Q1 2020 Earnings Call
Good thing I'd welcome to the Sterling Bancorp Q.
Two conference calls webcast today's conference is being recorded.
Let's turn the conference over to just kind of ski peacefully.
Good morning, everyone and welcome to our first quarter 2020 earnings call.
Joining me on the call, which at least much the army, our Chief Financial Officer, and Bank President and.
Chief Credit Officer.
On our website, you'll find the slides we're referencing in our presentation.
Before we review the first quarter performance, we want to start by recognizing that these are extremely challenging in difficult times for all of us.
Especially those on the front lines of this crisis and those that have been affected by cobot 19.
Very focused on aggressively and proactively supporting our colleagues clients and communities in these uncertain times.
Good morning yourself them to ensure our colleagues are safe and secure Walker body I'm erupted value added service to our clients.
We're not well developed information technology platform at the onset of a pan pen down. They we were able to quickly trends there shouldn't be roughly two thirds of our employees to work from home.
We have in short our financial center colleagues are safe and our operating with reduced hours and have maintained 85% of the offices open no. We are adjusting closures as safety dictates that changed hours and access protocol across the institution.
We have provided additional compensation and adjusted benefits to all employees to support their families.
Really needs during this difficult time.
We are proactively reached out to our commercial and consumer clients to support them as they navigate this challenging time.
For consumer mortgage clients, we're providing 90 day grace period relief as well we'd be in certain fields.
Commercial clients, we are working to extend interesting principal payments as needed.
Total, we're providing relief on $1 billion of loan balances were approximately 5% of the loan portfolio.
We are providing the support necessary for the U.S.P.H. Paycheck protection program at approximately $650 million in applications and funding working through the process.
We intend to participate in the main street lending program in conjunction with the Federal Reserve.
We have pokerstars philanthropic action on communities that are most vulnerable and hardest hit by providing funding to 14 food banks in our markets and providing technology resources to schools in low and moderate income areas I'm extremely proud of our colleagues as they have worked exhausted.
To support our clients communities and each other during this crisis.
Moving through the financials for the quarter on an adjusted basis, we incurred a net loss available to common shareholders, a $3 million and adjusted loss per share up two cents.
Our results were most impacted by the elevated day to provision, which was made more severe by the pandemic driven disruption to our economy.
Docket Cecil on January 1st 2020, and that they want adjustment increased our allowance for credit losses by $91 million.
Even in increasingly uncertain outlook for the current in the beginning in March we added $138 million through our provision for credit losses at the ended the quarter, bringing our allowance for credit losses to 1.5% total loans.
Our base case for C., so utilizes a blend of movies scenarios, reflecting moderate and severe what sessions and anticipates GDP will shrink by an annualized rate of 18% in the second quarter not returning to prior levels of production until 2022.
We believe our allowance reflects the current economic outlook as all today.
We adopted the regulatory relief that provides for to your delay and subsequent three your phase in for regulatory capital impacts, let's see so.
The credit exposures, we are focusing on given the disruption of the economy ARPU on page 15.
First we have a commercial real estate exposure, primarily two hotels in the greater New York Metro area that National flags are supported by long term liquid operators and the amount of $395 million.
These properties have alone the value of 54% and strong historic cash flows.
Also had a small real estate secured portfolio of restaurants with $48 million Outstandings.
The hospitality commercial real estate represents 2% of the overall portfolio and we've been working with these clients to modify off $110 million imbalances or 25% of our portfolio.
Secondly, our commercial real estate book has exposure to retail operators in Metropolitan New York in the amount of $1.3 billion.
The majority of these properties are anchored by grocery drug and other essential tenants and have a weighted average loan to value up 50%.
There are no regional malls or lifestyle centers in this portfolio and these properties have been operating over the past month, given the essential nature of the anchors.
Retail commercial real estate represented 6.1% of our loan portfolio and has traditionally had strong debt service coverage, we are working with clients to modify $78 million imbalances or 6% of the portfolio.
Third arc limit is fine, yes, and they'd be all portfolios have $654 million and outstandings to the transportation industry.
The majority of these loans are to national shippers have the total balance we maintain $122 million to smaller localized specially transportation businesses, such as Tony services that have an average outstanding of $83000.
Transportation exposure represents 2.3% total loans and we are working to modify $90 million imbalances or 14% of this portfolio.
Fourth our franchise finance business is primarily to larger quick service national franchisees that have continued to operate during the pandemic.
The loans secured by real estate and equipment, and we're modifying $77 million and loan Outstandings.
Finally, we are very low exposure of $64 million to the oil and gas sector through our equipment financing need be all portfolios.
Turning to our performance for the quarter on an adjusted pretax pre provision net revenue basis, we grew by 3% over first quarter 2019 recall works are slower pace of growth over the past year reflects our shift out of Commoditized asset class.
Losses into targeted relationship oriented portfolios. This transition is essentially complete.
From a balance sheet perspective commercial loan growth for the quarter what strong.
Our commercial loan portfolio grew $412 million over the fourth quarter of 2019.
Or 8.7% on an annualized basis.
Portfolio increased 13.7% from the same period last year.
As we adjust our capital allocation, we will only fund loan relationships that you will accrete of risk adjusted returns.
Credit spreads and yields for new loan originations and commercial finance asset based lending in certain sectors in commercial real estate are not currently achieving our target that targeted return hurdles.
Given the historically low rate environment, we will be very selective in what opportunities. We fund in the trade superior return characteristics for growth.
We estimate net commercial loan growth to be in the 500 million to 1 billion dollar range for the full year.
The main street Federal Reserve program should enhance the viability of middle market commercial borrowers.
Total departure to increase approximately 1% over the link corridor and six per cent year over year.
Since mid March to the present, we have seen increase the positive closes clients have moved funds from the market and the same bank havens. We also continued to expand our funding channels and have that encouraged by the growth in relationship bounces and digital deposits, we estimate the <unk>.
Will match loan growth over the course of course of the year.
Given this historically low fed funds rate and dramatic downwind shifting the yield curve. The net interest margin declined in the corridor loan yields declined by 37 basis points over the link corridor due to a decrease in accretion income and as a short term rates declined sick.
<unk>.
<unk> costs declined eight basis points and interest bearing liabilities declined nine basis points.
