Q1 2020 Earnings Call
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Good day, everyone and welcome to the E.S.S.C. Earnings Conference call Today's conference is being recorded.
This time I'd like turn the conference over to Jim Miley, President and CEO with Enterprise Financial Services Corp. Please go ahead Sir.
Thank you Sarah.
Good morning, welcome to our current ones first quarter on school.
Well I want to call. It okay families are helping sorry.
Unprecedented times.
Joining me on the calls one teacher, Chief financial and operating Officer her company, Scott Goodman hundreds of enterprise banking trials that's all.
Hi, Good office, you're going to personally trust.
Before we began to watch remind everyone on the Paul.
Of the release in the company <unk> have you done or website.
<unk> earnings release bird species for each day yesterday.
Hi, This is where just likes to the presentation titled forward looking statements are most recent Sanjay reasonably actual results may vary from any forward looking statements that we make today.
The fourth quarter 24 will be a flavor.
No.
Yes.
Well the quarter to show the financial strength and resilience.
Well the last several years.
For example for Houston.
It's funny culture supplemental.
Prudent investments.
For girls innovation.
Hallmark of our company.
So.
Good luck company words into during the fourth quarter.
Record operating revenue of 77 billion.
Since our net interest margin and that is stable persons ratio compared to the linked quarter.
I wanted to part with workers Shlomo.
Loans grew by 143 million or 11% annualized.
Deposits grew 290, 415% and the ones.
In response to uncertain economic conditions.
And.
With that provision for credit losses, and 22 million reserves.
Well, we feel good about our financial results from the first quarter neurons able to estimate impact unfolded.
Business and operations and sometimes.
As such we're not going to provide guidance at this time.
Our guidance should not be wonderful.
You will get into the system is in the quarter no. That's what's your conclusions, but these results and mid rather lard Friese vision I previously mentioned.
As it relates to clear the quality.
We've been hard at work in life and certain portions of the portfolio.
Doug <unk>.
No current.
Well, obviously no more often.
Loan portfolio over next several quarters.
We are committed to providing as much transparency as you can then we can.
The good news is that we are starting from a very strong position.
Instead of credit phone numbers that we reported yesterday.
The bottom line is that a strong balance sheet ample liquidity and high capital levels.
In addition, as well for continued success.
Well, let you take in the next few minutes update you on approached in response to cope with 19.
This time, we've been successfully serving our clients associates and our communities.
Well that's three shows you are timeline of actions.
Since two years strengthening petzner business confidence.
Informed the communication action tap sports.
Yes actions to restrict travel.
In burden in 14 virtual.
Ultimately instituting the work from home they well ahead of restrictions that positions in our markets.
I'm glad that each of which sets and happy to report that our company doesn't mean operational.
It's important client success.
We haven't relationship and won't Anderson take over 5000, Pauls cleansing process over a three day period easier to understand what the words were and take the first steps and working to help.
Correct and upcoming needs.
Earlier, I mentioned, a careful consideration for school students that we have but yes I see.
Slide four gives you some perspective, what we've done.
All these benefits are aimed at meeting in our culture, a walk for players individual so she needs.
Recently established that's still get support fun.
As it relates to our clients continue to these slides slide two flights and some perspective often.
Our clients our top priority.
We believe it taking the best care than now will ultimately drive the greatest at central the long term value for shareholders and other constituents.
We have taken seriously.
Teaching the programs and that's the Bible governments, and our regulators into oval, that's dipping into account <unk> paychex and that means that the American workers.
Based on the number of loans that we have process through the program.
40 upwards of 67000 jobs, Scott will provide important statistics around the paycheck touching program.
You know they see executing this plan has been especially rewarding.
He incredible dedication Barr associates, combining with entrepreneurial DNA of our company to create a very successful program.
We're also working with clients or corporate wonderful strategies details of which Doug will comment on.
Oh relationship managers and not just thinking about the next weeks.
They're leaving their clients discussions regarding the multiple phases that lie ahead.
Oh important Kashi capital will be in order to respond to changing environment, and helping to see opportunities and <unk> businesses over the next several quarters.
Hi, good for shows the other pricing sums opportunities next several quarters and legal difference.
We'll stay focused on the lesson tenets of our business sound credit and client acquisition.
I'm very proud of what we've accomplished in the fourth quarter like never before we're living out and mission.
People to a lifetime of financial success.
I would now let me turn the call Scott.
I'd much more detail about call our teams in regions are poor Hugh and this is unique times stuff.
Thank you Jim.
Hey, good morning.
As Jim outlined and had shown on slide seven and eight fundamentals of Q1 were strong as we grew the loan portfolio by honored and 43 million or 11% annualized.
The scene I activity represented over 70% of this growth stemming from increases across the specialty business wise.
As well as higher line of credit usage.
Borrowers access lines for additional working capital at modestly higher levels.
Creates usage of roughly $40 million versus the prior quarter end.
