Q1 2020 Earnings Call

Good morning, welcome to Webster Financial Corporation's first quarter 2020 earnings call.

Oh now introduce Websters director of Investor Relations Terry Megan. Please go ahead.

Thank you Rob welcome to Webster.

This conference is being recorded also this presentation includes forward looking statements within the Safe Harbor provisions of the private Securities Litigation Reform Act 1995, with respect to Websters financial condition results of operations and business and financial performance Webster has based these forward looking statements on current expectations and projections about.

Future events actual results might differ materially from those projected in the forward looking statements.

Additional information concerning risks uncertainties assumptions and the other factors could cause actual results to materially differ from those in the forward looking statements is contained in Webster financials public filings with the Securities and Exchange Commission, including our form 8-K containing our earnings release for the first quarter of 2020.

Now introduce websters, President and CEO John Seal.

Thanks, Terry Good morning, everyone. Thank you for joining websters first quarter earnings call. We modified call. This morning, as a result of the cold at 19 pandemic.

I have told one again, it's now I will review business and financial performance for the quarter.

Also provide some additional information on the line of business performance and Cobot 19 related activities across the bank.

We're going to I complete our prepared remarks, I will review, our credit profile, including one our exposure to industry's most directly impacted by the pandemic to a comparison of our current portfolio with the portfolio. We had heading into the 2008 financial crisis and free up portfolio by portfolio review of key credit metrics.

And industry exposures, our Chief Credit Officer, Jason Soto will join me during this portion of the presentation.

After the credit discussion H., I say bank, President Chad Wilkins and Jason will both join me in Glenn in responding to your question.

First I want to acknowledge the fact that we're living in uncertain challenging an unprecedented times I hope that all of you and your loved ones are healthy and safe.

And I want to let those whose health has been impacted by the crisis no that the Webster Bank family as you enter thoughts.

The way our backers of taking care of each other our customers and communities over the last two months is truly amazing.

Usually end my remarks, with thanks to our bankers so today I'm going to start by thanking each and every Webster bank or for their remarkable contributions during this challenging time I'm. So proud of the entire Webster team.

Webster Bank and the entire banking industry has rallied to be part of the solution to this health crisis, and the resulting economic follow up.

I also want to publicly acknowledge the bold swift and timely actions of legislators bank regulators, the treasury and state and local officials each of collectively and individually reached out to banks listen to what's happening on the ground and rolled out creative and impactful programs to help those individuals and businesses and need.

When you turn to slide two you can see Webster at its very best.

Consistent with the way our values based organization has operated since our founding during the Great Depression and 1935, we immediately took action at the outside of the pandemic to support our employees customers and the communities we serve.

The safety of our employees was and is our number one priority.

We swiftly moved 80% of our workforce to remote or at home work, thereby creating a safer socially distance work set up in our buildings for those who need to be onsite to execute a central operations.

We modified ranch activities in hours to ensure the safety of our employees and customers while being available to meet our customers' needs. This included moving to drive through an ATM service with bank lobbies opened by appointment only.

We established a no interest loan program for our employees, whose families had been financially impacted by the pandemic.

We have paid all of our employees at 100% of pay including those who are home because of illness quarantine higher health risk or to take care of loved ones for kids home because of school closures.

We've increased the daily pay of those bankers on the front line and have added PTCL time to those workers as a future benefit.

We have not reduced our workforce by a single F T. During the crisis.

And weve augment it and expanded our employee assistance programs to support our employees during the pandemic.

For our customers just as we led the banking industry with our foreclosure avoidance program during the great recession, we immediately placed moratorium on residential mortgage foreclosures relating to Webster on mortgages, we waived fees on early CD withdrawals, we increased availability and amount of funds for withdrawal by our customers and we've worked.

With our customers adversely impacted by covert 19 through the modification of loans, the deferral of loan payments and through participation in the S.P.A. Paycheck protection program and the Feds main street lending program.

Here are some data points related to activities, we've undertaken both as principal and what we've done through government programs.

As of April 16th we have modified over 2000 and units representing 476 million of residential mortgages in home equities, that's approximately 6.5%.

Total home equity in mortgage balances.

Roughly 750 borrowers or $300 million of small business loans, representing approximately 17% of our small business portfolio Outstandings and over 300 borrowers and close to $1.6 billion of commercial loans or roughly 13% of the funded comes.

For loan portfolio.

With respect to the Paycheck protection program, we started accepting applications on day, one and despite technology and process challenges experienced by all banks.

We were able to help many business clients in need when the SBH accepting applications last Thursday, we had more than 2000 SP I approve loans, representing approximately $650 million most of which should be funded over the next week. We have continued to process applications internally and we will begin submitted.

Those applications for approval when the FDA has additional funding and opens up the process, which it looks now like it will be later this week.

With respect to the Feds main street lending program, we have worked with our industry organizations and directly with the fed to be prepared to utilize these loan programs to help our larger commercial customers through the crisis.

And for our communities Weve increased the amount of our 2020 philanthropy budget and reposition dollars to support those most impacted by the cobot 19 pandemic.

We have made more than $375000 in donations, thus far to feeding America, the American Red Cross and United ways across our footprint to provide urgent basic needs.

I'll now turn to our financial highlights on slide three.

Webster's first quarter results continue to demonstrate our ongoing commitment to strong execution on strategic priorities through any and all operating environments pre provision net revenue of $125 million was up modestly from Q4, driven by a slight increase in total revenue and a slight decline in expenses.

Earnings per share were 39 cents in the quarter compared to 96 cents in Q4, 2019, and a dollar six in the prior years first quarter. The declines resulted primarily from an increased provision, resulting from the adoption of Cecil a weakening forward economic outlook and the impact of a significantly lower interest rate.

Rate environment, Glenn and I will walk you through the assumptions underlying our fee so process and ultimate provision number.

Diesel process is strong consistent with the requirements and controls the accounting process in this quarter that process included the appropriate amount of conservatism and thoughtful judgment to reflect the uncertainty of the environment and the behaviors in our portfolio with respect to onset of the pandemic.

Tangible book value per common share increased 8% from prior year, our first quarter return on common equity was 4.75% and return on tangible common equity was 5.95% with each reflecting the $68 million reserve build in the quarter.

The combination of a slight increase in total revenue on a slight decrease in expenses led to improvement in the efficiency ratio, which was 58% in Q1.

March 30, Onest reported credit metrics remained strong while our forward forecast of economic conditions deteriorated significantly with the onset of the pandemic.

Slide four presents loan and deposit trends loan growth was strong as total loans grew 11% and commercial loans grew almost 16% from a year ago or by more than 1.8 billion strong organic growth increase was augmented by approximately $450 million in revolver draw.

Our downs in the commercial portfolio in March and we saw a reduction in prepayment activity deposits grew 7.7% year over year, driven by the inflow of HFSA deposits and public funds and transactional in nature say deposits now represent 60% of total deposits up from 57% a year ago.

Also of note footings at HSBC Bank increased 9% from year ago for growth of $679 million during the year.

Turning to slide five I will spend a few minutes speaking to each of our three lines of business.

In commercial banking loans were up nearly 7% linked quarter and 15.5% from a year ago, which includes the aforementioned $450 million in net revolver draws.

Pre drove the year over year growth, while sponsor and specialty loan balances, which saw the lions share of the revolver draws drove the linked quarter increase.

Prepayments were lower in the quarter, partially attributable to lower economic and transaction activity in the second half of the quarter due to the emergence of the pandemic.

Deposits were up smartly, some 15% linked quarter and 20% from a year ago, largely driven by the depositing of revolver draws into DTA.

Normalizing for revolver usage.

Deposits were up approximately 5% in commercial banking in the quarter.

Loan and deposit volumes in the quarter drove a 3% year over year increase in net interest income in commercial banking despite rate pressure expenses were up 4.3% year over year, driven by investment in people and technology commercial banking PPNR was relatively flat year over year.

While we are appropriately cautious was new underwriting activities I can tell you that we closed meaningful high quality new business in the quarter in segments that are not experience experiencing a material adverse impact from the pandemic segments, such as software and technology infrastructure.

In fact in early April we closed our largest agents a deal on a best efforts basis $350 million technology infrastructure deal, where we held just over 10% of the risk after close.

Turning to slide six.

NHS payback, we are continuing to make great progress. We concluded another successful first quarter as we opened 338000, new accounts for a total of 734000, new accounts opened over the last 12 months. In addition, we added over 1000, new employers in the quarter.

There was no material impact in the quarter related to the previously reported movement of accounts tied to the decision by two wholesale partners custodial partners to in source account administration.

Any accounts were up 6.4% to 3.1 million, while deposits increased 8.5% to 6.7 billion.

