Q1 2020 Earnings Call
I'm off today and welcome to the HomeStreet Bank first quarter 2020 earnings conference call. I will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press * then two, please note this event is being recorded dead.
I would now like to turn the conference over to Mark Mason chairman and CEO, please go ahead.
Hello, and thank you for joining us for our first quarter 2020 earnings call before I begin. I'd like to remind you that our details earnings release and an accompanying investor presentation was furnished office yesterday afternoon to be SEC on form 8-k and is available on our website at our home screen under the news and events Link in addition, cording and a transcript will be available at the same address following our call. Please note that in the course of our call today. We make certain predictive statements that reflect our current views and expectations about the company's performance and financial results. These are likely forward-looking statements that are made subject to the safe harbor statements included in yesterday's earnings release the investor deck and the risk factors disclosed. In other public filings off additionally reconciliations to non-gaap measures referred to on our call today to be found in our earnings release available on our website.
Joining me. Today is our Chief Financial Officer Mark Rue Mark will briefly discuss our financial results and that I'd like to give an update on our response to the current covid-19 with the results of operations and review our progress and executed our business strategy mark
Thank you, Mark. Good morning, everyone and thank you again for joining us.
Our Consolidated net income for the first quarter of twenty was seven point 1 million dollars or Thirty cents per diluted share compared to net income from continuing operations of 13.1 million dollars or $0.54 per diluted share for the fourth quarter of nineteen note that we are comparing current. Consolidated that income to Prior. That income from continuing operations off as HomeStreet terminated discontinued operations, accounting treatment effective, January 1st, 2020.
Come for the first quarter of 20 was eight point 1 billion dollars or 34 cents per diluted share compared with core. Net income from continuing operations for the fourth quarter of nineteen of fourteen point nine million dollars a month or $0.61 per diluted share. Our core pre-provision income before taxes was 24.1 million dollars for the quarter.
Excluded from corn and income in the first quarter. It was approximately 1 million dollars of restructuring related expenses that affects a decrease in net income compared app or decrease in income compared to the prior quarter was primarily due to a $14 allowance for credit loss provision estimated under the new seasonal methodology to be discussed later in the presentation.
Well net interest income decrease in the first quarter of 20 due to decreases in both the rate and volume on our loans held for investment our net interest margin increased wage six basis points. Do you do significantly lower interest expense?
Was on rates declined during the quarter approx 29% of our variable rate loan portfolio was a contractual interest rate floors at quarter-end which mitigated the impact of the general Decline and interest rates on our net interest. Margin deposit balances were five point three billion dollars at March 31st decreasing 1.6% from December 31st. This decrease in deposits was primarily driven by a decrease in certain High rate broker deposits and the maturity of promotional certificate of deposit that we previously issue to fund the transfer of service in related deposits in 2019.
This deposit decrease was offset by increases of seventy two point six million dollars or 4.5% and 117.5 million dollars or 6.1% of business and consumer core deposits respectively.
Our interest costs decrease due to our proactive reduction in rates paid on interest-bearing deposits lower balances of higher-cost broker deposits lower rates paid on the advanced package and the maturity of higher rate promotional certificate of deposit.
In fact, our costs deposit is was 72 basis points of quarter-end vs. 122 basis points at year end.
As a result of these changes our net interest margin increased to 2.93% for the quarter up from 2.87% in the fourth quarter of last year.
On January first twenty we adopted the current expected credit losses accounting standard referred to as Cecil Cecil replace the allowance for loan and Lease losses incurred Lots model within allowance for credit loss methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable forecast information to inform credit lost Reserve estimates.
The adoption of Cecil resulted in his day one increase in our Lounge for credit losses of approximately 3.7 million dollars at January 1st, 2020 or 9% as compared to our December thirty-first nineteen aggregate Reserve levels. This adjustment was recorded in retained earnings and did not impact net income nor did it materially impact Capital ratios the 40 million dollar day to provision for the first quarter was entirely due to the forecasted economic impact of the covid-19 kok enek absent the crisis we would have recovered approximately 2.3 million dollars of provision in the quarter.
Ask the quality remains strong as evidenced by Arlo non-performing loan to Total loan ratio. However note that loans most at risk have not yet been downgraded or designated as troubled debt restructuring based on regulatory guidance.