Slide nine and 10 break down the change in loan balances by category and doesn't listener.
Commercial real estate activity with steady.
Captured opportunities with investors to both refinance and purchase properties, particularly in Saint Louis and Kansas City.
Higher construction loan fundings, mainly represents steady activity on project originated over the past three or four quarters.
They looked growth during the quarter also reflects increases and the affordable housing tax credit sector.
Add new business originated by the agricultural lending team.
Okay, they need to see a steady flow of new project opportunities in the affordable housing business, which was further bolstered in this quarter with some refinancing.
Yeah, I'd game was able to successfully onboard three new relationships and significantly expand another during the first quarter.
As a reminder of the clients and this year that represent traditional row crops pork in cattle farms for Chad history of solid operations and are well known to our experience aggregators.
In the specialized lending units enterprise value lending started the year strong.
With a solid pipeline and new growth for both M&A and recapitalization activity.
This activity quickly flowed as deals were put on hold Blackstone answer the latter part of Q1.
Life insurance premium finance experienced growth from several new policy referrals and the funding of existing premiums.
Moving to deposits on slide 11.
Well the balances were up 219 million in the quarter or 15% annualized.
The growth reflected that increases in balances from new account origination.
As well as solid seasonal inflows from existing accounts.
Year over year.
The deposit portfolio was up 8%.
Growth in our commercial and business banking line continued to be the main driver here.
Positively impacting our portfolio mix has D.A. continues to be around 23% coal deposits.
Behavior from depositors shifted within the quarter with account closures swelling substantially in March.
An average balances up new accounts totaling roughly five times that have closed accounts and at a lower cost.
The growth and next is even more encouraging.
There's a significant reduction and deposit costs, which king will review in more detail during his comments.
We were able to react swiftly as the fed reduced interest rates and our sales teams have been able to execute well reaching out proactively to large depositors and shifting the conversation from rate to financial strength and sort of us.
Okay.
The type of proactive quite communication is a theme, which isn't strongly reinforced this quarter.
As Jim discussed we reached out to businesses very early at the onset of this stress environment to understand their concerns and express our support.
We'll take away it's for lease conversations are helping us both offensively can develop unique marketing content.
And defensively to analyze our portfolio based on the risks and stress points identified.
At a high level, we are hearing some things.
Certainly revenue continuity is that the topic of works.
No duration of this downturn is creating significant concern.
Access to liquidity is also a major focus foods businesses.
However, roughly 65% of our clients believes that they had sufficient cash and working capital.
Weathered the storm without really programmable systems.
This manifests itself in a relatively modest percentage of our business clients requesting deferred payments.
Well the addresses has come.
Within industry sectors demand for most of our manufacturing clients remain strong.
Although labor shortages illness.
Child care needs.
Mandatory shutdowns are creating significant challenges to executing on the orders.
Well manufactured and distributors supply chain issues or challenge, but internationally depended companies running out of inventory.
Other key other key things include stalled construction projects.
Hi, good access to labor.
Maintenance and sterilization for real estate owners and lower productivity overall.
Given the current environment I'll provide some commentary on our execution of the payroll protection program.
And turn it to go to discuss some specifics on t. sectors and other aspects of the credit process.
Our deployment of the P.P.P. program outlined on slide 12.
It was executed by experienced professionals fund failed operations and credit sides of our organization.
As a bank built on serving private businesses.
No we made a decision to manage this process internally.
Parents that connects significant resources.
Our existing partnerships and aren't that's when they technology proved invaluable.
We were able to position ourselves with clients are the key point of contact for information and guidance.
And cooling instructional webinars.
Website resources and video messaging.
Or came to a highly effective in getting this program for our clients.
And as of April 20th.
We've obtained approval for over 1500 loans.
Is there any more than $680 million and as Jim mentioned and testing over 67000 jobs.
Overall.
Credit quality remains sound and key performance indicators are acceptable levels those king will further detail.
Taking a more focused look at where the portfolio could mostly impacted by the economic slowdown.
Slide 13 shows roughly 22% some loans arpus see high borrowers with an additional 27% and niche funding.
At a high level loan portfolio with well diversified by industry with no significant concentrations within the heavily threatened industry types.
Now I'd like to turn it over to our Chief credit officer about being forced to further comments subs.
Thanks, Scott and good morning.
During these challenging and uncertain times, our relationship approach to credit reveals it's true value.
Well, we are pleased with the solid performance of our credit portfolio during Q1.
Our attention this turns square like working with our clients in particular those that have been most severely impacted by the pandemic related economic effects.
I touched on the diversification of our overall credit portfolio and I thought it would be helpful. If I spend a few minutes talking more specifically.
Not our exposure to the higher risk sectors, including she or he read keno.
He deal.
Hospitality.
Well and gas.
In agriculture.
Like 14 shows a breakout of RC and I and chiari portfolios.
