Q1 2020 Earnings Call
Given the changes in the operating environment brought on by covid-19. We want to spend most of the time on our call today providing an overview of our response discussing the
Fact we are seeing on our business and providing some additional color on our loan portfolio after that. We will open the call up for questions.
As a reminder, you can follow our comments with the help of an investor back. You can find in the investor relations section of our website before we get into the covid-19 discussion. I want to provide you with an overview of the first quarter. Net income for the quarter came in at 3 million dollars for seven cents per diluted share. Our bottom-line results were impacted by a significant fruition leading to an increase in our allowance to reflect the weakening economic conditions disruption in the market for government guaranteed loans and a fair value right down to our servicing asset despite significant slow down in prepayment speeds.
The quality of our deposit franchise was evident and reflected in our net interest Market which excluding increase in income remained stable from the prior quarter at 388 basis as we were able to reduce funding costs to offset declines and earning asset yield the scene come component of our Revenue declined by 5.3 million from the prior quarter and wage really impacted by lower gain-on-sale revenue and they're fair value charge to our servicing asset that I mentioned earlier our efficiency ratio increased to 66% with the In Crowd entirely driven by lower Revenue given flat expense levels on a quarter-over-quarter basis.
Balance sheet growth for the quarter was healthy and saw the loan portfolio grow by 7.9% a portion of that growth was driven by commercial customers throwing underlines particularly at the start of the crisis total deposits increased by 91.3 million or 8.8% annualized with non-interest-bearing holding steady at 30.5% off of Total deposit the loan to the faucet ratio remained essentially flat at 91.4% as deposit growth slightly outpaced loan growth for the quarter tons of acid quality number forming loans increased by 12.7 million for the quarter. The increase was driven primarily by three acquired commercial loans and one government guaranteed construction loans that pig fell into non-accrual status during the quarter provision expense cover charge of support point six million by more than three times, which resulted in the allowance for loan losses increasing dead.
241.8 million or 1.08% of loans to add the end of the quarter turning to slide for I want to provide an overview of how we responded to The covid-19 Crisis Support employees customers and communities.
Since day one of the crisis our primary concern has been protecting the health and safety of our employees and customers the technology Investments. We've made in our platform over the past few years allow us to quickly wage inflation, all of our non-retail employees more than six hundred and forty of them or 64% of our Workforce to a work from home environment while maintaining business continuity wage activity and service levels. We put a number of programs in place to support our employees during this time including providing paid time off for anyone dealing with covid-19. Either personally wage or within their family and have expanded our health benefits to cover the cost of covid-19 testing and treatment from a retail standpoint customer activity activity has been stable and the environment has remained very manageable. We have obviously experienced a significant reduction in Branch traffic as we have temporarily closed some of our locations and Scenic correspond dead.
increase in the use of digital and
Alternative delivery channels by our customer base. We have continued to provide Branch access through a combination of By Appointment services and drive-thru locations.
In terms of our borrowers were closely monitoring line of credit utilization as we sell customers increase increase draws on credit lines by $170 million relative to the prior phone number which Porsche line utilization rates to 63% are focused during the quarter shifted from managing new business pipelines to focusing on existing customers and a blessing relief and support programs to help them navigate through this. Turning to slide five. I would like to provide a bit more detail on the support programs. We have put forth in place for customers is one of the largest SD a lenders in the country. We have been an active participant in the PPP program with a focus on our existing customer base. We have processed more than 3,600 loan request resulting in approximately $718 million dollars and approved loans today. We have funded approximately $436 off.
And expect to get the remaining funds to customers over the next week customer participation in the program was Broad and covered all of our business lines including SBC Commercial Banking as well as retail customers, the average size of a PPP loan was just over 200,000 with the median coming in at $65,000. We expect to generate approximately twenty-three million dollars in fees from the program.
