar to what he had had done then and is doing again now with regard to payment payment deferrals.
But by proactively asked the team to reach out to their hotel customers and pick up the phone call and don't wait for the hotel customers to call us because we knew that you would expect there to be reduced occupancy with all of them to stay at home rules and everything that the governor's we're putting in place.
And we just wanted to get in front of any any potential issues. Because you. Just don't know rate is going to be a 30 day event. Six today event 90, 120, nobody nobody knew then and still there's not a lot of clarity.
Clarity to to that so.
So we may have had a number of those hotels, who would not have approached us at this point.
To ask for deferrals.
Or for that matter restaurants or any other.
Companies.
But again, we proactively reached out we thought that was it really good risk mitigation strategy to do so that we didnt get.
The systems clogged up and things like that that.
It's interesting that trying to do the modifications and then.
Pivot to do the PPP loans with limited resources and things like that in the organizations you prioritize your time to manage the risk with a customer basin and shareholders is important how we balance that so I wanted to get out early in front of it and I think thats why you've seen 80% or so of our hotel portfolio has been deferred at this point.
It was it was due to our aggressive telling them that.
Basically we are going to defer your payments unless you tell US you don't want that.
And pretty much but all those those deferrals in place.
So that's kind of the idea behind it in the approach behind it and I've seen a number of peers that are up in that same same 18 to 20.
Percentage point of their portfolio that Dave Dave deferred I think that is.
Just a really good risk mitigation strategy, but it wasn't an indication of a bunch of customers, calling us because they were the you know we had customers that were struggling more than than other other banks that wasn't the case at all I think those banks that are up at that higher level have proactively reached out to companies, particularly those higher risk industries like us and and just wanted to get things put in.
Place and I think you also build a fair amount of goodwill with customers.
On those lines to its a lot easier debt through bank Callie and say what you might be to for your payments is that okay. Then.
Having to pick up the phone call and ask for that type of stuff. So that was the idea behind it.
Okay. Thats helpful. Then just wondering in terms of the geographic exposure on hotels, and restaurants, and what percentage of that as Neil from recent acquisitions as well.
Yes, I would tell you that we've got about and feel good about this ex above 40% of the hotel portfolios in the mid Atlantic.
Marketplace.
And I think I think the numbers I had.
Lower than effort.
Kentucky, Kentucky markets and the rest are kind of sprinkled sprinkled throughout the franchise.
Pittsburgh, Columbus, Cincinnati, primarily urban urban area.
Hotel portfolio.
So in overall basis, the loan to value in the 50 50 ish percent range and debt service coverage ratio above 1.5.
We just feel good about where that portfolio is overall, it's I'd tell you. It's it's very well dispersed throughout the organization major metro areas with the heavier concentration in the mid Atlantic market.
And then maybe to a lesser extent.
Number two market with would be the will in Lexington related related markets.
Okay. That's helpful and just in terms of restaurant is that also Midland to have a similar concentration.
No no not necessarily know I think thats that's across.
If the franchise and it's again, it's a pretty small part of our relatively speaking overall portfolio.
And the deferrals in there are running much much lower and 25% to 30% range of that have that portfolio with majority of those loans under under half a million dollars, but.
Those are dispersed throughout the footprint pretty pretty equally.
Okay and are those quick service or kind of wondering what the types of restaurants are within the portfolio. There yeah, I would say probably the largest would be.
View this as it is a large large organization.
Restaurant organization, but they operate in a very decentralized manner.
Donalds.
We'd be a goodwill to a fair number of Mcdonald's restaurant loans that would probably be.
The were to click the category the biggest.
And it's in similar restaurants like that we we don't have a big book of business in restaurants, we aren't going out there looking for restaurant loans so to speak.
And.
Mcdonald's would be there would be the lion's share.
Okay. That's helpful. And then one last question just on the energy portfolio here I Wonder if you could provide.
More precise dollar amount and then curious as to.