Of the Investor owned real estate approximately $356 million includes retail see Ari.
Oh that the average commitments is $1.8 million with a weighted average LTV of 64% and personal recourse on 98% of the portfolio.
And our segments stress testing.
It was determined that 88% of the loans to be serviced for a period of 12 months from borrower and guarantor liquidity reserves.
Our enterprise value lending for easy Yelp portfolio consists of senior debt exposure to private equity primarily FDIC.
<unk> middle market companies.
As referenced on slide 15, or $441 billion portfolio includes bones $299 million of senior secured term debt.
And $142 billion borrowing base secure working capital lines of credits.
The portfolio is well diversified with approximately 90, you need borrowers, resulting in an average exposure of nearly $5 million per relationship.
$2.5 million per alone.
[noise] industry segmentation includes manufacturing at 34%.
Trade, it's 15% and professional and technical services at 15%.
We have enjoyed long term relationships with our proven SP ice and sponsors and this portfolio performed quite well during the prior economic downturn.
Our general underwriting and space leads to a conservative senior leverage position us to two and a half times.
Total leverage below four times.
I should know that 60 or 90 <unk> portfolio clients recently approved for a total of $75 million in round worn do funding or an average of 1.25 million per portfolio company.
Slide 16 demonstrates our hospitality portfolio, consisting of approximately $358 million a bank owned commitments.
218 million of which is hotels and 75 million this restaurants.
We recognize that the hotel industry, it's been severely affected by the travel and shelter in place restrictions.
We have responded to the each of our hotel clients do our common they just 90 day payment deferrals in the funding them much needed PPP loans.
The average existing hotel loan size, it's $4 million in the weighted LTV is just under 61%.
86% to the portfolio than food personal recourse to the owners.
These are in large part your typical flag.
8200 key non convention center type properties located within our Metro markets.
And the oil and gas sector I simply pointing out that we have not providing credit direct you to producers.
Rather our $140 million an exposure as shown on slide 17 is largely to end market convenient stores.
No wholesalers and railcars used for transportation of oil as well as some manufacturing companies that sell product directly to the oil and gas industry.
And finally on slide 18, or $168 million AG portfolio is well balanced between crop primarily corn and soybeans.
Model.
Contract Hog operations with minimal exposure to dairy.
We have a seasoned team of bankers that are very well known and respected in AG communities we serve.
Since our acquisition of JCB back in 27 team, we have selected Lee Onboarding top performing local producers.
The debt to equity ratios collateral coverage and ample operating cash flow.
Well, we have experienced minimal delinquencies are defaults in the portfolio to date, we continue to closely monitor performance in light of the international trade disruptions depressed commodity prices and the recent announcements and temporary shutdowns at large meat processing plants around the country.
We're keenly aware that we have clients outside of these high risk factors that are feeling the drawn to be economic conditions on their businesses just the same.
The length of this uncertainty will ultimately determine the severity of the impact to our credit portfolio.
Fortunately as Jim commented, we entered this environment, but our clients reporting very favorable results and strong balance sheets.
But the infusion of $680 million and liquidity to our clients and the PPP stimulus.
The lead delinquencies and defaults will remain manageable in the near term.
In the meantime, our bankers.
Aided and supported our highly experienced resolution management team will continue to take prudent measures that boat protect our capital.
Maintain or reputation as a truly great banking partner good businesses and individuals for like.
And with that I'll turn it over to Keene Turner.
Yeah. Thanks, you comment and good morning, everyone. My comments were fluff slide 21 of the presentation.
Net income for the first quarter of 2020 was $12.9 million in earnings per share was 48 cents.
Total revenue compared favorably to a seasonally strong fourth quarter and there's a solid to get into 2020.
Net interest income added three cents earnings per share not linked quarter. Both through the continued average asset growth as well as 11 basis points of total net interest margin expansion.
Core net interest income was essentially stable, while incremental accretion added two cents per shift.
Also we would've expected fee income and expenses to compare unfavorably to the fourth quarter due to the seasonality. Nonetheless, there was some environmental items that helped make up for the expected trends in both categories, which I'll highlight for the and my comments.
Our strong revenue and expenses resulted in a pretax pre provision net.
Net income of $48.1 million for the first quarter of 2020 and allowed us to be proactive with a provision for credit losses 63 cents per share while still negative 48 cents per show of earnings.
Turning to slide 22.
Interest income increased to $62.1 million in the first quarter.
Core net interest margin was 20.7% to 1%.
An increase of seven basis points in the linked quarter.
Net interest income was aided by $1.3 million of non core acquired loan accretion, particularly related to Cecil adoption and zero point $8 million, a discount accretion related to prepayments on core Pcr longer period.
Overall margins were stable during the quarter privately actions by the federal reserve and Mark.
Portfolio loan yields were lower burst was the linked quarter, primarily as a result of a interest rate reached up during the period and a 38 basis point decline in one month LIBOR.
