Q1 2020 Earnings Call
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Thank you to wind up being good morning, everyone. I Hope you all are saying.
Hi, Atlantic Union, Bankshares, President and CEO, John Asbury Executive Vice President and CFO reform and with me today.
We also have other members of our executive management team dialed in for the question and answer period.
Please note that todays earnings release and webcast or any companies like presentation Youre going to go through our available to download on our investor website investors that make that union dot com.
During the call today will comment on our financial performance using both GAAP metrics and non-GAAP financial measures important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, including animal earnings release, and then the earnings supplement for the first quarter 2020.
Before I turn the call over to John I would like to remind everyone that on today's calls will make forward looking statements, which are not statements of historical pack and are subject to risks and uncertainties.
Certainly never Shurn stuff actual performance.
Oh.
Well not differ materially from any future results expressed or implied by these forward looking statements.
We undertake no obligation to public revise any forward looking statement. Please refer to the earnings release for the first quarter and our other asked you see filings for further discussion the company's risk factors and other important information regarding our forward looking statements, including factors that could cause actual results to differ all comments made during today's call are subject to that safe.
Statement.
At the ended the call we'll take questions from the research analyst community and now I'll turn the call over to John Asbury.
Thank you bill thanks to all for joining us today, and I hope everyone listening is safe and well we began 2020 with momentum and had an ambitious set of work ahead of US. We continue to believe that our strategic plan has the right. One that we have a great opportunity before us to create something uniquely valuable for our shareholders in the communities, we serve and remain keenly focused on reaching the full.
Central of this powerful franchise, the what a difference a pandemic mix and this cobot 19 unfolded, we quickly adjusted both our near term and mid range plans since been bartsch, we have had 90% of or non branch personnel working from home in order to distribute our workforce and reduce the risk of Cobas 19, contagion that we were able to pivot quickly.
Effectively it's a proof point that we built a resilient organization that can react to unexplained unexpected circumstances and innovate.
Rob will cover the financial details for the quarter, including a deep dive into Cecil.
Instead of tracking back to our progress on our strategic priorities is that typically do during these calls I'll cover our kubat 19 response its implications in the near term and its implications for our future is we realigned our company's expense base to the new reality of a much lower for much longer than expected interest rate environment.
We do believe the current pandemic is transitory and we'll manage through it but we must position ourselves for the new reality that comes afterwards.
In crisis, it's good to play the fundamental strengths one of our strings I believe this consistency we haven't will continue to operate under them Entre soundness profitability and growth in that order of priority to somebody though I began my career at the old Wachovia Bank and trust in Winston Salem, and 1987, where I was trying to commercial credit officer I learned that my trip soundness.
Profitability and growth in that order of priority from John Medlen, whom I still consider among the best Bank Ceos of all time never more than now over the course up my nearly 33 year career I look back on what I've learned from Mr. Bad luck and I believe he was right a sound bank as our first priority.
And credit culture served our company well during the great recession, and it will service well during the current a virus pandemic.
Turning to our pandemic response, we started our first awareness campaign with teammates in late January and continue to monitor the situation and make preparations through February.
As it became clear the pandemic was eminent we activated our formal incident response team on March 4th we restricted travel him in person meetings on March six our first customer update went out on March 13, we did a Max test of our virtual private network, which is remote work capacity on March 12 to prepare for working from home model.
On March 16th we restricted nonessential vendors in teammates from offices and shifted to a work from home model, 90% of all non branch teammates are currently working remotely, including 90% of our call center team edge.
In March 19th we were one of the first Virginia banks to move our branches to a drive-thru model with branch lobbies access by appointment only.
We limited Saturday branch hours on March 21.
March 20, Threerd, we notified our clients about our customer hardship program and how we can help during this crisis.
We started preparing for the SP, a paycheck protection program on March 27, Stefan its being signed into law and were in position to accept applications through our online application portal on the day. The program began Friday April Threerd, we mobilized and five days, we developed the application portal and an automated workflows system in preparation.
And for what we correctly expected to be an on slide of applications. Since so many of our small to midsize customers appeared to be eligible.
Our teammates recognize the importance of this program and it worked tirelessly and still are to establish high levels of customer service even through the exceptionally strong initial demand we've had over 400 teammates or 25% of our workforce working on this full time since it started.
And over a thousand employees are half our workforce working on it and some capacity to date, we processed approximately 9670 applications for 1.8 billion and the SP approved 6500 to them for 1.4 billion in the first round the funding.
Yes be approved funding supports nearly 130000 employees of our clients across this great franchise.
We offer this program to all existing eligible customers of Atlantic Union, not just borrowers not just a select few.
After the first round of funding ended we left or application portal open continuing to process existing applications and invited new clients to apply in preparation for round to a funding, which we're working on now.
We revisited our charitable contribution strategy to support Cobot 19 relief.
Since March 16th the leadership team has started and ended each day together on video conference lying better communication real time decision, making and team work than ever before despite our working remotely from the beginning our priorities for them to make the right decisions to protect our teammates come first and the bank for our teammates the pivot and working environment has been surprisingly.
Active while we had the resilience plans in place and had conducted tabletop business continuity exercises nothing could have prepared us for the reality of a pandemic. Some of the planning we found effective and use it and someone out the window more important we made decisions quickly in the face of uncertainty found a way to do what needed to be done and continue to.
Do so today, we've learned to work differently and our customers have learned to bank differently. For example, we've seen usage of our digital channels increased 46% our call Center volume has doubled the average call time as a little more than a minute longer than before we time averages are hovering around four to five minutes compared to about a minute before.
The crisis, yet call center customer satisfaction is above our historic highs based on our measurement.
For most of our customers. The storms arrived we batten down the hatches from a credit risk mitigation standpoint, we feel confident about weathering. The storm, we don't have outsized exposure to the industry's most directly impacted by social distancing measures put in place such as hotels restaurants in retail.