Any of the underlying mix to.
Oil field services and also what the pass rating was as of December 30 Onest.
Bob do you have do you have the details with you.
Okay.
I have some of it.
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First of all I did want to say on the on the restaurants about two thirds limits service one third full service to.
Complete the answer to that question.
In terms of.
Risk rates.
First of all oil and gas.
It is about $60 million, an exposure coal is minuscule at less than 5 million.
There's some other utility generation that approximates 30.
And then the bulk of the rest of that is indirect energy sector exposure think.
Tertiary or tier two kind of companies, we've talked about that in the past.
You know sand and gravel companies water truck companies things like that.
So thats what comprises the bulk of the energy loan exposure energy to total loans of 1.22%.
Total energy as a percentage of capital at 10%.
In terms of risk rate, there's really very little.
That.
Is considered either criticized or classified.
The bulk of that would be in the indirect portfolio.
At approximately.
15 million or so and I don't see anything else.
In any of the other buckets so.
Hopefully thats helpful.
It's about 10% of in total.
Okay, great. Thank you very much I appreciate that.
Our next question will come from Brody Preston of Stephens incorporated. Please go ahead.
Good morning, everyone. How are you.
Good morning Bird.
I just wanted to circle back on the the hotel portfolio.
So you noted a 17% as in shale markets just wanted to better understand has the 17%.
Thats there then.
Packed into a greater degree or just differently than the rest of the hotel portfolio.
I would tell you that we continue to get information and on that obviously with the drop in in oil prices has a little bit of in impact obviously, it's driven more by natural gas prices than anything else is the reason why we started the.
Shrink our portfolio as a result of something being flux occupancy being determined by the price of commodity we didnt want that to be the case. So what we did as we went through that a couple of years ago. We exited a number of hotel loans that we didnt think had a lot of staying capacity.
And we really looked at those that could operate it up 50% occupancy.
And still be able to up to debt service warhead connections to other other hotel entities.
Maybe that were non share related that had cash flow opportunities that can be directed towards those.
So I think that portfolio held up relatively relatively well as a result of it.
Right now I'm sure just like other hotels, there well below 50%.
And I've heard I've heard hotels could be in the.
You take out the extended stay might be in the five or 10% occupancy range right now I'm not talking about our portfolio, specifically, because we haven't gone out surveyed that but just to put I've heard about the industry in general in terms of kind of what they are experiencing right right now because of the stay at home orders. So im sure the ones in the shale area being impacted as well and we put loans.
Barrels in place as well too so.
Answer to your question as I would expect it to perform relatively similar to the the rest the portfolio only because we had more conservative underwriting guidelines for those portfolios to begin with.
We just the breakeven point as much lower than it would have been for a typical hotel loan. So I don't see any reason why would perform differently.
But we'll have to we'll have to wait and see once we we get the occupancy.
Reports vacancy reports on on a monthly basis now we're going to we're tracking all that and we'll be able to see any differences by geography are also any differences by shale related versus non shale related.
Okay, Okay, great and just thinking about the Ics, we extended stay portion of the portfolio as is the bulk of that in the shale gas market, you're saying about like the workers that are working that it might not necessarily live there longer term.
No no not necessarily.
No I think that that's pretty dispersed throughout throughout the portfolio I mean, there's a lot to need for extended saying a lot of our more urban markets and we've seen a lot of those.
Requests over the over the years and areas outside of the the shale related.
Interest in the shale related areas.
It.
You know there tends to be audit.
Trailers and things like that honest with you that gets set up man camps that are set up that's kind of where a lot of the rollout of the workers out of the workers end up.
Or just in hotels I stated, though till the first year six years ago is with less Banco.
And.
Every Monday, they all showed up in every Friday, they'll they'll want to home.
So I think you still continue to see that that cycle right and obviously, it's down at this point.