Based on the accidents, we have taken the day, we expect the total cost a funding to decline 10 to 15 basis points in each of the next three quarters to ended the year down to 35 to 45 basis points.
They should allow us to stabilize the margin throughout the year as our focus is the match asset yield declines with funding cost <unk> decreases in.
In addition to deposit read pricey.
Spectral reduce our cost of wholesale funds by 25 basis points per quarter through the balance of a year and we have $170 million and senior debt and senior <unk> maturing in June that we prefunded with our something that is fumes in December.
Core fee income for the quarter was strong increasing 19% over the link quarter germ, primarily by loans fees and conditions, including operating income $4 million acquired in our portfolio purchase they closed and the fourth quarter.
Expense levels were essentially flat to the prior quarter.
Efficiency level continues to be among the best of pure banks. It is most essential to provide added support to our colleagues and clients. During this difficult time, which may result in a temporary increasing costs. However, we we will continue to focus on controlling expenses, where we can and making investments then chore.
Superior efficiency in the long term.
Net charge offs decline $7 million or 13 basis points of loans.
Delinquency levels were similar to this quarter, one year ago, but nonperforming loans increase by $82 million driven by credits in commercial real estate, maybe I'll and equipment finance.
We were more aggressive and moving credits to substantial some standard and M.P.L., given the environment and potential risks in the future.
We have provided significant detail on R.C.R.E.V.A.B.C.N.A.B.L. and equipments finance portfolios on pages, 16, and 17, which represents the majority of our criticized loans.
Comfortable with these portfolios given diverse industry exposure strong levels are collateralization and individually underwritten bar relationships.
Capital and putting any relationships capital illiquidity ratios remains strong.
Tangible common equity tangible assets was 8.74% and tear one leverage ratio tore 9.41 per cent at the holding company and 10 per cent at the back.
We are targeting a minimum of T.C.E.T. a range at 8% to 8.25%.
Into your one leverage at the holding company of 9.25%.
Even with this meaningful increase in the allowance for loan losses capital levels were similar to last quarter and we'll build throughout the year.
During the quarter, we repurchase 4.9 million shares, although we have decided to temporarily suspend our share repurchase until her long term impact of the pandemic there's no.
Liquidity levels are extremely strong with core low cost deposit funding untapped S.H.L.V. borrowings Federal reserve liquidity majors bank lines of credit and wholesale funding up nearly $9 billion.
Addition, we have minimal exposure to unsecured committed lines of credit.
[noise] to summarize the corner and provide our thinking for the balance of 2020 for what we know today I want to make the following points.
We are a strong diversified and profitable on a pre tax preprovision basis for the quarter return on assets was 170 basis points every turn on tangible equity was 20%.
A diverse mix of credit portfolios to ensure that we are not highly concentrated in any one area and that we have multiple options to allocate capital based on market dynamics.
Robust levels of capital a diverse mix of liquidity sources and substantial earnings which will continue in this cycle.
We have historically generated net capital through earnings of approximately $350 million after dividends with strong returns and we ever created significant <unk> value over the past nine years.
We will adjust our models or meet the challenges facing us with <unk> proactive strategic actions to ensure continued level five performance.
We expect to grow tangible book value in 2020 by five single digits.
Leadership team has been through many cycles enough in the past 30 years, and we will successfully navigate through this one it's one of the reasons why we decided to go to 150.
Basis points on the allowance because we our view is that given the the challenges in the market, we would prefer to provide a significant.
Offer up front to to deal with the pandemic as time goes on.
Finally, I want to recognize are amazing colleagues and clients are calling some adjusted to this challenge very quickly and find ways to support each other added value in provide great service to our clients are Klein something terrific partners in working through the unknowns and our economy. This is that time when.
You need us modes, and we will deliver for them I relationship based team model has enabled us to comprehensively be a hands on adviser and cough or not I.
I am very confident that we will collectively find a way to defeat this challenge, we all fighting and create an economy that thrives improper prospers in the future.
Let's open up the line for questions.
[noise] I can't even if you would like to ask the question office time. Please call style <unk> on your telephone keypad, even pause for just a moment to lower your opportunity just thinking for us cans.
We can save our first question <unk> <unk> <unk>.
Okay go ahead.
Yes, actually my gosh.
Funny, maybe just start off on the on the outside of migration sound like you guys were a little bit more aggressive given the environment. There was a decent amount, though keys provide a little color [laughter] you know what you were seeing it as a bank lending I set my finance and the construction portfolio and then secondarily, what's this or these.
From acquired portfolios.
Yeah. So let me start off and I'll turn it over the <unk> and this one you know given what we see in the future. We we were very aggressive about moving credits through this cycle. So.
Whether it's a substandard in M.P.L., probably half of what we moved through the cycle. We wouldn't have me in a normal time, but we decided to be aggressive lie on a on on this in this process. Yeah. Then I will tell you is all of the credit so we on the M.P.L. side that the.
We're increase end up being <unk>, we have very good collateral and all of them. The last given default quotient just the ones. We moved in a is extremely low we don't believe we all those and much of anything on on these if they go to the false scenarios. So.
But that I'll turn it over the raw maybe have some more color to this.
In terms of most of the N.B.A.N. Korea or not from the acquired or there was a little bit of that.
Transportation related and then in terms of more commentary the construction and and we get highlighting things.
But it really is is you know that has already been constructed it's in we so now the least what's lower than expected, although usable now with Kobe, though that changes the dynamics in that particular, you know 30 million dollar meal and so that's why would that or not.
The bulk of them are really just use in terms of industry. So.
Don't want anybody more ourselves and extrapolate from you know anything in particular.
That's about it.
Okay, Great and just just switching over to [noise].
The longer if God in a name guide. So you know it sounds like there's you know there's not that not much on along roadsides hitting your hurdles you know so what's I guess, what what kind of categories are hitting your your respiratory hurdles.
And I'm, where where our new money yet [noise].
Those categories versus to you know versus the 447 and [noise].
Fourth quarter on the first quarter here as well and the New York, you know versus <unk> 22.
Yeah. So it's about so okay. That's a a new originated in front of yields hi, three for low fours is is what we're trying to target and we think that there are opportunities like that out there across the entirety of our portfolios, but you have to be selective in identifying those so it's not that were necessarily you're marking.
You know loan portfolio over another two you know for <unk>. It's just that we're going to be selectively growing no across the board all the portfolios whenever we find opportunities that from a credit spent parted perspective in particular are over 250 to no 250, 270 by basis points or better than that so.