Outside of the PPP program we have been proactively working with borrowers and granting relief on a case-by-case basis the modifications. We planted have primarily been 90-day deferred wage of either Prince either or principal and interest payments through April 29th. We have granted 396 million of deferrals representing just over 10% of our portfolio with the majority of that being for our Commercial Banking clients in terms of Industries. Today. We have granted the most apherald to borrowers who rent non-residential property manufacturing companies retail Enterprises and accommodation and food service companies at this point. I would like to turn the call over to Lindsay to walk you through some additional information regarding how we are positioned to manage through the crisis and see thanks Alberto. I'll start on slide seven with a review of our liquidity and capital positions our liquidity.
We ended the quarter with a hundred twenty million in cash and equivalents and an Investment Portfolio representing 22.7% of total assets. In addition. We currently have 5 2 billion in funding availability excluding the FED PPP liquidity facility. We plan to utilize to fund or PPP portfolio in terms of our Capital are strong operating performance has steadily increased our Capital ratios over the past year while supporting our balance sheet growth and return of capital to shareholders through both our share repurchase program and our quarterly dividend total capital and tangible common Equity ratios, exceed four levels at the end of the quarter at 14.5% and 10.3% respectively as part of our Capital planning process and as a result of Uncertain environment, we ran several adverse scenarios resulting in projected capitals All Above well-capitalized including the continuation of our common dividend. However, given the uncertainty just on the
on the current environment and our commitment to support our
We have paused our activity on the share repurchase program turning to slide eight. We have provided some additional information around the composition and diversification our of our portfolio page in terms of concentrations within the portfolio the real estate and rental and leasing segment and the manufacturing segment represents the largest percentages of our total loan at 30% and 14% respectively generally, our real estate portfolio has a minimum debt service coverage ratio, 1.25% with a maximum LTV of 75% our retail and office space generally off of minimum debt service coverage of 1.3% with a maximum LTV of 70% 57% of our loans are variable rate split fairly between off loans tied to Libor and lungs tied to Prime and 43% are fixed rates are total commercial lines of credit exposure is 2.1 billion with 786 million of that being unfunded wage.
In terms of line utilization. We saw four percentage Point increase in our utilization rate during the first quarter to 63% since the crisis started. We have implemented a proactive approach to credit risk management that has included direct contact with our customers to get real-time information and assess the impact of covid-19 turning to slide 9, we have provided information exposure to the industries that we have identified as early impact and sensitive to covid-19 in aggregate these industries represent approximately 10% of our total loans to date we have granted deferral approximately $76 million of the outstanding balances on these loans about 19% of all deferrals approved to date our largest exposure is restaurants, which represents 3.4% of our total loan. It's a very granular portfolio with the average loan size that approximately 227000 and 12% of the outstanding amount carries a government guarantee.
We have minimal exposure to the hotel industry with these loans representing just 1.6% of our total loans the two largest relationships in this portfolio have a combined total of approximately Twenty One am standing and have strong credit profiles and sponsorship moving to slide 10 will discuss our government guarantees lending business as Alberto mentioned earlier the disruption we saw in the first place impacted our level of Loan Production with clothes loan commitments coming in at 79.9 million. The total balance of the government guaranteed loans that we managed was essentially unchanged in the quarter and the largest concentration in our retained portfolio continues to be manufacturing retail trade in Food Services, which each account for between 14 to 16% of total loans in this portfolio under the exact dsta will pay all principal and interest for 6 months on all existing SBA Loans and regular servicing status as well as new loans disbursed prior to September 27th as suck.
Borrowers will have a bit of breathing room.
To absorb the initial impact of covid-19 turning to slide 11. We look at our net interest margin.
We have consistently generated a net interest margin above our peer Group which we believe will help us to offset some of the impact that this crisis will put on other revenue-generating areas while the full quarter impact of the recession said rate Cuts will continue to pressure are earning asset yield. We believe there will be a number of factors that will help us offset a portion of this pressure. We have been able to steadily reduce our cost of deposits by improving our dog awesome mix being proactive with our deposit pricing and the declining rate environment and benefiting from the CD pricing that occurred during the first quarter. Our March average cost of deposits came in at 62 age compared to an average cost deposits of 75 basis points for the first quarter with this lower starting point. We should continue to see a decline and deposit cost in the second quarter.
