Q1 2020 Earnings Call
Welcome to the old National Bancorp first quarter 2020, <unk> earnings Conference call. This call is being recorded and pass it back.
Public in accordance with U.S.
Regulation FD.
Corresponding presentation slides can be found on the Investor relations page at old National Dot Com.
And will be archived there for 12 months before turning the call over management would like to remind everyone that as noted on slide two participating on today's call maybe forward looking in nature and are subject to certain risks uncertainties and other factors that could cause actual results to differ from those just us.
These risk factors are fully disclosed and discuss what's in it I only.
In addition parts inspires contain non-GAAP measures, which management believes provides more appropriate comparison.
Non-GAAP measures are intended to assist investors understanding of performance trends reconciliations for these numbers are contained within the appendix of the presentation.
I'd now like to turn the call over to Jim Ryan for opening remarks Mr. Ryan.
Hey, good morning, good morning, everyone I hate this call five all of you and your families safe and healthy.
We are pleased where first for first quarter core fundamental trends and the implementation of the only be way strategic initiatives.
Commitment and focus today, that's supporting our clients team members and communities.
I'd also like to take our team members for their hard work and dedication to serving our clients. It communities. During this difficult time.
Sorry, that's why we are first quarter net income was $22.6 million, including $31.2 million an old way charges. Adjusted net income was higher at 41 point 42.1 billion, which includes higher loan loss provisions for the first quarter adoption of seasonal.
As you review results you see their core market was down due to the fed fund rate cuts industrials and yonker, we weren't able to lower total deposit cost by nine basis points to 34 basis points, all commercial production of $647 million most seasonally higher.
As a result, and the good production lower pay offs and some higher quality line usage commercial loans grew over 13% annualized.
We recorded $17 million and provision expense during the quarter related to the adoption of Cecil I suspect, you'll see why experiences in seasonal provisions this quarter for midsize banks.
We all adapted to this new standard and the multiple economic forecast.
Once we determine to accounting or at least from seasonal was very temporary and the regulatory capital at least was extended it makes sense breast to proceed with adopting adds up January 1st.
But at this price is yet to be known I won't even speculate on future losses are provision to gauge what the impact is clearly very broad based.
They haven't felt the same in taxes other parts of the country and we're hopeful that wouldn't be programs. We have put in place coupled with the various government programs will ultimately want economic impact to our clients.
National celebrating our 186 year in business.
As you know, we pride ourselves on being a basic boring bank.
Our loan portfolio suburbs, it's granular and overall a strong ever been heading into this crisis.
But we will need more time to better understand the magnitude of economic impacts before truly understand if future losses.
We have won and shared with our board of directors multiple economic forecast and very stress test as a result, we're still open for business and extending new credit.
We manage for the long term.
She capital already strong our markets are diverse and our spirits team will help manage through this challenging time.
I'm confident that we will work even stronger on the other side.
We were successful, making organizational changes, we revealed last quarter and we made significant progress on efficiency initiatives under the only way.
Branded they provide all the details, but we're on track deliver $22 million in cost savings in 2020 and achieved a full 40 million run rate 2021, as we discussed on last quarter's call.
We continue to make robertson rather than initiatives, but admittedly some of that been reprioritize given the pressing need for investments in the various government relief programs and our own internal really programs.
On the Cath lab, we did repurchased 4.9 million shares during the quarter at an average price of 16 Obi.
We didn't suspend our program given the uncertain economic conditions. After reviewing the very stress tests with our board, we don't anticipate any other capital actions and we expect to maintain our current dividend.
Moving to slide four we detailed our cobot Nike response for clients team members and communities.
The health and safety her team members and clients is Paramount we granted additional sick time for team members along with additional paid time off for all team members to assist with unforeseen personal needs.
Also expanded family and medical lead benefits to those who are at risk or would have an at risk personally their household <unk>.
We've been able to many team members to work remotely.
Daily we have more than 1000 team members working for home.
And lastly, we expand or one which program for team members with unforeseen financial needs.
All our branch or branches are open to be a drive throughs lobbies by appointment only.
We provided information on digital banking options and change in our service delivery model the old National Dot Com emails direct mail and social media platforms, we've definitely seen healthy increases that are mobile and online platforms.
We are providing clients released by improving payment extensions not reporting payment to break the credit bureaus and waving a refunding overdraft and multi service charges are clients impacted by Copel 19.