Let me talk for a moment about the steps we've taken to solidify our credit position. We of course reached out immediately proactively to our business customers to assess the cobot 19 impact on them and implement payment modifications were necessary verify collateral reviewed in detail our loan books with a focus on the highest risk borrowers and industries.
Since the start of the crisis until February April 24th we've modified approximately 4000 commercial loans with a total balance of 1.9 billion, which is approximately 15% of our total loan portfolio.
Modifications run the range of options that are tailored for each borrower the majority of them about 75% for payment deferrals with a total balance of 1.4 billion, which is about 11% of the loan portfolio. Our goal is to help us many of our clients to this time as possible.
As the quarter ended commercial line utilization remained steady at around 35% since quarter end. We've seen line usage decreased slightly we're not seeing any broad drawdowns. We are aware of the press regarding excessive line of credit drawdowns, but believe that to be mostly a large corporate phenomenon and that's not a major factor for us.
Our exposures to the most in focus industries are limited and are outlined on slide nine of our accompanying presentation. Our hotel portfolio comprises 650 million or 5% of our total loan portfolio consists primarily of non resort hotels flagged by branding.
The don't rely on conventions are conferences, the hotel portfolios debt service coverage ratio and the loan to value is the best among all of our commercial real estate property types portfolio debt service coverage is 1.9 times and the median loan to value is 60%, providing a good equity buffer to ride out the shock and accommodate deferred.
Payments, our restaurant exposure is 226 million or less than 2% of total loans, its granular and its 85%, 85% secured by real estate collateral.
Our retail trade exposure is less than 4% of total loan exposure about half of this is to local gas station with convenience store operators and auto dealers and 80% of the exposure secured by real estate collateral.
Regarding senior living facilities, we finance independent living assisted living and continuing care communities. These represent 280 million about 2% at a loan portfolio. There are managed by good operators with established track records thankfully so far in non have been a hot spot for the pandemic.
Our healthcare segment is also granular and heavily secured by real estate, we have no meaningful exposure to aviation cruise industry's or energy and as you may recall, our third party consumer portfolio has been winding down for some time.
Our perspective is that were simultaneously managing three significant events first the cobot 19 pandemic second the paycheck protection program, which has been an enormous undertaking like nothing we've ever seen before and third the recognition that we must align the company's expense base to becoming reality of a much lower for longer rate environment.
Than expected, we will manage through the pandemic, which we consider a limited duration of that but as it ends will have positioned ourselves for the lower for longer rate environment and the macro economic reality afterward.
I've told our teammates that the current normals not the new normal but that we think the post cobot 19 normal will be different still we have to prepare for that reality.
We are realigning and expense structure to match revised revenue expectations to maintain our goal of top tier financial performance, we'll have more to say about this is our plans are finalized in the coming weeks, but rest assured we remain focused on the long term and are continuing to deliver top tier financial performance. We remain committed to our previously discussed top tier financial metric.
Markets beginning in 2021.
Although it seems like each in history by now Rob will take you through the financial results for Q1, and I'll speak to key accomplishments during the quarter as I mentioned before we had good momentum heading into 2020 and started off the year with strong deposit growth with loan production tracking to our plan.
Looking at accomplished a lot in the first quarter, particularly in digital start we rolled out our new online account opening platform, which was perfect timing given what has happened implemented card control. So customers can turn off their debit card on their own improved our chat and secure message functionality for customers improve fraud detection for online bill.
They can sell transfers.
Rolled out a stark card to provide a temporary debit card at account opening and identified a number of process improvements to make our company more efficient scalable.
We also launched in the commercial Bank Treasury Management Group Health care Lockbox service, which supports accounts receivable collection for the unique needs of healthcare organizations.
And the second quarter, we plan to further improve our digital experience by rolling out an interactive chat function for online account opening.
Upgrading alerts to near real time for a better customer experience and better fraud detection and launching an appointment scheduling to allow customers to book appointments in the branch from a website and or mobile app.
Our financial metrics were heavily impacted by the elevated provision for credit losses due to the worsening economic outlook related to the 19, Rob will walk you through all of those details.
I will say that given the challenging current and expected operating environment for banks are full year outlook will ultimately depend on the duration of cobot 19, and consequently, the length in depth to the recession, there are markets, but our goal remains to achieve and maintain talk to your financial performance, regardless of the operating environment, we face great uncertainty at this point.
But we do believe we are in a you see eight pardon me. We believe we're in a U shaped recession and expect recovery before the years out. The question remains as to how long will be at the bottom of the you at this time, we simply don't know.
The economy in our footprint was steady heading into the crisis with unemployment in Virginia, 2.6% in February and picking up to 3.3% in March we continued to see higher unemployment claims since April progressed.
The Virginia economy is fairly unique is about 20% of the economies anchored by the federal government. The federal government spending is for 10 for Gen is mainly for agencies in the department of defense with only a small fraction going to income assistance programs education and transportation.
I've consistently said since I arrived that I believe problem asset levels at Atlantic Union and across the industry were below the long term trend line. We're now experiencing an unexpected change in the macroeconomic environment that I mentioned could impact credit quality and we're now in a systemic downturn.
We expect to return to more normalized levels of credit losses. After the impact of the pandemic works works its way through the economy.
We didn't away from the quarterly results. We continue to believe that our three year strategic plan will create a company with differentiated financial performance, but the path to finish the work of this plan is going to take longer than we had planned.
I'll have more to say about the changing timeline or a progress against our strategic plan in future calls.
Looking down the road in regards to other strategic opportunities that should be clear from my comments that were busy and focused on the near term pandemic response and credit management.
For now we'll do what we need to do to fight another day.
Our slice opportunity I believe will emerge from the crisis stronger better more efficient than before I believe we will demonstrate that we made the tough choices we needed to make that we were a nimble resilient and innovative in response to a most unexpected operating environment, we'll manage through the crisis, while positioning for future opportunity again success.
Summary, we're focused on weathering the storm, taking care of our teammates and customers and protecting this bank, we will realign our expense structure to match the lower for longer rate environment. That lies ahead, we'll continue to work our strategic plan, but will shift their timelines to adjust for the new reality Im incredibly proud of our teammates and all they've done and their ability to.