Non-interest income increased from 21.9 million in the fourth quarter of nineteen to thirty two point six million dollars in the first quarter of twenty. This was primarily due to a significant increase in single-family gain and loan origination and sale activities related to higher interest rate lock commitments and due to higher profit margins from strong refinancing activity fueled by historically off mortgage rate during the quarter are increase in Loan Servicing income was caused by higher risk management results.
A sharp decrease in Market interest rates in March initially caused mortgage rates to fall to record lows triggering a surge in mortgage refinance activity towards the end of the quarter of single-family rate locks were $560 million in the first quarter of 20 compared to three hundred and three million in the fourth quarter of nineteen participate in the primary mortgage Market. HomeStreet included have responded to both of the past that he constraints created by the large volume Surge and American uncertainty by increasing gain-on-sale margins.
This change and mortgage pricing resulted in primary mortgage rates not declining to the same extent as the secondary mortgage rates during the quarter driving to positive variance between the change in the same values of our single film EMS ours and are related hedge instruments.
Not interest expense increased $2 255.2 million dollars in the first quarter of 20 from 53.2 million dollars in the fourth quarter primarily due to a $2,000 recovery of stock-based compensation expense in the fourth quarter of nineteen.
The number of full-time equivalent employees oo 1000 during the quarter ending at $996 and 18.4% decrease since June 30th 2019. Thank you for your attention. I will now turn the call back over to Mark Mason.
Thank you Mark. As you know beginning in February our markets have been significantly impacted by the coronavirus pandemic stay-at-home orders and all states where we do business have contributed to significant business disruption and created substantial increases in unemployment our customers and our company will be adversely affected by the crisis in ways. We are still trying to quantify nevertheless. I feel strongly that home street is well-positioned to navigate this crisis. Successfully. We have a strong Capital base with Consolidated tier-one and risk-based capital ratios of 10% and 13.5% and Bank tier-one and risk-based Capital ratios of 10.06% and 13.9% respectively off. Additionally, we have substantially increased our allowance for credit losses in anticipation of potential credit losses that may occur as a result of the crisis.
Beyond our strong Capital base and increased allowance for credit losses. Our current earnings provide meaningful additional capacity to absorb future credit losses additionally to Thursday. We have ample on balance sheet liquidity and access to more from our contingent sources today are available borrowing capacity from the Federal Reserve and the federal Home Loan Bank including existing lines on a digital unpledged collateral is three point seven billion dollars during the crisis. We expect some deterioration our loan portfolio credit quality with surge loads most of risk. Our loan portfolio has by Design limited concentrations by product type industry and geography in order to limit our risk of exposure to any one part of the month to mitigate additional risk to our portfolio. We have among other things suspended lending to borrowers operating in the most adversely affected Industries suspended most new commercial Lending Club.
Commercial construction lending and certain mortgage products. We've tightened our commercial real estate underwriting standards and increased our margins.
As a result of our history and portfolio composition. Most of our loan portfolio is secured by high-quality real estate and some of the strongest fastest growing economies in the nation are a conservatively underwritten single family and multifamily mortgage portfolios are performing. Well despite assisting some homeowners with forbearance these portfolios perform substantially better than portfolios at other Banks during the Great Recession additionally our residential construction portfolio continues to perform. Well given the continued scarcity of new homes that are Market wage and the conservative conservative lending standards with which we operate this business accordingly. Our credit risk today is concentrated in our commercial lending portfolio in certain businesses most impacted by the shelter-in-place and shut down orders in the states in which we operate.
For investor deck also published yesterday contains good data on our under.
Trading standards and portfolio composition. We added a few slides further disaggregating the information and providing additional detail on the parts of our portfolio most at risk today. Our risk is manifested itself and requests by our borrowers for loan payment forbearance to allow them to get past the shutdown orders and get back to business.
Let me summarize these requests by loan type as of April 23rd. We have 150 single family mortgage customers that have requested and have been granted this forbearance month for the aggregate fifty eight point five million dollars representing 3.7% of our on-balance-sheet mortgage portfolio for comparison. We have granted 1068 Dodge customer support balance for balances representing 3.5% of our loans service for others. This compares to current industry forbearance levels of approximately 7% nationally as of April 19th for Bank services.
The Great Recession we also substantially outperformed the industry as a whole on single family mortgage forbearance and default reflected disciplined underwriting in strict adherence to our conservative policies an application of agency guidelines.