The 2019 year end Devaney report indicated an overall HFSA market that slowed marginally as the market growth rate of accounts was flat and the deposit growth rate declined by three percentage points during the year.

One important point to note is that HFSA banks funded account growth rate was 9.2% in 2019 compared to the industry rate of 5.6% in the first quarter. Our funded account growth rate was 6.8% year over year, both reflective of our consistently low percentage of Anil.

Funded accounts when compared to industry data.

We had a good start to the year from a sales perspective, as we signed several large employers in the quarter. We also announced a major partnership with jelly vision that will further enable our customers to make informed and smart healthcare choices. We also launched partnerships with Blue Cross Blue Shield of Michigan.

In principle financial group. These partnerships are all uniquely capable of delivering strong growth, especially within the jumbo employer market.

In addition, as you may have seen yesterday, we announced that we signed an agreement to acquire state farm banks portfolio of season, the HFSA accounts, representing approximately $140 million in deposit we expect to close that transaction in the second or third quarter.

In response to the pandemic and consistent with all of Webster, we were able to quickly transition 96% of our HFSA staff to work from home in less than three weeks, maintaining 24, seven customer support and continuing to meet service and quality metrics. In addition, we are working closely to support our customers through the pandemic.

At a time when our services may be particularly critical including capabilities, we have deployed directly or via partnerships such as E health HSH phase store, good Rx Blink health medical cost advocate and healthcare Blue book.

We feel that the current legislative and political landscape remains favorable for the HFSA industry and the chances of a near term Medicare for all national healthcare solution are even more remote than they were a year ago.

Our relationship with WEX, our technology partner and Cigna, our largest HFSA partner have never been stronger.

I'm on page seven.

In community banking, we've done a tremendous job keeping our employees and customers save while continuing to provide the standard of customer service our clients expect.

Total community bank loans grew by 5% year over year with business banking loans, leading the way at 9% deposits grew by 3% again led by business banking noninterest income was up 9% as a result of higher mortgage and investment services revenue.

Many more customers have transitioned to self service channels as digitally active households crossed 50% in the quarter for the first time and we see that trends continuing given the pandemic.

As you can imagine our community banking team along with the resources from across the bank are working diligently digit diligently and executing on the PPP loan program, which will help so many of our customers we've been focusing on customer outreach and support and I can't say enough about the way our community bankers, including all of those in our banking centers have.

Delivered for our customers and communities during the first quarter and over the last several weeks.

Before I turn it over to Glenn I'd like to make a couple of comments related to capital management first we are completely focused on internal execution and other than opportunistic HFSA transactions Bank M&A remains a low priority, we have a strong capital position, enabling us to support our customers and assist in the financial recovery.

In the country.

As we announced this morning, our board has approved the quarterly dividend of 40 cents per share.

Also after a modest repurchase of approximately 2 million shares in early Q1 before the onset of the pandemic, we do not anticipate repurchasing additional shares until this pandemic is behind US I'll now turn it over to Glenn for the financial review.

Thanks, John I'll begin with our average balance sheet on slide eight.

Average loans grew 516 million or 2.6% linked quarter growth was led primarily by the commercial business a linked quarter increase of 329 million in commercial real estate was the result of strong originations and a reduction and pay offs.

On a year over year basis, our commercial real estate loans grew more than $1 billion.

Commercial loans now represent 66% of total loans compared to 63% in prior year.

Consumer loan performance was driven by a 96 million dollar increase in residential mortgages with some offset in home equity.

On the deposit side, our low cost transactional and HSC deposits have increased more than 1.2 billion from last year and now represent 60% of total deposits with a combined cost of 13 basis points.

The Q1 seasonal inflow of HSBC and government deposits funded loan growth as well as a 200 million dollar reduction in short term borrowings.

With regard to capital the modest average linked quarter reduction in common equity is reflective of a day, one seasonal adjustment of 58 million and approximately 77 million as a result of share repurchases in the quarter.

Likewise modest reductions in the common equity tier one and tangible common equity ratios are also reflective cecil share repurchases and asset growth.

We have elected to phase in the seasonal impact on regulatory capital, which favorably impacts our ratios by 2025 basis points.

Even excluding the phase and then capital treatment, our capital ratios would remain very strong and well in excess of regulatory well capitalized levels.

Slide nine summarizes our Q1 income statement and drivers of quarterly earnings.

Net interest income was flat to prior quarter as a 6 million dollar benefit from loan growth was offset by the effect of a lower rate environment.

This is reflected in our net interest margin, which was lower by four basis points versus Q4, 16 basis points due to lower loan yield, which was partially offset by nine basis points from lower deposit costs and three basis points from lower borrowing costs.

Versus prior year net interest income declined 11 million 31 million of the decline was due to lower market rates with a partial offset of 20 million from earning asset growth.

Noninterest income increased two and a half million linked quarter and 4.8 million from prior year.

Hey, just say fee income increased 3.4 million as a result of account growth and the seasonal increase in interchange. In addition, our mark to market on hedging activity increased 2.6 million, which was offset by a decline in syndication and client swap revenue.

The increase in noninterest income from prior year reflects the mark to market on hedging activity as well as higher mortgage banking revenue.

Reported non interest expense of 179 million decline modestly linked quarter and grew less than 2% from prior year.

Pre provision net revenue of 125 million increased 3 million from Q4 and decreased 9 million from prior year.

Provision for credit losses for the quarter was 76 million, which I will explain in more detail shortly.

The efficiency ratio improved to 58% for 58.5% in Q4, reflecting a modest increase in revenue and a slight decrease in non interest expense and our effective tax rate was 22.6% compared to 22.3% in Q4.

Turning to slide 10.

We view our results of our seasonal adoption and the first quarter allowance.

As we look at the walk the day, one seasonal adoption was 58 million a 28% increase in the allowance, resulting in a starting coverage ratio of 1.33%.

During the quarter, we had 7.8 million in net charge offs.

We recorded a 12 million provision as a result of loan growth of $855 million during the quarter.

Loan growth primarily came from the commercial categories and included $450 million aligned draws in March slower prepayment activity and loans funded from our strong fourth quarter pipeline.

The remaining Q1 provision was 64 million, bringing our allowance to 335 million.

Or coverage of 1.6%.

The provision is reflective of our economic outlook, including GDP unemployment and housing prices and a qualitative assessment of our loan portfolio and how will perform through the pandemic.

This was accomplished by reviewing higher risk sectors loans participating in modification programs and potential risk rating migration based on a granular bottoms up credit review.

At the time, we closed the books in early April our outlook included a second quarter GDP decline of nearly 20% with unemployment, peaking just under 10% and a recovery beginning in the second half of 2020.

As we move into the second quarter, we will refine our assessment in three critical areas first would be an update of our outlook on macroeconomic variables second.

An updated review of higher risk sectors, and our loan modification programs and third the assessment of the impact of government stimulus programs on our portfolio.

Initial April economic forecast are projected to be more severe as the second quarter GDP decline could exceed 30% with unemployment, peaking their 15%.

All of these areas are still developing making it difficult to project, how the pandemic will impact the provision in the second quarter and over the remainder of the year.

That being said our provision in the second quarter will be driven more heavily by the expected duration and severity of the pandemic.

Slide 11 highlights our key asset quality metrics at March 30, Onest prior to the effects of the current environment nonperforming loans in the upper left increased 12 million from Q4 see and I represent a 9 million of the increase.

Net charge offs in the upper right increased slightly from Q4 and totaled 7.8 million in the quarter.

Commercial classified loans in the lower left represented 287 basis points of total commercial loans. This compares to a 20 quarter average of 317 basis points.

The allowance for credit losses increased to 335 million, resulting in a coverage ratio of 1.6%.

Slide 12 highlights our key liquidity metrics, our diverse deposit gathering sources continue to provide us with a strong competitive advantage.

More than 1.1 billion of core deposit growth in Q1 has maintained our favorable loan to deposit ratio of 85%.

We are predominantly core deposit funded with brokered Cds repping, representing less than half a percent of total deposits at March 30 Onest.

In addition, our sources of secured borrowing capacity remain intact.

Totaling over 9 billion at March 30 Onest.

Slide 13 highlights our key capital metrics.

Regulatory capital ratios exceed well capitalized levels by substantial amounts the common equity tier one ratio of 11% exceeds well capitalized by 1 billion.

While the excess for the tier one risk based capital ratio is 809 million.

The 1% unprecedented environment makes it difficult to provide formal guidance at this time, what I can tell you is we expect average earning assets to grow in the range of 4% over Q1, driven primarily by loan growth.

We expect net interest income to be flat to Q1 as a result of loan growth Paycheck protection program volume and lower deposit and borrowing costs to be somewhat offset by lower asset yields as average market rates have come down since Q1, non interest income will likely be flat modestly down given.