We don't want to follow the trap of absolute yields the are very mindful of essentially continues and then the discipline round origination, yielding particularly related to credit spread and when your credit spreads makes sense, regardless of the after class and and in many respects and you know a little bit ignostic that industry as well.
<unk>.
The reason for essentially lowering that guide.
Yes.
And go to to get the types of meals and that that sells tivity that we're talking about you know we are sent you know we have to step off each other to put a little bit there and we need to focus on again just.
Places, where we're going to find for relationships that are being it'd be overall more profitable over time.
Also component to Jack alluded to have you know substantial amount of our borrowing of our clients or borrowing clients are going to be eligible for various programs mainstreet being one of them.
So it's it's uncertain to know exactly how those programs are going to continue to work and in particular, how means b. doesn't work, we do envisioned that some portion of origination gotten would've had over the course, new year are going to be offset by some of these programs.
Forward, so there's going to be more details on that you know, we think shortly and we'll be able to I'm going to get her heads around a little bit more about those good morning, Patsy no the pipeline.
<unk>. We are you know these in the positive than the negatives you obviously solving are pretty substantial hurting asset meal, you know for pressing in the first quarter, that's driven by the six and a half the $7 billion a floating rate loans that we have those loans are largely concentrated in for business mind to chart traditional she and I asked if they spend being.
A warehouse blending and then about a billion and a half the $2 billion a loan swap you know transactions that we have that on or commercial real estate or multi family portfolios that <unk>. You know so it felt you know a lot of pain in the first quarter, there's going to be some additional earning asset pressures that liable continues to convert down work for that funding we started.
See that in your part of the second quarter that said that.
Negative the positive being that you know we've also just has also given that the opportunity to reprice pretty meaningful across the board everything that we do funding liability side. So we provided to me a slide deck. There you know we considered to be pretty good guidance of how we see that that that cost the funds evolving because when you think about that.
Since between the weighted average cost the deposit them away with average cost the funding liability for the first quarter of the oldest aware at positive and funding liability exited the core drawn spot bases at 331, you're getting about 17 to 22 20 basis points to pick up in a in funding cost reduction is going to continue to see that or the second quarter. Because you have three paying that wasn't.
Give me that first and foremost our <unk> want to continue to replace down we have another billion dollars just over $3 and C.D. impresses my second quarter. The difference between the weighted average yield weighted average cost in the middle C.D.'s and where they are going to be priced a day in about 100 120 by basis points, depending on the term of the CD.
Second is that athletes he'll be advances that we have about found a million dollars I think he'll be advances that during the second quarter. There's another billion that mature in the second half of this year the funding pick up on that beach he'll be across the board of you essentially take the rate for the day relatively weighted average copy of each of you come up.
About 150 basis points.
On average and the third component is that we have been very aggressive and starting to cut down, particularly in the month of Mark from started and cut down pretty meaningful all consumer commercial deposit plant as well we are not done with that yet and you're going to continue to see that happening or of course at the second quarter and over the second half of the year. So are weighted average <unk> fun total funding I believe.
Which was 98 basis points in the first quarter on a weighted average basis, we exited the quarter 81 basis points and we think that that we are targeting the <unk> 81 basis points from here to the end of the year, you're gonna get down to closer to 35 40 basis points are they a meaningful repricing of about 40 to 40 by these disciplines that will happen on our.
$26 billion of funding liability than that is what we think of you agree that some pretty good instability and moved through up through the rest of the here.
Oh, great. Thanks, So he's just just one more the T.C. ratio down to eight eight and a quarter. It doesn't sound like there's a lot of balance sheet growth coming so I you know I I don't so it doesn't seem like there's a lot of erosion from this age 74 level <unk> why.
Why sorta lower that a little better to just to nod to to the triple P. participation.
Yeah, it's not it's not really have already like if you go back to you know probably the last two years earnings call. We Miss actually guiding to you know we're comfortable running the company that eight and a quarter T.C. ratio based on where we stand today for me reserve.
$326 million and allowances the rest of the capital reasons that we have when you combine allowance plus you know allowance plus tangible capital we have plenty of capital relative we have established or the the the the hurdles that we can run in the company yet so if anything.
Pointing to the fact that tired you know the tangible comment or the or the P.C. racial decrease it it's actually the fact that we think that we still already pretty you know kind of robust exit capital position relative we would be comfortable running the company because <unk>. The girls perspective. It when we decided turned back this year Baton Rouge survive that it'd be it'd be environment becomes clear we continue to have.
Capital, where we would be comfortable running the company it a little ration room.
Yeah. It does not about not about increasing the ratio per se because of Boston, Yeah, just going around the sides of Saint Paul because we have a lot or the write ups that that misinterpret, we're not intending to move it to eight to eight and a quarter were just saying that that is the minimum level that we're comfortable with if anything capital real build in our forecast for.
Of the year. So we want to create you know capital of flexibility as time goes on.
Yup side of that way I just wanted to clarify thank you.
Thank you okay.
[noise] [noise] <unk> to our next question.
It comes from.
<unk> yeah.
<unk>.
Wanting guys.
And when.
What's your name too bad we wondered all yeah.
[laughter] ultimately that 25 minutes, a dial and so I'm happy to be here.
[laughter].
To me that you guys you know going back to the reserve here. It seems to me that you guys took about as severe scenarios you could justify.
Tried to put as much ways you could on that scenario and then tried to find out as much in the pain as possible and that potentially could result from this whole crisis is that they're characterization of the way you'd have thought about the reserving here.
That's you know that evening fair characterization, one copy of being that there's you know everybody and say and and we think so while there's still uncertainty out there right. So we have always taken the approach that we think it's better to kinda it'd be things head on and get them behind you as quickly as you, possibly again, that's why you know we didn't take advantage.
You know determining that things were you know covert related essentially not might be credits and so forth through the classification right at the end of the day. You know we are you know very competent in the composition of the book a business and we have always been very you know cognizant of the fact that when you go into environments. Like this embargo wouldn't have some additional try knock on that we.
<unk> pretty you know given we know which ones are the portfolios are going to have some of that lost content. Those are portfolio that have now been in our view for the most <unk> you know very poorly reserve.