This was partially mitigated by higher average loan balances along with five basis points of yield related to the also mentioned prepayments on core PCR loans in the period.
Our cost of funds declined 18 basis points compared to linked quarter and benefited from higher average customer deposit balances and lower levels of wholesale funding and Cds.
Core non interest bearing DTA accounts were stable at 23% until deposits and deposits, excluding broker time deposits increased $130 million on average compared to the fourth quarter.
The cost of interest bearing DTA accounts with nine basis points lower what money market rates were lower by 30 basis points.
The reduction in deposit rates was primarily due to action taken their response the decline in the fed funds rate and other short term not a market rates during the course.
Wholesale funding costs also declined during the period for similar reasons.
The drastic change in the economic environment and declining interest rates of the ended the quarter. Please download pressure on the net interest margin in coming periods.
Well, we realized strong loan and deposit growth in the core to our balance sheet as asset sensitive approximately 60% of loans with variable rates. We responded aggressively to rate reductions by repricing deposit account swiftly and also securing other sources of low cost funding.
Additionally, the impact of the S.P.A.P.P. loans on net interest margin can be substantially in the near term.
We've also experienced deposit inflows and we're increasingly vigilant about our on it off balance sheet liquidity, which will likely effect net interest margin result over the coming quarters.
Nonetheless, as you heard from Jim gotten Doug we're in a strong financial position and we remain focused on helping our customers during these difficult times.
We believe it execution on many fronts will further solidify loyalty with existing clients and has the potential to attract more clients that also sees the value of having a trusted partner to help and navigate both the prosperous and challenging times.
We are committed to this principle, which we know can help us build long term value for all constituents.
And with that I'll, just add one more minute on liquidity.
Our liquidity position remained strong our focused efforts to generate core deposits provided funding for loan growth in the quarter.
The investment portfolio is expected to generate $40 million to $50 million a cash flows core.
Adequate capacity for additional wholesale unbroken funding if necessary.
As of March 31st we had access to nearly $2 billion a funding through our sincere lines of the federal home loan bank and that discount window, along with holding company liquidity in fed funds lives.
We anticipate that loans issued in conjunction with the I see a paycheck protection program will be funded through the feds pay to paycheck protection program liquidity facility.
With that I want to spend a minute on slide 23, which reflects credit metrics and asset quality changes during the quarter.
We have several moving pieces that affected credit results.
First as part of the adoption of C. So on January 1st we elected to remove some PPI loan from pools and account from them individually.
This call is nonperforming loans to increased by $8.5 million as well as classified loans increased by $26 million.
We believe that because we are willing to work and continue to be identified individually that they are well mark and reserved. However, there is a gross up in terms of asset quality and allowance for credit office.
We also immediately charged off $1.7 million on the lungs. According to our accounting policy for loans individually accounted for that immaterial balances.
On that note the day, one adoption increased the allowance for credit losses by $28 million.
This is nearly dollar for dollar the increase in absolute balances of classified loans noted above.
The us from day, one coverage improved by more than 50 basis points with the resulting allowance for credit losses. The total loans of one important 0.34% on January 1st.
Comparatively classified loan levels improved on January 1st well nonperforming loans experienced a modest increase of $4 million due to an accrual troubled debt restructuring of $3.7 billion.
Turning to slide 24, as Scott noted loan growth was solid to start the year under the day, one methodology the related provision for credit losses would've been approximately $1.5 million as we experienced nearly $1 million of net recoveries during the first quarter.
With that said, we recorded a provision for credit losses of $22.3 million as a result of the rapid deterioration of economic or the economic forecast associated with the current conditions.
Resulting allowance coverage increased another 35 basis points to 1.69% and the reserve for unfunded commitments include another seven basis points of coverage.
It's important to note that we have successfully ample ended the S.P.A. TPP program.
With our customer base and we continue to work with our customers to support their near term operation through deferrals and other methods. The Parisian into the quarter is nearly entirely reflective of forecast a deterioration that might occur in the environment absent consideration this or any other mitigants with that said we are.
Also continue to see the expectations for conditions worsen, which in that case, we are well positioned to continue to proactively to provide for future potential credit losses.
I will reiterate that although we are combing through the portfolio talking to customers and working hard to identify any issue we have not seen material credit stress manifest thing at the current time.
That will turn to slide 25, and reflect on fee income, which was seasonally strong at $13.4 million for the quarter.
We started to see some impacts of the overall economic environment or credit card and wealth businesses and we expect that they will continue to experience softness as commercial spending remains low and the market in the things remain depressed from 2019 level.
With that said.
Tax credits swaps and mortgages all started the year well.
Combined with a game from bank owned life insurance sub zero point $7 million first quarter fee income proved the strong start to 2020.
<unk> expenses on slide 26 were similarly strong.
Coming in at $38.7 million for the first quarter.