In the Mark we recognized in Q1, and noninterest expense will likely be flat to Q1's level.

Our share count will be about 1.3 million shares lower on average due to buybacks completed in Q1.

With that I'll turn things back over to John for review of our credit profile.

Thanks Glenn.

Many of you know that I'm deeply involved in our credit execution as I grew up in commercial lending and credit and served as websters Chief credit risk officer during the financial crisis.

As I said, many times I'm proud of the credit risk framework that we have built over the last dozen years with respect to risk selection underwriting portfolio management and credit reporting the nearly 21 billion dollar loan portfolio. We have today has been thoughtfully and purposefully built.

While I never predict credit performance, the ultimate outcome of which will be determined by the depth and duration of this crisis I can say that we've been true to our underwriting guidelines and I'm very proud of our line of business and credit professionals, who always put risk management first as I mentioned earlier, Jason Soto, our Chief Credit Officer, who joined.

Thats five years ago from GE capital is with US today on the phone and I will be and he will be available for Q1, a will now walk through the credit slides that we posted this morning with the earnings deck and will respond to any credit questioned during the general QNX.

Starting on slide 14.

You will see an outline for this discussion as I mentioned, Jason I will comment on our exposure to those segments most directly impacted by the cobot 19 Pandemics.

I'll, then provide what I hope to be a clear in concise comparison of our current loan and securities portfolios with our 2007 pre great recession portfolios and then I'll briefly walk through each of our loan portfolios, allowing Jason to provide some context with key metrics. So hopefully you'll get a sense have a clear granule.

Our view of the $21 billion, we havent loans I'll highlight on each side without reading every detail, but I will provide you with what I believe to be the key takeaways.

Slide 15.

You've seen this disclosure from other banks as they have reported this attempts to capture our loan outstandings in each of the most impacted sectors, including ratings categories modification in line draw activity through 331, which Jason will update in a moment I want to make clear we wanted to be transparent with with this.

Disclosure, but this doesn't represent all of the loans that we think our at risk. Many of these loans are not at risk. These are simply the categories.

That the industry has been reporting that are obviously most impacted in the first order by the pandemic in fact, 94% of these loans are pass rated and you'll see here that there has been limited modification and revolver draw activities. So I want to provide a little context there.

The key takeaway on this slide is that our direct exposure to these segments is modest on both an absolute and relative basis, 94% as I said, our in pass rated categories, most representing one or maybe 2% of our total loan portfolio. We are fortunate as our strategies have over the long term been phone.

Focused on less cyclical industries with recurring cash flows so on a relative basis, we've not really pushed hard on sectors like energy transportation discretionary retail as as focuses.

The other point I want to make before letting Jason provide some context.

Is that you'll see retail in as broadly defined represents 5% of our loan portfolio in this category more than 50% of those loans are in high quality investor Cree and those are mostly in non discretionary pharmacy or grocery anchored and.

For those of you heard me talk about Bill Wrang over 25 years with his retail exposure. He is always looking for Nondiscretionary. I'll also tell you that had an additional 20% of that retail exposure is fully followed in our ABL group, where credits are borrowing base secured and often have cash dominion and I've.

And working with more and minnow in that group for the entire 15 years I've been here and they have an unbelievable track record in managing even struggling large retail exposure. So we've got a lot of confidence within that pocket of retail Jason maybe I'll turn it over to you to make a couple of comments there.

Great. Thank you, John and and good morning, everyone to provide an update on the information on the slide as of late last week. The overall pace. The modification request has slowed the last couple of weeks modifications are up to 692 million versus the 517 revolver draws in these sectors are up modestly to 130 versus 122.

That said as John mentioned early commercial modifications in total have been roughly 1.85 billion as of late last week. So we're clearly seeing modification activity beyond just the sectors reality is that you. Many of the company's be impacted may have a portion of the revenue tides these sectors or otherwise fueling the ripple effect of the current environment, it's a bit.

Hard to capture all of that would have street top down approach by sector and so for that reason, we're using a more granular bottoms up approach to identify the exposure to borrowers that we believe maybe weren't impacted in the current environment. My exposure, we reviewed over 80% of the accounts in the portfolio and have reached out to the majority of those where we have direct relationships.

We created a common framework to rate the potential level of impact to the borrowers we rolled that up weekly and have a call to review updates.

Based on this I believe we have a good handle on the exposure to borrowers that meeting some accommodation in the near term I will also say that 90% of the borrowers that have requested modifications are pass rated and many have low loan to values junior capital owner and sponsor support and liquidity. So assuming we start to see a resumption of economic.

Activity throughout 2020, we're optimistic that the majority of these borrowers will recover and we will certainly do all parts of support them in a prudent way.

Thanks, Jason turning to page 16. These next three slides demonstrates a purposeful strategic shifts in our portfolio since the great recession. This would be execution that I talked about earlier.

The reason I think these three slides are so important is that I've seen so many people use credit performance by asset class during the great recession as a proxy for lost prediction during the next credit downturn like the one we are entering into right now again I'll never promise.

Or or predict ultimate credit outcomes, but I can tell you that our portfolio today is vastly different than what we had in 2007 not only are the portfolio dynamics different but the way we underwrite manage and report on risk is light years ahead of where we were in 2007, when we had only a few years array.

Earlier transitioned to be an FCC regulated commercial bank.

The key takeaway on this slide comparing consumer and business banking loan portfolios and performance is at the overwhelming majority of losses here come from broker originated non centrally underwritten out of market mortgage and home equity loans and from a small portfolio of business banking unsecured loans.

We no longer originate out of market mortgages and home equity loans with few exceptions, we centrally underwrite everything internally even correspondent in market loans.

And we have been very disciplined on underwriting guidelines over the last 10 years. Moreover, we have virtually no unsecured business banking loans, and we do not originate that product.

On page 17.

It shows the same analysis for our commercial banking portfolios, we had outsized losses in the discrete residential development portfolio and a discretionary aviation portfolio and equipment finance consistent with my earlier comments, we have focused since the great recession on less cyclical verticals and businesses and you can see here that our exposure.

Those two areas is minimal as a result, another key point on this slide is the fact that sponsor and specialty and leverage loans within our Cnine business in general performed at the same level or better than our other portfolios in the commercial bank a point I've made several times over earnings call calls when asked about the nature of our leverage loans.

While our sponsor and leverage loan portfolios are larger today on an absolute basis I'll remind you that they represent roughly the same percentage of see an eye loans as they represented in 2007 and they represent roughly the same percentage of tier one capital plus reserves that they represented in 2007.

On page 18. This is a critical slide you've heard me talk about the geography of our capital losses. During the great recession here you can see that the single biggest category of losses or write downs for us during the financial crisis was not in the loan portfolios, but in trust preferred securities in our IND.

Yes that portfolio.

Today, only 18% of our 8.5 billion securities portfolio is credit sensitive compared to 44% in 2007 and the nature of those credit sensitive instruments today is higher rated and higher quality.

Again this was a purposeful strategy shift from lessons learned during the great recession.

So the natural question. After these three slides is so you've eliminated those activities that drove the highest losses, but are there other portfolios hitting in the port in your overall loan portfolio that could blow up and have losses and again I can't tell you that theres not going to be a specific segment or industry that will not.

Have credit losses, depending on the depth and duration, but I can tell you our ability to monitor our portfolio. The surveillance, we have the ability to look at correlated risk of cross portfolios. The quality of our risk management team is light years ahead of what it was before and I can tell you that we pivoted overtime in the last 12 years.

On things like contractors or traditional advertising based media. So that we're able to make decisions quickly to reduce emphasis in certain portfolios overtime and we've done that so my confidence that there aren't hidden pockets of risk is much higher than it would have been during the great recession and I hope that those three slides.

Provide some perspective on how thoughtful we've been about building our portfolio and the fact that we did take a hard lessons learned during the last downturn.

On slide 19.

You will see just an overview of the portfolio and the truth is it's a straightforward midsized bank typical portfolio with obviously a sponsor book in there where we have industry expertise.

You can see a high level break down here of the $21 billion and in the carrots on the right you will see where those exposures reside.

So for consumer finance, the 7.2 billion dollar portfolio 7 billion of that are prime end market residential mortgages and home equity loans, and then a small par pocket of consumer finance, which includes lending club I will speak to each of these on the following slide our commercial real estate is comprised of a majority of it in our culture.

Commercial banking Investor Cree book run by Bill Wrang for over 21 years here Who's had great asset performance, even during the great recession, and also encapsulates our business banking investor Cree and owner occupied Cree and it also includes owner occupied middle market commercial real estate loans as well as shown.

LNG infrastructure.

Data center like real estate secured.

