Q2 2020 Comerica Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Comericas second quarter 2020 earnings Conference call. At this time, all participates already listen only mode. After the speaker presentation. There won't be a question answer session to ask a question. During the session. You want me to press Star one on your telephone if you read.
Why or any further assistance. Please press star Zero I wouldn't know my thing at the conference over to Darlene persons director of Investor Relations. Please go ahead ma'am.
Thank you with Gina good morning, and welcome to America's second quarter 2020 earnings Conference call.
Sitting on this call will be our president Chairman and CEO Farmer, Chief Financial Officer, Tempers, our Chief Credit Officer, where the chassis and executive director of our commercial bank computer suffer.
During this presentation, we'll be referring to slide which provide additional detail.
Recompletions like interprets or they are available on the Fccs website adult Investor Relations section of our what's like America Dot Com. This conference call contains forward looking statements in that regard and should be mindful of the risks and uncertainties that could cause actual results to materially Barry for my suspicion.
Forward looking statements speak only as of the date of this presentation that we undertake no obligation to update any forward looking statements.
Please refer to the safe Harbor statements in today's release insight to which incorporate into this call as well if there are pieces Berlin for factor that in fraud actual results to differ now I'll turn the call hurt who will begin on slide three.
Good morning, everyone and thank you for joining our call I.
Oh, you and your families were hoping and could be where all joined this unprecedented.
Today, we reported earnings of 80 cents per share.
So how are the quarter was very strong loan to deposit grades, which drove balances to record highs and probably offset the impact of lower interest rates on net interest income.
Overall protocol and remain talk.
However, with the unprecedented rapid decline its economy and how much more uncertainty, we again prudently increased or credit reserves.
Capital levels continue to be strong and our book value per share grew to over $53.
We have quickly adapt it to the covered 19 pandemic are continuing to make adjustments as the crisis evolves.
Well there were 65% of her colleagues working from home.
Welcome to try to give our employees and customers remain our top priority.
For those who cannot work from home and our operations areas and banking or what have you mentioned, we affected precautions to minimize health risk and it provides enhanced covered 90 and related benefits.
Across the bank our colleagues to continue to ensure that our customers are well taking care of consistent with our longstanding relationship banking focus.
Our team has worked diligently to support our customer providing sound financial advice credit expertise and payment flexibility where do you did.
I'm proud of tremendous dedication our colleagues have displayed in supporting their paychecks protection program.
Got it extremely thankful for the unwavering commitment of Arc America team and I'm honored to serve as he during these challenging times.
Helping our customers in communities in Durham, stressful situations and achieved long term success, because it's a horrible comericas relationship banking strategy.
As we previously announced we're significantly increased our financial commitment to serve our communities.
America.
Together with America charitable foundation have pledged $8 million to nonprofit organizations that cure for and provide critical services jerk communities.
This includes more than $3 million to community development financial institutions and other business development nonprofit as Walter recent 1 billion dollar commitment to the national business, leading to assist black on small businesses.
[noise] Arlo Brilinta second quarter further demonstrates is important we have provided our customers.
Average loans increased $3.9 billion, where degrades the majority of our businesses, including 2.6 billion and triple P. loans, which provided needed liquidity to middle market, a small business customers.
The strength of our customer wants to shift was also evidence with broad based growth and average deposits a 7.5 billion.
Noninterest bearing deposits grew 5.9 billion.
Government stimulus programs have resulted in tremendous liquidity. In addition, as we have seen another times of economic uncertainty.
Retail and commercial customers are conserving cash and the safety or there could America counts.
As expected the declining interest rates had an impact on net interest net interest income.
And this ultra low rate environment, we continue to carefully manage loan and deposit pricing to attract and maintain customer relationships.
[noise] Premier has a long history to prudent credit underwriting, which has allowed us to manage through many economic cycles.
Despite the current period of unprecedented disruption our portfolio has performed well and while we have not go how we've seen some negative migration. It is thus far have been manageable.