Rapidly adjust to a new way of working in the midst of all of this uncertainty am grateful for their grid their willingness and ability to deliver it great personal sacrifice $1.4 billion of the paycheck protection program funding for our clients their employees in our communities. During the first ran to the program.
We are hard at work on ground to even as I speak.
I remain confident with future holds for us and the potential we have to deliver long term sustainable financial performance for our customers communities teammates and shareholders I'll conclude my remarks with a familiar refrain Atlantic Union Bankshares is uniquely valuable.
Dense in compact and great markets with the story. Unlike any other in our region now more than ever before I believe we've assembled the rightskill the right markets in the right team to deliver high performance even in uncertain macroeconomic environments.
I'll turn the call ever to Rob to cover the financial results for the quarter Rob.
Well, thank you John and good morning, everyone. Thanks for joining us today I Hope you your families and friends are all seasons that are staying healthy.
Before I get into the details of Atlantic units financial results for the first quarter I think it's important to reinforce John's comments on Atlantic unions governing philosophy of sound this profitability and growth in that order of priority.
This core philosophy is serving us well as we manage the company through the current cobot 19 pandemic crisis.
We are currently facing an unprecedented crisis management is that that requires us to be laser focused on the safety soundness and profitability of the company.
As we will discuss further Atlantic Union enters this time of uncertainty in a very strong financial position as we deal with the impact of coded 19 on the banks financial results, we have a well fortified balance sheet strong capital base and ample lots of liquidity, which will allow us to whether the current storm and can come out even stronger once this crisis as Pat.
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As a matter of some enterprise risk management practice, we periodically conduct capital credit and liquidity strip stress tests for scenarios such as the operating environment, we now find ourselves.
Results from the stress to us give us confidence that throughout the crisis. The company will remain well capitalized and has a necessary liquidity and access to multiple funding sources to meet the challenges of Covidien 19.
But effectively managing through this crisis, we will become a stronger company that is well positioned to take advantage of growth opportunities as economic activity resumes 80, but government support and stimulus.
Now, let's turn to the Companys financial results for the first quarter of 220.
GAAP net income for the first quarter was $7.1 billion or nine cents per share, which was down significantly from the prior quarter due to the 57 million dollar increase in the provision for credit losses compared to the previous quarter.
This increase is primarily due to projected credit weakness as a result at the deteriorating economic outlook related to the coded 19, Corona virus pandemic, which requires a company to materially increase its allowance for credit losses during the quarter.
Non-GAAP pretax pre provision operating earnings were $68.3 million were 86 cents per share, which was down slightly from the prior quarter, primarily due to seasonally higher personnel related costs.
I will now discuss the impact of the company's adoption of Cecil on January Onest and the subsequent impact of the worsening economic forecasts related coated 19, which resulted in the material increase in the allowance for credit losses, and the quarterly provision for credit losses.
Atlantic unions adopted the Cecil accounting standard on January Onest as you know under Cecil County Lifetime expected credit losses are now estimated using macro economic forecast assumptions and managements judgment, it's applicable to and through the expected life of the loan portfolios.
At March 31st what each one of the allowance for credit losses was $150 million or 1.17% of total loans inclusive of the allowance for loan and lease losses of $141 million and the reserve for unfunded loan commitments of $9 million.
The allowance for credit losses increased $107 million from December 31st.
Rich 52 million was due to the adoption of Cecil so-called Ses will be one impact and 55 million was driven by the deteriorating economic outlook related to covert 19 subsequent to the adoption of Cecil.
So called Cecil day to impact.
The allowance for loan and lease losses increased $99 million from December 30, Onest due to the Cecil day, one intact, the $48 million in the Cecil due to impact the $51 million the allowance for loan and lease losses as a percentage of the total loan portfolio was 1.1% at March 30, Onest, which was up from 34 basis points at December.
31.
The reserve for unfunded loan commitments increased $8.1 billion from the prior quarter due to the Cecil day, one impact of $4.2 million any ses will be to impact of $3.9 million.
The $55.2 million Cecil day to increase to the company's allowance for credit losses took into consideration the kogan, 19th pandemic impact on credit losses, both through the two year reasonable unsupportable macro economic forecast utilizing the company's quantitative Cecil model into management's qualitative adjustment.
Beyond the two year reasonable unsupportable forecast period, the seasonal quantitative model estimates expect the credit losses, using a reversion to the meaning of the company's historic loss rates on a straight line basis over two years.
And that's the meeting expected credit losses within its loan portfolio at quarter end the company utilize Moody's macro economic forecast as of March 27th for the two year reasonable insupportable forecast period, the Moody's economic forecast assumes that on a national level GDP with declined by 18.
Were set in the second quarter, and then that the national unemployment rate would peak at approximately 9%.
Moody's forecast for Virginia, which covers the majority of our footprint assumed a peak unemployment rate in the state of about 6.5% remaining at about 5% throughout forecast period.
In addition to the quantitative modeling the company also make qualitative adjustments for certain industries viewed as being highly impacted by coven 19 included hotels retail trade restaurants in healthcare as discussed by John earlier. The qualitative factors also considered the potential favorable impact on estimated credit.
Losses, but the massive U.S. government stimulus support funding, including the small business Paycheck protection program.
As a result and above expected credit loss modeling assumptions as mentioned earlier, the first quarters provision for credit losses was $60 million and the allowance for credit losses increased by 55 million subs to $150 million were 1.17% of total loans up from 34 basis points to the end of last.
Here.
Well the context, the 1.17% allowance level represents approximately 60% of Atlantic unions peak two year loss rate rates in the great recession, and approximately 63% of the projected nine quarter losses in the company's most recent internal stress testing scenarios.
From a regulatory capital perspective, the company is phasing in the capital impact of adopting Cecil over a five year period has allowed under the interim final rule.
Rules issued by the regulatory banking agencies in March under this rule. The company has allowed to include the capital impact of the Cecil transition, which is defined as the Cecil day, one impact to capital plus 25% of the company's provision for credit losses recorded recorded during 2020.