We continue to lives the qualified businesses for working capital in general business purposes. We've helped nearly 5200 clients with U.S.P.A. payment protection program, and we're proactively reaching out to our clients and improving loan payment extensions.
Today I'm pleased that we announced a 1.2 million dollar commitment to immediate near term relief efforts 600000 for immediate needs with an emphasis on low to moderate income communities and 600000 for foundation with a focus on long term restoration.
As you can see us like by the Cobot 19 impact to the states in their footprint, it's been less impactful than other parts of the country.
Michigan has some of the highest reported occasion their footprint with almost 80% concentrated into.
Where we haven't go branches.
And our footprint business and governmental leaders are talking about safe ways to open businesses and return to work I'm optimistic that the Midwest would be among the earliest to reopen.
It's got Evren Hammer, Chief risk Officer, and Daryl Moore, Chief credit executives are joining us on the call today.
Both our experienced in their roles have many of the same leaders and their teams for the 2000 makes financial crisis.
We are fortunate to have their own experience in this environment given them an old national more than 40 years.
He was really hoping to finish his career I never having to present slides in earnings conference call again, but I'm glad to have experienced today and I will now turn the call over to Darryl.
Thank you Jim.
Slide six gives us a high level overview of the composition of both our commercial and consumer portfolios, while there's no denying that most industry segments have been negatively impacted by the Kobin 19 outbreak you've outlined in the top chart for you. The commercial industries that many believe will suffered disproportionately in this crisis.
Over the years, we've tried to identify those industry segments that are most volatile island do not performed well in the cycle and for the most park habit tempted to either not participate in those segments or participate with appropriate structure and risk mitigation in place.
We certainly will not be immune to difficulties in these segments, but as you can see the size of our exposure to these most vulnerable industries appears to be well manage going into the cycle.
With respect to our consumer loan book you can see the chart in the bottom left quadrant of the slide a breakout the size and average FICO scores are the different product types within our consumer portfolio going into the cycle. There's no doubt that because of the significant increase in unemployment, we will experience difficulties in this portfolio that none of us would have anticipated when we originated these.
Loans, but again looking at the FICO scores and the fact that less than 2.5% of the portfolio could be considered subprime. We believe that we're fairly well position to address any developing difficulties in this portfolio.
Just a couple of comments about line utilization as reflected on the chart and lower right hand quadrant, we have seen an increase in commercial line utilization predominantly compliance with stronger asset quality ratings commercial line utilization at March 31st was 35.2% compared to 32.6% at the end of the prior quarter.
We've also seen an increase in he lucky applications within the last 45 days with the quality of those application generally being very strong well, we're not able to definitively determine why we are seeing an up tick in this particular loan category, we suspect that many of our consumer borrowers are following the lead about commercial clients wanting to liquidity backup if the economy continues.
Distress for a more lengthy time period.
Next we wanted to give me an idea of the volume the loan for approvals, we have granted and have laid out those along with some he checked protection program information on slide seven.
The commercial side, we have approved roughly 900 request from borrowers totaling $1.1 billion, representing 14% of total commercial outstandings well, 62% of the deferrals. We have booked to date are in the theory loan category. We expect to see this percentage drop if we continue to book approved request as proportion of Syria.
<unk> appears to have been higher early on in the deferral application process.
As you might suspect while the number of loan deferrals is higher in the consumer area. The dollar amount of those people and the portfolio penetration numbers are lower than in the commercial area.
As shown in writing a slight side of the slide to the exhaustive work of many of our team members. We have helped provide $1.3 billion Paycheck protection program systems, roughly 5200 borrowers.
Slide eight provides a recap of credit trends for the first quarter results.
Non performing an underperforming moms belts likely in the quarter to levels lower than we have posted at any quarter ended 2019 and lower than any year end level in the past three years charge offs were higher in the quarter related to particular credits.
Chose to take an additional write down prior because ended the quarter on the relationship that was the subject of our larger 2019 fourth quarter charge off being concerned about collateral values and this new economic environment, We commissioned new appraisals and felt in addition to write down $2.1 million was appropriate.
The other larger charge off in the quarter was a 3.8 million dollar action on the credit we had been working with for an extended time period waiting on the investment about take capital that had been promised by the borrower.