Nevertheless, there remains a great deal of uncertainty about the duration and severity of the impacts related to Carbonite team.
After taking a large provision in the first quarter, we further increase our credit reserve to over $1 billion or 2.15%, excluding TSB a guaranteed triple b loans.
We're thankful to our customers and are working to address their needs.
At this point, we believe our reserves are appropriate and that we are well positioned.
Regarding noninterest income, we saw growth of 4% quarter over quarter with our strong card franchise being a major contributor.
Overall, we have continued to maintain our expense discipline.
However, covered 19 related expenses.
As well as external card processing costs resulted in an increase expenses for the quarter.
Capital remains strong and we further bolstered our tier one ratio by issuing 400 million a preferred stock.
We remain focused on maintaining our attractive dividend at deploying our capital to support right.
[noise] recent conversations I've had with employees and customers reflect the challenges of the current environment, especially as we have seen that uptick in Cobiz 19 cases.
However, what is very difficult to predict the path for assets longer term optimism based on the country's overall economic resiliency.
I continue to be inspired by the spirit of the termination demonstrated about Latin America colleagues, our customers and the many communities we serve.
Now I'll turn the call over to Jim to review the quarter in more detail.
Thanks, Kirk and good morning, everyone.
Turning to slide four average loans increased 3.9 billion for 8% in the second quarter.
Eric Schoen said, our mortgage banker business, which serves mortgage companies rather an all time high increasing 1.2 billion due to very strong refi activity seasonal spring home sales.
As far as corporate banking you may recall, the large companies began to drawdown lines late in the first quarter to build liquidity buffers and the time of great uncertainty.
Those advances have begun to decline for the full quarter contributed to a 767 billion dollar increase the corporate banking average balances.
General Middle market increased 737 million in business banking increased 567 million aided by Triple PE loan fundings.
Also commercial real estate loan growth continued driven by multifamily projects, where we work with proven developers provide substantial equity upfront.
Providing a partial offsets to the strong growth loans decreased the national dealer with lower inventory levels as expected.
Period end loans were stable and very close to the record 53.5 billion report at March 31st.
Increases in loans to small business in a peak in mortgage banker loans at quarter end were offset by lower national dealer balances and customers, reducing working capital needs and leverage in the uncertain environment.
Line utilization decreased to just over 49%, mainly due to the drop in national dealer usage.
Commitments decreased about 300 billion with increases in corporate banking and general middle market more than offset by declines in energy equity fund services and mortgage banker.
Loan yields for 3.26% decrease of 93 basis points from the first quarter.
This was mostly the result of lower interest rates.
One month LIBOR the rate we are most sensitive to declined 105 basis points.
In addition, lower yielding triple P. loans weighed on our total loan yield.
This was partly offset pricing actions, we're taking particularly adding five workforce when possible as loans review.
Deposits increased 13% or 7.5 billion as shown on slide five with growth in nearly every business line.
As Curt mentioned customers are prudently conserving and maintaining excess cash balances.
Great and deposits increased 10.4 billion is led by general middle market business banking corporate banking and retail.
Deposit growth outpaced loan growth, resulting in a declining to our loan to deposit ratio the 79% and helped increase balances held the fed over $12 billion at quarter end.
The average cost of interest bearing deposits was 26 basis points, a decrease of 50 basis points from the first quarter.
Our prudent management of relationship pricing in a lower rate environment, our large proportion of noninterest bearing deposits as well as the floating rate nature of our wholesale funding to over total funding cost only 22 basis points for the quarter.
As you can see on slide six the yield on the MBS portfolio declined just a couple of basis points.
By the fact that in the first quarters rates began to fall, we opportunistically pre purchase a portion of second quarter expected payments.
You also on recent purchases have been around 130 basis points.
We had a moderate increase in prepays in the second quarter. However, this did not have significant impact on the portfolios duration or the unamortized premium which remains relatively small.