And you know we are not to say that we're not going to have incremental you know reserving requirements going forward. Because you know been will depend on what happens from a macro environment in other words forecast in poor cat assumptions change, but we have based our forecast and we based our modeling off of mid April data, which I do think it's slightly different to what others have done that.
We're up against it from a tiny perspective. They you know there there was the use of a forecast scenarios that were just earlier on so we do invasion and we do think and believe that we have essentially got in the end of it a little bit more.
Just because we you mark the date information, where again be a little bit more draconian and the assumption that we were making from you know from all things macro yeah. The only reason why we're comfortable with what we what we've done on that basis.
Back and there's just one of the place I I have not done good enough job and getting across from one we are in secured lender. So we have two big portfolios. One is a commercial real estate portfolio. That's about it 48% loan devaluing total and was a debt service coverage of 168 and we had.
I see an eye portfolio that is 97% she could within margin. So we don't have things like committed I'm. Many committed unsecured lines of credit. So we had the minimum if saddam out draws on lines of credit because all of our lines of credit on the majority of our lines of credit or.
Secured and they're they're they're they're based on the assets that secure them as to the advanced race. We don't have very much leverage lending you know we have some degree of three and four times a leverage deals, but we have a very small amount and frankly, we have virtually notes next so.
The shared national credit so it tends to be a bread and butter, although the verse bread and butter secured you know less leverage type of portfolio with that sad as I mentioned in the comments you know I do you know all of us around the table have that.
<unk>.
Challenges like this in the past not exactly this one but similar you know economic shocks to the system and our experience as you know take take them as much medicine as you can up front and hopefully it gets better going forward. Then you estimated but in case. It doesn't then you know you have to deal with that.
So we've tried to use experience in history to look at this thing and you know as as we said like the benefit we have a by announcing earnings now is we've been able to see all the models work through this so the numbers were using are very up to date and you know very direct them. So.
Thank you.
And then just as I think about the 150 reserve today and and you know and then just knowing that so many your portfolio is required and marked on acquisition is a way to kind of.
Characterized reserve in answer to say you know if you had you know include those loan marks on there that instead of being a 150 would go to x.
Yeah that another 30 basis points.
They get closer to 570 until when somebody by the money.
Hmm.
Okay.
Helpful. And then just said as you think about a loan growth going for it and and you cut the.
Cut the guidance justifiably for 2020 and that sort of as I think about that stacks up versus the expense targets. I spent seven just hasn't really changed however, I know that a good chunk of the expenses were supposed to be.
Ranch, rationalizations et cetera that kind of wheeling into into business development on the long go outside and if we might have less business development, along the side shouldn't expenses come down a little bit more that and and watching the gods.
Yeah. The the way we've looked at that Alex I, frankly, because it's the right moral and ethical thing to do we decided to create full employment. This quarter. So we wouldn't normally cut costs and personnel I I'm not going to cut people in this quarter in the middle of a a pandemic when we get through.
This quarter hopefully the economy turns around and we will adjust our extends models.
You know into the third quarter and the fourth quarter, along the way. So there's one other things that I think yeah like a little bit of a moral imperative to take care of your folks. During this period of time, but your assumption about expense reductions and you know by the nature of what's happened in the economies are going to be businesses that we.
Need to put more people against some businesses we.
Take less people from so that's how we see it so the expense levels will improve through the year. We're just you know we're we're we're doing in our view the light thing in this particular you know you're a date and then in this particular corridor. So.
That's how we view as I say that if anything <unk> positive that have come out of that you know the current you know situation that we're all going through but one of the positive than that if anything were actually more bullish longer term on you know how many you know financial centres and how many you know kind of locations you actually need to.
We didn't provide you know services to you know the same level and and and you know value added provided the clients through this so we've actually been very encouraged by the fact that we've seen a substantial amount of migration from poke the traditional user financial centres people in other online systems and using online banking tools, we've seen a substantial we we had seen Emily.
It's becoming clear as to where the opportunities are continuing to rationalizing the entirety of financial center footprint. So you know we <unk>. We made a decision that you know it's not the we're not that we're putting it on a you know it's not that we're not going to continue to rationalize expensive, we're putting that on hold for each short period of time as we continue to work through this.
Longer term like anything we're going to actually be such Nancy War <unk>, we have been up until this point in continuing to reduce.
The number of locations in continuing to shift how we essentially staff Oliver businesses in particularly or consumer bank to make it you know substantially more fish in the woods been it's proven to if you can actually even more aggressive.
Point, so long utterances actually <unk>.
And you can take my questions.
Yeah. Thank you.
[laughter], Thank hey, we cannot move along to our <unk>.
[noise] eight the morning guides.
And when it's not just this morning.
Have you guys from internal structure catch recently and it's so do you mind, giving us with your loss rates were on those.
Yeah, so they'd be gone last race, we know we're not going to provide cleaner, but we have run you know stress best we run severe recession scenarios and not necessarily you know O.C.C. or or be faster than scenarios can you don't think that those necessarily you know kind of <unk> you know in this instance, but we have run stress scenarios that have severe recessionary invite.
<unk>, even more severe than we are modeling out and we are very confident and comfortable that we continue to maintain substantial buffers relatives of old catalyzed specials across the board. So one of the positive things about being you know that I mean, it takes a deep you know profitability that we had it not being is being in a big deal with impaired. The fact that we have a substantial amount.
Internally generated capital rack that you shut off or you know decrease the the trajectory of balance sheet growth, we get to a place that we <unk> you know tangible capital ratios very very quickly show even hundreds of your recessionary scenarios that running we are very confident that would be continued to go to run you know like levels are well above well capitalized.
And well about war internal internal capital requirements as well.
Great and I'm, just I'm just curious like indeed, <unk> you know you're looking at your P.P.N.R. generally you know their sense of how much of a decline peak to trough 15, P. P.P. an arc those too.
And you know is that primarily from just generally from a rake shop or you know get affected by delinquencies as well.
It's a combination of both you know, it's mostly rate shock and it's mostly.
Sorry, we put the phone when I'm user for second so yeah, we are.
My merely from rate shocks in you know you can imagine that you can can you have a prolonged environment, whether they rate curve like the one that we're in right now we really have no steep next to it that's where the biggest amount of pressure comes from and that would be the biggest part of the of the you know kind of severe you know stress scenario that we continue to model is that the extent that you don't get any weakness of the curve you are.