Lower incentive accruals travel and FDIC insurance mitigated seasonal payroll taxes, and nearly $1 million and some related expenses for our efforts a bit community and employee families affected by current economic conditions.
Core efficiency at 51% to be Windermere compares favorably to a year ago and is an encouraging start to 2020.
We continue to work hard to ensure that we're spending prudently in this environment. The will also committed to supporting our associates in a family through this challenging time.
I would also add that operationally, we are faring well our business continuity was built around working remotely with our geographic dispersion, who are already used to working virtual out of the office. This is clearly another level and completely broad based but our teams are successfully and safely serving clients while collectible working through this challenge.
I'll conclude my remarks on slide 27 in terms of our capital our capital level remains strong with common equity tier one at 9.6% and total risk based capital nearly 13% as part of our ongoing capital planning process, we have stressed our capital position using adverse effect.
And I'm, a forecast and our own historical loss experience during the downturn.
Under the scenarios you projected our capital level would still meet well capitalize limits and we can maintain our current dividend level.
However, I'm missing that and economic environment, we temporarily suspended our share repurchase plan and kept our second quarter dividend at 18 cents per ship.
Prior to suspending our share repurchase plan, we returned $15 million on capital to our shareholders to the were purchases in the first quarter.
Our tangible common equity intangible assets ratios, 8.4% at March 31st down from 8.9% at the end of 2019.
This trend was due to the impact from adoption of Cecil and building our credit reserve in the core what's combined totaled $35 million or 48 basis points on our Tc ratio.
Significant level of capital strong liquidity as strong pre provision income all support the overall strengthened our balance sheet.
I just want to conclude by saying that it's clear to us whenever that we value our relationships with our customers and we're utilizing the strength of our talent balance sheet and overall financial strength to support them.
We're more focused than ever our ensuring that was mid long term financial nothing that are in the best interest of all our stakeholders is also evident that where we have worked so hard to do build a robust revenue profile combined with an exemplary expense management will allow us to serve our clients and our shareholders over.
For the near and long term we.
We will continue to be who we are proactive and client focused in order to create the best possible enterprise in years to come.
I appreciate those who have joined US this morning and at this time, we'll open the line for analysts club.
Thank you if he would like to ask a question. Please take note by pressing star one on your telephone keypad, if he by using a speaker phone. Please make sure your mute function. It's turned off to allow your signal to reach our equipment again. Please press star one to ask a question.
And we'll pause for just a moment.
[noise] and our first question will come from Jeff Rulis with D.A. Davidson.
Thanks, Good morning.
What do you haven't done or on the capital just in terms of ER.
Well, if you double dose the loan loss reserves, so sort of capital come from different sources, but any thoughts on that industry, a T.C.E. comfort level at that age for it here in excess acceptable levels is that comes it further you guys get it gives you about wanting that liquidity.
Our sources of capital, but just put that metric.
Any any thoughts on.
Comfortability levels, where we sit today.
Yes, I. This is keen eye I think we're extremely comfortable of capital at these levels I think particularly when you look at you know the the confluence of factors here in the first quarter. You had you know they want adoption, let's see so you have the what we feel like as a proactive day to provision and we were also.
No buying back them shares in the quarter. So you know, we're ending up at 8.5% T. I feel like that strong and then I think it's worth noting yes in terms of C. So I mean, there is some regulatory relief and phase and that you get so you know TV as one indicator, but you know, but the rest of the ratios from a regulatory perspective remain strong.
And you know again I think the earnings profile or you know sort of that first line of defense on potential future.
Provisions that that will need to take so I think we feel good right here, that's eight and a half with some level on you know moving forward I wouldn't know, obviously weve been stable and pause on kind of the capital management. So I do expect that you know the capital position will be sufficient here and we can you know how those.
The quarters like this and you know if you had no call. It a 50 cent quarter here with an 18 cents dividends or you know you're a new building Tc every quarter.
Thanks, and then another one on expenses and religious good color I know that they're not looking to provide guidance but.
There are lot of moving pieces in Q1, and you know things [noise] rapidly towards the end of the quarter, but if you could touch on this level of expenses in the first quarter, given thoughts of a branch closures and travel limitations.
Is that figure.
Good level or would you expect that to kind of come in or or increase its not indicative of maybe to Q.
Yeah, Jeff I would just say normally a first quarter expenses are high because of seasonal payroll taxes and <unk>.
A myriad of items that go along with it including Merit increases late in the first quarter, we do have that kinda normal trend, but I wouldn't say that that the environment has given us some natural mid again for that and also adding to that was reduced incentive accruals. So I think the first quarter level here felt pretty comfortable.
And really at all they had no call. It a month of some of them more extreme expense measures in it.
I would also just say with that said the Austin, there's some variability we're definitely going to see some more professional fees.
No as we consult with attorney even council on you know either specific credits or you know how to navigate no challenges that the current environment provides that we just you haven't seen that specifically before so there's there's a little bit of given take better, but there's nothing that I would say as a material upside or downside.