Businesses to see an eye as typical cnine in middle market in sponsor and specialty it includes our enterprise leverage loans asset based lending and equipment Finance and then you'll see the investment securities where we make the point again on the breakdown between non credit and credit sensitive instruments and on page 36 indices.

All of mental inch information. Please don't turn to it now you will see a detailed breakdown of the investment securities portfolio, which I will not cover here.

On page 20 residential mortgage the key takeaway on this slide is that our 5 billion dollar mortgage portfolio is a high quality prime end market essentially underwritten portfolio with high FICO scores and modest ltvs, both at origination and when updated for today.

Credit performance not surprisingly has been outstanding and I told you that we've only had a modest level of modification and payment for request to date on this portfolio.

On page 21 home equities pretty much the same story.

As mortgages end market Prime strong FICO and LPV metrics at origination and even slightly improved when updated today.

We manage this book effectively through end of draw on much of the portfolio and we have not seen interestingly any defensive drawdown activities on the unfunded portion of these home equity loans, thus far into the crisis I also want to highlight one care at their that close to 50% five AUO of this portfolio.

Though is in a first lien physician.

On slide 22, personal lending a very small $220 million.

80% of it represents.

Lending club.

And as you know, it's about a $176.2 million and has been coming down since the peak of about 230 $240 million, we stop purchasing lower tranches in 2017 purchasing just A's and B's and recently just A's and we are no longer purchasing lending club.

If you look at at the FICO scores are strong and have been improving and we have not seen credit performance in this small portfolio.

Deteriorate, yet, we'll obviously watch it closely.

We've got good geographic diversity in the portfolio and over the time, we've been involved with lending club, we have seen performance in the portfolio that meets or exceeds expectations.

On page 23 in commercial real estate, our total Cree portfolio.

We've had meaningful and targeted growth over the last few years as we are good at it and we've been underway compared to peers and when compared to regulatory concentration hurdles.

The majority of this business is in our Investor Cree line within the commercial bank led by the same management team for many years and through cycles.

I'll provide more detail on that $3.8 billion, representing the 62% you see in the top chart. There on the next page. The overall portfolio is well diversified with limited exposure.

And more volatile sectors, and very little hotel exposure very little discretionary retail exposure.

We've had left office exposure as well than we did 10 years ago. So on the next page, let's do a deep dive on our our largest exposures and our largest part of the retail.

Portfolio.

Focusing on Investor Cree, we've had a targeted strategy of growing multifamily in industrial selectively financing office projects and strong markets as I mentioned I think six times on this call already and I apologize Bill Wrang with us for more than 20 years, who came out of Aetna managers. This portfolio, it's more of an institutional quality real estate portfolio.

Performed exceptionally well during the last downturn it tends to be lower yielding but more resilient during a tough credit time, we partner with experienced sponsors on equity partners and provide well structured solutions with sufficient cushion to withstand volatility.

If you look here at the origination metrics they've been very steady over the last few years, despite competing in a highly competitive lending environment and that discipline tends to serve us well.

It's also translated into very strong updated portfolio statistics, which are the bottom chart. There. So we're not talking about 80% loan to value real estate loans were talking about a portfolio of 60% loan to value real estate loans with an average debt service coverage ratio of nearly two times overall and not surprisingly asset.

Quality is really strong in this portfolio and we've been reaching out to our customers aggressively and we will be managing through.

Whatever the crisis brings us, but we feel really good about this portfolio.

On page 25, you will see the CNL I portfolio balanced and diversified. This includes our sponsor and leverage portfolios, which are primarily industry focused collaterally focused businesses in ABL and equipment finance core in foot businesses in middle market and business banking most meaningful consecrated concentrate.

And our in broad diversified categories, such as services and communications a good portion of which is software sale software technology and infrastructure originated in our sponsor business and we've maintained lower exposure in construction and retail as well as finance companies, which we feel could represent correlated risk with our broad.

Broader portfolio. So we have deemphasized overtime those segments on page 26.

We will talk about sponsored specialty and leveraged on these last two pages and I'll ask Jason to provide a little more color in context.

One of the important things that we always talk about and I'm not sure is fully understood is that our sponsor and specialty business is $3.3 billion or something only a third of that is leveraged loans were reporting here leverage loans, which are leveraged at origination based on regulatory.

Laurie definitions generally three by four senior to total leverage so a full two thirds of our sponsor and specialty portfolio is acquisition and an industry specific financing that does not qualify as leverage loans.

Most of our leverage loans are in this book over 80%.

We've been Lee at lending to sponsor backed and leverage companies since 2004, when Chris modal and I arrived at the bank and as you saw earlier in the presentation. The performance has been strong and in line with overall cnine, even through a cycle, we've meaningful shift meaningfully shifted this book overtime to make sure that were lending to non cyclical end markets.

That have recurring protectable predictable streams of cash flow.

You'll see that software check and infrastructure has grown from about one third of the portfolio to almost 50% again, that's because of the nature of the transactions in the underlying companies and these companies seem to be less susceptible to this particular crisis as well healthcare is another define vertical where we seek to support routine medical.

Services that will benefit from demographic trends and at the same time, we've shifted away from some segments that are less predictable and less protectable from a cash flow perspective.

And the last slide I'll cover before I, let Jason provide a little context on sponsor in specialty is slide 27, and this is something that I talked about little over a year ago on an earnings call. When we talked about leverage lending. This page shows comparative metrics between what we're originating and sponsor in specialty and the broader leveraged loan capital Mark.

Yes on average we have a turn to return and a half less leverage on the deals we do versus the market that's less risk weve maintained discipline on covenants, we only 7% of our book being Covenant Lite, where the general market is almost 84% Covenant Lite.

The leverage deals we have those that our leverage loans are still half a turn to turn inside the broader leverage market and non leverages, our almost two turns inside the market.

When we look at the borrower's ability to service that we have a very strong profile with 85% to 90%, having fixed charge coverage ratios of greater than one and a half times and on average for both leveraged and non leverage deals and sponsor our loan to value Thats the loan to the enterprise value is between 35 and 40% on average.

In most cases with Sig Mexican cash equity or junior debt beneath us and the sponsors that we have worked with through financial crisis with relationships over a long time have deep financial and management resources to help us through downturns, we saw that during the 2008 crisis.

Jason can you put it maybe a finer point on some of those are bore fill in something I might have missed.

Yes, John I think you hit all the key points I guess, the only thing I would say is we really increase the percentage of direct deals.

We've done over the last four five years from about half to about two thirds, which we think is important and I guess the last thing I'd probably added I think could just speaks to the credit culture here at the bank is our strategy and sponsor and leverage has only been deliberate but it also has been very collaborative between the lines of business and credit we've been particularly disappear.

And then moving away from the areas that you mentioned like traditional media restaurants, as well as smaller cyclical credits, where we've had some historical losses and we've also been very clear about our underwriting parameters as we've grown.

Example, in tech in infrastructure, which is the largest segment, we talk about financing recurring revenue business models, 90% of the exposure in that book has over 70% recurring revenue. There is only one deal that has less than 50% of recurring revenue in that book, which again represents almost half of the sponsor book.

If you deals coming outside those parameters are commercial leader generally just pass and again, it's not to say that those deals will be bulletproof right. It really depends on the end markets. Those customers served and the competitive dynamics, but our thesis is that the services and software being provided are making customers more efficient and smarter about new businesses.

So we expect that once installed the revenue will be sticky.

Thanks, Jason I appreciate it before we go to Q and I'd like to acknowledge the departures of Jim Smith, Our chairman and John Crawford, Our former lead director from Websters Board of directors. Following our virtual annual meeting of shareholders, which will occur. This Thursday, the insights direction and dedication that Jim and John of given to Webster over so many years.

We have helped to make this organization what it is today and we'll continue to influence us into the future. They are both personal mentors to me and I'm proud to call them friends I appreciate everyone's patience going a little bit longer in the comments.

This morning, and I hope they were helpful with that Rob Im happy to open it up for questions.

Thank you at this time will be conducting a question and answer session. If you like to ask a question. Please press star one from your telephone keypad and a confirmation total indicate your line is in the question Q.

First start to if you'd like to move your question from the Q.

Participants are using speaker equipment, maybe necessary to pick up your handset before pressing the star keys.

One moment, please when we pull for questions.

Thank you My first question comes from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your question.

Hey, good morning, everyone.

For the state aren't good morning to start on.

The reserve so given Glenn you called out some of the assumptions in the one Q reserve and the economic outlook appears to be a bit worse than that just based on how you guys are seeing house diesel is now working should we see cobot 19 impact and the reserve in Twoq you similar to what we saw in one Q.

Given the change in model assumptions look like they're coming.

No I mean, we don't see that I talked in my comments about.

First let me back up and just say our diesel is an estimate of multiple scenarios and modeled losses as a result of that and then we did a bottoms up granular belt build as I indicated.