You know place where over some period of time do we continue to feel some you know some margin pressure and it you extend that out you know for a period of you know two or three you know kind of like you know like two or three your window, you get the place where P.P.R. decreases above 20%.
15 to 20 is that right.
Correct.
Okay now that's quite a beggar set so.
Clear that's not what we envision is going to happen you know certainly be clear on that but that is when you essentially thinking about what are the pressure points that we had in our business models of your reception scenario, whereas if you're stressed scenario is the fact that we do generate about 80, 590% of a <unk> spread landing in an environment in which you continue to have any kind of lower forever.
Type of rate dynamic with five year tenure treasury that contained it'd be it somewhere between 45 to 65 basis points that would you know that would cause you know that that would cause a little their pain and we continue to move through environment like that that's not where modeling but that would be the you know what would be true.
Stress and area for force wrecked ranking.
So if that 15 to 20 per cent a decent amount that's from a rate shock and we kinda rate gone through a rate shock that's right.
So that kind of make dinner ready that fair to say.
It's basically totally definitely make another floating rate loans no doubt now you also you know that one for part that's not.
And that's why I said, if it's over two or through your window is the fact that you know new origination meals. For example in the first quarter worth 380, just wonder if you're in 85 basis points right. So weak that day after the book and business the existing book a business rolls off there wouldn't be some continued margin compression from the perspective of that same type of asset class not having might have a bigger credit spreads.
Doesn't have that facility to hire absolute you'll know were before so you know <unk>. There's always just on that too statements or it's not easy you know those assumed static portfolios doesn't assume that really move you know bouncy compositions on both the acid in my beliefs I think the difficult question to answer put that there's no doubt that that type of environment will continue to costs and pressure from an income.
Action perspective, but there are various leverage that we could pull that would essentially alleviate some of that longer term that are not factored into that needed funny that mentioned too long term.
Alright, great. Appreciate that's it for being just good luck with everything thanks, guys right. Thank you.
[noise]. Thank him he could have a block to our next question from about two weeks off Stevens <unk> can go ahead.
Take your morning, guys.
Running that.
Going back to the substandard loan migration can you just talk about the process for identifying loans that were were or were not impacted by covert 19 here I mean, even the construction loan that Rob mentioned it sounded like you you may you could have interpreted it that that is coping impacted why didn't you decide to use some delay.
Attitude, given given to put that loan for parents into the forbearance bucket versus M.P.L.
And the reason I ask is [noise].
Is I think the interpretation of the deteriorating you know isn't necessarily aggressive versus non aggressive as you put it but that it occurred you know pretty <unk>.
That's you know that's correct I you know evening I'd agree with you were saying from you know from previous is no pre versus post.
You know that's it and that you know this is no. We are wherever we're going through a you really modification prophets were barents process. We are not just taking the p. versus posted insane and drawing the fine line of saying that that the defining you know factor as to why something becomes <unk> migrated credit or not you know we are looking at every one of these.
Individually.
Centrally getting updated financial information Forever, you know for commercial reasons. They didn't want that family deal from getting everything updated with rent roles in tax return and everything that you need to be able to make a decision for commercial take credit for essentially looking at models and updated projections and understanding what are the true underlined diameter business, just because we're not taking your approach of saying just.
Because the business current part of recall that it needed to do before variance on that doesn't migrating pretty well. We're looking at the long term you know impact totally on that business in the long term, what we consider to be long term viability that business. The reason for migrating those credits and putting them into the <unk> give it back that those are not credit, but we have determined that we're going to run through and we're going to manage.
They were a workout credit every sensitive focus on executing on collateral position and getting on my <unk>, possibly can.
Sound pulled harder than that we're not working when borrowers because obviously you are but that doesn't mean that were essentially just give them carte blanche to our node or commercial banking things in our credit books essentially work with everybody. We're making individual decision then whenever it makes sense to provide for grants, we will and we will work with borrowers do you know to help them through this and provide some really but at the same time when we identified.
Relations that need to it since we continue to run the reports from a credit perspective, we will absolutely do that and that's what we decided to do those credits we could have what it was four credits are we could have taken the position where those credits of essentially saying don't my created in the sport we decided not.
Understood Okay.
You're one of the few banks to use the April economic forecasting a permissioning you know she went through the quarter and and and Moody's provided updates how much of a difference in the outcome permission was here from using D.D. late March data T.V. to meet April data.
<unk> by about 35 above 35%.
And one of the challenging factors that we went through and all things that use movies. You know went through this is the fact that three period of time, Moody's essentially producing a new forecasting there you'll everyday right. So you know we started running models mid March with some impact a you know where you get started to see already that macro with something <unk>.
And therefore, there was some changes day to reserves already.
Those started you know the Moody models kept on getting worse over the course of the the into marching into April.
And you know, we finally decided we put the you know kind of a line in the sand and and you know kind I was thinking the ground on April legal 11, and say that it's near that we're going with and subsequent to that come out with some additional scenarios, where you continue to see some deterioration, but it's much more you know the the the level in grade of <unk>.
<unk> in the forecasts assumptions is actually you know as as you know <unk> subsided somewhat relative to the scenario you. So we purposefully decided to wait as long as we could do essentially you get the most updated information we ran multiple scenario. We ran the you know scenario that included the no pre draconian impacts of <unk> and no we'll continue to manage limit.
We have read over the course of the year.
Understood. Okay, and then just one one a reserve as I look at the breakdown on page 700 different buckets. Once you had stood up to me was that your traditional scene I bucket is about 129 per cent reserve versus theory, which is 172 I would think it would be the opposite could you just helped me better understand why the <unk>.
Scene I portfolio is at a lower preserve level of intercourse real estate.
Oh look at the Middle historical lost confidence that we've got in C. and I gave you take out medallions, which are better than that traditional c. and I bought it.
You know, we have essentially had zero zero losses in traditional she night that back in bread and butter commercial banking of the the input print commercial banking that all of our relationship managers Infirmary filmmakers do those are long you know tenured relationships with the bank, where we have had a history of we have very very strong castledine.
<unk> and that is not a portfolio that even under severe stress doesn't you know doesn't get through this and so little bit of with Jack was talking about before we don't have in C.N.N.I., a whole lot of and security exposure. So all of that and bring them for the most part off a bar on basis of a substantial chunk of that bond base being based on Advansix off of accounts receivable.