Okay. Okay, great and then just thinking about the loans that aren't pass rated across the industry disclosures that ship provided on slide seven will those loans make their way into delinquencies into Q, if they're delinquent or like does the risk rating not necessarily match up with whose eligible for.
Deferrals.
Yes, I mean, if there was a company that was in trouble from delinquency and payment standpoint.
Then we still going to work with them through this this time period, they don't know get a pass necessarily.
Because of cope with 19, I mean, we're going we're going to work with them on it but with regard to those companies that are directly impacted say performing companies that all of a sudden become nonperforming.
Because they.
Our impacted due to the stay at home.
Requirements or anything else.
We'll go through a deferral period, either a 90 day or if it gets extended to 180 days at the end of that that deferral period.
When you when you will see whether or not they they can bounce back quick enough to be able to cover their payments. So.
The guidance, we've gotten from a regulatory standpoint, and others is not to not to downgrade accompany simply because it.
Is getting the payment deferral.
That may turn into a downgrade down the road if they don't come back very strong.
But the fact that you deferred alone should not.
Should not factor into that but again at the company was having trouble before that and this exasperate sit then yes, they'll have to we'll have to address that.
Okay, Okay, great and then on the CD book, what was the cost of the of the Cds that ran off this quarter.
[noise], Bob do you have that have that detail.
I do I'm going to news second to get it.
Yeah, we've been in this.
Shrinking the CD portfolio now, particularly single service Cds.
For the last seven or eight seven or eight years, so lot of the.
I'd say the higher price CD saw relative nowadays came off in Europe early days, so that the rate the loans not or the the Cds now actually that are coming off.
Aren't as high rate as you might as you might might think.
And our strategy has been particularly with with liquidity position that weve historically hadn't have right now is to not.
Not to pay up for those because we havent, we haven't needed to I would've thought if if the cobot 19 impacted not happened we might have been a couple of quarters away from having to look at RCD strategy, a little differently, particularly with the loan growth and things we were going to be expecting that to get from our acquired markets but.
You know that that Ballgames changed right right now so we're pretty comfortable letting the CD book go go down.
It was about 149 basis point honored call at 1.5, a percent as what repriced in the second quarter.
No. It does not include.
Purchase accounting.
Which significantly reduces the overall cost of Cds on the income statement and in the margin.
Because of old line.
Okay.
Okay and then one last one for me what was the Im sorry, if I Miss this follows the average fee percentage for the PPP loans that you funded and do you plan on recognizing that in the third quarter.
Yeah, I don't think we were not only is I'm not tracking that that that ex fee the percentage amount for kind of all hands on Dec just to try to give them through the system at this point and getting daily updates on on that what I will tell you is.
With our third third party processor, we pay 250 Bucks alone to the third party processor and we set that up here in the last few weeks just in order to get more loans through so.
You know the profitability impact of fees associated with the PPP program.
I would say would be would be would be a marginal and a lot of banks are in that that that same spot but in terms of.
Our average our average loan has been right around the 200000 dollar Mark at this point.
And.
Yes, you could probably figure out from their average loan 200000 and then.
To take 250 bucks of each each loan.
Okay, great. Thank you very much everyone.
Our next question will come from William Wallace with Raymond James. Please go ahead.
Thanks morning, guys when it won't.
So Bob on the Csos, a follow up to the to the question about Cecil reserves and maybe what might happen in the second quarter in its my understanding that there is some recovery estimate.
Built into the model can you talk a little bit about maybe what the baseline recovery scenario you have in the model and then I think it seems like some banks differ but sometimes there are some kind of stress scenarios that are given some probability can you talk a little bit about about the kind of recovery economic assumptions.
I would say, we pivoted to adopting the forecast from Moody's pretty quickly at the end of the quarter call. I said my comments that we were speaking of being incurred adopter post cares Act and.
And so having completed our work at the end of the quarter. We had obviously finished our day one or.
Had we been in a position to to adopt.
But.