We also have 291 commercial customers with aggregate loan balances of $211 that have requested payment forbearance included in this amount is 18.8 million dollars of owner-occupied real estate underwritten conservative loan to values and eighty six million dollars of loans primarily to Denis who we will believe we believe will successfully restart their practices relatively soon after the shutdown orders are lifted.
Also in this total r61 million dollars of restaurants and bars of which one Regional restaurant and Brew Pub operator represents fifty two point seven million dollars, sixty 1% of this balance is real estate secured and we recently arranged the 4.5 million dollar liquidity the line for them secured by another eleven point six million dollars of real estate collateral. Additionally. We just by today maximum $10 paycheck Protection Program loan for them.
They have historically benefited from an extremely loyal customer base which gives us a higher level of confidence in their ability to resume operations at an appropriate time in the future.
The remainder of this risk pool includes a very well operated Church a regional transportation company and other Quality Companies.
Today of the 291 forbearance request 156 loans with balances totaling 123.7 million dollars have been granted not all borrowers who request for Barrett's needed in our experience. We evaluate actual borrower liquidity and cash flow before granting forbearance in our experience wage borrowers request for Barrett's well in advance of actual need which may never occur.
1218 commercial real estate loans, totally ninety eight point six million dollars that have requested forbearance, but none of those requests have yet been granted in April. We had only one portfolio took martial real estate loan. Only one that didn't make their April payment. All Fannie Mae loans that we service were current in April.
The strong performance reflects our conservative underwriting which is generally allow these loans to stay current under current conditions.
We have provided detailed underwriting and portfolio characteristics on page nineteen of our investor deck published yesterday additionally one borrower with eleven residential construction loans, totaling 10.3 million dollars has requested forbearance to date. This request is not been granted. Our underwriting of residential construction loans is substantially more conservative than that in common use before The Great Recession. We have provided detailed underwriting and portfolio loan characteristics of these loans on page twenty of our investor debt.
These numbers only represent our experience to date and we like everyone cannot predict with certainty the duration or impact of the shelter-in-place and state shutdown orders on these businesses. It is clear to us that are risk concentrations are today well defined and we believe manageable with current reserves capital and earnings.
Adding to our current confidence level is the fact that much of the team that initially came to HomeStreet to guide the bank out of the credit challenges of the Great Recession including me were met at the company today and keep position wage this experience and capability will be invaluable as we navigate the current crisis.
We are working hard to support our communities and our customers while also protecting our employees. We like our peers have devoted significant time and resources to processing loan back by the small business administration under the paycheck Protection Program. We began taking applications for these loans on April 3rd. And as of April 16th, when the treasury Department advised that all funds available, they've been allocated. We had approved and registered 396 loans for a total of 158.2 million dollars.
Yesterday the SBA opened the portal to begin accepting registrations of paycheck Protection Program loans under the current appropriation. We hope to register in fun 1100 additional loans for approximately $160 million dollars for these customers that we were not able to get registered before the first allocation of funds under the program was exhausted. Unfortunately, the SBA portal each ran has experienced up time and throughput challenges since opening and it is unclear at this time, whether we'll be able to input successfully all of our college applications, but we are working literally twenty-four hours a day to do so.
where
Also taking steps to protect our employees customers and vendors. We have committed to know covid-19 related layoffs. All of our employees were able to work remotely are doing so with only certain operation critical employees including Branch employees working on site. Additionally. We have limited our Branch lobbies to appointment only access with social distancing procedures projected personal protective equipment provided covid-19 paid sick time and additional paid time off for our front-line workers and eliminated out-of-pocket cost for employee wage in nineteen Medical Care.
Well, it has been an adjustment the business of the bank is continued without significant interruption.
There is still much work ahead of us. And the ultimate impact of the pandemic is largely unknown management is working closely with our borders and our advisors as we plan and execute our response to the significant disruption caused by the crisis.
Reflecting are strong first-quarter results, even with the impact of the pandemic as well as confidence in our ability to successfully navigate the crisis the board of directors declared a $0.15 per share a common stock dividend to be paid to shareholders of record on May 4th.
On behalf of the entire board of directors. I want to commend the courage and dedication of our employees and pursuing our goals and serving our customers and communities during this time of personal risk and uncertainty as a Regional Community Bank HomeStreet Bank plays an important role in supporting our communities through this crisis and we believe home street is well positioned to help our customers and communities move past this pandemic looking forward. We have made some revisions to our guidance.
Our prior guidance called for flat to slightly increasing average loans held for investment for the second and third quarters of this year as a result of the temporary suspension of certain land activities and expected on going to run off in our loan portfolio. We now expect a flat balance of average loans held for investment.