We expect payments to range for the 900 950 billion dollar per quarter range for the near term.
We are considering opportunistically, putting some of our excess liquidity to work by increasing the portfolio as market conditions allow.
Turning to slide seven net interest income declined $42 million to 471 million and the net interest margin was 2.5 Overset a decline of 56 basis points relative to the first quarter.
The major drivers for the negative net impact of lower rates, which totaled 67 million or 37 basis points in the margin as well as an increase in excess liquidity, which reduced the margin by 17 basis points.
Interest income on loans declined $83 billion and reduce the margin 60 basis points.
Lower interest rates on loans loans had an impact of $105 billion 57 basis points in the margin.
There was a 2 million dollar or one basis points impact from lower nonaccrual interest activity.
Higher balances at a $15 million and fees in the margin added 7 billion over.
Over half of the combined increase in volume and fees was related to triple P. loans, which had a net negative impact of three basis points on the margin.
Other portfolio dynamics contributed $2 million or one basis point, which mainly reflected our success in adding light workforce to loans.
Interest on deposits of the fed had a $15 million negative impact or 26 basis points on the margin.
The lower fed funds interest rate reduced net interest income by $16 billion or nine basis points in the margin.
Higher balances at the fed added $1 million, but resulted in a 17 basis point driving the margin.
Deposit costs declined by $36 million and added 19 basis points to the margin primarily a result of are prudent management of deposit pricing as interest rates declined as I previously discussed.
Finally, with lower rates into a lesser extent lower balances wholesale funding costs declined by $20 million, adding 11 basis points to the margin.
In the third quarter, we will receive the full quarter benefit of the June maturity of $675 billion and senior debt. It may repayment of $500 million enough HLB advances as well as a further planned reduction of $1 billion nothing choppy advances.
As a reminder, given the nature of our portfolio or loans, we priced very quickly.
Also we continue to closely monitored the competitive environment and our liquidity position as we manage deposit pricing.
Overall credit quality was solid as shown on slide eight.
Net charge offs were $50 million or 37 basis points, and only $5 million or four basis points, excluding energy loans.
We continue to work closely with our customers carefully reviewing their current and projected financial performance and adjusting risk ratings as appropriate.
This is reflected in the $922 million increase in criticized loans.
General Middle market criticized loans increased 519 billion, primarily related to the migration of leverage auto and social distancing loans as expected.
Energy criticized loans increased $348 million.
The total criticized portion of the portfolio remains low at 6% of loans.
Non performing loans also remained low at 51 basis points, a modest increase over the first quarter, excluding energy nonperforming loans decreased.
In summary, we started the cycle from a position of strength with very low nonperforming and criticized loans and migration. So far has been manageable.
Turning to slide nine as far as the allowance the economy improved for the quarter. However, it does remain weak and the outlook continues to be uncertain with the unprecedented impacts that the cobot 19 pandemic.
Particularly related to social distancing.
Our seasonal modeling include included significant recession, we have been experiencing followed by a slow recovery.
More severe assumptions for used in the quality of adjustments made for certain segments.
This resulted in an increase in our allowance for credit losses to $1.1 billion.
Our credit reserve ratio was 2.15%, excluding triple P. loans, which are guaranteed by the SPJ. Some carry very little risk at the majority are expected to be forget over the next six months.
Our credit reserve coverage for Npls was strong at 3.9 times.
Again, we are well positioned with relatively high credit reserve and low nonperforming assets as illustrated.
We believe our disciplined underwriting diverse portfolio and deep expertise will assist us in managing through this pandemic recession.
Energy loans, which are outlined on slide 10 were $2.1 billion at quarter end and represented 4% over total loans.
BNP loans make up about 80% of the energy portfolio and energy services, which is considered the riskiest segment was only $50 million.