So.

I think our reserves and our provision in second quarter will depend less on that like a two Q shock and more on the expected duration and severity of the of the economy over the next one or two years right and so we additionally, we have to assess the impact of the stadium stimulus programs and our ultimate much loan modification programs.

And then we'll evaluate that over next couple of weeks, but I don't see it as anywhere near where we were in Q1, Steve Let me give it context too I know I know, it's so hard for you and obviously, it's hard for all of us because what we're doing is with the knowledge and we have as we're going through the process for giving we use we use a third party obviously with respect to data like.

Many of our peers do and then we look at that and we look at the applicability to our portfolio with what we're seeing the results of our bottoms up approach to looking at all the commercial credits, reaching out to our borrowers and all filters and what we try and determine at that time with the best forward outlook, we have on the economy and the best information we have on portfolio.

Performance is.

Our models assessed the life of life losses lifetime losses life of loan losses in the portfolio and so what I think will happen in Q2 is the banks will continue to revise based on what the forward outlook is and I think Glenn made a really good point I also think that we'll have better indications of how much the fiscal stimulus and other programs have helped.

To help maybe mitigate or offset some of that and at the end of today, depending on the depth and severity of the future economic forecast at that point in time that will impact and influence the magnitude of either additional provisions or no additional provisions or somehow we miraculously.

Start to reverse course, the release of provisions overtime, but I think it's really based on what what the macro economic forecasts, we will be as we approach the ended the second quarter.

John in terms of this specific exposures I appreciate all the color you're giving on credit, but if we look at the most impacted sectors on slide 15, which is really helpful. But there's a lot on pack on that slide.

Walk us through which of those do you see is the most for a specific to Webster and maybe which do you see you know being less risk risky just specific to base.

Yes, ill and I'll, let Jason obviously, because he's got a good perspective on it for us and.

I think restaurants are obviously, probably.

At risk I look at that portfolio, we do have some.

Broader.

Those aren't on the corner store restaurants for the most part there they are broader sponsor backed breast backed restaurants with high brand name. So we believe there is a good chance of survival, but they will be impacted.

Very little oil and gas very little travel and leisure from a hotel perspective.

So for me I think about restaurants.

I think about what exposure, we might have to nondiscretionary retail, although I said that thats relatively small.

So I would say that those are probably the most directly impacted Jason I don't know if you want to provide some color, yes sure happy to tackle the comment on restaurants right. Luckily we have a relatively small exposure and it's it's a portfolio. The we've actually been working down over the last couple of years.

I would also say that our average hold size in that portfolio is substantively less than other parts of most of that exposures in the sponsor portfolio.

We haven't we haven't today, taking material losses. So far we've got we've got the borrowers who are have multiple locations diversified geographically, but thats certainly part of the portfolio that I would be concerned about.

Gary talked about retail a lot of that is collateralized I guess a few the other sectors that I'm focused on is things like advertising base, which again, we don't have a ton of.

No companies that put on host or support conferences, and large gatherings right and business services to those.

And also we're seeing a lot of pressure at the moment in some of the routine health care services like dentist optometrists physical therapy things like that but you assume that most of that will recover. So they are definitely some pockets that we're looking at you could even focus a little bit on perhaps smaller office REIT will consumer.

Have you change after this right those are the things that I start to think about in the areas that I focus on.

Thank you that's helpful and maybe if I can squeeze one in for Chad. If we look at putting an account growth and HSH. It seemed to slow year over year view in the industry is this a new normal for the HFSA business.

Chad you want to take that one directly.

Yeah. Thanks, Steve.

I would say, it's not a new normal I think that we're going through one we've seen so as I talked in multiple calls over the last several quarters, we've seen slowness related to some of the Tailwinds subsiding in the industry.

I do think that in a recession, there's an opportunity for agencies are high deductible plans to grow more significantly because they tend to do well and economic downturns as employers are looking to reduce medical costs and so on I think there's a potential impacts ongoing impact as we look throughout the year.

With regard to the occurring.

Pandemic as one quarter's looked to go out to bid on.

Benefits plans and door, you've seen some for lows of folks impacting plans. So we're paying close attention to that we haven't seen any.

Packed yet in the first quarter.

Good and perhaps some some slowdown in some of the RFP.

Yes.

The quarter.

Alright, very good thanks for taking my questions.

Steve.

Thanks questions from the line of Collyn Gilbert with KBW. Please proceed with your question.

Thanks, Good morning, guys well.

So obviously right at the million dollar question on on how you guys took a bit about the reserve and how you build that going forward.

But just trying to put that into some sort of contact. So if we look at what you added but the reserve you added to the loan growth this quarter. It looks like it was like a 135 reserves.

Can you just maybe.

Help us sort of understand why that why that was hurricane in the way it did.

Sitting at 116.

Where it could go just kind of just framing that a little bit for sure. So congrats.

Yes, so the most of the growth that we had in the quarter as I said in my prepared comments was under commercial side. So were up 855 million so depending on what portfolio grows and the risk profile that'll drive the reserves for the quarter. So thats why its it's a little lower than the total reserve.

Okay column and.

Okay.

No go ahead, John No I was just going to say, it's really hard to give any more context, except to say I think we chose as Glen told you, but the actual underlying economic performance variables on.

Unemployment and GDP and house prices that he used we then did a qualitative review as Jason spoke to really bottoms up and I think we really know our portfolio very well looked at potential risk rating migration over time, the level of modification activity and what we tried to do was.

On the day that we put our pencils down we tried to.

Using our models and using our Q factors come up with life of loan losses across a $21 billion loan portfolio.

And across a securities portfolio of $8.5 billion and so I think when you think about what all the other banks are doing some of them put their pencils down earlier, we tried to take a conservative approach at our current economic forecast also looking at some of the potential behavioral elements in our portfolio.

And so we feel really good that we meet we meet the requirements of seasonal and obviously what happens with this the good part about it is as we move forward based on actual risk rating migration in the portfolio and based on a forward look of of the economy.

Our view will change and the models will change and it's really hard to do an apples to apples comparison, what I can tell you is we feel really good about our portfolio as I walk through our seasonal is not an indication that we're trying to get ahead of some issue. We don't see we literally feel like right now that's the appropriate number given all the.

Information we have.

Okay. Okay. That's helpful and then I guess and it was a hard question to answer, but just anecdotally and you guys have so much detail, which the slide you offered were fantastic. Thank you for that.

Yes.

And obviously as the duration.

Of this.

On the cobot experience do you have a sense.

The majority of your customers like how long they can sort of withstand and stay operating and staff slowed and modify and I mean is this something that they can carry through the next quarter or two or.

If this goes im just trying to get a sense of where their heads are on how they're thinking about the duration of that.

Yeah, and I'll, let Jason comment here as well I mean, obviously, that's it that's a tough question, but but the sense I think the sense is if you look at I mean, Jason made a very important point. We showed 331 modifications inline draws. We then also on the documents. We then told you verbally what it was as.

April 16, and we made a comment that the activity has slowed which is interesting right. So the number of modification request and the number of defensive line draws slowed over time, that's actually a positive sign we're working with a lot of our borrowers.

Regulators have given banks.

The greater flexibility in terms of being able to make payments referrals and modifications.

Overtime, and I do think that given the parameters and banks capital position in this just isn't for Webster I'm, giving the kind of a general view that we have the opportunity to modify three month, we can do another three or six month modification at the end of that period, there's a lot of liquidity coming into the market. There's a lot of programs like domains.

Street lending program hasn't even hit yet, which will give some larger borrowers opportunity for additional capital if they can't get it from their backs that ERP programs being refunded. The checks are coming out to individuals and families. So I think there is a sense that if we actually start what is it opening up America again.

Within or within a reasonable period of time that all of those bridges with the banks support and with good operating management by our borrowers that we can get through this so.

That's anecdotal right, you're asking me an anecdotal question I'm, giving you an anecdotal answer that says we havent seen a lot of our borrowers say.

If I don't get out of this in the next two months from done right. It's everybody's working together and there's a feeling that banks can be supportive sponsors can be supportive of their companies the government's providing financial support. So that's just my view, Jason I don't know if you have anything else that yeah. No look I think you hit all the right points in terms of the stimulated.

Unemployment benefits PPP.

As evidence of that perhaps is we've actually seen some borrows withdraw modification requests once the PPP. So when it went into effect and so we're seeing some evidence of that support and him, but I could do is I could break down if you think about the type of modifications that we've been doing by line of business I would say generally 3% to.

Six months right. So on a consumer side, it's been almost all three months. So we'd obviously has some ability to further extend if the impact in the virus goes on further on our small business business banking about a third has been up to three months and two thirds has been up to six months on the commercial side, it's been up to three to six months.