This was somewhat be offset by continued growth and our multifamily portfolio it SBA origination related to the paycheck Protection Program.
Our prior guidance called for decreasing average deposits which we are continuing. We expect a continued meaningful reduction in broker deposits mitigated by the commotion you grow a business and consumer core deposits.
Our prior guidance called for increasing this margin which we are continuing assuming the current low level of Market interest rates in shape of the old curve. We expect our net interest margin to increase this year reflecting are now meaningfully lower deposit costs.
The rate of increase we now expect is likely to be more meaningful than we previously expected.
Last quarter we expected recurring on interest expense to decrease the same periods reflecting lower headcount resulting in lower base salaries and related occupancy expense. These reductions are still expected. However, they may be offset by continuing higher commission expense is our single family Mortgage business continues to originate higher levels of refinance loans off. The current Lok pipeline is closed.
Finally due to the high level of uncertainty surrounding the ongoing covid-19 pandemic. We are withdrawing our previous profitability and efficiency ratio guidance.
However, it is important for me to stress that excluding any further loan loss provisioning. We continue to believe that we have the opportunity to achieve our previous Target at the time for time frames previously stated.
Would like to offer some color here.
Consider are just completed first quarter pre-provision pre-tax income of 24.1 million dollars if we applied a 20% effective tax rate to that off 24.1 million dollars. It would imply an after-tax annualized return on assets of 1.13%
And return on average tangible common Equity of 11.8% efficiency ratio in q1 was 69% And we continue to have faith and see Improvement opportunities to realize going forward compare these ratios to our now withdrawn prior guidance, which was to receive which was to achieve a core return on average assets of approximately 95 basis points a core return on average tangible common Equity of approximately 11% and it efficiency ratio in the low 70% range all by third quarter of this year. Obviously, all three measures are already Superior to that guidance and 2/4 early.
There are of course many factors to consider. Maybe the most meaningful one is that we should acknowledge that we are currently benefiting from a much higher level of profitability in our single family Mortgage business wage. Then we had previously expected it is anyone's guess of how long that will remain to be the case, but I do note that both origination volume and margins remain robust today and woke up in almac forecast predict the continuation of low rates for the foreseeable future which should extend this mortgage refinancing. And support any weakness in the purchase Market.
Additionally going forward are substantial reduction in deposit and borrowing costs should support and improving that interest margin mitigating potential lower levels of earning assets.
So the bottom line is this.
Credible and doubted well as doubtedly beat Remain the big question mark for the entire banking industry for at least the rest of this year. Hopefully among other things the characteristics of our loan portfolio that we have provided and our quarterly investor deck and have discussed on this call reflect our disciplined approach to credit and we're well-positioned as we enter covid-19 crisis environment.
the experience
In preparation of our lenders and credit management team and the diligence with what we have with which we have addressed our clients unique circumstances to date well, otherwise mitigate losses.
The markets in which we operate were the strongest in the nation going into the crisis and we expect the damage to be less than the recovery faster in these markets.
Hopefully this background provides you with a foundation for the cost of cautious optimism that we have today at home street to successfully navigate this environment. This concludes our prepared comments. Thank you for your attention today Mark and I would be happy to answer any questions you have at this time operator.
We will now begin the question-and-answer session to ask a question. You may press star then one on your touch-tone phone. You are using the phone. Please pick up your handset before pressing the key to withdraw your question, please press * then two.
Our first question will come from Jeff with d a Davidson.
Thanks. Good morning. Good morning, Jeff.
Just a question on the provision trying to get a sense for the the the thought behind that and timing clearly as we progressed over the last month. There's been a pretty volatile view of the macro economy. And and and so just as that's posted for the first quarter was that Mora 331 read a book or something kind of mid or late April on on the economy and how you adjust for a a Cecil provision in in the first quarter. Well, the first quarter provision is based upon the the March, um substantially on the March. Um Moody's economic forecasts. If you look at our deck home page twenty-two, we describe the key drivers of the provision, which is substantially almost exclusively the wage.
Week forecast by Moody's as of the end of March for the there pandemic forecast in our model. We also compared the results, um in the moderate recession forecast and then later after we closed the books. We took April's pandemic forecast, which was much more severe than marches and took off at what impact that would have had as of March and we came up with substantially the same numbers, right? So that is driving the the the reserving today. It's reported note. What's what's not driving. It is loan migration and probable expected losses, which ultimately is is the is the real answer right off how much of our sensitive or risk pools will ultimately migrate to Los and and what would that imply about?