Over the rest of 2020 we have eight hundred and ten million CDs maturing at an average rate of 166 SEC these Renew at lower rates. We expect to see further declines in our deposit costs incurred as a result of the PPP program. We estimate the income to be 3.3% of the loans processed over the life yield on the loan at 1% will cause compression initially for the Nim. However, the processing fees will positively impact or non-interest income and possibly our net interest margin in the future quarters as well depending on how quickly the loans are forgiven or repaid. We may see accelerated recognition of these fees during the third quarter at this point. I will turn it to call back to Alberta. Thank you, Lindsay and turning to slide twelve. I want to wrap up with a few comments about areas of focus on current environment. Our immediate Focus will be to continue to protect the safety of our employees and customers particular food, particularly as we eventually plan for return to a more normal work environment dead.
Maintain expense discipline and operate the business with the utmost safety and soundness in mind on the business front. We expect that during the coming quarters. Our efforts will be sent off on helping clients navigate through a difficult. Although the duration and severity of the covid-19 pandemic is uncertain. We're well-positioned from a capital and liquidity standpoint to support our clients and communities during this unprecedented. With that operator. I'd like to open the call up for questions.
When I begin the question-and-answer session ask a question, you may press * then 1 on your touchtone phone you're using a speakerphone. Please pick up your handset before pressing the keys withdraw your money, please press * then two. If this time will pause momentarily to assemble our roster. Our first question comes from Ibrahim poonawala of Bank of America, please.
Good morning guys. So thanks for all the detail. I guess if you can just go back to the slide line where you lay out all the sort of impact except I guess just talk to us Alberto around the restaurant Finance walk around just who the what the borrower base looks like sort of the guaranteed portion and your visibility around response again, a quick service versus casual dining. Like what is the type of restaurant and your comfort around how some of these bombers May navigate leave lockdowns?
Sure.
So e be the the I would categorize it in in when you look at the total. I would say that there's a there's a conventional component. I believe the number is we just kind of just give you the breakdown. What is you know kind of the small business piece? Um, so about 80.9 million months about a hundred and twenty five point two million dollars that you see there is is really kind of small business Capital so that there is you know, the the essentially the bulk of the page and I would say that's very granular that's a mixture of all sorts of you know, quick service restaurants, you know different franchises as well. As you know, smaller restaurants operating generally in the you know, within the Midwest, you know footprint that we typically originated, you know, government guaranteed loans in um the balance of birth
That is more restaurants that fall in what I would call our conventional book and you know, as you can see from from the difference, that's more limited and that's typically, you know, we're not month financing so much as as franchises or Quick Service restaurants, but rather more establish restaurant or operators of multiple facilities, you know in some cases we owned a we Finance the building for the restaurant owner as well as provide financing for the restaurant in some other cases. We're just essentially just financing not necessarily the restaurant so that hopefully that gives you a little bit of color in terms of what what you have and that category
Well, that's helpful. And you mentioned that you ran also stress test in terms of measuring Capital adequacy when when you think about just received and obviously you still have the model talk to us in terms of how you see that issue evolving Beyond this point. Like do you do you expect to see some pervaded migration as we think about the second quarter and that will be a bigger factor in informing the reserve it from your own. Yeah. We're not going to give exact guidance on this but I'll give you our faith in terms of what what we think we we did obviously have a reserve increase related to covid-19 in the first quarter right now given the uncertainty and everything that's going on here and just the front frankly the unknown. We we really believe that it's going to depend on the severity and the duration here in terms of what the head so we do think that the birth
The future will be robust in terms of what's going to be needed to be provided. But in terms of how much time will tell.
If I may just one last one, I understand your focuses on serving customers and focusing on just getting through this over the next few months. Do you see like within your life print this location being created by this which eventually feeds to your business model of rolling are requiring potential smaller Banks if you can talk to that, Alberta.
That's that's a good question. I think I think as as with any type of you know situation like like God we've gone through before in terms of a crisis. Um, I think there's a plenty of fog in the Horizon right now and I think as that fog clears, there's some that are likely to be opportunities. Um, I think what what what our focus is right now is really just trying to see, you know, the city, you know here in Chicago and and also offer in your city as well, you know, we're not open for business yet. You know, I think we want to see what the environment looks like, you know after we start returning to some degree of like normal fee and and be able to you know at that point kind of assess what what the environment is going to be on a go-forward basis but to answer your question
In times of stress, you know that usually, you know, opportunities usually will present themselves, you know as the dust starts to settle and and they become evident and I think it's uh, I do believe that you know, that will be the case this time around as well.