When we did pick up the Moody's forecast and we looked at the probability analysis behind each one of their alternative scenarios, we just decided to stick with the baseline and then adopt in effect and adjustment that was qualitatively analyzed.
So it's a negative adjustment to the overall level that the model would've otherwise produced.
Based upon the level of unemployment at that time that was being projected again this was the.
Forecast March 27th which started with 8.7% and then basically averages 6.5% for the next three quarters. So.
As I suggested during my prepared comments, we use the qualitative adjustment to basically say here's what we think the value is associated with the unusual government assistance.
And and so Thats what created.
A little bit of at a downward adjustment to off that calculated level.
If if we are if we find ourselves six months from now when.
When were kind of past the these a lot of this government stimulus and where we're hopefully.
Open back up in and we are still uncertain as to what the recovery might look like because businesses are customers are slow to return to businesses.
Do you anticipate.
Cecil will work as as intended and you would if we're starting to experience losses that you would be able to use Cecil or do you anticipate that because of uncertainty you'd have to continue to maintain your cecil reserves at or near levels, where they where they are and then just cover losses with provision.
No I think the former not the latter I do think that one thing Cecil does is to bring forward our estimate of losses for future periods subject to changes in macroeconomic factors and changes in the portfolio.
So theoretically.
If the macro economic forecasts adjust downward.
Even if you're bringing in net charge offs, one should offset the other if on the other hand, the forecast stays flat as to unemployment and you're experiencing charge offs. Then you would have to replace the charge offs are there other factors like and we know them in our deck on page six six I apologize.
Such as changes in prepayment speeds changes in portfolio mix changes in overall credit quality the age of the portfolio. Some of that information is will be found in the 10-Q here in a week or so.
In the so called vintage table, but if you just look at that change in prepayment speed alone.
Now you can argue some of this is related to the forecast.
For.
Rates and the reduction in rates, but.
With that in a normal environment without a Colgate 19 adjustment would have produced.
Really very little provision at the end of the quarter.
And so if you have those kinds of adjustments and you have portfolio mix adjustments then.
You could actually experience a reduction in the provision a negative provision sooner than you would end the incurred model.
Okay. Thanks, I'm not predicting that yet though.
Right.
Nearly.
Okay. Thanks in my my only other question that has already been asked is.
For for round two if you will have PPP can you give us a sense of your pipeline.
And where you stand today I'm getting getting that through the process. Yes, yes, I think we put in the release about $570 million were now just over over 700 million and actively putting things through the the trans system. Our first round I think we did okay that was all my annual right. So.
We went out we've got to third party processor get us set up on a more automated fashion that allow us to deal interrupt operate a lot quicker for around too so.
Yes, I don't have a real good estimate where I think we'll end up you know were 700 million now, but will be will be north of that I would tend to think that.
I heard this what some others other calls too and I would agree with this that we would expect maybe 70% to 80% of that to get paid back.
And then maybe there were the remainder has had a 20, 30% would be around for one to two years.
And.
You might see maybe 15, 20% of that start to get paid back in the at the end of the quarter here at 60 day time period.
Then the majority probably another 50% would happen in the third quarter.
But those are just kind of.
Estimates at this at this point in time.
But we could we could see a few hundred more million it all depends on when when they run out of money, but we've got a little more of a automated system now than we had through through round one.
Okay and to be clear, the you're saying 700 million on top of the Fiveseventy from around one no no. That's inclusive that's inclusive of the Fiveseventy, we put up.
On a 130 million or so and over the last 36 hours of open back up again.
But it's it's grown daily.
Yeah.
Okay.
I'll hop out all my other question all right. Thanks.
And our next question will come from Stewart lots of KBW. Please go ahead.
Hey, guys. Good morning, good morning Stewart.
My questions have been had been answered, but Bob maybe one follow up for you on the on the margin.
I appreciate the guidance.
For that 20 to 25 basis points of core compression over the course of this year.
Just kind of thinking about from quarterly perspective, do you think that the majority of that is coming through.