Regulatory capital through 2021.
Beginning in 2022, the Cecil transition capital amount will begin to be excluded from Rick regulatory capital over a three year phase in period ending in 2024.
For the first quarter 2020, net charge offs were $5 million were 60 basis points of total average loans on an annualized basis as compared to 4.6 million or 50 basis points for the prior quarter in 50 basis points for the first quarter last year.
As in previous quarters significant significant amount of the net charge offs approximately 55% came from non relationship third party consumer loans, which are in runoff mode.
Now turning to the pretax pre provision components of the income statement for the first quarter tax equivalent net interest income was $137.8 million, which was in line with the fourth quarters net interest income level.
Net accretion of purchase accounting adjustments for loans time deposits in long term debt added 24 basis points to the net interest margin in the first quarter, which was up from the fourth quarters 80 basis point is that primarily due to increased levels of loan related accretion income.
The first quarters tax equivalent net interest margin was 3.56%, which is an increase of one basis points from the prior quarter.
One basis point increase.
In the tax equivalent net interest margin for the first quarter was principally due to this six basis point cost of funds decline, partially offset by five basis point decline in the yield on earning assets.
The five basis point decrease in the quarter to quarter, earning asset yield was primarily driven by the net seven basis point decline.
Loan portfolio yield.
The decline in the decline in the loan portfolio fully yield of seven basis points to 4.3% was driven by lower average loan yields of 16 basis points, resulting from lower loan fees and the impact of declines of market interest rates during the quarter, most notably the significant declines in the one month LIBOR rate than the prime rate.
This impact was partially offset by not by the nine basis points positive impact from higher loan accretion income.
The quarterly six basis point decrease in the cost of funds to 94 basis points was driven by six basis point decline in the cost of deposits to 86 basis points as interest bearing deposit costs declined nine basis points from the fourth quarter, two 110 basis points.
Due to aggressive to due to aggressive repricing of deposits during the quarter, there's markets market rates declines.
Also contributing to the first quarters lower cost both funds was the 20 basis point decline in wholesale borrowing costs driven by lower market rates.
Noninterest income decreased by approximately 300000 to $28.9 million in the first quarter from $29.2 million in the prior quarter mortgage banking income of $2 million was lower by $667000, primarily due to net losses on derivative instruments more than offsetting.
The impact of higher loan origination volumes.
Producer in asset management fees of $6 million declined $547000 from the prior quarter, primarily due to lower investment advisory fees, resulting from the equity markets driven decline.
Assets under management during the quarter service charges on deposit accounts declined 293000.
Primarily due to lower overdraft fees and interchange fees declined $229000 from the prior quarter on lower transaction volumes.
Increases insurance related revenue of 836000 in loan related interest rate swap income of $478000, partially offset the over the call decline in noninterest income.
In addition, during the quarter the company recorded a 1.8 million dollar loss to unwind and interest rate swap related some short term federal home loan bank advances, which was offset by gains on securities sales of $1.9 billion. This net balance this net balance sheet restructuring transaction improved net interest income.
By approximately $2 million annually and adds one basis point to the net interest margin.
Non interest expense increased 1.3 million to $95.6 million in the first quarter from the prior quarter as expected salaries and benefits increased $2.9 million, primarily related to seasonal increases and payroll taxes group insurance and annual merit adjustments FDIC expenses.
Increased $1.6 million due to the FDIC small bank assessment credit received in the fourth quarter of 2019.
Other expenses in the first quarter of 2020 included 1 million dollar expense and supportive community development initiative and approximately $380000 of expenses incurred related to the company's response to coven Nike.
These increases were partially offset by declines in marketing and advertising expense of approximately $936000 as well as lower Oreo and credit expense of approximately $859000 due to lower Oreo valuation adjustments.
Additionally, there were no merger related or rebranding costs recognized in the first quarter 2020, compared to $896000 and $902000 respectively.
Spectacle in the fourth quarter of 2019.
The effective tax rate for the first quarter declined to 12.2% from 16.7% in the fourth quarter, primarily due to excess tax benefits related to share based compensation recorded in the first quarter.
For the full year, we expect effective tax rate to be in the 60 than they have to 17% range.
Now turning to the balance sheet period in total assets stood at $17.8 billion, an increase of $284 million from December 30 Onest.
At quarter end total loans held for investment were $12.8 billion, an increase of $150 million were approximately 5%.
Annualized.
While average loans increased $266 million or 8.7 million, 8.7% annualized from the prior quarter.
Overall loan growth was driven by commercial loan balance increases of 8.3% on an annualized basis led by strong growth across multiple commercial categories.
Consumer loans declined approximately 10% annualized in the quarter driven by mortgage and third party consumer balance runoff, partially offset by growth in indirect auto balances of 8.7%.
At March 31st total deposits stood at $13.6 billion, an increase of $250 million were approximately seven in half percent from the prior quarter. The first quarters deposit growth was driven by material increases in transaction account balances, partially offset by declines of money market deposit balances.
Low cost transaction accounts now comprise 46% of total deposits total deposit balances at the end the first quarter, which is up from 44% at December 30 Onest.
The loan to deposit ratio was approximately 94%.
Quarter end, which is in line with the company's 95% target level.
As noted earlier, we feel good about our current liquidity liquidity position with multiple sources that can be tapped if needed. Although to date, we haven't seen any unusual client behavior that would require us to draw on these resources.
We expect upon the approximately 1.4 billion in counting.
Paycheck protection program loans approved by the FDA using the federal Reserve's liquidity facility that had been set up for this purpose.
From a capital perspective, the company is well positioned to be ends through the cobot 19 pandemic and its impact on the banks financial results.
At the end of the first quarter Atlantic Union, Bankshares, and Atlantic Union Bank regulatory capital ratios were well above regulatory well capitalized levels.
From a shareholder stewardess stewardship and.
Capital Management perspective, we're committed to managing our capital resources prudently as the deployment of capital to be against that of long term shareholder value remains one of our highest priorities.