Two thirds of that payment related balances more covenants and borrowing base. So I kind of look at this right now between the stimulus programs and modifications that we've been granting three to six months plus the benefit of the of those programs.

Feels like a lot of our borrowers can withstand that that timing of impact.

Okay, that's great I will.

Yes. Thank you I'll leave it there I'm sure everyone I'll ask a question that I have so thanks, guys. Thanks Colonsay safe.

Thank you. Our next question is from the line of David to agree with Wedbush Securities. Please proceed with your questions.

Hi, Thanks, So I wanted to ask about the leverage loans, you mentioned about how sponsors have been willing to step up in support their companies. If we look back to the financial crisis. How much do you have a sense of how much new capital was actually contributed by sponsors to support their companies to support the challenge.

As they face back then.

I don't have a number David and I would I'd would be a doing you would just service if I guess to one but what I can tell you. When if you remember in that call a year ago I talked about that our credit performance in our sponsor in specialty business was actually better than many of our secured lending portfolios. It was one of the best.

Performers in terms of of actual loss it had risk rating migration in it but what I can tell you just again anecdotally in from experiences that if a sponsor.

Has significant cash equity in a platform company unless there's some sort of paradigm shift that makes that company completely not valuable if 70% of the capital structure as their equity and were lending at 30, 40% of the capital structure. They are not just going to turn over the keys. If they think that this is a temporary crisis. So.

Again, I think it comes back to depth and duration and we have evidenced that during the financial crisis. If we're backing good sponsors who are buying good companies that overtime with the bank of providing covenant relief and additional liquidity and the sponsors providing capital support those businesses.

Tend to make it through and again thats anecdotal can make any promises but thats, what that's what we've seen and we saw during the financial crisis.

Yeah, John if if you don't want I could jump in as little bit as well I would say that as you as you all know the level of dry powder, that's out there sitting in private equity funds right to support existing investments has never been higher and so and you couple that with the fact that you multiples for elbows have gone up and so the percentage of.

Equity and that's in these capital structures.

Disproportionate increase versus the amount of debt that has gone on so I think theres going to be a lot of incentive to support borrowers that have good business models.

Experiencing sort of a deep short term impact and we were actually already seen that with some of the modification request that we've got in responses have been willing to put in some equity provide us with a little bit of ahmeek, well to get access more liquidity and things like that.

And you just touched on in a little bit for one of my follow ups are you getting anything in return for providing loan modifications to these leveraged borrowers either in the form of consent fees or additional equity contribution from from the sponsors to provide those model.

Locations.

Yes.

We are getting some additional equity we are getting in some cases that make well right. Let us access the revolver for a couple of million dollars more we'll give you a guarantee.

We're taking the opportunity to add in LIBOR floors on a goods a substantial portion that are coming in which which is obviously health when a different way. So so we're not I don't think we're focusing so much on big fees right. Our goal is to help all borrowers at this point get through the time would also improve our position where we can.

That's right I'd remind you that maybe these are really strong relationships over time so.

Both both parties work to get to the best outcome. So good good answer Jason on the answers, yes, we're close to these folks and we work with them not not across purposes.

Thanks for that and then shifting gears to the State Farm HSC Act acquisition went out of curiosity when did state farm put it up for sale was this kind of a recent thing or has this been in the works for a while it was this a competitive bidding process.

So.

It was a couple months.

We've been talking to them.

As far as competitive I think I think Atlanta and more on our ability at our our capabilities.

From an acquisition standpoint, less on price it wasn't it wasn't an auction or anything like that and we've struck a very good partnership with them.

Which were looking forward to working with them going forward.

And your appetite for additional HFSA acquisitions sure Yeah remains remains strong David yes.

Thanks, very much sure.

Thanks questions from the line Jared Shaw with Wells Fargo. Please proceed with your question.

Hi, good morning, with his team or Brazil are filling in for Jared.

Good morning first.

Good morning, first looking at the level of PPP lending.

Color than what we've seen out of some of your peers with vis a vis a choice at Webster was this something structural that limited the level of production as we look at future SK programs coming on board.

What level of participation should we expect from UBS Sir.

That's a good question certainly we wanted to help every small business borrower and customer of Webster that we could we got through let's say approximately 30% applications approved 30% funding plus or minus a few percentage points on both sides of that we full.

We expect to.

Trunk those numbers significantly higher over the next few days as we've got internal approvals.

So I would say no. The answer is we add yeoman's efforts, we repositioned almost 300 people in the organization.

To go through it obviously you know there were technical issues.

At points with the trend system.

We've worked on trying to make our.

Automated process, a little bit more efficient so I'd say, we're kind of right in that national average, although you're right to point out that we trailed some.

We're going to work, our but off to make sure that when the funds come up.

Open up again that we close that gap a little bit.

Okay, and then can you disclose what the a kind of weighted average fee was for the.

That you did book.

So I think we're we're probably in the range between two and three.

Percent teamwork.

That were funding that basically at the PPP Lf at 35 basis points.

It helps us.

And then just last one for me not sure. If you can disclose this or not but the current reserving for the lending club loans and further restaurant portfolio.

No, we're not going to disclose by by segment, although again I'll just make a qualitative determination that.

That didnt that didn't drive.

Serving disproportionately to anything else that less than 1% of the portfolio and it does not have a disproportionate.

Impact based on our last modeling.

Okay. That's helpful. Thank you.

Okay tumor be safe.

Our next question is from the line of Laurie Hunsicker with Compass point. Please proceed with your question.

Yes, hi, good morning.

Good morning.

I just wondered if we could go back to slide 16, which by the way you're declines great really appreciate that.

We can just to start by looking at the total the total of $2.8 billion, how much of that is relisting on this slide.

So now approximately you obviously gave us the detail around the retail being 15% crane pets to that.

On your Mandelson now if you had you know how much is actually thanks.

Right, Jason probably does not have that off the top of the head, but I would actually one I ask you first Jason and then otherwise I can give rail relatively rough estimate.

Yes, the main components in there that are retail and is hotels in motels right. So it does not include some of the multifamily and office properties that I mentioned before it's also going to be and in retail as we talked about 58% I think is the number is Cree collateralized.

Retail and we talked about some of the characteristics of that right. So call that 600 million or so called the hotels other 125.

There may be a little bit scattered into restaurants in our small business, but thats, probably the sum total of of the real estate, a little less than 1 billion as my guess.

And on construction unrelated.

Yes, that's mostly equipment finance right. So that's why you trucking right good contracts, but right trucking.

Type exposure thats, probably to 300 million on it.

Okay. That's helpful. Thanks, and then in your air travel and leisure category, what primarily is that.

Yes, so thats everything from fitness facilities to.

You know conference providers or.

Companies that support conferences that might be our key rock climbing those types of golf clubs Hawaiian sees its a variety of different types of leisure activities for the most part a little less than travel unless we do have one or two borrowers that support travel events.

Right. They put on travel shows and so thats, probably the lion share that goes in there.

Okay. That's helpful. Thanks, and then.

Roughly up your billion, we'll have to sell outside the leverage lending how much of that says that on on slide.

On slide.

So I am sure I do have at this point 8 billion and I guess, how much maybe how much of the point 8 billion yen leverage lending at 230.

236 million.

Okay. That's great. Okay. Thanks, and then.

Also.

And I appreciate all the details you gave us around around modifications of your.

But that 3.2 billion or sell outs and that's how much of that is modified our Randy.

Okay.

FNF, excluding leverages about 17%.

And then some person that okay.

Lower lower than that.

Okay. Okay. That's great and then just last question of your 6 billion commercial real estate, how much of that multifamily and what's the LTV on that.

You don't have that I can follow up if you off the call.

Yes, you can you can see that on the chart right sorry Guy John.

No glasses.

Yes.

Yeah, you can see that on the chart that it's roughly 23%.

6.1 billion and if you focus on the exposure the majority of which is in the Cree line of business.

The LTV on apartments is.

62%.

Okay, great. Thank you.

You got to laureate sorry.

Our next questions from the line of Casey Haire with Jefferies. Please proceed with your question.

Yes, thanks, good morning, guys.

We'll follow up Hey, guys follow up on the.

Glenn the average, earning asset growth, you're expecting I think 4% and the and the second quarter here.

Just the composition of that I mean, the 650 that you've booked quarter to date is roughly half that 4% move it sounds like you're going to your you're going to be doing more one on the program refunds.

So my question is is this 4% growth is this going to be entirely PPP or is there going to be any any core loan growth.

So I think a lot of our commercial growth came in at the at period end, So we'll get to pull that into the.

Second quarter and on a CPP side, it's probably about half of it so.

So I'd say about five on average.