To a level or at where we feel pretty good about or at least in light of kind of profitability and let him to the extent that things work to get better.
And we would have no customer growth and things like that obviously that the teams will be on line for for some level of themselves there and that would have to de crewed up later in the.
Thanks, One last just want to clarify I think it was in doug's comments about the [noise].
The average P.P. balance a balance of your you'd be able approved clients instead of a million in a quarter upper.
I get that.
Yeah, Yeah, you're right. It was 75 million total for the portfolio of clients with an average of $1.250 million portfolio client.
Great. Thanks, that's it for me.
Our next question will come from Andrew Liesch waste paper Sandler.
Morning, guys how are you.
Good morning, Andrew.
And I just started.
Let's see so I'm I'm amazed isn't there.
And just curious if you know what we tend to get value of floating rate loan book is currently in Florida.
I do you know we've got.
That's a fine lepage here I apologize, we've got 3.2 billion in total variable rate loans, a 1.2 billion of those have a floor and you've got almost 50% of those currently on the floor you know food. So that's where it sits in and will provide some.
More detail when we file our Q on that as well.
Okay.
I don't have still hopeful and they just on the provision here I'm just trying to get a sense.
Macro outlook would that based on and I've got look at March 31st or maybe later on in this quarter just trying to get a sense I was.
It could be some further though they'll just from an economic factor in the quarters ahead.
Yeah, Let me try to give you those must flavor as I can there Andrew we felt like it was important to use the most updated information we had in terms of our economic forecast and so.
With that one blended.
Both downside and upside scenarios and no, let's just say our our base forecast includes nearly 9% unemployment in the near term a includes almost 5% decline in GDP and then those extend out a respectively.
Nearly 13% unemployment and an additional almost 70%.
The decrease in GDP so.
You know I think it's safe to say that you know.
When you felt like getting.
The head of this are taking as much information that we could.
And incorporating it into the forecast and you know working that into the result early was was the best approach and it allows us to be positioned to either continue to add to that you know or if the the efforts to mitigate borrower stressed and distressed continuous sr.
Much out how will this movie sort of status quo until we get some clarity, but we felt like this with the right posture on the rights start to use the most updated forecast, which is I think clearly you know the little bit maybe more of a conservative view them then we could have taken.
Catch up now that that's helpful. I will step back into taking my questions.
Thanks, Andrew.
And once again, if you'd like to ask a question. Please press star one.
Well now hear from Michael Perrigo with KBW.
Hey, guys Hope you all doing well, thanks for giving us the time today Lorne Michaels.
I wanted to spend a little bit more time on credit or Peter your prepared remarks, you metrics that you had not seen any material credit stress manifest spring time I was wondering if you come if you extrapolate that comment a little fish further I mean are you suggesting that [noise].
I just what is your assumption in terms of <unk> businesses. I mean, there's quite a few that are taking some form of intervention or <unk> or forbearance, I mean, what kind of assumptions in terms of their ability to return to kind of full operational later this year, you guys, making and kind of reserve builds export tax.
Yeah, Let me, maybe a handle that a high level and I'll ask Doug or Scott to kind of color and maybe the borrowers for stuff, but I think so I think it's been pretty clear that the idea that there's been behind much of the release has been to provide initial liquidity.
And the leaf and you know when we've been looking at deferrals and things like that that's really not an income event now certainly you know there's a collectability element that <unk> I think right now is just on certain and it's going to depend a lot on you know that's how how people get back to work.
And the speed of recovery in we're clearly not in a position to forecast that so I guess, what I would say as our provisioning level is based more on broad based economic information and potential that it could have across the portfolio and clearly I think our lens was in.
Tended to be.
You know.
More conservative than more optimistic and what will work on who the next quarter or two is how.
Certain sectors certain businesses a certain industries.
Perform and borrowers as it relates to our portfolio and their ability to get back the business and make those payments and then our expectation would be those will start to meet in the middle right, but I think we're starting with a good publishers that one thing.
7% I'm, you know were double more than double from where we were at the end of year for a variety of factors and you know from from our perspective I think we just feel like that's the right approach in posture because just there there really is no. Other approach there's no information in any real he fail to be had been able to.
Estimate those losses within the portfolio rather than using the broader economic indicators.
[noise] it shouldn't see that my face I think we see transition from here, which is portfolio analysis into and what I call.
You know case management, which you go customer trust and that's what my comments talking about you know getting through the first eight weeks still yet to see beyond that and sitting down with those clients understanding where they stand and when when does the.
The economic slowdown impact them, if it does and then what do we need to do to prepare for that it's probably thinking about.
Hi, This is Scott, they're not all adelaar gonna have got that but.
Well that's okay I was just gonna at I think though the.
Well I look at it is the diversity of our portfolio is the first barrier.