You know total losses.
At this point it's really unclear the regulatory guidance to all of us has been not to downgrade and not to migrate these these these loans absent absent the the virus we would have been reversing 2.3 million dollars of provision based upon performance and Loan balances. So, you know a month a 14 million dollar provision disc or frankly is a 16.3 million dollar Delta from where we have been.
Appreciate the detail. It's pretty fluid environment. Just that's helpful to know your positioning on how you establish the provision this quarter and how it might be a trend going forward maybe Switching gears on the it's kind of an expense backdrop, but trying to get the headcount I guess reductions separate from any covid-19.
We have a number below the current headcount number that is is a current Target. It's a little fluid because we're having to add some Personnel primarily in a single family mortgage area because of the I mean substantial increase in volume that of course will last until I get this refinancing way of abate, right? So the numbers you see on FTE over the next couple of quarters are going to be a little volatile because of that I'm having said that we are nearing the end of the FTE reductions from an efficiency standpoint. Yes, Thursday, we will end up on a stabilized basis a little below this I would give you a number today, but if it's kind of fluid because of one single family and dead
And to some other business changes, but the the substantial changes have occurred. We would love to get into the mid-90s. Maybe just as sort of a a Target Downstream someday, but that's going to require some system changes and break fluid change in the in the in the mortgage business the greater amount of dollar cost changes over the next year and half. Let's say if we'll be coming from First Technology and to a lesser extent from Real Estate. We've been frustrated as we've talked about on prior calls by an inability to get
or primary
Technology providers to restructure and renegotiate these contracts early there has been some recent discussion that suggests perhaps in 2021. We will be able to get a restructuring of our core service provider agreement. I'm not relying on that yet because of of course so far from that wage being a reality. I I can't count on that but most recent discussions suggest that instead of waiting to 20 22. We may be able to get some meaningful help wage agreement in 2021 and perhaps with some of the less or agreements as well. So I'm holding out hope that we'll be able to pull some of those changes in 2/21 and the real estate environment. Unfortunately, it's gotten worse, right? If you think about subleasing office space in this environment, it's clear to me that those savings are going to get pushed out dead.
Right, there are companies that will fail. We will create greater vacancy and and and pricing and cost is probably going to get readjusted. So that part of life savings may make it delayed or not happen at least in our time frame.
Thanks, Mark. Back. Thanks Jeff.
Our next question comes from Steve Moss would be Riley FBR.
Good morning. I wanted to start with on the Mortgage Banking side. Just wondering if there was any hedging impact on game on sale income this quarter. And what were total mortgage originations for the quarter here.
It's a very good question Steve there was if if you have been monitoring wage other Mortgage Banking results is quarter. I assume other people have talked about mortgage pipeline hedging and mortgage servicing right hedging Effectiveness during the quarter the fixed-income markets were substantially disrupted. I'm not sure that's even a strong enough description the volatility that we took us to the fixed-income market particularly in early March was greater than we've ever seen it maybe historically the largest amount of volatility and the the the disconnect or the widening of normal spreads between instruments was very challenging for hedging.
Particularly anything related to mortgage yields a combination of significant increase in supply of much lower rated page mortgage-backed Securities because of the refinancing volume the delivering and liquidation of investment funds all lead to a significant decline in demand for mortgage rated product, which widened spreads significantly mortgage rates actually increase accordingly during that period two levels that wage act even us now, they they've come back down since then all of that created ineffectiveness particularly in our mortgage origination pipeline hedge. We actually lost a certain amount of money on that hedge the impact on our gain
sale for the quarter
Was about sixty basis points of gain. That's how significant that impact was our margin our profit margin for the quarter in the first quarter was approximately the same as the fourth quarter, but it would have been about sixty basis points higher.
So what does that imply going forward mortgage profit margins are historically wide I would repeat that statement historical today.
Example fixed rate loans FHA VA loans are priced at profit margins in excess of six hundred basis points off.
fixed rate agency loans 30-year conforming in excess of five hundred basis points
So you you gotta understand what that implies the profit margins today. And thankfully the fixed-income markets has settled into reasonable approximations of primer thread. So hedging is much more effective today today. We're in a positive position on our pipeline hedge. And so everything is sort of hitting on all cylinders. That's today. We live in very volatile times and I don't want to predict the outcome for the quarter but things are substantially better for the month of April in March our servicing Hedge.