Look that it's probably about 500 million, yes, Casey at that question also kind of tries to get to what's going on in the into core underlying I made the comment we closed a big deal in April on on a technology infrastructure transaction I looked at our pipeline, it's clearly lower than it's been generally just as a seasonal low pipeline any.

Away, but it's slightly lower than last year.

As I said, we're going to be more careful obviously your lending into uncertainty and so you need to make sure that the underlying fundamentals work obviously on the cutting the other way you do have a little bit more leverage and use that word I, probably should use that word but as a lender you have a little bit more leverage to make sure that your structure and your pricing work. So I would say glens right.

You'd see probably that act that yes in fact that we had a lot of findings at the end of the year will carry into the quarter will carry through the next quarter, we got PPP and some from the main street lending program, and then a lower level, but a decent level of organic growth and then the last thing I will say as we do anticipate and I'm always asked us.

Paydowns.

I do think just with the general level of uncertainty and lower economic activity, we'll probably see lower pay downs, which will help keep that earning asset number up.

Okay, Great and just if I, if I pieced together the the NII in earning asset it looks like you're implying a NIM down about 10 bips.

In the second quarter.

Can you just.

And from that and then you know.

If you could where spot rates for loan yields and deposit costs at 331, if you have that clients. So yes. So I think your your NIM is probably in the range and I think if you looked at our outlook on a on rates going into the second quarter.

We're assuming the tenure.

The around 70 basis points, a three month LIBOR about this is and this is the full quarter average about 77 basis points, a one month LIBOR about 53, and you've seen that trade up closer to two to 70, but we think that will come back in and in fed funds, obviously around 24. So.

So the market rates continue to go down.

And I think so I think if you look at our net interest income you have continued Nate.

Rate pressure, but it's offset by loan volume. So the net result is our net interest income was flat basically flat quarter over quarter.

But I think your new met your NIM estimate is probably in the range.

Okay, Great and just last one on the other capital management front.

No I understand that triple pays.

Is it carries a zero risk weight, but it does it does hurt the Tc ratio.

Oh, yeah at seven seven today, where is there a floor that where you guys would not want to go even Steven.

You would not want to see that dipped below even regardless of what you did with TPP.

I think we have plenty of room there. It's it would be very low I mean, it go below seven before we have any issue with it.

Got it thank you.

Thank you Jason.

Thank you. Our next question is from the line of Matthew Breese with Stephens. Please proceed with your question.

Good morning.

Hey, good morning, Matt and you put out a whole bunch of good credit pieces in the last few weeks I appreciate that thank you.

Just on the PPP wanted to just a point of clarification. How are you treating the fees are there was going to roll through and I or other noninterest income.

And then what is your average life alone there.

So we're assuming about 24 months and the average life alone and yes, it will roll through at <unk> to the extent, there's any pull forward, obviously that would pop NIM right and then net interest income.

Okay.

Okay, and then just looking at some of them more granular aspects of the scene I portfolio. You mentioned that equipment finance is 7% of that book can you just walk us through some of the common types of equipment that you'd like to underwrite weren't or stay away from and if you have it I would love to hear how much of this equipment. If you know is active versus.

Idle right now.

Yes, that's a great question and obviously, we've lowered the amount of disclosure because the portfolio used to be over $1 billion. There is much smaller now I can't tell you that it's generally things like yellow metals fleets of school buses.

Tractor beds and other things, Jason I don't know.

You probably have more of a granular insight into the the collateral types I don't think we have the active and dormant stats right now, but Jason you have any anything that there yes, no I don't I don't have the detailed on with idle and what sort of working at this point, but you hit the major categories. It's it's primarily.

The trucking, it's auto transport you know, there's some yellow iron in cranes.

I'm a little bit of construction, we've reduced that a fair amount as well as buses whether it be mostly charted buses. So it's it's definitely more on truckee side, which which is it's interesting we were see modifications. There. But then there are certain company to just flat out it just depends on what markets, they're serving right. So.

But yeah, that's the primary break them.

And I think.

Thanks, Matt I May have said this and I'm not sure I believe that of the 300 commercial banking units of of modification. The actual borrowers at about 100 of those are small ticket equipment finance. So we are seeing some activity there, but as Jason said, it's kind of hit or Miss.

In terms of of of what's happening there. So small dollar amounts, but more higher volume request for modifications and equipment finance, but we'll we'll try and disclose more next time around okay. And then a similar question on sorry, there is roughly 425 million in health care. That's another 539 million health care loans in the scene I ports.

Folio can you just.

Provide a little bit more detail on the types of health care, whether its hospitals are outpatient skilled nursing nursing homes that type of thing.

Yes.

Yes go ahead Jason.

Yes, I am it's it's mostly skilled nursing right and what we've got probably about 300 million and then we've got what I'll call. Some senior living facilities right that if at a lump into the same category, whether its independent living assisted living memory care.

I think John mentioned before in his comments you know Datacenters is a big is a is another section of about 250 million and those are real high quality assets would tend to 15 year contracts with you know really really high or double a AAA borrowers take or pay contracts and then on the Midmarket side, it's more onerous.

The pie.

Type properties in footprint.

Got it okay. That's all I had I appreciate taking my questions. Thank you anytime that.

Your next question is from the line as Ken Zerbe with Morgan Stanley. Please proceed with your question.

Great. Thanks.

I guess going back to the reserve.

Given your assumptions do we could be fairly much in a V shape type recovery can you just talked about the magnitude of difference if I get that if unemployment goes or GDP falls, 18% goes down to 30, it's it's probably not as big as the initial GDP move, but whats the magnitude if you assume.

Instead of a second half recoveries, maybe twice why one recovery. So we actually go through say three more quarters of very depressed economic activity.

I'm not sure I can't quantify that for you can what I can say is that.

If if the assumptions around recovery end up being more dire as you move forward, we'll probably see some of the management overlay that we put forth this quarter.

Actually flow into the numbers, so we might not need as much qualitative adjustment to the underlying models, but I would say Glenn what what's the most recent April the difference in terms of what we see in terms of depth as far as GDP, yes, it's probably another.

12 basis points lower in Q2.

But then the recoveries much stronger I'm not sure can just to go back little bit I'm not sure. We're we're thinking of a V shaped recovery that we're thinking of a more gradual recovery and towards the second half of the year and that's really what you know our estimate again as a mix of of multiple scenarios and multiple MRO losses, and that's really what we're focused on but we it is something as John any.

Case that we're monitoring very closely and I don't think.

Anyone knows a precise answer right now, but based on everything we said and making.

Model adjustments and they're looking at our portfolio building it up from a granular basis and seeing how our customers would behave over the next 90 to 120 days. This is where we ended up.

And can I simply I can I completely understand where you're trying to get too, but it's exactly what Glenn said, because we're going to see if we see risk rating migration, depending on the impact of all of the stimulus and the government programs and our modifications overtime, we're going to see changes and whether its JV or you are an l. shape.

And so we kind of have to wait to see how that plays out to really figure out because we may have oh.

A longer recovery period, but we may see really strong impact of fiscal stimulus and all of those variables go into.

You know our modeling in our Cecil and we kind of have to wait to the ended the quarter to see where that is gosh I guess I guess I was trying to figure out like whether the like assays in l. shaped recovery, but less GP decline like if that could have say multiples of the reserve build they saw this quarter I guess I'm just trying to size the impact on.

Hi matters more to your reserve.

No I am I thinking the in all of the different models. We ran I don't think its multiples right I think I think multiples that may be more the depth or another shock or some issue, but in terms of the nature of the recovery. If you think I think that depth, maybe more impactful than the duration in some respects.

So I do think that if you look at our going out that if we if we end up going away from a year or are you more towards and al that it's not multiples right in any one particular quarter.

Okay, Great all right. Thank you.

Thank you sure.

The next question is from the line of Bernard Horn with Polaris Capital. Please proceed with your question.

Hi, Good morning, Florida, it's going to questions and by the way great detail on the slides and all the explanations with respect to credit.

Thanks, just on the PPP.

Did I understand you're right that it looks like the margin on that program was about either from 75 to a 200 and.

A 25 to 23 basis points, two to 300 basis points on rate with 75 basis point funding and then did you.

What kind of additional fees are you in occurring in those I mean, the earning.

And our you dealing with existing customers and are those providing.

Additional relationship activities that you might develop into other business.

So I think we're probably.

So I think various Glenn good morning.

We're probably we probably we have a coupon about 1% and then with the fees are probably being a range between two and a half at 3%.

The funding is about 35 basis points to the pp Lf, which is uniquely instead of uniquely for this so.

So that that that gets you probably maybe a little higher than what your range was right. So the right. The program has about a 1% interest rate and then have sliding fees depending on the size. It I'm looking at what we're doing I think 80 about 80% of our applications have been below $350000. Those carry higher levels of fees. So you kind of put that also.