As we were not entirely certain at this capital investment would be made we chose to fully impaired alone for loan loss reserve purposes back in 2019.
I became apparent that investment would not materialize by the end of the quarter and given the change in the economy, we determined that a complete write off with the exposure was appropriate we will continue to pursue collection efforts on this relationship going forward.
At this point in time, we do not feel these write downs are reflective of any general Prequaled 19 credit issues in the portfolio represent isolated credit events that occur over time and any portfolio.
Just a couple of comments before I get my part of this discussion about our approach to this newly changing environment.
Over the years, we've dealt with numerous economic cycles, it's become apparent that an intentional clearly communicated plan with respect to how we will approach the challenging and it's important to minimize the losses.
We have found in the first item in hand is for every one to recognize the economic conditions have changed.
It is current environment the pace in the breadth of the changes unparalleled Oh this sounds obvious and simple to accomplish we'd have to remember that just 60 days ago. Most banks were in full new loan production mode getting team members to switch for production called no two when necessary, having tough conversations with clients about new economic realities is.
I really important and have to be accomplished quickly for the benefit of both the client and the bank.
In this new environment, we're emphasizing at minimum we must evaluate of borrowers liquidity capital adequacy and availability and bone structure every time, we touch a credit.
Liquidity is the first concern the bank and most borrowers in such times is these without the ability to continue to fund the basic necessities of the business and otherwise resource will enterprise can't survive.
What is different about this downturn as the infusion of liquidity that the government is making through the paycheck protection program. Another offerings. While we are hopeful is yet to be seen whether the amounts our borrowers are able to draw under these programs are gonna be at levels sufficient to bridge them through this challenge.
The adequacy Nobel with a capital is the next concerned we talk with our borrowers about remember that worked remind them. The capital is reserved but they have to cover on anticipated setbacks.
If we do not believe that our borrowers have sufficient balance sheet capital to get them through the current setbacks, we challenged them as to what outside resources. They may have at their disposal raise needed capital encouraged them to begin to lighten up those resources.
As a final point required review with the current loan structure in collateral sport, we are emphasizing that opportunities to strengthen structures in terms of guarantees and covenants must be considered and the acquisition of additional collateral if available has to be on the table in our discussion with our borrowers.
We're also going to think about how the current challenges of shelter in place might have an impact on collateral values and ultimately loss given default assumptions for close to seven put on hold auto auction houses are not currently in operation in many locations courts are close and I could go on.
It's a time proven fact that in most instances collateral does not get more valuable passage of time in an economic downturn, how collateral values and liquidation strategies play out and you got to be seen given the pent up demand may play a role softened risk associated with this potential issue.
Outlined here fairly obvious items, because I believe that a banks discipline around these are very basic fundamentals can make a difference it's what the ultimate performance of his portfolios.
Finally, I think it's important to reaffirm that the bank embraces the vital role it needs to play supporting each of our communities recovery efforts, while focusing on the basic credit fundamentals I've addressed is critically important environment. We also understand our obligation to provide credited every responsible opportunity help our clients in this country get back on our feet.
My belief is that banks to understand how to properly balanced. These two imperatives will have every opportunity be very successful as we come out of the cycle with that I'll turn the call with Brent.
Thank you Carol.
Before turning to the quarterly financials, we would like to provide additional color on our seasonal allowance on slide nine.
Our gave one reserve of $96 million was $41.3 million over our year end reserve and right in the middle of our projected range.
The relatively large scale to increasing reserves and $17 million provision expense for the quarter were primarily driven by protected economic impact of the current a virus.
The macroeconomic variables using our models were derived from the Moody's critical pandemic forecast scenario published on March 20.
That's an area the sharp decline in GDP in Q2 and returned to growth by yearend.
You need to increase in unemployment is less severe than current expectation expectation, but does remain elevated through 2023.
Slide also outlines the key economic variables and portfolio inputs used in our model.
In addition to the quantitative but we also considered several qualitative factors and our final reserve assessment, including the risk that the economic decline, specifically unemployment and GDP proved to be more severe and more prolonged our baseline forecast.
We also took into consideration the mitigating impact of the unprecedented fiscal stimulus, including direct payments individuals enhance unemployment benefits as well as the various government sponsored loan programs, which we expect will provide relief to consumer and commercial borrowers.
Lastly, if there are reviewed we considered a relatively low exposure to the industry is expected to be most vulnerable to this crisis.