As such during the first quarter of 2020, the company paid a dividend of 25 cents per common share repurchase approximately 1.5 million shares at an average price of $33.37 per share.
And suspended share repurchase program with approximately 20 million.
Dollars remaining under its 150 million dollar share repurchase authorization.
Overall, the company repurchased approximately 3.7 million shares at an average price of 30 $35.48 per share since August of 2019.
Regarding the dividends the company has no intention of cutting it at this time, but management in the board of directors will continue to monitor the business environment and will be prudent and managing capital levels going forward.
So to summarize Atlantic Union delivered solid pretax pre provision financial results in the first quarter. Despite the onset an unprecedented unprecedented business disruption associated with the Kogan, Nike pandemic and the headwinds of a lower interest rate environment.
As John noted the company, just taking significant and immediate actions to reduce expense run rate to align with the lower for longer interest rate environment as we strive to me top tier financial performance, regardless of the operating environment.
Finally, please note that while we are proactively managing through this unique an unpredictable unpredictable pandemic crisis.
Taking the proper steps to weather the economic downturn to ensure the safety soundness and profitability of the company. We also remain focused on leveraging the Atlantic Union franchise to generate sustainable profitable growth and we remain committed to building long term value for our shareholders.
With that I'll turn it back over to Bill to open it up for questions.
Thanks, Rob and Twanda, we're ready for our first caller. Please.
Ladies and gentlemen, as a reminder to ask the question you will need to press Star then one on your telephone.
Withdraw your question press the pound cake again, it's still want to ask the question.
Our first question comes from the amount of Eugene Coleman with Barclays. Your line is open.
Good morning UGI.
Good morning.
Thank you for taking my question.
Right at the we appreciate the detail you provide other than the loan segments in fact over the nine team.
Can you give us a bit more color on what percentage of clients in these impact that categories, such as retail restaurants hotels have asked for payment forbearance and also what are your specific loss expectations from these loss category.
Eugene I'll start in terms of your question on what percentage of the impacted portfolios or underpayment deferral. If you refer to page nine of our accompanying slide presentation, you'll see that on the far right hand side modifications.
Retail trade is 30% restaurant, 52% senior living 5% hotels, 67% and healthcare 34%.
In terms of what our expected losses are on this we have no idea Rob do you have any better answer than that.
Well.
You guys as I mentioned in in our prepared remarks, we have.
Provided.
Qualitative adjustments to those.
Impacted portfolios.
And have.
The increase those reserves against those particular portfolios significantly.
Up to three times four times, what the model wouldn't have told us.
Our historical loss model, which would tell us. So we do have a material reserve against those debt portfolio. At this point in time in Eugene I would add I should clarify that if you look at it we feel good about the nature of these businesses.
Things like restaurant and retail you would expect to have.
Some of them as challenging.
Problems as this works through having said that this is mostly real estate secured exposure.
It is virtually all in our local markets people that we know guarantor support et cetera. So while we will have impacts on it we feel very good about that provision that we've made we feel.
Good about the nature of the exposure and we think it will be manageable, but quite candidly ultimately what the loss rates are going to be clearly be driven by the duration of the coven 19 pandemic, how long the recession, Ryan's et cetera, but we feel quite confident.
The the overall credit worthiness, the portfolio and our ability to take some some hits out of this loss sensitive portfolio as well.
Thank you really appreciate detail and.
Just wanted to ask question and maybe on the revenue side.
What are your puts and takes four net interest margin.
Net interest income going into the second quarter terms of impact from the rate driven the balance sheet repricing, maybe accelerating the accretion.
The loan.
Yes.
I'll take that one.
Yes in terms of our expectations for the second quarter from.
Net interest margin perspective, we do expect that thats going to come in lower than than what we recorded in the first quarter. One of one of the drivers of that would be we expect lower accretion income as you saw.
About 24 basis points of our reported margin related to.
Accretion income which was up.
About six basis points from the prior quarter.
We do expect that to come down we do have a schedule within our earnings release that that shows how we think accretion income will flow in over over the next.
Several quarters in even into the out years now I would caveat that a bit that thats based on contractual payment schedules and as we saw this quarter you.
You could see an acceleration.
Recognition of that accretion income if.
If there are paydowns related to that.
Those books of business.
In terms of the overall core margin.
We also expecting that to compress based on the.
The lower for longer rate environment, as we mentioned, but the recent.
Market rate.
Declines with the Fig.
Cutting down to zero primary that's come down.
With that.
LIBOR has also come down market rates quarter to quarter net continue to come down in this in the current quarter.
So we are expecting that.
That the margin based on that will probably stabilized in the overtime in the re 15 that the reach 20 range.
We also.
Just to give you some flavor on that.
About 27% of our book.
Loan book is priced off of one month LIBOR or another 13% is prime by sub Prime the index.
We do have about 11% portfolio at floors. So it's not quite as the 40% is actually lower so we are sensitive to lower.
Rates, both prime in one month, LIBOR and those have come down quite a bit so.
Again looking forward, we expect our core core margin, but 332 probably will.
Come in over the next few quarters. This is Ics.
Not including any impact from the PPP program.
Probably the 315, the Threetwenty range over the next several quarters.
Thank you.
Great. Thank you gene into under we're ready for our next caller. Please.
Thank you.
Next question comes from Milan.
Well Wallace with Raymond James Your line is open good morning Wally.
Good morning have you guys are well.
A few questions.
I think the primary want to have is I'm, just a little bit confused on on seasonal and I apologize. If this isn't the release I I just didnt see it if it was but last quarter there was.
Roughly 50 million Dollarss and remaining mark on.
Purchase loans.
What happened after that.
That's still part well it was.
In terms of the seasonal day, one adoption the reserve related to purchase credit impaired out purchased credit deterioration deteriorated loans.
Was moved over into the allowance for loan loss.
That was relatively small amount of the total purchase mark.
I want to say less than $5 million 6 million got newbuilds are related to the PCI PCB.