What is texting my questions?
Next question comes from Nathan rice and Piper. Jaffray, please. Go ahead. Hi everyone. Good morning, and hope you're all doing well. Thank you. You too. I'm just going back to the discussion. I appreciate all the details on the deck along those lines and make sense to see you guys very active at page. Just giving your scale on the side of things. I'm just curious no case on this is closer to you guys provided on slide 9 just in terms of the early impact industry exposure curious, you know, what amount of those PPP loans are going to do like restaurants and hotel operators within the portfolio that are maybe more at risk near-term promote liquidity and capital standpoint. So name, I would say that uh for the vast majority of our customers unless I mean there were really, you know exceptions where customers decided Thursday.
They didn't want to participate in the program or they didn't qualify for the program for X and Y reason we really strive to get you know participation and make sure that our customer, you know, we're offered, you know, the opportunity to participate in the program and then hopefully, you know for us to be able to get them an allocation in the program. I think we were able to do that. So I would say broadly speaking for the vast majority of the customer base here including those that you see, you know categorized there on slide nine. They were all participants and the PPP program.
Click here. And then can I change the gears along the SDA side of thing? Um sold volumes were all obviously down on the corner and some of that could be usable and what not, but just curious to know given, you know, you're focused near-term seems to be unjust funding loans to help a lot of these small clients both new and current kind of get through this turbulent time, which is any thoughts generally speaking how those um, you know, non p p p s d 8 volumes Trend into two and two three Q as well to some extent.
Yeah, I mean there's you know, we that the interesting thing about the quarter is is kind of like A Tale of Two Cities. We had the kind of the pre March, you know quarter and then we had obviously the the massive change in the environment that happened during the month of March so I can tell you we you know, the quarter was a typical quarter, you know through through essentially, you know the month of February. Um, we had you know pipelines were building both on the SBC side. As you know, the SBC side is a little bit more seasonal and slower during the first quarter but pipelines were building, you know there and we had an active pipeline, you know going into into the month of March some of those loans will continue and will resume and we'll eventually fund those loans and and you know, and we can talk about the the secondary market and kind of the state of the secondary Market, you know, yep.
But you know clearly the focus, you know, during the month of you know, April and Ernest, you know, but really, you know, after the the onset of the crisis wage was more internal as opposed to external that being said, I mean there's business there's a pipeline there that will continue and I think we'll have to see how long how things develop from here. As you know, the current seven a appropriation is tied with the payment Protection Program, you know appropriation at this point that you know funding hasn't run out but you know, there's a potential that funding potentially could run out and we're by the funding would not be re-established until July 1st. We will we will see we've gone through those periods before you know, and we'll see what happens with ultimately the funding of the PPP program.
The other thing is, you know, as you know, there's another stimulus bill that's being discussed in Congress. There's rumors that you know additional language a language in that bill could potentially expand the guarantees for the existing program. So for the 7 a as well as for the you know, SBA Express programs, I don't we don't have any visibility into that language and a lot of stuff can happen certainly before before that bill, you know, hopefully or eventually, you know becomes a law but I will have to see you know, how how the environment is it pertains to funding for the programs and what changes to the programs, you know become you know available that being said the environment is certainly a stressed environment. It is fair to say that we believe that a number of borrowers here will be going through difficult periods in the months and quarters ahead.
and as we April
Rooms in the past particularly coming out of Crisis. He's have been very useful in providing financing to companies that are not able to access conventional financing at that time. And you know, we expect that this environment, you know, and ultimately as we come out of the environment that that will be no difference.