The future severity of economic fallout from this virus is yet I know as is the ultimate effectiveness. The government response, and providing a branch many individuals and businesses impacted.
Time goes on we will have more clarity on both and we'll adjust to reserve levels Accordingly.
That said, we believe our current return leveling products, our best estimate of the credit losses in the portfolio today.
Turning to the quarter on slide 10, our GAAP earnings per share was 13 cents and our adjusted earnings per share with 25 cents adjusted earnings per share excludes $31.2 million and don't be way related charges, as well $5.2 million and debt securities gains.
Moving to slide 11, our quarterly adjusted pretax pre provision net revenue was 3% higher year over year and 5% higher over prior quarter.
This result was driven by increased fee income led by our mortgage and capital markets businesses as one of the reduction in adjusted operating expenses, resulting from our progress towards achieving the expected savings from the only way initiative.
Despite the challenging operating environment, we improved operating leverage by 100 to two basis points year over year.
We believe our strong pretax pre provision net revenue and provide a buffer against future provision needs.
Slide 12 supposed to trend in outstanding loan.
And it varies loans decreased $274 million corner of a quarter largely in our commercial commercial real estate loan categories.
Increase was driven by solid commercial loan production of $647 million slowing prepayment speeds and higher line utilization.
The 2.6% increase in line utilization was concentrated in our highest credit quality borrowers.
Commercial activity with high during the first quarter, which resulted in a sizable increase in our pipeline, which currently stands at $2.7 billion.
Given the current economic uncertainty, we would expect to pull through rates to be lower than recent quarters. The full impact for the December rate cut on existing loans, coupled with lower coupons on new production drove overall portfolio yields lower we expect a dramatic shift in the yield curve will continue to put pressure on asset yields in 2020.
Moving to slide 13, both period and add average deposits decreased during the quarter due to seasonal declines in public fund operating accounts and modest CD run off our total cost of deposits declined nine basis points quarter over quarter to 34 basis points.
We quickly reacted to the emergency rate cuts in March and ended the month at very low 21 basis points and total deposit costs.
Deposit rates averaged 1.34% during the quarter, but with approximately three quarters of our CD book maturing in the next 12 months, our interest expense should continue to decline.
We're pleased with the results for deposit pricing strategy that has resulted in a meaningful reduction deposit costs, while maintaining our core client base.
Slide 14 chose our first quarter, earning asset mix in quarter over quarter change in loan mix strong commercial loan growth. This quarter supports our goal of re mixing our balance sheet to more productive commercial and commercial real estate loans. The investment portfolio yield was down just three basis points quarter over quarter to 2.71% with new purchase to dealing 2.42%.
Next on slide 15, you'll see the detailed changes in our first quarter net interest income and corresponding margin strong, earning asset growth contributed to our net interest income and we're pleased with the performance of the margin given the challenges of the interest rate environment.
Net interest margin, excluding accretion was slightly lower than our expectations at 3.16% compared to 3.25% last quarter. However, adjusting for the day impact and lower interest collected on non accrual loans core margin was down just two basis points.
The reduction in core, earning asset yields which were down 10 basis points was nearly offset by reductions in our funding costs.
Active repricing of our deposit book and balance sheet strategies continue to help mitigate the negative impact on margin.
Slide 16 shows trends in adjusted noninterest income our first quarter adjusted noninterest income increased $5 million the quarter over quarter change was the result of an increase in mortgage banking revenue, which was driven by strong production.
And healthy gain on sale margins, but also benefited from a 4.8 million dollar change in our pipeline valuation.
We did take a 1.5 million dollar impairment charges were MSR portfolio. This quarter that is netted against our mortgage revenue.
The capital markets line of business continued to be a bright spot interest rate swaps continues to be very attractive declines.
Other key categories were generally stable, but will likely come under pressure in the second quarter.
Also included on the slide as a summary of our mortgage activity the quarter, what shows $361 million in production low interest rates continued to support strong refi activity in the quarter, which accounted for 48% of our production.
Next slide 17 shows the trend in adjusted noninterest expenses, which reflects our ongoing focus on expense management onetime charges were $31.2 million this quarter, which is slightly better than the $34 million we projected.
Adjusting for these onetime charges and tax credit amortization non interest expense was down almost $3.6 million quarter over quarter, and we remain on track to realize the expected savings from our own D wave strategic plan.