Yeah, I think to Doug's comments, we tried to dial in through a lot of the work that our internal folks to really dial into the sectors that we think are higher risk.
To do work around liquidity.
Loan to values guarantor support to really see how long that could weather. The storm. So I think the canes points. The key issue is you know what is the longevity 'cause that's as I talked about that's the comments. That's the concern that weighs. Most on everybody is you know how long are we going to be.
And the state but.
I think diversity or the portfolio is a key factor that Oh Smith with at night.
Got it and then I know, it's still early and transaction volumes haven't been high in the real estate arena, but it seems like there's a bit of real estate collateral obviously in the portfolio Nextraq seen any.
Updated data points, yet in terms of how real estate.
Hi, Susan in your markets of operation or are trending since this some pandemic has really started to take older or it's still too early to comment on that.
Now I can let Doug comment specifically if he wants to I think it's I think it's early from a value standpoint I.
I think what we monitor cash flows because I think that's obviously a cash flows lead to valuation.
And I think generally what we've seen as those that are related more to retail hospitality are certainly impacted.
Those that are more commercial you don't have a bigger buffer, but I don't think with saying for example.
An overabundance of CRT take advantage out of the deferrals, but oh candidate to Doug If he has further comments there.
Yeah, I know I I would say in terms of.
Furrows first and foremost we've entered into a very cute forbearance agreements on commercial real estate game, so far deferrals and largely Dan accommodative to those developers that.
Oh really just looking for an opportunity to preserve some liquidity.
During this temporary cash crunch, but I think in general or changes in real estate values. It is early.
But certainly we're mindful or potential long term intact that cobot 19 could have relative to demand for in particular.
Office.
Retail stage. So we're mindful of that my watching it but I think early yet to determine the impact relative to current loan to values.
Okay. Thank you and then you actually fixed lastly, and I do appreciate all the added disclosures Guy that's really helpful and all that the areas of focus I think with boxes interest lies just on the aircraft. It's a small quick question on the aircraft portfolio can you guys. Just confirm I believe this is true, but none of that air nervy.
Grafts are actually you generate revenues correct.
Yeah, the the bulk of that portfolio overwhelming majority that portfolio is aircraft checking in on trade stuff for plan basically short term.
There may be less than 10% of the portfolio, where the aircraft would be used to generate revenue.
But that's not certainly the focus of though of the business.
Got it well. Thank you guys I appreciate the yes timing and help because with the questions. This morning, I Hope you all stay well in the top Morrison.
Thanks, Mike can you.
And once again, if you'd like to ask the question. Please press star one.
Well now take a question from Brian Martin with Janney Montgomery.
Hey, good morning, guys.
Good morning, Brian.
Hey, Thanks for all the a added color I echo that it's very helpful and insightful, but maybe just a couple of things for me just be did you guys mentioned the total deferrals at this point in the portfolio in kind of what that was that assets coming to your question earlier came because that as of March 31 is that it kinda, they're looking a little bit after that you know the most recent data.
As far as what the deferral looked like.
Yeah, Brian of Sky and I can dressed up.
Okay ticket okay.
Yeah, the deferrals that we've talked about we're really.
Try to give some color post the 31.
As you know right now I would say, we've we've done 30 to 60 30 to 90 day deferrals.
Pierre NIE, some borrowers will take less than 90 days some borrowers will take.
Principal not just interest, but impacting less than 500 million or the portfolio for 110%.
Ah probably fewer than 400 loans overall.
Okay.
That's helpful. Okay, any how about just secondly, I'm. The P. P. P program I guess can you just walk through kind of how I guess if this do you anticipate this being a march in event keen or is this a fee income and then just kinda timing at how you're thinking about you know recognizing that tam that rather than just as we kind of model something.
And on that.
Yes, Sir so, but let me just add one thing to Scott's comment, which is on that you know half a billion of principal balances that you know the the loan the amount requested through the full as is not very big So we're talking.
$20 million to $25 million, a total payment deferral, that's been requested for that period. So just worth sizing and you know relative to the the unpaid balance.
And then I would just say on the PPP loans, you know the potential for the fee income is no right now you know call. It 16, 17 $18 million in fees plus than the modest net spread we would get you know once we fund those loans or.
Are you don't need to be clear, we don't have specific instructions yet on how those yet so given or necessarily repaid.
But no let's it's probably some combination of second to third quarter recognition of of you know what a majority of those will pay off and then you know in speaking with peers in and trying to get our arms around maybe what might continue drag on store. There you know I thought.
I think 20% to 25% you know might be around for some period of the full term that that's yes, you know us kind of guessing and modeling and figuring that out but you know we do think you know when the next couple quarters here or we can start to get some payoffs, but to the extent that we don't that'll be a a loan yield went on.
Margin drag, albeit with a zero percent risk weighted assets. So.
We're not we're not overly focused on that a world, but we're focused on making sure that are our clients can stay in business and that we've done an excellent job executing but that's how we think about the plant moving back in here to earnings and and shrinking down the balance sheet.