The allocation on loan reserves to energy loans remained above 10% as fluctuating oil and gas prices have resulted in increases in criticized and non accrual loans.
However, charge offs decreased quarter over quarter.
Spring Redeterminations or 90% complete and on average borrowing bases have declined 20%.
As we've done through previous cycles, we aim to work with our customers secure deficiencies through repayment overtime.
In general our ERP customers have less leveraged in the last energy downturn, our hedge to varying degrees and are acting prudently cutting costs, reducing capex in order to preserve liquidity.
With more than 40 years served in this industry, we have deep expertise and remain focused on working with our energy customers as they navigate the cycle.
Slide 11 provides detail on segments that we believe post higher risk in the current environment.
We've seen only limited negative migration in the social distancing segment, and we applied a more severe economic forecasts. Therefore, we believe we are well reserved for these loans.
Also note that this segment is relatively granular and our exposure to any one of these industries is not significant.
Our automotive production exposure, primarily consists of loans tier one tier two suppliers.
Many of these customers experienced disruptions and manufacturing however production has begun to ramp up.
We have deep expertise and a long history of working in the cyclical sector.
While non accrual loans are only $1 million criticized loans have increased and as a result, we increased the reserve allocation.
Ultimately, we believe losses will be manageable.
I wish loans or were you often see the first indication of stress while balances were stable criticized loans increased as expected.
Our leverage loans tend to be with middle market relationship based customers with sponsors management teams and industries, we know well.
Also our sweet spot would be on the lower end of a LIBOR spectrum and we avoid the highly leverage covenant light deals that have been more prevalent in the industry in recent years.
As repayments deferrals and forbearance, we have granted deferral requests for more than 2000 customers totaling $4.5 billion and loans with substantially all firms that are performing at the time of deferral.
Over the past month, you request, including request for a second deferral happen nominal.
Noninterest income increased $10 million as outlined on slide 12.
This included deferred comp asset returns of $2 million, a 5 million dollar increase from last quarter, which was offset in noninterest expenses.
Card fees were very strong and increased $9 million due to higher transaction volume related to stimulus programs and changes in customer behavior.
Securities trading income increased $8 million, reflecting fair market adjustments for investments, we hold related to our technology and life Sciences business.
There were also increases and securities gains as well as customer derivative income, which included a lower credit valuation adjustment.
On the other hand for economic conditions weighed on several fee categories.
Deposit service charges declined $7 billion with reduced cash management activity.
Lower money market rates wait a brokerage firm fiduciary income and foreign exchange activity decrease with the decline in economic activity.
Turning to expenses on slide 13, salaries and benefits increased $7 million with annual merit and additional compensation paid colleagues, who were not able to work remotely or worked over time, a triple Pete loans.
Deferred comp increased $5 million as I mentioned on the previous slide.
This was partially offset by a seasonal decrease in payroll taxes.
Outside processing increased $5 million, primarily related to higher card transaction volume and triple PD Lone initiation.
We continue to invest for the future and prepare for the return to normalcy, while maintaining our expense discipline.
The Americas Conservative approach to capital liquidity has positioned us well to navigate the current environment.
Our capital levels remained strong with an estimated CP one of 9.97% as shown on slide 14.
And the second quarter, we issued $400 million in preferred shares. This was the next logical step and optimizing our capital base, adding approximately 60 basis points to our tier one ratio, which is our binding constraint.
We opportunistically took advantage of market conditions and received a very strong response reflected on the favorable pricing a five inphi base.
Earlier this year, our board increased or dividends, the 68 cents per share and declared that level for the try first dividend payment.
As a dividend is determined careful consideration is given to expected earnings power and capital needs to support loan growth and investment in our businesses.
The current dividend yield is very attractive and supported by strong holding company cash position.
We also conduct robust capital stress test to help ensure our development withstand cyclical pressures like we are experiencing now while we maintain strong capital levels for the C on target of 10%.