It's also worth noting that our Q1 non interest expense included a diesel related gate to adjustment to our allowance for unfunded commitments of $1.7 million.
Our adjusted efficiency ratio for the quarter is a low 59.3% representing 166 basis point improvement over Q4 2019.
As I wrap up my discussion on the quarter here are some key takeaways. We are pleased with our overall performance at the fundamentals of our core business were strong as demonstrated by our improved pretax pre provision net revenue.
We posted 9% annualized loan growth in the quarter without compromising on credit.
We defended the margin well in an increasingly challenging rate environment.
Our fee businesses posted healthy revenue growth, particularly in mortgage in capital markets and we delivered on the promise expense savings, we outlined last quarter.
Slide 18 includes our.
Thoughts on our outlook for the remainder of 2020.
Well, good 19 virus, well, having meaningful impact or 2020 performance commercial loan activity was strong in a quarter and we ended the second quarter with a healthy pipeline. However, near term economic uncertainty is expected to having negative impact on pull through rates and they knew future loan growth.
TPP loans are expected to add 1.35 billion dollar store outstandings in Q2, but there are some uncertainty about how long these loans will stay on our balance sheet.
We have meaningfully mitigating the impact on our net interest margins in the short end occur, but historically low long term rates will continue to put pressure on asset yields as our bone and investment portfolios reprice at lower coupons.
Active repricing our deposit book has been a key component of our margin defense and while there is room to move deposit costs lower particularly within the CD portfolio. Most of the transaction account rate reductions are now behind us.
P.P.P. loans will also impact our margin going forward. These loans carry a 1% coupon and an average fee of approximately 3% there will be accretive through margin on a level yield over there are two year terms as long as are paid off early any remaining fees will be accretive to income immediately.
Several key items will also likely come under pressure from economic slowdown, our wealth management and investment businesses I've seen a decline in evaluation of our assets under management no impact fees in the near term.
Overdraft fees and interchange income were down sharply in last week of March as consumers began to comply with shelter in place orders and limited their spending with central services.
Although we've seen a pickup in activity in early April we're likely to say below trend until the economy of reopened.
As I mentioned earlier the mortgage pipeline ended at record highs, we could see but we could see increased fallout in weeks to come a.
A large driver the mortgage revenue this quarter was related to our pipeline build that revenue typically reverses in the fourth quarter as pipelines decline, but given the disruption in the housing market. It may reverse more quickly.
We expect to remain or 2020 to reflect the expense reductions associated with all the way that were communicated last quarter net merit increases beginning in Q2, we're now estimating total onetime charges and 2020 related on the way to be $39 million, which is a decrease from the original has made up $42 million all of our expense.
Initiatives remain on track, including the plant closure or 31 branches by April 20 per hour.
We'd also like to give you an update on our current capital position and outlook.
We ended the quarter with a healthy <unk> one ratio of 11.4%.
In an abundance of caution we had suspended or buyback program temporarily with any future future use of the authorization dependent on the facts and circumstances present later in the year.
I would also reiterate that based on our current capital levels and our outlook on 2020 performance. We believe we have to capacity to maintain our dividend.
We've also recently updated our stress test model and under the C car severely adverse scenario, we remain well capitalized at the lowest point in the nine quarter horizon.
Our liquidity position also remained very strong with our low loan to deposit ratio of 87% strong cash in unencumbered security position and various other sources of liquidity, we have plenty of flexibility to respond to funding needs.
Lastly, we provide some guidance on our full year 2020 tax rate, which is expected to be approximately 19.5% on an S E basis, and 14.5% on a GAAP basis. The effective tax rate included $6 million and tax credits primarily related to the historic tax credit project, which was placed in service in Q1.
This project generated the majority of the $5.5 million and tax credit amortization included in our operating expenses this quarter.
Project delays caused by covert 19 have impacted the timing of our other historic tax credit projects that were included in our last quarter estimates.
Please move any additional tax credit amortization you have in your model other than the actual amount from Q1.
We will take you next quarter regarding the timing the remaining projects.
As a reminder, that tax credit amortization is recognized through expenses in the quarter that corresponds with the placed in service date, while the tax benefit the spread of full year through the tax why.
With that we're happy to answer the answer any questions that you may have and we do have the 14 here, including Jim Sandgren and Scott Ethernet.