Portfolio. The remainder is what you see a treating through income that's on on the page in the earnings release that is not.
That did not give move directly over from the credit Mark perspective also liquidity marks in there.
That's the so called double count.
Wally that we talked about so we have the accretion.
The purchase marks those still out there in creating into income but at the same time, we had to provide a reserve for.
Non purchased credit deteriorated loans, the so called good book of our acquired book.
Could you give the total balance of the remaining marked.
Jack to add up all of those years of accretion because that will that get yet that accretion that that will come through.
Over a period of time again, we've estimated in the earnings release, but again it really depends on.
How quickly that comes back to us, which which will.
Right time, but it could be accelerate depending on if there's pay offs et cetera.
Which which we saw it did the first quarter, which is why we had an upsize accretion income number.
Okay. So so theoretically that.
There's no credit expectation in that number it's all interest rate now.
Great well.
Yes, basically a treating the credit we actually did and the.
They want to adoption.
About half of the increase in a day one Cecil.
Increasing the allowance for credit losses related to the good book acquired portfolio the double count.
Yes, Okay, all right so.
Yeah, Okay. So now its yet so it's like bond accounting now where where.
Obviously it.
Accelerates it fell on pace, but theres no credit.
Loss impact to that number okay.
All right that's helpful.
On the PPP part to John You mentioned that you guys are actively applying funding that are applying for funding I guess on actually funding them yet but.
Can you can you kind of give us a sense of maybe that the pipeline.
Two and and.
If you have an idea what the what the average fees might look like on those yes sure. While I wanted to ask I Atlanta can you Bank President Maria Tesco to to try and then because she will have the most current information available. Please bear in mind, we're working virtually here. So we're not seeing each other.
While the what I would say as Maria comes on is that as a reminder, we left the application portal open when funding expired Thursday, a week ago or whatever it was.
We invited new customers and at that point in time and I can tell you that.
When the FDA opened for business yesterday, we had 3000 applications ready to drop in Maria can you take it from here. Please in terms of I think we at 400, new applications yesterday tell us where we are on this please.
Yes, absolutely again, we had 3000 going into yesterday, we did manage to get 900 approved yesterday for an average loan them out and about 100000.
Were hoping.
We continue that efforts today and for the next couple of days until we get through.
300 watts.
Continuing to get new applications at a clip of about four a little over 400 yesterday.
So it's a it's incredible effort.
And Maria My recollection is that of the 3000 completely vetted and internally approved applications ready to drop into the guest B Tran system. I think that was some total look something like $300 million does that sound about right in terms of summer borrowings.
Yes.
Okay, and then any idea I know you gave the average size of what it was approved but.
It's hard to get the average speed because of the.
Yes, some of the big ones sure in there at the 1% do you have an idea of that 300 million what the average fee was Sydney sitting in the pipeline.
And Rob I'm thinking that it's going to be.
The average is going to be less than 350, So think about a 5% get most of those should be I don't know of any individually large when salad regarded as most of those would be the 5% range. So wally.
With this ultimately does will be a function of how long this money remaining available and quite candidly the speed with which we can get the approvals through the SP a system.
Theoretically we believe we could get 3000 applications through and about six hours. The problem is because of all that glitchy ness of it that was so well reported yesterday, having said that to Maria's point I can tell you when I woke up this morning.
Last update us offset we had approved something like a thousand 24.
As we indicated we were up late last night, we got well over 900 yesterday, which is very good. So I wouldn't expect that if we did a billion for which we did you must be approvals around $1. We know we had 300 million yesterday ready to drop in.
Plus we're probably going to settle and it's somewhere between conservatively I thought you were approaching at least a billion eight maybe north of that depending upon how long the funding remains available.
That's that's right John that's about what's in our pipeline.
And I process is very smooth.
And very efficient, but it's really quite frankly dependent upon each brand and its ability to allow us to process.
And the manner that we would like which is at a much faster pace.
And while I can't help and pointing out as a reminder, Atlantic and New Bank was 15% one 5% of all round, one PPP approvals in Virginia by count and by dollar, we calculate or depository market share at about 7%. So we think we punched two WEX above our weight I'm. So proud of this team.
That's a billion for 90% of that billion for went into Virginia. That's good for our economy. It's good for our clients. It's good for everybody.
Yes, I agree thank you.
What was the what was the dollar amount of.
Hedge loss.
And as much quarter mortgage.
Now than it was about $1 million.
Yeah.
Okay, and then also Thats one last small question lets mail topline.
And the wealth business due to the nature of that kind of timing of fees would what would we kind of be starting at eight down 10% to 15% level in the second quarter.
Yes, you.
We're looking into the revenue stream is going to be down yes begin in second quarter as you saw.
Of course will really does depend on where the market what happens to the marketplace. Yes, we're anticipating.
That fees will be down in probably about.
$10 million are so range quarterly basis.
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Thanks, guys Ali I'll, let somebody else us appreciate it thanks Wally.
Don't worry for next caller. Please next question comes from them on the Laurie Hunsicker with Compass point. Your line is open good morning, Yes, hi, good morning.
I just wanted to go back.
Looking for a moment I just wanted to make sure that I've had all the comments together the right way so.
Again on to your point of core margin guide as you know 315 to 320 and it looks like 16 basis points or style just comes out of accretion in town.
Just going marks to begin CAD zone, and I love that they tell you present on that so we're thinking about probably an all in reported margin Kennedy tracking somewhere maybe 327 323 29 on a reported basis relative to your Threeq ex the reported this quarter I thinking about that the right way.
That's right Laurie I would say, yes, that's kind of add about 10 to 12 basis points from accretion income.
Okay. That's helpful. Okay, and love all the detail you provide ed.
Thank you for that just wondered if if we can't go back.
Slide nine the couple of things I want to pass on.
First what what is your leverage lending exposure and then second how much of slide nine how much of that 2.2 billion as my blending.