That's great. That's very helpful. If I could just ask one more on the cord and obviously a bunch of various moving pieces, but I guess if we kind of strip out the PPP impact that's going to occur next reporters, you know core deposit growth is pretty strong. You guys brought down deposit costs pretty noticing the court as well. So just curious how we should maybe think about the corn in into the second quarter. Obviously, the the Red Coats won't help but just curious within that context what amount of floating rate loans or maybe nearing floors at this point and I know you got done a good job over the last several quarters getting floors and a lot of loans. So just curious, you know again with deposit cost coming down in the strong core deposit growth in the corn how much more opportunity exists to kind of improve the funding mix and also, you know bring down for deposit or I'm sorry deposit cost just give them the early and asked if you'll head ones.
Sure, so Nate, I'll take that. We're not going to be giving specific guidance on the Nim just giving all the moving Parts with the PPP and everything that you described but I can give you some general directions in terms of what we're seeing. I I gave some color around deposit pricing and gave you where we ended in March and I think that should help in terms of giving you a sense of what's going on with our deposit pricing on that side. That should help offset. Some of the compression. We'll see on the earning asset side of the of the balance sheet. So I do think that you'll see compression just given where rates are right now and on the earning asset side It's just tough. So I think that's sort of my Outlook in terms of of the Nim. I do think the program will add some drag just on the 1% yield that they that they have so I think you'll see some drag there and then you'll obviously don't see some offsets as there's no
Business and repayments of those loans is that comes through. So again, it's it's murky. So we're not giving a guy complete guidance like we have in the past around the name so long in terms of the floors. We have about two point 1 billion in variable rate loans. So approximately 430 million of those loans have floors and almost dead half of that is currently at the floor.
Okay, let's super helpful and obviously understandable just giving all the Dynamics at play on the corn. And so I appreciate all the insights. Thank you guys.
Thank you. Thank you. Next question is from Terry McEvoy of Stevens, please go ahead.
Good morning. I guess we start with credit what contributed to the increase in non-government guaranteed for these loans that were more than 30 days past due at the end of 2020 and and just couldn't be then modified.
Different circumstances on each one. Terry one was simply it's a commercial property. They lost the tenant they were unable to walk. I haven't been able to find the tenants. So they just basically could not make payments that they just went past due and that happened a little bit earlier in the quarter. Another situation was December we uh, you know, and these were from from you know, acquired loans, but another situation was a restaurant operator in this particular case, the restaurant was struggling going into the game. They wanted to repurpose the restaurant into a different concept they closed the restaurant and it was a multi restaurant operator. However, you know, the global cash flow from the rest of the restaurants, you know, after the pandemic started coming into play was nowhere near sufficient. We had a dog
282 work out the asset very quickly. So we took that opportunity on that. The other situation is really a construction loan. And this is more on the government guaranteed size construction loan of a storage facility where you know, we think the value is there we have you know collateral value. They had trouble leasing. It's a specialized, um, you know, refrigerated facility. They had trouble leasing it so they, you know were struggling to make payments that we just, you know, took it to put it in in non-accrual and not performing. So that's you know, three very different set of circumstances in each one of the cases.
Okay, and then just following up on what Nathan's questions could could PPP change the longer-term economics of of SBA lending from either a supply and demand side and once PPP kind of works its way through the system. Is it your view today that it's business as usual and and Loan commitments will come back and and gain-on-sale margins will will likely return.
Let me try it on fact that question very into into multiple parts. So I think as we got into the PPP program, I think one thing that we realized is we certainly have knowledge and expertise in doing SBA lending and there's a lot of deep institutional knowledge that comes into understanding the Sops understanding the agency understanding, you know, how to how to document how to originate and how to service and and work out and liquid loans in accordance with with guidelines, you know, we felt going into the the PPP program that that was going to be certainly, you know, a leg up from authors that had never really done SBA lending or were not you know, really did very little SBA lending. I think what we realized that is that, you know, we approached it.
As we would normally in typically approach.
You know an SBA loan. So a lot of you know adherence to you know, the guidelines the protocols, you know, the details that are involved in that busy and I think what what you're going to find is that this program eventually became less of really an SDA program and more of a program that really was designed. It's just like a grant from the government facilitated by financial institutions acting as transfer agents to get money quickly to small businesses. So with that background, what I would say is I don't know that, you know, the PPP program would change in terms of you know, is it going to change the landscape of people that off, you know do SBA lending or people that didn't do SBA lending and now you know one to do is be a lending. I'm not sure that that it will you know, perhaps it would encourage suck.