As a reminder, if he would like to ask a question. Please press Star then number one on your telephone keypad that a star one to ask a question well pause for just a moment to compile the culinary roster.
[noise] well first question comes from a line of Scott Siefers with Piper Sandler.
Good morning, Scott you guys.
Has around doing.
We're doing fine hope you're doing well too.
We are we are thank you very much raskin. Appreciate you taking my question first Ah ones that I wanted to ask were just on credit. So first maybe just sort of a a second on the 86 basis point reserve.
To loan ratio and basically what that what that means a in a seasonal world maybe just kind of a a refresher there just in terms of adequacy and then you noted that you guys said updated your stress stress scenario and still remain well capitalized given that the low point just curious Uh huh.
Oh, the existing reserve compares to what you guys might consider sort of stress losses in that scenario you.
Yes, sure Scott I'll I'll start off and Daryl can can chime in so I'm. Just a reminder, so we started the reserve at $55 million at your rent were now sitting at a 106.
Million dollars and the $67 million as of March still remains outstanding on those loans.
As far as are the stress test concern. So we ran the most recent portfolio through our stress test models and come out with cumulative net charge offs at a roughly in line with great recession told us in that you're gonna have to 3%.
So what happened 3% ranch, so that would be that the REIT comparable to our 86 basis points they often.
Okay perfect. Thank you.
And and another question on the P.T. loans.
Maybe just I guess, a little bit of Oh tutorial on how you plan to account for them. In addition to what you put into the guidance by so first of all those everything that you've got you guys have approved that actually gets funded right based on what you guys, having the outlook and then.
The origination fees those it looks like will flow through the margin as well. So I guess, we could see it kind of be PBB be dilutive to the margin here in the immediate term, but presuming day or forgiven as planned than you would sort of accelerate so you get a bump up in the margin as they pay off is that the right way to think about it.
Exactly right exactly right Scott, that's how we're seeing it.
Okay.
Perfect.
Alright, Thank you guys very much.
Thanks Scott.
Next question comes from a line of Chris Mcgratty with KBW. Please.
Good morning, Chris you want everyone.
Just want to go back to Scott's question on the PVC loans.
I think that a lot of the programs are much shorter than I think the the two years that you laid out in the flight.
For modeling purposes, I mean, we bump up the the loan growth in the in the second quarter by the amount of billionth right.
My sense is most of that'll come kind of unwind over the next six months is that a reasonable base case with yeah, you're doing it how your structure in it.
That's our expectation to Chris but initially you have to set these things up to amortize over the life of the loans, but.
So if they are all forgiving within Q2, then and you'd see a bump there, but if it does and they're not forgiving from Q3, it wouldn't be dilutive to margin in Q2, Chris I would just as you know theres still lot of details to be determined about how we verify.
You know compliance with the forgiveness rules that are that are yet to be written or published so you know it could take a couple of quarters for this to kinda all unwind.
You know I think we're hopeful that online quickly, but the reality is since since we don't all rules. The play by it's gonna be difficult to determine exactly how fast these loans are gonna get forgiven.
Okay, and then the expectation is to either fund them with the balance sheet flexibility you have with love it deposit or through some of the government programs that it was like all banks right. Yeah. We're actively are planned to participate with the federal reserves or the Treasury Department's program.
Okay.
I appreciate that just just one more I'm trying to them to map slides six and seven the deferrals.
And the and the vulnerable industries I think in your prepared remarks, you talked about Siri being a big piece of the deferral.
Any any color on upon you know, maybe a restaurant bog or some of the other portfolios that might be you might be working with in terms of trying to.
Ics extend some terms for the for your stress caught clients.
Yeah, Chris This is Darryl certainly within those deferrals there have there there's a fair amount of request from restaurants.
And we have been working with those clients I would I don't think that we'll see them come back again until we get through at least the 90 days.
And see where we are on the hotels, the very little hotel exposure that we have most of those have been in asking for deferrals as you might imagine.
And on the CR each piece.
Much of that comes from either [noise].
Multi family the have retail associated with it a where the retail has been closed down. Some just departments early on were concerned about ability of there tends to pay rent a we looked at a little bit of that.
And then anything kind of retail strip mall those types of things. We're also heavy requester sperling on in this and the deferral approval process.
And as hard as you're going through this process with with your borrowers.