Slide 15 provides our outlook for the third quarter relative to the second quarter.
We are assuming recessionary conditions remain with continued slow improvement in GDP in unemployment.
However, a high degree of uncertainty remains regarding economic impacts and coated 19.
Loans to small businesses are expected to reflect the full quarter benefit of the triple teeth chances as it ramped up early in the second quarter, and we anticipate only modest loan forgiveness in the third quarter.
More than offsetting this we expect loan growth to be challenging in a few business lines.
Mortgage banker is expected to reflect lower pre buy volumes record second quarter levels, as well seasonality and home sales.
Also we expect continued reduction of liquidity draws by large corporates and lower national dealer balances auto inventory levels decline further.
We expect average deposits to be stable as some customers utilize their economic stimulus payments, while there's work to conserve cash.
The net impact from rates alone on net interest income is estimated to be 10 $15 million in the third quarter relative to the second quarter.
This includes the full quarter effect of lower interest rates, partly offset by our actions to decrease deposit rates, which we expect averaged 20 basis points in the third quarter.
Reduced loan volume is expected to roughly offset a reduction of wholesale borrowings and additional day in the quarter.
Credit quality is expected to reflect the economic environment with our solid credit metrics and our credit reserve at about 2% of loans for the second quarter. We believe we are well position.
However, the path of the economy is uncertain.
We expect non interest income to decline primarily due to the unusually high second quarter levels for securities trading income derivative income card and deferred comp, which are not expected to repeat.
Also we believe more market related activity should have an impact on investment banking institution of fees.
Partially offsetting this as the economy improves we expect an increase in areas such as deposit service charges as commercial activity picks up.
We expect a rise in technology and occupancy expenses as we catch up on initiatives that have been delayed due to cope with 19.
We are committed to investing or features that we are well positioned coming out of the pandemic.
In addition, we expect an increase in charitable giving and seasonal increases in staff insurance and marketing.
These costs will be mostly offset by our continued focus on controlling expenses as we are closely managing discretionary spending and expect cobot related costs declining.
As far as capital I mentioned in the previous slide we expect to declare first dividend on the preferred stock of about $8 million, which includes the stub period for the second quarter.
Our capital levels are healthy and remain focused on managing our capital with the goal of providing an attractive return to our shareholders.
Now I'll turn the call back to occur.
Thank you, Jim and I shared about opening remarks, I'm extremely proud of the comerica team.
However, our 170 year history Comerica has successfully manage through many challenging times.
We continue to demonstrate our resiliency an unwavering dedication to provide a high level of customer service as we navigate deliberate 19 endemic.
We believe our disciplined underwriting approach and prudent customer selection resulted in superior credit performance through the last recession.
That is assisting us in weathering the current environment as evidenced by our solid credit metrics this quarter.
Our diverse geographic footprint and relationship banking strategy continues to serve as well.
We are committed to maintaining a strong expense focus while investing for the future.
And then certain kinds light these our ability to serve our customers using our experience in deep expertise drills, we solidified loyal relationships.
With strong liquidity and capital levels, we are able to meet our customers financing needs and we remain focused on delivering attractive return for our shareholders now we will be happy to take your questions.
As a reminder to ask a question you would need to press star one on your telephone showing your question. The pound key your first question will come from the line as Ken Zerbe with Morgan Stanley.
Good morning, Thanks, good morning.
You.
Good.
I wanted to images, we can clarify if you can slide 15, the guidance for net interest income I. Just wanted me very really understand what you're saying there because obviously the rates as a negative totally got it is a negative signed there. There is also negative sign again.
Head of the lower loan balances, which are offset by lower debt et cetera.
So net net it sounds like China is going down from the here, but that can you just help us understand but like you quantify maybe what the lower loan balance part might be.
Im just trying to get a sense like are we talking because you do say, it's offset but are we talking like down a 1 million are down 20 million.
Thanks.
Yes, thanks for the question.
We.