So the nature of 15 I book is maybe not it not unsecured castle, they finding which is the reason after the last month and then you know again, if you set aside some specific vertical medallions.
<unk> had been very very strong you know well and that's reflected in the in long term on.
I'm a series died you have you know listen that is <unk> one of the portfolios, where you would have essentially seen the numbers.
That we were running a mid March that's one of the portfolios where the the increase in 35% that I would do is forecast assumptions change. That's one of the portfolio that was most severely impacted by that so in a the locks history that we'd have had in commercial real estate has been very you know you know been very strong not throughout all of the no prominent the but.
I see prominent bank as well as all of the banks that we have merged with an acquired over time have always been very good commercial real estate lenders the history and track record of C. already performance I've been very very good that is a portfolio that you know that under more <unk> the under changing macro assumptions that it be portfolio that that it felt the vast majority of that.
That shift directories or 35% that as a <unk> you know models in Arizona.
Very good last one for me it just I.
How many accounts receivable business do you just talk about what you're seeing in terms of aging of the receivables is there any deterioration there and I I know you have a look at the books every couple of weeks or you know or <unk> to stretch a little bit and and you know not pay on time.
So I'll have to first of all turn it over to Rob I think that you're on a you know so those that we have not seen major you know we've not seen migration in deterioration trends from eight aging perspective, but we have seen and what we are going to see over the course of the second quarter and into the third quarter is that the balances are going to decrease pretty substantial so.
The you know book from an end appeared perspective is way as long as an average balanced perspective, you look at our people financing or factory businesses today.
The there's been decrease of about 15% to 20% in the bounces of or volume of a of receivables that are being factor not surprisingly.
It you know when the economy to shut down and there isn't you know kind of the you know the turnover of Ah you know loot goods and services being produced are going to have less influences do provide dancing on so you'd starting to see volume decrease but they're pretty substantial.
We haven't yet seen a <unk> a significant aging that delinquencies and you'll see that that we actually have had up until this point no modification requests.
<unk> next up until this point, because we have been able to continue to collect on <unk>.
Yeah. There there are few accounts in the background, but my so that as you imagine we are watching very very closely and we are working with our clients, where we rent sharing with them more than we would have done in the past on specific retailer and our total explode or back or inside that we're watching.
Eating closely.
Is around $5 million with exposure, but nonetheless exposure.
<unk>.
That's all I had thanks guys.
<unk>.
Thank you as a reminder that fits title Styrofoam taught question then we can move along to our next question.
<unk>.
<unk>.
Thanks to one guy.
I don't know.
The whole.
Start on a over there and I've seen so adoption ladies adoption. So did you and your movie input did you use them. There April baseline outlook is that right.
Yes.
Okay. Okay.
<unk>.
Well, then that well I know that they're equal baseline. That's you know we tell them what their march they find a lot, but they did have other more severe scenarios on your outlook.
Within within that but just.
Again, I reckon April.
That's why I'm going with it.
The economics, what we see into two I think if they have reflect even greater deterioration, even what perhaps or April baseline fat or the qualitative and quantitative parts of that I mean, <unk> reasonable to think that no reserve could even increase even more in tune on what you guys posted in the first quarter.
<unk>, what's reasonable for one person might not be reasonable for another so that's a good and profitable question for me to answer at that what's reasonable, but <unk>. There is there's some well let it run it.
[laughter].
It's just going to say well just based on <unk>, but when you guys and looked at it that located.
So that could though so that's a better way to frame of the questions that <unk>, yeah I agree with you. There. So the you know how we're thinking about it. So in addition to the Quonset remember that people are stewed components do they have a quantitative aspect and it has a qualitative aspect. So you know are the models you know the the the Moody models that we're using it for you know for C.. So you know that give you a quantitative.
<unk> you know, they're estimating loss factors on top of that we put some pretty significant qualitative factors on specific portfolios, but we find the you know where we will we see today there there's gonna be to potential risks for incremental you know kind of lost contact so the numbers that were coming up with there are not reflective of what the models say.
Lost content that it's not what the movies models are saying last happened that that allowances higher than what movies is telling us and the reason that of tires because of exactly what you're suggesting which is there is greater uncertainty out there 'cause there'd be incremental reserves yep, absolutely. There's there's a lot of and certainly I found this is going to play out with that said you know and lost in the portfolios that we.
Mark and you know potential and you know kind of the places overseen you know kind of the issues right, which is in the small amounts of <unk> dance on the acid based lending front, we'd taken Moody's plus a substantial qualitative back or approach to get to the last race that we have to get to the the the the last coverage in the allows coverage reaches that we haven't was <unk>. So.
We've tried to get ahead of that you know we like very much for example, I pointed the small business and we put this out in a couple of slides then you're carrying balance of the you know the of the small business portfolio. In fact are performing and nonperforming transactions. It's just over 70% of a apart mountain. So we've gotten a had a lot of this not to say that there won't be more reserves, but we are.
Taping it pretty conservative view from a quantitative and qualitative perspective to get through the numbers that we got to hundreds or.
Okay. Okay, and then I know, it's sort of alluded to that but I don't know if it.
Breaks down where you know in terms of the dollar.
The 1.1 go again marketing made versus.
Yeah, the improvement classified and then the P.P. program how much. It is there is there overlap there.
But you're seeing with the modification request that were also in your criticized.
And yeah and modification request that were in criticize so you know so.
A little bit differently. So the and you would imagine we you know 50% of the portfolios and commercial real estate that smoke that family. So the larger percentage of of the $1 billion mind that we have.
Up until this point reside in the commercial real estate classical family portfolio. So that you know that suffer from second one is or the second one behind it is.
You know our franchise financed businesses reported inside of C. night, and that franchise needs business, which you know is largely quit service restaurants. You know as also you know we have been we've been pretty vocal and saying this for quite some time, which is you know those are all concepts that are going to make their way through this and they are going to get back the more solid footing, but there is going to be a substantial.
Amount of that portfolio that is going to have to be modified to provide some more from capitol. When you do this or the two components of the portfolio that have like say, 50% of the you know the loan modifications a little bit over 50% of about 60% of loan modifications today or commercial real estate multi family and then nothing in the franchise franchise in it.
On the construction side, which was one of the you know that are 80 C. book with one would criticize classified migrations. We add you know we did not have we've gotten a loan modifications there.