What kind of conversations you have in in terms of having them put more kind of skin in the game to two to work with you and to make sure you're not in the hook Yeah. Chris. So early on we had some conversation suppose climb, but mostly just given the uncertainty and the fact that we knew they were going to have cash strange.
We did a lot of these deferrals just look back on their operating history. If they hadn't had problems before I'll look to see what we thought was reasonable and then just moved on amassed we'd get to the into the 90 days on those that we did 90 days a we will out we're going to be asking for updated financial information on sponsors and and have to sit down and have.
In some cases some tough conversations if this is this hasn't turned around some borrowers. We did 180 day I extensions on because it made sense to do that all of our relationship managers will be out in 90 days and talking with those clients are beginning to understand how how deeply they've been impacted and start to gather financial information start to happen.
Conversations about additional capital or collateral or how we're going to work through this.
It is absolutely right now.
Thank you very much Uh huh.
[noise] for next question comes from a line of Terry Mcevoy with Stephens.
Morning, Terry.
Hi, Good morning, maybe could you start.
Just provide some insight into the accounting for their commercial and consumer deferrals, you keep accruing, but the yield is now lower in it. So could you talk about what type of intact at that could happen and I would assume it's it's built into your projections and outlook today.
There's no change in Terry to how we accrue for them, obviously, the cash will impact on that but relatively minor bulk of change will accrue those as we normally would.
Yeah.
Okay, and then maybe could you expand on that the CD pricing over the next well I think you you said six or 12 months kind of average rates today.
On the balance sheet, what current market rates are.
Yeah. So as I said, we're sitting at 1.34% three quarters of that book, where are you price over the next 12 months and depending on the churn in the tenor I'm not giving a specific number on that but they'll be meaningful meaningfully lower than they are today.
Okay, maybe just one last quick when they can you just talked about the impact and so on the income in the first quarter from some of the actions we took to help your clients and maybe just some color on.
What happened to be in March or late in the quarter to help us on a year over year basis kind of model out some of those transactional revenue lines.
Yes, I would say the first quarter impact from some of the fee waivers was was de Minimis I'm able to get caught all on a all kinda problem in the middle part of March and so really didnt have a meaningful impact I think it's Brendan pointed out, though I think everybody seems to spend slowed down right and everybody saw service.
Charges I think across the industry you know.
The lower it's just hard for us to get a handle on how permanent yeah, we already seen a better pickup in April and so it's just really hard pressed to have a pickup or you know our view on how long this last and what the exact impacts gonna be.
Understood.
Thank you.
Terry.
Your next question comes from a line of John Armstrong with RBC capital markets. Good morning, John.
Hey, Thanks, Good morning, I, just wanted to follow up on a couple of things.
Can you talk about the magnitude I think Brendan.
Talked about and your comments and Jim you just just the magnitude.
<unk> increased.
Consumer activity.
Meaningful at all or is it just very very early.
I think it's just very very early you know I would tell you when John here in the Midwest. So you understand I mean.
I see a lot of people snow bike food restaurants him out in about but clearly you know card spend is down and that's going to have an impact on I think the entire industry, but I think it's just too early to understand what the exact impact is I guess, what I'm optimistic is I know our state is having a lot of great conversations about return.
And to work and I'm very optimistic that by the end of April we will start to.
I'll start the economy back up here in the Midwest and I think hopefully you know card spend and other things will will return back to kind of normal I know its can take some time to get fully back up to speed, but but I'm optimistic that that the Midwest will start to restart and maybe some of the earliest in the whole country.
Good.
A question figures as well loan demand today.
Oh, you talked about the big pipeline, but you know that may not all pull through but what does the loan demand today look like compared to maybe what it was two or three or four weeks ago looks like it was one draws initially but what does it look like today and what are the areas, where you seem to the man.
Yeah. John This is Jim Sandgren, I'd say, a you know the pipeline is down a little bit you know the breakdown of that pipeline still kind of 50% or commercial real estate to bounce a a C and I I think everyone's kind of taking a step back and see how this is all going to impact their particular industries.
You know the pipeline typically when we look at the accepted categories, it's about 90% to 95% likelihood we're going to close those deals.
After reviewing with our commercial segment leaders I think that number drops to closer to 75% still a lot of deals I think to be to be booked, but they're certainly going to be some borrowers they're going to be a little cautious and in projects for investments may get a delayed a quarter or two so kind of a wait and see.