To be somewhat dependent on triple PD lone volume and when those prepay. So there is a range of outcomes there, but just to give you a general fuel for work could end up we're looking at probably 10 to 12 million.
In terms of reduced volume impact and then that should be roughly offset as we mentioned by the one additional day and lower wholesale debt and there's probably kind of a plus or minus two or 4 billion to that depending on where triple people and goes but hopefully that boxes the range and for you.
Got it okay that actually does help quite a bit so thank you on that.
I guess, maybe just a second question in terms of operating expenses. Your your expenses have been fairly stable I would say over the last few quarters.
Several of the other banks they cover scene.
Sharp declines in expenses, whether it's lower travel or marketing or even incentive compensation can you remind us is there anything different in terms of how you're approaching the expenses for the business, where you might not be seeing that same level benefit because I'm, assuming you're not traveling anymore or very little travel, whereas other bakes might be seeing.
A bit more that benefit thanks.
Yes, Ken we are seeing some pockets of more expenses just like I think some of our peer banks are I would point out to a couple t. dipped our key differences between us and perhaps some of our peers proceed to discount the $5 million of deferred comp expense, which was offset in noninterest income another key differentiator would be the outside.
Processing costs associated with our in crude card fees for the quarter. So we did have some very good performance in card noninterest income, which you saw in the previous slide but that does come some processing expense. So that would be a layer of expense that I would suspect are pure self would not have had.
Beyond that we did have some build up and our Sta program for Triple T. loans as possible and some repairs had an infrastructure already and we're not a rule big SD eight lender Asta Rexam investment that went into that so I would probably point to those three things key differentiators, but we're seeing the pockets of reduce expenses. So we are managing them.
Sorry, prudently. So overall, we feel pretty good about the way expenses are flowing.
All right great. Thank you.
Your next question comes from the line of John Pancari with Evercore ISI.
Good morning, John Good morning, good morning.
Back to your PPP comment there just wanted to see if you can give us a little bit more color around your expectation for how much of the 3.8 billion in PPP production could.
Remain on balance sheet or Conversely, how much of it do you expect to be forgiven. Thanks.
You know it continues to play out in terms of how these reviewed by.
The treasury, but we do think that the vast majority will be forgiven right now our assumption is in the five and 90% range, but that could have a plus or minus.
We do think that most of them will be for given the over the next six months, but we don't see a substantial amount of data in the third quarter to extend it does happen third quarter via very ended the third quarter. So I don't see it affecting average balances to a material degree.
But thats something that I think we interpret what else industry is keeping a close eye on in terms of just how quickly these are forgiven.
That should more clear over the next few months.
Okay. That's helpful and then separately.
I appreciate the color you typically give around the seasonality items impacting.
National dealer in mortgage can you just talked to us when it comes to the.
Core commercial loan book outside of those portfolios what are you seeing in terms of.
Underlying demand are you seeing anything.
At this point is showing signs of improving demand or where do you.
Where can you give us some color on that thanks.
You will take that as John I would say in the generally on the demand is still pretty muted.
As activity in various markets in certain industries, and we're being selective and smart about the choices, we made but I can't I can't say that you've seen a real pickup in demand across across really any of the major markets but.
I think the companies continue to be really really responsible managing their debt managing liquidity and and so thats that would be my answer to that right now.
Okay. That's helpful. Thanks for taking my questions.
Your next question comes on line of Scott Siefers with Piper Sandler.
Good morning, Scott.
Morning, guys. Thanks for taking the question.
Just hoping you could offer little more color any thoughts around the dividend I know you mentioned that midair prep remarks, but I feel like they're just a bunch of countervailing issues the returned to profitability.
Certainly relieve some pressure capitals back in your range and then the preferred helps the floods students some support.
Still relatively high payout those if this would be curious to hear any updated thoughts you have.
Yes. Thank you Scott your question is related to the dividend is that correct.