Was even more volatile.
And at times was down as much as 3 million dollars relative to our change of the value of the asset and ended up well as management results for the quarter up about three million dollars.
That's how Wild and volatile it was again. I'm happy to report that those markets and spreads have settled substantially and all of this is a consequence of the Federal Reserve stepping on a fixed income markets and providing a steady insufficient bid. Otherwise, they would still be just as volatile We Believe maybe worse.
Okay, that's helpful. And then I guess in terms of just you know, thinking about production here, you know, is that a similar level to the first quarter as you look at your pipeline here today?
You know, the quarter was was quite strange as you would imagine given.
The changing environment and changing interest rates, right? So we
We produced was it for the quarter was it totally lost $565 million, right? But God verses about three hundred million in the fourth quarter, but that $565 million three hundred or so over three hundred billion was in March alone. Right and in April, our production is going to be it looks like a little better than half of that, you know, maybe a hundred sixty months right now fish, but we got a few days to go but that would imply if it were consistent across the court or something less than last quarter's loss. And remember we're going to now be closing this quarter not all but most of the locks were in the first quarter and that is going to increase our expenses dead.
right commission expense
This is for example most significant upon closing. So Mortgage Banking profitability next quarter may or may not be as good. I think profit margin would be better as we just discussed that might substantially offset the additional cost. We don't really know we have to see where we end up.
Okay, that's helpful. Then if I just take a look, you know, imply from the numbers here for a production and you're going on sale. Margin you're running around call it nine to ten million. In fact on sale income for the month of April. Is that is that about right?
Hold on 1 second. Let me do some math.
What did you say nine nine? Okay nine. I mean given the numbers I gave it could be an excess of seven million but that's a very gross estimate, right? Okay. Okay, that's helpful. And then in terms of birth shifting gears here just on the construction portfolio here. Wondering if you see you know, you had a pretty significant decline this quarter wondering what your expectations are for that poor found the next couple of quarters, uh, give a mix of probably commitments and what you expect in normal normal time you pay downs, but then is there any impact from the shutdown here in terms of continuing to build?
There is an impact. I mean obviously projects have slowed down most of our constructions in Washington and no progress has been made on it until we started this job. Right which means no draws either but most of our commercial construction projects are nearing completion. We slowed down new construction loans many many months ago and most of of those balances are nearing nearing completion off in commercial construction and multi-family construction customer don't construction. You know, that's a that's just kind of an ongoing business and we have houses in in many phases of birth of construction. We did suspend Custom Construction new lending last month, and we're considering reopening it sometime soon, but there will be dead.
Will their home building obviously any Home Building in the state of Washington is come ground to a halt until this week but sales have continued with the traffic of as you would expect is lighter than it was but sales continue and we feel pretty good at this point about the build-out and sale of of our projects. The great part about that equation is most of these Builders have pretty substantial profits charges in these projects at least on a pro-forma basis. So if they need to decrease pricing to move these houses, they have a lot of room to do so
In that's helpful. Thank you very much for all that. I'll step back in the qur.
Thanks to you.
Our next question comes from Matthew Clark with Piper Sandler.
Hey, good morning. Maybe just first on the guidance. I can understand pulling the the RO and or we guidance for the the outside off, but the only efficiency ratio which doesn't incorporate that those credit costs, I guess.
Yeah, cuz why would you be able to still hit those targets made this year mid next year. It seems like the margin is is you know is going to see some.
Some more substantial expansion here just based on the deposit cause at the end of March. I think they were down 50 basis points. I guess what else are we missing here? That wouldn't allow you to talk to his prior efficiency ratio goals. We believe we can are are are my comments were done with grind guidance really were an overarching comment and maybe I should have been more specific on efficiency. We believe we can okay We believe We Believe by larger margin today.
Yep, okay, and then just on the security field, I think you're down 30 basis points. Can you give us a sense for if there's anything unusual there, you know premium am quoted a quarter or something, you know new purchases or just repricing just want to get a sense for where that 214 you'll might go.
Well, I mean again an excellent question our accounting standard for mortgage-backed Securities is the same respect of method. I have different names for it. But that's the official one. It literally requires us to recalculate from the date. We purchased with the security through the current date and then forward as if we had perfect knowledge and so when you have spikes in prepayment speeds that imply with a different forward balance, you must recalculate a level yield for the birth to grave ownership of that security office. And so when rates fall like they did and of course that implies a faster run off you have to write down the yield you have recognized life today, and that was about a million.