I'm going to ask Doug Willie or Dave rank to verify this I would say its darn near zero. So what I think about what I think about leverage lending in these categories I would mostly be thinking about franchise restaurant finance I'm very familiar with that business I was involved with it previously.
We don't do that so we're not doing large scale franchise operators syndicated restaurant. These are all.
Local business people something that franchises, but you're talking about a handful of them.
Doug do you and where David ring have anything you would add to that any leverage lending exposure in this category on slide nine yes, well read it Laurie this Doug good morning.
There is there is no leveraged lending.
Exposure in this category, we have a little over 300 million in that it's not in thats not in these categories.
Okay. That's helpful. Okay and then.
Keeping on on slide nine.
In terms of hotels, you had mentioned vault.
The 650 million it was done at 60% out civil what's it up a bit of your 61 million how much.
How much of that is being iverson reversals Craig.
What percentage about as real estate or is that all real estate.
That should be all real estate, you're looking at Doug will lead you want to comment on that yes. It's all it's all loans to the hotels themselves with the limited service flags that John described.
Right and do you have any hotels.
User.
We had theres a key theres a few dollars in that.
It would be not secured by real estate, but everything we have every every everything else we have.
To a hotel and every hotel is secured by real estate.
Yeah. It was actually question Laurie.
That answer that's helpful. Very helpful. Thanks, and then just pick him.
And ladies or the answer is now, but just to confirm you have no oil correct.
I'm, sorry did say oil.
Yeah Okay.
No oil better.
No zero anything you would see coded as energy would be a natural gas like local distribution gas company et cetera zero for wealth.
Zero for coal.
Perfect. Okay, and then can you just have data on the third party DMR loan book, just where are those balances Dan.
Oh sure yet so.
We brought the total third party is probably in the 215 to 20 range.
Lending club was as you know approximately $120 million. The ended the year, it's down to under 100 now it's about $98 million of the of the total.
But that's been running off pretty significantly.
Okay. Okay, that's great and then.
Categories that that I'm way less worried about that I just wanted to get an update if you have them if not I'll follow up. Thank you afterwards, but residential and home equity do you have what your Ltvs and your FICA with both of those back.
And if not I can you sound pretty incredible.
Yes, I don't have the in front of us here and lawyers. So we could follow up on debt everything we do would be prime of course, but we'll have to get the details on that for you.
Okay perfect.
Well I will catch up with you later I'll leave it there. Thanks, so much. Thanks, Laurie Thanks, Laurie Towanda, we're ready for our next caller. Please.
Next question comes from the line of stood lots with KBW. Your line is open I Stewart good morning, Good morning, Hey, guys.
Appreciate all the color on the margin.
Maybe circling back to your noninterest expense.
Rob I don't think you guys gave any specific guidance that you mentioned that you were looking at peeling back given the revenue headwinds.
Just curious how you're thinking about a run rate.
This quarter 95, and a half million pop and how you guys are kind of thinking about expense cuts this year.
Yeah. Thanks Stuart.
Yes, so a total.
We came into the year we were.
Projecting that we would.
Hey, fourth quarter run rate, which is around was around I guess about 94 million at 4% to that for the full year basically that 4% is be taken out as we speak through.
Management expense reduction actions.
The way to look at that is the run rate is going to drop from the first quarter probably.
In the $2 million to $3 million range.
In the second quarter.
Come down a bit more in the in the third quarter and then another couple of million in the in the fourth quarter. So I think we're going to end to end the year based on the details of the expense management actions, we're taking to be around the $89 million to $90 million rings coming out of the fourth quarter.
So so material material.
Adjustment to what we had originally expected to spend this year.
And in terms of geography, as there's lot of that coming out of kind of discretionary spending like marketing.
Or is it you know you're looking at your branch network any the optimization there.
Trying to kind of yes pretty much it's pretty much across the board.
We're looking at everything.
Actually we have looked at everything we've approved everything and we're executing on it now but all the items that you you just mentioned.
And.
In the buckets, you those costs salary and benefits and then other discretionary items travel.
Yes, we do in marketing.
Vendor.
Looking at all vendor management.
Outside consulting costs et cetera, so be across the board.
Got it.
And I guess.
Maybe just one more for me.
On the credit side and kind of looking at additional provisioning next quarter.
I really appreciate the breakout or 60%.
Of the allowance currently as you know compared to last cycle total losses, just kind of curious how you guys you're thinking about provisioning going into twoq, given we've seen further economic deterioration.
You know kind of how are you guys in putting out of your model and could we expect maybe not 69, our provision but something.
Kind of along the line it increase this quarter.
Yes in terms of that Stuart.
As you as you noted we have seen the economic.
Forecast worsening, which on its face if we were in the second quarter today, we would be lucky probably provisioning some.
Elevated level compared to prior quarters.
We don't we don't expect that we've kind of run some of the numbers. We don't expect it would be near the first quarter provisioning, we have to do although we would see.
Additional reserve build now.
We don't know that things can change.
We'll see where we are as we go through the quarter and where we end up in what the outlook looks like coming out of the second quarter.
But again to your point.
Like we would.
Add to our reserves a bit.
If we were to if were to close the books today run them on when the ironically the.
Lastly, pointing toward the origination fee income off of PPP, but I'd have to say that it is not lost on us at that effectively.
Good pre fund so to speak.
Any incremental reserves, there could be necessary that said beneficial and 70 respects, it's a bridge.
For clients and businesses.
And and obviously, there is something kind associated with it too.
Yes, Thats true Jonathan.
And in terms of when we talked about the margin and net interest income my comments excluded anything related to PPP in terms of.
The net revenue stream, which will will be booked through net interest income which will affect.
Closely.
Dollars and.
Net interest margin itself.
Awesome.
Yes, John maybe maybe one more for me.
You know, Virginia, the stay at home orders kind of through I think early June.
Which is a little bit more conservative.
We're seeing in other states, yes, I'm just curious if you're if your head and anything else. There with regards to you know some of your local markets and how consumer behaviors kind of thinking about that are or.
The governor ultimately decides to lift that sooner in the June 10th.
Just curious.