Together and it increases the NIM, depending on what your average life has made your spread could be two in a quarter to 250.

And your question on customers versus non customers. We have we we work with both and we haven't denied we our primary focus is to help our customers and as you can tell Bernie from the stats we gave.

Unfortunately, when the money ran out we havent helped as many customers as I would've liked to help, albeit we did an unbelievable job yeoman's effort of people working remotely.

From an bringing people in from other areas and leveraging technology.

We've accepted applications from both primarily roughly 90% of the applications. We received were from customers.

Yeah.

With that provide you with any opportunity to do more business with them I mean I'm just.

Wondering if it allows you to get deeper into the customer.

Yeah, I'm going to be I, I'm going to be honest with you philosophically, it's not our primary concern right now is to try and be part of this solution and you know I'm actually talking with our other banks Ceos on a frequent basis about making sure that this program does what it should should be but certainly if you're there and you take care of your customer.

As a noncustomers, presumably that's going to have an added benefit over overtime and I think we'll obviously be able to talk about impact to customers in non customers as the program works itself through.

Very helpful. Thanks on the Securities portfolio was the increase on slide six as a result of market appreciation with Matt major drops and interest rates or did you add to the.

So the portfolios.

A year from Bernie you're referencing slide six.

36, sorry, 36, okay. Yes, so we did add to the portfolio you can see that in our balance sheet period, and I think were up 283 or 283 million quarter over quarter.

Okay. So after that or is that gives it but.

I'm sorry.

So you at actively purchased additional securities. It wasn't just from the increase because rates drop we did okay. It and so I guess that.

Go ahead, I mean in part due to life in.

We're at a six year duration in part to to help our improve our asset sensitivity early in the quarter yet.

Yes, I guess at partially answers my next part of the question, which is given that that portfolio has swung from a you know a.

Total loss to I mean to from a loss to a gain any.

Given that interest rates are so low where they are right now can you comment on whether you might.

Change your outlook on.

How you hold that securities portfolio.

I think it's too early to too early to say.

Morning.

In terms of accordingly, we obviously like it from a from an interest rate risk standpoint, we use it to manage our asset sensitivity and we use it yeah thats portion for liquidity so.

I think we'd sort of triangulate those three and we arrive at where we think we could be obviously these are lower risk weighted security. So.

It doesn't take up a lot of capital either so we like where we're positioned right.

Okay. Last question is on could you comment on the CD roll forward and repricing and what you're seeing there.

So I think you've seen the CD balances come down part of that's in response I think we've pulled back on a lot of promotional programs in most of our markets and so yes, I think you see what you've seen as customers sort of pausing and moving into into other funds not locking up their money over a longer term.

So as a result, our CD portfolio, a short, which again helps our asset sensitivity.

Great and any comment on the the amount of those Cds that will be repricing over the next you know two or three quarters.

Oh, Yeah, I don't have that in front of me.

I can come back to you went up Bernie.

Well, thanks, very much that's up that takes care of banks Bernie.

And on denim and our next question is from the line of William Wallace with Raymond James.

Morning, guys.

Hey, good morning.

On the on Slide 15, I'm wondering if you could just talk a little bit about.

The risk migration of the ratings within the past category as as you modify these loans and if you didn't give it already how has that modifications number change since 331.

I'll, let Jay can do that we did update.

William the the revolver draw modifications on those pages with and Jason will repeat that.

For you and you know there hasn't been let me make one general statement, then I can give it to Jason there hasn't been much risk rating migration, yet right because you're going through this process and you're really looking at you know reported numbers, where your customers are and things that are purely temporary and coated related from.

Modification perspective don't necessarily warrant a downgrade based on.

Regulatory guidance specific to the pandemic. So we havent seen much in I think when all of you get on the calls with all of the banks in the second for the second quarter earnings, you're probably going to its going to be able to see a better indication of actual ratings migration, but Jason do you want to update those modification stats.

Revolver draw stats for page 15 as of April 16th Yeah, sure up from 517 to 692 and revolver draws on the up modestly from 122 to 130 and in terms of the risk rating migration, Yes, I think we're sort of taken a alright, let a wait and see.

So to speak and as we get more information as to how long the pandemic flu pandemic impact will last.

But we've made sure as Glen went through that we've captured in an appropriate reserve to reflect.

The modification activity that we've seen in a potential risk rating migration, we expect.

Okay. So.

I mean, I know, it's impossible to know exactly at what point, you'll start to adjust but is it three months when you start to worry about what are what.

Cash flow recoveries for these for these loans might look like has it six months or is it to two impossible.

Yeah, No no I don't think Theres a rule of thumb. So you saw downgrades, we have higher classified in the quarter. We're watching every single loan in every single portfolio. So we're just being disciplined to the approach that you downgrade once the ongoing financial metrics trigger into a new grade category or if you think you're.

Potentially at risk for further downgrade and it goes to watch special mention or sub standard. So, we'll we'll do that and we're still doing that I'm, just saying given where we are we have not yet seen a meaningful risk rating migration that you may see depending on the depth and duration of the of the downturn.

Okay. Thank you very much appreciate yes. Thank you want I appreciate it.

Our next question is from the line of Mark Fitzgibbon with Piper Sandler. Please proceed with your question.

Hey, guys. Good morning, and thank you for all that detail on credit just two quick questions. First can you give us a sense for what percentage of your commercial loan portfolio. Do you think ultimately will go into forbearance and then secondly, if you could just Glenn clarify your comments on the margin I missed those so I apologize.

For the margin.

Okay, No Mark actually it's great to that's great to have you on the call and we've gone a long time on this on this call. So appreciate you hanging in there.

I'll take a crack and then maybe see adjacent wants to put.

Another comment what's very interesting isn't we talked about this that if you look at the modifications through April 16th right. We gave that number verbally on the whole portfolio of slightly up and the revolver draws we've seen a slower trend right. So it's it's hot.

Third to predict.

Again, looking at depth and duration as who is going to come to us for more modifications. We don't know whether the PPP program. If in fact, even if they authorize another 250 billion. If you look at the statistics, probably everybody that qualifies doesn't get funded so maybe if those people who are eligible and do not receive.

Weve alone maybe they come and ask for modifications. So there could be an uptick after that but what's fascinating is is the amount of defensive draws in the portfolio and the amount of modification request has sort of kind of slowed down with respect to pace and trending so it doesn't look like now.

At least in what we're seeing that we're going to see a flurry of additional modifications I think it will be dependent upon particular challenges by independent.

You know in under independent circumstances by borrower, Jason I don't know if you think that's that's accurate correct me if you want to.

Yes, all I'd say as we've actually seen net revolver reductions through the first half of the month from you know we talked about the 450 or so that when draws in March and almost 100 million at has been paid back down.

That's a bit of an encouraging sign and again across all the lines of business, we've seen less modification over the last.

A couple of weeks in the last week in particular, it's hard to peg exactly where we think this might end up or what I can tell you is we do have that weekly update and bottoms up approach that we go through updating those numbers exactly and so we do think we're going to see more than what we've seen so far it may slow down for now we may see another wave when some.

The you know the initial modification request, we granted sort of come back for further discussion once we have more information, but but we're on it and we haven't very very good feel as to what we think we might see.

And Mark I don't know if you were on the call at the beginning but I did give as of April 16th right in the mortgage and residential books combined that's about a 7 billion dollar Prime book about 476 million or 6.5% had requested and been granted modifications as of April 16, Thats last week.

In small business 750 borrowers.

Reflecting $300 million or 17% of our business banking $1.7 billion business banking portfolio, 17% had been modified and in commercial about 300 borrowers representing 1.6 billion or 13% of the commercial funded loan.

On book had been requested are granted modifications.

Thanks, and then the question on the margin for Glenn sure and so Mark Good morning, where we're assuming.

The following as far as our average rate forecast for the second quarter, we're thinking the tenure swap or probably around 70 basis points, a three year LIBOR rate on average around 77 basis points in a one month LIBOR rate somewhere around 53 basis points of course fed funds at 25.

So is making that sort of assumption.

Again, I would say that you can assume that our net interest income.

We'll be flat quarter over quarter set to 30 to 31 somewhere around there they'll continue to be margin pressure and you know it could be 10 to 12 basis points, depending on the mix. So it's hard to tell this early but I mean, that's that's about where we think we'll be at this point.

Thank you.

Yes, Mark say stay safe and well please.

Thank you.

So weve reached into a question and answer session I'll hand, the flow back to management for closing remarks.

Thank you what we very much appreciate your spending so much time with us this morning, and giving us an opportunity to walk through our credit portfolio as well.

We're focused on being part of the solution here and helping our.

Customers and our communities and keeping our employees safe and I wish the best to all of you out there on the phone. Thank you.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.