Yeah, Okay, So probably fair to say keen in the second half of this year, maybe you get 75% or you know 70% to 75% of that total revenue and then the remainder of just spread out over the quarters. However, we think about it that fair.
Yeah, I would hope so and you know with the intention of the plan, which is to keep people employed I'm. You know, we're hopeful that it's it's 75% or more because that means that it went into the community than paychecks and and for really the purpose of it was intended poor so that it can be forgiven.
Yeah got it okay. That's helpful. Thank you and they've just done me on the margin came just put that with the rate cuts and then the proactive efforts you guys have had on the on the funding side how much of the 150 basis point rate cut was in the quarter or just maybe if you talk about the March barge and I guess, you know just as a starting point now.
That you've had the rate cuts and they acted in the <unk>. The cuts that you guys have been proactive I'm just kind of how to think about that core margin.
Going forward is just in the near term.
Yeah. I mean this is it you know, it's it's X X X I would say generally when you look back at our asset sensitivity tables, I think you know.
We expect that we'll be able to maybe mitigate some of that affect the really big wild card that we've got right now Brian is there's a lot of liquidity coming into the into the bank him into the system and we're also taking actions to bolster liquidity. So.
Now I'd be hesitant to give an answer because I think some of its about.
The relative margin the net interest income given the risk profile and were working as hard as we can the names maintain a highly liquid you know a highly capitalized institution to be able to support our client needs and so.
Yeah, I think it would be irresponsible if I if I tried to give you some sense for that I will say that.
You know March margin was lower than January and February or you know comparatively but you know I also thinking you can see the results here for the first quarter and no. They were they were pretty stellar. So I think you on our way to having a pretty good year before you know the fed actions and and the economic.
Conditions kinda.
Started to dark and.
Yeah, Okay, Alright, that's helpful and just see a one housekeeping question can you guys talked about for a while that seasonality that tax credit line I mean, it looks like first quarter was you know I guess it looks like maybe it's more your expectation would be it's more streamlined or more you know I guess more stable less volatile this year I guess.
It's one queuing indication of battery I guess would you still expect you know some volatility the next couple of quarters rent for Q being back up just big picture on.
The changes you've made that tax credit line of trying to normalize it.
Yeah, I would've said six weeks ago, I would've expected to be more consistent but still probably weakest in the second quarter.
I would say right now the the predictability of that business is a challenge and it's mostly our ability to source credits as opposed to sell credits. So you know I think all else being equal you know we will expect some fourth quarter activity and then I would just also add that some of it depends on what happens to rates and some of them.
The quarter results were driven by.
The reductions in LIBOR, which caused some of the credits that we fair valued to be adjusted so maybe a little bit more clarity on that in the upcoming 10-Q as to to the those in a indications, but you know right now we don't have as Scott indicated on a variety of crops. We just don't have the clarity of.
You know what a.
30, 60, 90 day delay in business woman in terms of timing if it all comes back or if it pushes out or if that you'd see overall level of activity and that the tax credit spaces.
No difference.
Okay, and they didn't get last one high level for many of you know given that these people a lot of P. acquires haven't taken a deferrals or said, they really don't need them and in your comments about the exposure you guys had I mean.
The greatest level of rescue view today any kind of look at those buckets I mean, it's really just the four four you've outlined or is there one in particular with you I guess more concerning at this point from what you've seen as a data gathered.
Brian I can take the I think you know I think its liquidity to weather. The downturn is the theme that regardless of the industry that was kind of what came through more than anything but I think the good news is you know based upon.
Deposit inflows based upon.
You know the rate at which our clients.
Know accepted deferrals.
They feel like they're in decent shape, so, but it's definitely the liquidity to why that out.
Okay, and you know normally you guys have one Q1 seasonality with the deposit base with the tax payments for for people, but obviously that being pushed back and they would you expect some did I get it gets it does that influence it normally going there and why Q fall into Twoq now with but the timing changes that what's your expectation would be.
Yeah, I would just said Brian that we're not I don't know that I can wager I guess as to what this will be like moving forward and what we're going to see I mean, clearly with you know lending into the PPP program. We're seeing that you know go into the positive account the clients of borrowings other places we don't know if.
That's come to the bank or not but we do continue to see a flight to quality imbalances grow as Scott mentioned those people put more cash on their balance sheet is there you know worried about the outlook.
Okay perfect. That's helpful. King Thanks, everyone enough they say.
Thanks, Brian you too [noise].
And there are no further questions signals that the Sims I'll turn things back over to our speakers for any additional or closing remarks.
[noise], yes, Sir I take it this is Jim and I just want to thank everybody for their time today and your interest in our company.
They say well stay safe and look forward and talking to you again in the second quarter, if not sooner and thank you.
And that does conclude today's conference once again, thanks, everyone for joining US you may now disconnect.
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