What is of net interest income a million in our Securities portfolio and we expect the yield to to recover not to the regular was before of course cuz I filled came down slightly, but you can expect a meaningful recovery and yield and net interest income from the Securities portfolio next quarter.
And then just last one for me on the on flight 23 the forbearance request and the amount you've granted. Can you give us an overall sense for how large those portfolios are the dentist's the restaurants bars entertainment Transportation so forth. I know some of this, you know couldn't quickly recover like the dentist's but and it may be kind of watched the real estate industry and investor Siri. That's ask for request. What specific Industries those are just to get a better handle on the overall exposure that's getting some increased scrutiny wage. Sure. We added page eighteen in our deck which breaks down the cni portfolio by these by these groups.
And you can see that Healthcare which includes Dennis. It's mostly dentist. Frankly is 22% off of the $662 million-dollar cni component that excludes owner-occupied real estate, right? Mm million includes on occupied real estate. So there's a little bit of a correlation to her. But I think in total we have approximately dead.
a hundred and
eighty million dollars roughly as health care including owner-occupied real estate may not be quite that high. I could have Gerhard get back to you on that. But the the name
86 million dollars of that component obviously is not a hundred percent or near 100% which means that we have a lot of dental practices that may have sufficient liquidity to they think to get through the the shutdown order.
When we republish this again, we will probably add the total portfolio here to give you some proportionality. That's a fair criticism of this slide.
Okay, would you know and then and then just thinking about hotels as as another example is that in? You know that's on the Siri.
The theory portfolio breakdown. I don't recall seeing it but
It's if you look on the detailed slide of permanent in other.
There's a there's a footnote. So the other category includes One secured by schools $81 and hotels thirty-six million dollars of that $36 million bucks largest loan. I believe is 27 million. I think a single loan which is a a large well-known flag hotel in Bellevue. And yeah twenty six point seven million. It's it's in the the bullets under other largest Dollar Loan that that twenty six point seven million dollars is 40% of the land value.
So we're very very well secured. Obviously, they're not operating today. Right but they have very very strong owner. And we feel very good about life and obviously the difference between that and the total Hotel exposure of thirty-six million dollars. We have a couple of smaller exposures. We have a one-off is patient, which is relatively small of a flag franchise hotel with another another one of our peer Banks and then another even smaller ones. So I'm relatively little exposure.
Okay, and then just last one for me, I guess how are you modeling the PPP loans you expect them to just come and go as you in the third quarter on most of them. Love to hear your view on that. Yeah mostly right. I think we're going to experience somewhere between you know fifty and I would say 80% forgiveness. I think that there will be some companies who can't accomplish how to present forgiveness or spend within that. Or at least, you know, subject the 75% payroll requirement unforgiveness. I haven't seen much analysis on it yet. But we are we have analyzed profitability assuming a forgiveness period of three months six months nine months and forgiveness amounts of between 50% and 75% and and I will tell you that wage.
Return on Equity of those various levels of fees, right 1% 3 percent five percent runs between 60% and over 100% off and return on assets accordingly. Obviously quite quite high, right? So this is a program that should be highly profitable will certainly be highly aggravating. If it's it's miserably run. I can't even express to you my aggravation and in true sadness for our customers and what they've been through aggregation for employees and what they're going through as we speak. It is a real shitshow.
of a program
understood. Thank you.
as a reminder if you would like to ask a question if you press * then 1
Our next question will come from Jackie bowling with KBW.
Hi, good morning. Good morning sticking with the the PPP. I just want to make sure that I have those numbers, right? So you had 396 million loan for $158 million that were approved as of 4:16 and then an additional 1,100 applications for a hundred and sixty million that you're working through for round two months. Do I have that right?
That's correct.
That's what that's what we decided just down the script. I will add to that that in the last twenty-four hours. We've only been able to enter 144 loans for 35.1 million month with twenty people working twenty-four hours straight.