And then on the public finance warehouse manufacturing period.
No modification either the rest of the portfolios are pretty evenly split.
Between you know could've been answered on the application find inside are pretty evenly split from the perspective modification or part that have been you have not yet <unk> not necessarily been approved but what have they requested at this point.
Okay. Okay.
<unk>.
Suction psyche from I guess what.
Per cent of your construction bucked, it's in that type of that but yeah, I'm having tax credit.
30%.
30.
30%, yeah, 30%, an affordable housing there, we got our own <unk>.
In in those in those prize X., we essentially our own take out because he ended up investing in the low income housing tax credit programs longer term. So what we're running the risk that we're running there is that the for whatever reason the developer the project and then you know perform and all that happens in the developer gets taken out and somebody else comes in to finish the projects and with respect to look too.
And that construction loan into a different type of you know into the equity investments.
Really isn't much risking so we we keep very close tabs on how those developers are for for me, but that's not in that we're not concerned with that you know unable shape or form that presented with that component of the book the vast majority of the rest of the book is just multi family construction, which is in footprint or you know when the New York got in New York, New Drew Connecticut area.
They're very strong L.T.V.'s and it represents lesson, 30% of audience or monitoring closely but we're not you know construction sites and that one transaction that that we have taken a conservative you on that we have migrated into N.P.L. status.
Concerned about the construction book at all.
Okay. Okay, and then look on the men how how it well let me let me start by saying I feel like the corn in outlook is pretty optimistic and I know, what you're saying I'm to find inside you know everything you control over that I found I guess, just thinking in the asset side right.
<unk> <unk> <unk> <unk> first quarter, what what kind of gives you confidence in that corn and guide and then part you're that question is also.
Mm mm.
And then I guess the assumption is that it's classified substandard long, they're really actually not going to get into any kind of like non cool <unk> impacting and then as well I'm definitely are just as it could kind of it for that corn and.
Yeah.
Yeah, so when you're going to see that where you're going to continue to see some credit my <unk> credit migration that you're going to continue to see near term. So called second quarter is gonna be largely driven by the small balance it would've been in football, though so that component of 120 million Bucks for loans that will continue to migrate through because those are business as a little bit what we're talking about in.
You know when that read the question of how we are individually looking at these credits since he decided to make it will parents or you know we modification. Those are credits that again just have to say that we're not going to work with borrowers revitalized because we are but those are credit for the viability of.
Things really that as long term is going to be in substantially greater about then pretty much every other portfolio that we are working on right. Now. So we should not see you know the vast majority of the pain, we're going to see that you were going to see from the migration of credits that would then go into not a cool that would impact or yield which was pretty significant in March that had for the most part.
Happened already because all those credit the number for you know credit that we're talking about which continue to be performing today.
You know actually have already impacted or you know we've already reversed a you know we we put them on non accrual in Riverside interesting can afford it which you know had a little bit would impact and <unk>.
You know why are we competent you know I think there's two reasons I think the first and foremost we are still in the very early stages in early innings of repricing the entirety of the funds back as we talked about so that if you have not seen the impact of that on a financials yet the difference between the weighted average cost the fun for the quarter relative to go exited.
Quarter is the biggest difference that we've ever had you know since we've been here and it's but it's the biggest difference by a lot during the difference between weighted average and spot is somewhere between five to 10 basis points for the double that 17 to 20 basis points in this quarter and we have the pricing strategies in place to get ahead of this and continue to move those costs the funds across.
Word substantially lower as we move into second quarter.
Second component of that is is that on earning asset side.
We have $6.8 billion, a floating rate loans.
Dirty Little 40 rate loans did not hit you know had not breached in the low for for provisions in the first quarter just that because of you know where the starting point was relative that we're we're acid mills is it up for the corridor.
We don't have known floors on every one of those aren't you know, we don't have well cause meaningful known for a number $6.8 billion worth alone, but we do have a substantial chunk that as we continue to move down in life will continue to reprice will start hitting you know some of those going forward and that's going to represent approximately a third of that type of 23, so even though they were to bigger drop.
In in my building the second quarter, you do start to offset that longer term from the perspective of starting to group. Some of it won't work, we don't get the impact of brought into the full impact of life.
Down so the way that we're thinking about it is essentially take a similar type of drop in earning acid yields in the second quarter relative to what you saw in you know between the first in the fourth quarter, which was about 20 basis points on earning assets and this is including you know accretion income on on loans, it shouldn't pretty stable discord relative to the first quarter.
So do you simply take earning acid meals that are no 20 basis points lower in the second quarter than the one the first and you're already starting from 20 basis points lower on the cost of funds and you're continuing to move that cost the fun lower you get to a place where again, there's there's always gonna be some you know some uncertainty on that because what happens with rates weekend. Unfortunately don't have the magic crystal.
But the starting point for where funds will cost the fund and earning ass yields are they didn't know much better place in the second quarter that wasn't the first thing we're pretty confident that it would continue to manage those types of running acid yield dynamics, we can offset that would cost the funds reductions longer term.
Okay. Okay <unk>. Thank you and then just last week the living in its security book on Canada's I sort of explain kind of decided you. There I know some of it was called away from you about just for the trying to entice old and just how you're saying at positioning turned to fuck going forward.
Yeah, well that's one of the thing that's also going to help and then you know going forward. We've been I think for the past three or four calls we've been talking about him looting due to continue to move the no the balance of security down as a percentage of total learning assets the strategy behind the $400 million largely M.B.S. is up and sold in the first quarter is the fact that over security that where we had.
Some substantial longterm premium amortization risk that that we wanted to get rid of so you know yield door security that we can't on the books that were yielding you know to an aptitude when 7%. When you started accelerating that we would have essentially waited and just had those securities continue to you know to run off over time in pre pay they will not be able to do an aptitude, 2.7% because we would have.
<unk> substantial amount opinion amortization that would've bought it would have been accelerated so we're going to continue to manage that percentage of the security book down you know, we would be comfortable running it somewhere between 12 and a half with 15 per cent security total total total learning assets. We were at 17%. This quarter, we will get the 15% by the end of the year. So we're gonna.
Do that through a combination of some incremental you know gun reducing of of specific component to the portfolio and we're also going to do it because there is going to be some you know some earning assets that and logo, but that didn't happen over the course of the year, but we will hit that 50% target.