To to try it because they've had some experience now doing it, but I think it's too early to tell we still have to go through this forgiveness cycle that we're all thinking about that's coming coming up in the next six weeks and I think that's going to be a lot of work. So I think it I think some folks and the in the space we're going to think long and hard after we get through that cycle if that is something that month that really they want to, you know, pursue on a long-term basis now going back to your question to the second part of your question about the seven a and the more traditional, you know, a programs. I do think those programs will come back, you know, even if they are not further enhanced by Congress. I'll be temporarily with higher guarantees or higher loan amount or what-have-you. I I do think those programs in the past have provided a very good Bridge from borrowers that went through difficulties could not get access to Convention.
Open and saying and therefore we're able to rely on SBA Loans, you know to get them over the hump. So to speak to then be able to go back and and become conventional. I don't see why this environment would be any different given the amount of stress that we're likely to see here over the coming quarters.
In terms of the secondary Market, I I do think the market, you know premiums were severely impacted. I would say in the middle, you know roam around when when you know, the market essentially collapse. Um, I view that as really no different than what happened in every other asset class, you know in the job market at that point in time, right you saw spreads for everything from investment-grade to all sorts of different, you know assets, you know, we're we're trading levels that were not consistent with previous, you know near-term or kind of midterm historical president. So I think what what happened here was you know, you have some circumstances that are unique to the SBA business, you know, I think it's really hard for people to pool loans today. So what you have is you have essentially primary loan.
Bears that are you know kind of long-term.
Fundamental buyers in the market today and that's what's setting the price today. So I think as as pulling resumes, you're going to have more buyers come in the market and I do think that you know, that premiums and spreads will spread to compress a bit and premiums will come back. So I do think the market will enhance already started from what we've seen so far in the second quarter the markets a little bit better than it was, you know, certainly during the during the latter half of the of the first quarter.
Thanks for your thoughts, Alberto.
Thank you. Our next question comes from Michael. Should I have owned the cable, please? Go ahead.
Hi, good morning. Thanks for taking my questions. Good morning. Mike Maureen. Just go back to the restaurant book real quick. Can you guys give us more detail on what kind of collateral these loans have? And also how much of the book might be on deferral? I can give you the deferral in terms of the restaurant booked right now about twenty-five million is on deferral of that book. And can you give him some detail on the collateral piece? Yeah of the 125 million real estate mortgages secure 67,000
And really the bulk of it is UCC blanket lien on business assets.
Okay, thank you. And then can you provide more detail on the traditional 7 a loans that you guys have already written and life. How are they impacted from a credit perspective under the cares act and if you guys expect charge off to drop next quarter because of the less may be a related office.
Oh, this is from the deferral of payment on payments from the SBA. Well, are are you asking about the 6 months of picking up principal and interest? Yeah, it's just how and then on a go-forward basis how you expect the traditional SDA to perform. Sure. So the FDA is is paying for the next six months. I'll principal wage for for loans that are in regular servicing. So, um for the next six months, they will get a brass and then from there it time will tell how they emerge out of that. And really it's going to depend on the severity of what's coming and the duration of what's coming. So if things are more of a v-shaped they they may be okay and then if if things are more prolonged will have to address it and and um go from there, so I think there's different bills that are being discussed is Alberto outlined for additional relief that could apply to them as well. So, yep.
and too soon to tell but for the next six months, they will have p and I
Covered by the FDA. Yeah, I would say might the other thing I would add to that is so if you think about it just conceptually, so you're essentially you should have a borrower now that you know as an SBA borrower has a 7 a loan and that borrower is essentially getting six months worth of relief for payment that the government or the SBA is essential picking up for them, you know, after that, you know, and certainly before that will start reassessing and looking at how that business is going to emerge from the crisis. What are the job prospects going forward. What is the cash position? What what were they able to do during this. How much cash on hand do they have is it at that point in time business as usual? They just took Zoom operating perhaps they need, you know, some working capital to get started and we can certainly look at at doing that or is it a question of those the business needs some additional? Yep.