I can see why you are frustrated. Sorry. Just just sorry for my level of aggravating. No. No, that's that's very helpful information to have so thank you mam. I where I'm getting out with my question is and I'm just trying to think of you know, the fee break out between the first round and the second round because it's you know, just using the numbers that you have. It sounds seems like the average loan was a lot higher for the first round and I know that that ten million loan you spoke of is part of that. So I'm assuming there's some other larger loans with the the 396 loans and then with the additional 1,100 applications. I'm assuming that either much smaller loan is that accurate that that's accurate and you know, I think people have gotten the wrong idea maybe politically or otherwise about why that occurred a couple of reasons one. The more sophisticated borrowers were ready the minute we could take applications we
With complete packages that were tied out made sense fully documented as you get into smaller loan sizes, you get much less sophisticated business owners. They often forget to bring back up or they provide backup that doesn't tie to the calculation of the loan and while it seems like, you know, we're supposed to just accept any representation of the borrower. We actually have a responsibility to lineated by the SBA to make just minimal reasonable sense of the application and do certain things and what what that did do is force a divorce way in many of these smaller applications to get reconciled and we spent the last week and half doing that with a about 800 of these Eleven Hundred left.
And not any not all make perfect sense. And and when I think about how to apply, you know, the fees that you're receiving for that, you know, obviously with an ash plume balance for the first tranche of those over 350,000. I would assume that the fee is probably somewhere between you know, maybe around to 2% and 2% is it would be between one and 30% and then maybe with the second round. It's probably somewhere between three and five percent. So, you know, maybe an average of around 4% Is that a reasonable way to think about it?
I think it's probably a little better than that, right if if we're averaging three hundred thirty or forty thousand in the first group. The cutoff was 350,000 right to go from 1% to 3% I mean from 5% to 3% right? So that would imply there's a lot of in that three to 5% bucket wage because of the lumpiness of some of the larger ones like a ten million dollar loan. I know we probably process a couple of five or six million dollar deals and things like that. We expect it'll probably be closer to 50% Maybe even a little better.
And then I would assume higher in the second round to the extent that you know, you're able to fund some of those. Yes, because the difference between the average and the median is much closer in the second group.
Okay, that's helpful. And then just lastly, you know in the past we've talked, you know, a significant amount in terms of heat maps and how you're thinking about um, you know, just the overall state of the economy and how it relates to loan portfolio and obviously, you know, no one expected this to happen and with the speed that it happened when you think about re-entering a loan loan segments that you are no longer doing right now. What kind of indicators are you looking for in able to get back into those markets and may I know this is a very open-ended question on relates on a lot of factors outside of your control, but how are you thinking about potential timing?
Well, I think there's some obvious steps one. They have to reopen their businesses to we need to understand their level of activity relative to their prior profitable level of activity. And and this may be the biggest hurdle. Right? We may have companies who reopen who are reopening at a marginal loss. Right? If you just look at cash flow, maybe they could make positive cash flow, but it's not fully absorbed. Net income. Right? Probably not ready to lend into that circumstance wage in certain cases. And so I think some of these industries are going to struggle for credit for a while the ones that I worry most about are those that will require additional capital for starting working capital who exhausted their working capital reserves in pain final pay off.
And in pain suppliers that extent they could well they've got to refill that cash pipeline or those that working capital reserve in order to to restart and I think that that's an a market that Congress really hasn't focused on right. There's this restart Capitol. It's not enough to keep employees employed in cash flowing to Consumers, but you have this restart need that I think is as yet unaddressed.
Okay, and when you think about the timing of that my assumption is that when you gave your average growth forecast for 20 20 that assumes that the you know, the segments that you have you won't be re-entering them during that period of time is that fair?
It is it is generally I think our portfolio is going to end up different at the end of June. Then we had expected I can say that for certain right we were expecting higher levels of of seeing my lending then we will surely accomplish as a consequence Thursday. We we may experience lower levels of homebuilding surely Home Building will not be immune from this even in our Market. I'm not worried about credit risk, but the the velocity of of homebuilding will probably decline somewhat mortgage lending obviously should be up and we are currently reviewing our Targets on multifamily lending with an i potentially to actually increase wage.
our mortgage lady attacked
Could be over the remainder of the year. It's an area we feel that we can operate in not just successfully but safely.
And some people were quite good at so these are the things were thinking about right now is we think about you know, what are earning assets are going to be for us the year.
Okay now thank you for the extra color. I appreciate it. Thanks Jackie.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Mason for any closing remarks. Thank you. I know. This is a busy week for everyone else from an audience standpoint. We appreciate you joining us today. Appreciate you listening to our view on our Market. Good luck. Look forward to talking to you next quarter.
The conference has now concluded thank you for attending today's presentation. You may now disconnect.