Any commentary.
Back to the Governor, Virginia, who happens to be a physician is probably related to our relatively conservative approach everything has been pretty manageable so far.
Interestingly the headline this morning as I looked at the Richmond times dispatches. The governor is at least showing a receptivity now to thinking about a regional reopening of Virginia, that's something that was off the table as recently as a few days ago and so it would not surprise me if in certain of the markets you've had relatively little incidence of this we began.
To see them reopened sooner, but I.
I think bottom line they'll take a thoughtful approach we are in a different place from certain other states have been more liberal and quite candidly I think that the governor is doing the right thing. So I think that that will be at the relatively conservative end.
But you know I've got an email from my dentist yesterday, telling me there reopening early may because the way. This works technically certain businesses are going to begin to put in early may.
And we'll see so I expect it will be it'll be phased backend.
Great.
Thanks, Stuart and some of that we're ready with them you have come from one more color. Please.
Our next question comes from on the Brody Preston with Stephens. Your line is open.
Hi, Brian.
Hi, good morning, everyone.
I just wanted to know Rob just maybe ask more pointed question on the provision. So another regional bank. This morning granted in a different geography. So the difference between using Moody's March forecast in the April forecast resulted in a 35% increase in their provision. So I guess, if we sort of looked at that difference.
Is that similar to the numbers that you've run for Twoq so far.
To be 35% of the Q1 numbers yeah, yes, that's that's.
To put a finer point on it but thats not.
Question.
Okay.
Thanks, and then just wanted to I know, we talked about the margin nauseum, but just wanted to circle back.
11% of the loans have floors per the deck is that is that the amount that is at floors or what's the percentage that has already at floors.
That's about 8% of that 11%.
Okay.
And the borrowings could you remind me the flipper advances that you have the majority will flip into Q right and could you.
Yes.
Let us know what the difference between the funding costs in the most recent quarter for those super advances wasn't versus what they will be when they flipped.
Yeah, that's a good question.
I'd have to look at that again, let me, let me get Betsy I can't remember exactly what that number is.
Okay, maybe maybe on our call. After this we can talk about they'll get the inflow.
Okay great.
On the PPP for loans it looks like just based on what you did so far it looks like the mix that's out about a 3% fee is that is that in the ballpark, yes that is.
Okay, Great and then you obviously had an outsize impact relative to your deposit market share across your footprint just wanted to better understand the breakdown I think John you mentioned that you had.
Someday existing borrowers some the new borrowers so just wanted to better understand the breakdown there of sure what was say existing borrowers versus <unk>.
Andy I'll ask Maria to that's going to comment on this I will say that our position on the first round that funding as we were focused on the existing client base. We knew we were going to be over overwhelmed that was obvious and so we were very much focused on serving the existing client base first having said that we had a long line at our door.
Perspective relationships trying to comment.
And so as we gain confidence late into the process of around one.
We began to change our thinking and then we immediately opened up for around two to accept new customers.
The current stats in terms of what percentage that we think.
Based on what we're seeing really more it's more more of around two issue or new customers.
Yes, that's right.
Two but if you look in total of all application.
Obviously, the new customers coming on in this second round, we are very close to 17.5%.
New customers.
And I think that you know what's happening is we've been fortunate to receive good process based on the the good results we had around one so weve. It's been frankly, we never viewed this as a business development opportunity, but it's at our doorstep. So we have.
Absolutely been able to welcome new relationships and for the bank.
Hi, Great and then just a couple more quick ones for me the healthcare portion of the book is that mostly dentists and small practitioners yep got its going to be.
I think what you think of smaller medical practices lots of data set sort of thing.
Okay.
Okay, and then you know.
So obviously you mentioned on the continuing to invest in digital which just given the current state of things has become more and more important. So you have any I guess, maybe data around mobile adoption and usage since social distancing began.
Oh, Yes, Kelly Daikon setup digital and customer experience is on the line Kelly are you able to comment I think we stated that we've seen a 46% increase in digital use its got away I want to complement the digital team under Kelly's taken for technology teams under Chief Information Officer, and head of Bank operations team Brown.
They are among the many heroes of the whole PPP, we could not have done what we just did a year ago. So.
Kelly could you comment on what's going on with digital adoption.
Sure absolutely so of our current customer base, we saw a 46% jump and customers activating online and mobile so that was an increase of customers who had already enrolled but may not have become active.
For the non.
Online active customers. These are the newer enrollments, we saw 25% increase in enrollment.
So we are seeing quite an uptick and usage mobile deposit obviously seeing the biggest uptick based on the fact that customers aren't going into the branches.
We're seeing overall uptick there as well as our digital sales channels have seen quite is a large increase in the amount of digital sales new the bank digital sales.
Okay, great. Thank you very much that Kelly and I guess, maybe one last one on the expense base.
Obviously the branch transformation just given most branches are sort of.
Effectively closed right now you know I'm, assuming that just given the new revenue environment as maybe in some of that going to slow down even if were opened up in the back half of the year or how should we think about the investment in the branches well I think that.
It is very clear to us that we have learned to work differently customers that want to thank differently and that is causing us to rethink some of the traditional notions of the role of the branch we're still committed to the physical branch presence I think what you're going to see as will be more aggressive in terms of rationalization of the branch network, mainly but.
Yes, we're seeing our customers began to bank differently. So we're not yet shy Brian had a consumers on shot on if you have anything you want to add but we're definitely studying some of these changes a consumer behavior with an eye toward ways to better rationalized. The branch network anything you would like to add to that comment.
No I would just.
I would remind that.
Yes, the break the branches lobbies are largely closed because we have.
Dr. nearly all our branches they are very busy so the branches are open in functioning than we're fortunate to have all those drivers and then John point.
We are looking to rationalize the branches.
Given some of these changes.
And I think.
We'll now here.
Okay.
Alright, great. Thank you Sean. Thank you everyone for taking my questions I. Appreciate it. Thanks for next spring and thanks for everyone for dialing in today, we hope you stay safe and can be well.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a one day.
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