Yes, that's it exactly yes, you were putting off over there first let me just say that as Jim and Mark and I did as well in my comments, we are coming at us from a very strong capital position.
Deferred issuance helped to strengthen that further on the tier one side and all ways for us from a capital perspective, we sort of think of it and to a two areas. One is how are we support our customers and continue to grow as an organization that secondly, how do we provide what we would consider a healthy income.
The other competitive dividend to our shareholders. Obviously, there's a lot of unknowns out there around the depth and duration of the current economic health crisis, but at the moment, we continue to feel very comfortable both from our capital position in our in our dividend.
Okay perfect. Thanks, and then just out of curiosity. If you guys received any indication from the regulators that Nazi car banks would be subject to that same newer burning sufficiency test that this car banks are subject to now.
No.
Okay perfect Alright, good. Thank you guys were taking the questions.
Your next question will come from the line and Steven Alexopoulos with JP Morgan.
Hi, good morning, everybody.
Maybe a follow up on Scott's question. It seems like you guys are in the same bucket as many regional banks, where you may not be forced to cut through your dividend, but just because rates are you may end up having a very high payout ratio. Since you think about recommending to the board right the dividend where it is right now how sustainable do you view that.
But over the intermediate term.
Yes, Stephen it's John we do very long range forecasting very sorts.
Three scenarios and we actually feel pretty good about or PPNR or.
Foreseeable future, we run out the range of credit outcomes and if you layer in just a number of what I'll call normal credit run rates.
Pearson dividend is very sustainable from a payout ratio and there are some capital left over to grow assets and serve our customers. So I.
I think the key factor there is how long this credit cycle continues but assuming returned to some level of credit normalcy in the not too distant future, which we do expect it to normalize we feel good about the ongoing PPNR and normalized credit costs are expected to maintain the dividend and grow assets.
Quarter customers. So we feel pretty good about it give you my comment about liquidity at the parent company as well yeah. That's certainly not an issue we have more than enough liquidity at the parent company you, especially the preferred issuance, we did a $400 million in may.
So we have thought we were somewhat of a wash in liquidity at the parent company and it really does come down its evolving point out to the payout ratio that is the key we do have the strong capital levels to sustain any type of.
You know over 100% ratio should that occur again like we had on the first quarter.
But again the key thing is the ongoing long term PPNR scream at normalized credit costs and in our bottom line that is.
Capable standing to dividend.
Okay. That's helpful. And then if we looked at where you saw most of the increase in the criticized loans in the auto production and leverage loans. What does the reserve that you are now carrying on each of those buckets.
Yeah. This melinda and we do not disclose individual reserve level for each of those individual carve out portfolios. What I would say is we feel very good about our failure in one and reserves and our 215 coverage ratio the entire when there is available for credit losses really in any of our.
Portfolios and the only one that we have disclosed sophocles NRG honestly don't really good about that plus 10%.
Okay. And then you think you said the covenant light of the leverage loans was small can you can you call out exactly what portion is covenant lite. Thanks.
I I don't know what that number would be but I will tell you that we generally just don't play in that space again are leveraged loan book is really it's a wrap around for our middle market relationship banking strategy and our percentage of loans in the large corporate space in leverage is very very.
Small okay. That's helpful. Thanks for taking my questions.
David.
Your next question comes from the line of Jennifer Demba with Suntrust.
Good morning, Jennifer.
Hey, this is branded keen bump agenda.
Hey, Brandon.
Hey, so I wanted to do more cone that energy portfolio I believe in your prepared remarks as needed and charge offs were actually lower sequentially, well that book and I wanted to know your thoughts earned with now as to where you see charge offs trending going forward.
Relative to where charge off from energy Brooklyn, Yeah, Yeah, Let me talk.
Our how we view energy. Obviously this is the segment that we are most concerned about it happen for quite some time.
This entered this industry with under stress prior keep comment and then obviously when the demand shocked that took place because it's cold and stay at home.