Okay, but I couldn't live without thanks, guys.
<unk>.
[noise]. Thank you we can take one [laughter] <unk> I'll be <unk> Hello.
Oh good morning.
If they want to follow up on the security book Here wondering you know helping level you need in corporate Securities. Just wondering what your appetite is for keeping the current mess versus a pencil restructuring somebody more conservative.
We you know so we liked her portfolio, where it is and you know, particularly the municipal book is Ah those bugs and concentrated in you know state you know kind of you know state level no general obligation bonds of state that are already kind of reopening and that have a substantial amount of no. There soon.
You know high credit grade with you know go there were no they're they the the finances or the state finances are injured aren't very good shape and they're going to be able to let her you know letter through there. So we're not concern from the perspective of the composition of the security book on community side and on the corporate side you know the majority of what we have you know and at age 50% of our exposures are out you know senior instead.
Holdings of you know other financial institutions that are very very strong you know shape. So we are you know you're not going to see us restructure the blood from the perspective of changing the mix of what we have today, we are going to continue to reduce some components, but we see we are more concerned from the perspective of reducing you know kind of reinvestment risk in reducing.
You know people remembered as they should rest versus we're not concerned on on the credit risk to the portfolio at this point.
That's helpful.
That and then in terms of the modification I believe it's 1.1 billion were approved just wondering what's the total number of request that you've seen.
The total number is about to let you know twice that level and so it's about two it's about 10% of the total portfolio and we are working our way through it as that you know who said before were essentially taking individual you know underwriting decisions on on the proving modifications for each borrower and spokesmen tickets.
Time to you know to work or we <unk>, we do not anticipate that all of those will be approved.
Understand too you know we have a lotta people asking for our lives <unk>. Yeah. So that's part of the management process, but the five per cent numbers a good number you know work through some other was about you know as you would imagine it's kind of like the P.P.P. program, It's a great program.
And why wouldn't you apply for this thing. It's the same thing that has wants there are people that are truly amazing.
Others that have liquidity in the financial sense to continue your pain as they have been structured.
I appreciate that color and then in terms of just the H.B.O. point point I apologize I Miss this but I was wondering just drove migration to credits in criticizing classified this quarter. If there's any particular segment or a couple of loans.
Oh, I'm, sorry state you cut out a little bit what was the question.
Oh, sorry.
Terms of the email portfolio, just wondering what the level of criticized and classified the migration in criticizing classified that credit score wondering is just a couple of loans or any particular segment and I'm starting to.
It was to relationships to lungs, and they were not in the same industry at all.
But not the industries that you would have you ever they I guess.
Retail dry.
Okay. Thank you very much I appreciate that.
Maybe the.
Oh.
[laughter], we have a further questions. So there's points on the call the speakers signing additional cuticle mikes. Thank you.
So we didn't have a couple of female questions, Oh, sorry, I forgot about that.
I mean that hurting a little P.D.P. yeah.
What was the what kind of yields are we expecting to generate.
Those are.
Yeah. So for that so just in case. So everybody here is that it's a yields on P.B.P. loans that are expected to come on the balance sheet. So first and foremost from a balanced perspective and that is a great that there's going to be between not all 650 million of Ah funded been requested will will be you know necessarily approved so for modeling purposes were shooting 500 million.
Dollars of that actually hits are bound shooting, where she had 3.5% yield on on the on that book of business, which is consisting of the 1% fee. In addition to the a combination of you know the processing fees that we're seeing that perspective, how the mix of of loans are coming in from an average balanced perspective, so 3.5% about.
Five and a million dollars of a of loans and we're assuming that 75% of those loans actually get forgiving over a period of three to four months post or Puerto so by the end of the third quarter, we anticipated that 500 million.
Onto about 120 times and $50 million bounces Assembly bones get they the majority bones get for again, so that the the first question on P.B.P. in the second question second question, we don't have any outlet temporarily suspended on my back.
What would read initiate interesting repurchases environment.
Rivers Rivers Star got so when that when we say temporary we've known truly do you know we've we've we do need temporary we you know that's one of the reasons that we have provided that guidance regarding our nor tangible common equity ratios and how we're comfortable running at those types of levels. They did that we have a substantial amount of capital above those ratio today, and we're going to generate a lot of internal.
Generated capitals, we continue to me too of course this year in the next from a we know what needs to happen, we'd need to essentially get back to an environment, where we'd just understand that you know forecasting macro assumptions are going to continue to change every other week based on what the latest and greatest stuff you know kind of headline news that comes out regarding how we're going to open or not we open you can.
When you think about locally or <unk>, what do you think about the exposures that we have we are obviously in New York City Bank was about 65, 70% of our <unk> you know within a 20 mile radius of a of Midtown Manhattan as soon as we continue to see greater clarity as to how New York.
State in New York City reopened and how we essentially get back the more normal lifetime or local economy, and therefore, we can essentially factor that in with a more you know kind of you know crossing a keeping dining advisable that schooner represent.
On the.
On all things model for reserves, you know, we would be in a position essentially report and start turning on the by back again. So we envision that that is going to happen at some point in that was on the second or third quarter that we're going to get that greater clarity and we'll be able to establish clear you know kind of pappan guideline to being able to to get back to buy back years.
And then just to close that you know first and most importantly thoughts and prayers are with a everybody affected by a program and frankly, we need to support each other in that in this process.
Secondly, you know from visit standpoint, we think we're than most appropriate in the lounge for credit losses, and very up to date and how we've structured just so the or the next those as on the credit assigned we we feel very comfortable way of arms around the credit. These are secured credits and not lever.
Credits.
They are things that we can work thriller or comfortable on any of the laws can default type of scenario. So we have and then lastly Ah work. We also comfortable as the the year goes on for what we know today.
P.N. are all progression and <unk> building. So we we're we're we feel like we have our arms around this and and can it'd be effective as we go forward and pull the necessary levels letters you know what you've seen from us over a long period of time is we'd reinvented that company and we.
Lake all companies in times of crisis and change like this that there are opportunities to continue to reinvent the company and we'll continue to do so so we appreciate the call and <unk> your support from so thank you very much.
Yeah.
[laughter] conference call. Thank you for your participation maybe some does someone you may know just.
Oh.
[music].
Oh.
[music].
Yeah.
[music].
[laughter].