You know Josh I might add you know this is a little bit longer term view, but I.
I think manufacturers are looking at their supply chain today, and saying how much of this could be done onshore versus offshore and I'm optimistic Midwest might see some increased investment over the coming year to and six people think about most critical suppliers and their supply chain and how much of that really should be.
News here, the U.S. versus versus someplace else and so I think the Midwest can be a long term beneficiary of that kind of new view of the supply chain dynamics.
Good.
Keep going with questions, but I have a couple of couple of more follow ups I just.
Maybe Daryl or Scott you talked about the increase in the CRT deferrals.
And I'm curious areas, where you expect to see deferral increases from here.
And if you said any shot it what percentage of book do you think.
Could buda for it I don't do that as a mega It was I guess I'm just curious is.
How far you think this could go.
Yeah, Johnson, Daryl I think we have most of the deferral requests behind us it has slowed considerably.
Now you know maybe pick back up after the PPP, but I I, just don't think that you're going to see significant increases or changes going forward.
Okay.
And then one more Daryl for you just.
Maybe more of an industry observation I'm curious to the.
P P.
I don't want to say loan quality.
But any assessment of the business health.
Of the businesses that are in the PPP program.
And how we should think about the longer term.
John That's that's really interesting. So if you think about the program none of the review of what we did on anything P.P.P. loans had anything to do with the financial strength of those businesses was verification now anecdotally as we all work through those if it goes the gamut right. We've got some very strong borrowers who will not concerned about at all it took advantage of this broker.
Ram and then we also have some very small businesses, who I'm sure.
Have very little cash and I know just by talking to some of them, they're asking when does this money come. So it is really all across the board.
Okay.
These are these are things will will eventually find out mucin quarter too and we'll know more on that.
Yeah, you know.
The PPP program. It is a broken them. There is meant to bridge. These borrowers through keep people employed and to the extent that Jim suggested at least in our markets. We can begin to open things up fairly quickly I think it will have a really positive impact with respect to home being able to get these businesses I started up again long.
He goes you know the more risk we have that these programs won't be as effective as well they'll be.
Alright, Thanks for taking my question.
Thanks, John.
As a reminder, if he would like to ask a question. Please press Star then the number one on your telephone keypad or next question comes from the line of David long with Raymond James.
Morning, David.
Good morning, everyone. Thank you for taking my question I appreciate the color you've provided with the Moody's [noise].
Critical pandemic forecast, but curious if you could tell me tell us what the specific economic inputs made its been built into your reserving as far as it relates to unemployment in GDP.
Yeah, So David what we did it we looked at every one of the Moody's forecast from the 10, that's the Twentyth and the 27 to grant all of them through our models and sensitized to model. So we didn't consider all of the economic forecasts. The one we actually went through and put through as a baseline for modeling and then did qualitative judgments.
On top list.
Less than one on the Twentyth and unemployment in there as it goes up to about 6% and then stays elevated at around that level for an extended period of time GDP comes down pretty sharply six 7% and then starts to rebound and I've had a V shape matter and Q4 stars starts growth again and then.
2021.
Kind of growth at the same pace. It was prior those are the two key critical insights and inputs into the model.
Got it thank you and how how frequently have they been providing you with updates.
There so through the quarter end to let the last one we ran through our models Miss the one on the 27th but I believe I believe there was another one April and they came out but that's not one that we ran to remodel and just as a reminder, we only expected to receive one [laughter] per quarter. So.
Interesting timing, having multiple forecast or come out throughout the quarter.
Especially is this the first quarter we adopted.
Yeah, I would assume that this is a you know this is obviously new to them, but hopefully that do we can get it to one per quarter.
Some point here in the future west Okay. I appreciate the color thanks, guys.
David I also asked our senses is weve, obviously compared lot unknowns with a lot of different banks and a lot of different banks use bunch of before to ask a bunch of her management overlays and so I think he just gonna see as I said in my prepared comments, you know just kind of a wide variance in how we look at this and and everyday makes a difference of how you view. This you know these the future economics.
Oh round, the pandemic and so we thought we put in place a very supportable forecast that made sense for us at the time, but everyday you have better optics, and we're going to continue to wait and see and just as necessary.
Got it thank you Jess Thanks, David.
There are no further questions at this time are there any closing remarks.
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