In the second quarter, given the rate shock, we get full quarter of from the fed funds cut.
As well as some lower accretion.
Kind of a stable core NIM.
Back to back half this year, you kind of see that flowing through.
Five that five the EBIT per quarter.
Just curious how you how do you guys you're thinking about it from there.
Well really saw nice.
We took some very proactive actions to deposit side that have yet to be fully reflected in the quarterly deposit rate.
We'll see that here in the second quarter.
But we cut rates between February and March that helped the deposit costs at that time by 21 basis points. I think it was eight basis points is what we said quarter over quarter, but that additional amount happening in the month of March will benefit us going forward, but as you can imagine.
Loan portfolio yields are dropping our home equity book drops on April Onest month after.
Our experience the rate cuts and as loans reprice, you've got a billion and a half in prime or LIBOR adjusting a lot of that's going to adjust here in the second quarters.
And while LIBOR repricing initially a would have been much higher than if you were pricing off of either treasuries are so for.
As you can see the last couple of weeks those rates have come down as well and so.
For those banks that have a large portfolio of LIBOR based adjustable loans and that would be harmful in the second third quarter.
We have a lot of five year repricing loans and inherited a fair amount of that portfolio north of 600 million from old line, and so that actually reduced between the third in the fourth quarter as I recall, our asset sensitivity when we added in old line.
And so Simon substance I would say that helps us a little bit but the total guidance is between where we are today and where we expect to be at the end of the year and yes, I would pull that forward. My expectation is the second in the third quarter, where a fair amount of loan repricing occurs its.
Barry it's more of that than say in the fourth quarter of this year or rolling into next year.
Got it I appreciate the color there.
And then maybe just one more follow up on on the expenses.
You mentioned the 87 at nine core run rate you feel pretty good about that go into the second quarter.
I'm just curious with the conversion of old bind taking place in February we really didn't get a full quarter.
[music].
The expense savings from that.
So I guess your second quarter guidance implies that you could again.
Quarter post conversion as well as some.
Some annual merit increases is that kind of right way to think about it.
You anticipate the majority the cost saves will will be in the second quarter run rate.
Or should we expect additional cuts maybe go into the third and fourth quarter. This year. Thanks.
So for instance, the duplicate systems, we converted in February you get those cost savings because we had to pay a onetime fee to get off.
Their old system.
So you experience that within a month or two after conversion as you shut down their systems.
In terms of employees.
We had attrition both in the fourth quarter and the first quarter, but the.
Individuals in the back office and in corporate finance and some other areas that we're not going to stay with us.
Post conversion.
Towards the end of March so you have that in the run rate.
Going forward, we'll get some back half a year cost savings as well telecommunications is an area, where we typically get that six to nine months.
After conversion, but the bulk of it begins here in the second quarter and then there is a little bit of an offset from merit increases that start.
Towards the back half of the second quarter and.
And then there's a day count.
I think in the although this is a leap year I think there's an extra day as a day or two as we move through the year.
So that's my guidance I'm not going to give you.
Quarter by quarter, but what I said earlier that 87 day 87 App to 88.
Seems to me in the first half the year to be a reasonable guidance point.
Great. Thanks for taking my questions.
This concludes our question and answer session I would like to turn the conference back over to Todd Clossin for any closing remarks. Please go ahead Sir.
Well. Thank you I appreciate everyone's time. This morning lot are really good good Q in a.
Hopefully weve address questions that are out there during this unusual time.
We feel really good about our liquidity position our capital position our pre provision net revenue I mean, we think we're in we're in good shape. We just got a lot of uncertainty with regard to the future and what thats going to look like but we anticipated that.
Going into the kind of a downturn we wanted to make sure we were positioned for success and we think going into this on our on a relative basis, we're in pretty good position.
So thank you for your time and hope to get a chance to talk to you were hopefully see you.
At a conference at some point in in the future have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].