That's the latest.
We have all that being said, we do feel a little bit better about where we are at the end our Q2 than we were at the end of Q1.
Compared to where we weren't it's fine last quarter prices have stabilized around $40 barrel or we have very heavy oil weighted business.
The capital markets. However are still not exist that and that's what's really leading to our charge off.
It would be really gets I'll call. It impossible for me to predict exactly what we're going to see in terms of timing of charge off but just given the elevated levels not across this portfolio. Specifically, we would expect to continue to see charge off in the common cornered Oh. This is a portfolio of very large sophisticated borrowers as Jim mentioned.
Indeed, they have lower leverage than what we saw in the last downturn and quite frankly our.
Operating appropriately as they could and it's really difficult environment in terms of shutting in wells controlling capex and expenses and working with us where there are any deficiencies in borrowing basis, but repayment plans in place.
Okay.
Thank you were just two quick follow up with.
Were there any thoughts around selling some of those energy loans like another bank has.
With that not even a consideration.
No. We are very committed to the business and have no plans on fell in the portfolio.
Okay. Thank you very much.
Thank you Brenda.
Your next question comes in a line of Erika Najarian with Bank of America.
Hi, good morning.
Hi, I tried to follow up on.
Scott and Steves question on the dividend so Jim looking forward you know as I look at consensus estimates there is definitely plenty of room in terms of dividend coverage for the 68 10 common dividend and I'm. Just wondering you know the fed test is backward looking.
So if we use dividend coverage according to the sad according to consensus by the first quarter you won't be covering your dividend. If you look back in terms of your average net income before prefer it because of that loss corridor in the first quarter and I guess the question really curious if you haven't gotten any color from you are right.
Do later is about dividend coverage Fernand de Haas banks, there's the look back in terms of dividend coverage in terms of how the fed calculates. It just doesn't matter to you in terms of how we should think about dividend sustainability as it relates just too.
Coverage.
That is correct, we had very strong capital levels and if you look at the Basel III rules, it's really not into a bank dips into the conservation buffer that before for net income test should really be applicable so seems to be able to fed has done with CFR banks as Dave essentially use that buffer above the conservation buffer.
I can say in essentially said it doesn't matter.
We're going to platform for net income test, regardless that the special see card view the regulators have does not apply to us as Curt had mentioned and we feel really good about the capital levels, how far above we are of the commerce conservation buffer were about sure that's above it. So we just don't have any concerns about dividend to that.
We should be good to go up just from an overall check the box what are the key things were concerned about payout ratio parent company cash capital levels.
No concerns there.
Got it and my second question is you know there's been a lot of discussions now among investors in terms of valuing banks on normalized returns post pandemic recession, particularly for stocks are trading below tangible book and as we think about the net interest income run rate.
Post all the PPP noise post forgiveness more calculating something like your your net interest income would have been 457 million without PPP and I just think about the back half of 2021 is that a good jumping off point in terms of how we should think about your your core.
Net interest income power and what are the puts and takes that would take you above or below that run rate.
Yes, there are number of factors that are floating out there that I think can be beneficial to the run rate of course, we're not done with deposit pricing. So there's a little bit to go there we have managed that pretty prudently up to this point.
Her big X factor is going to be loan pricing, which obviously makes up the vast majority of earning assets our loan portfolio roles over a little more quickly than the typical thing it's a little bit shorter and we are seeing expanded pricing in the industry and more flow floors LIBOR floors are becoming more predominant and so I think thats it.
Going up X factor that there's the potential to well exceed the numbers that you're quoting there during 2021, but there should the number of unknowns that deposit pricing the loan pricing I mentioned that we are going to opportunistically invest some rex us liquidity into securities, which should give us a small phone. So there are some things that we can do.
Due to head office interest rate impact.
But you just remains to be seen how much of it we can offset.
So just how wallboard tracks given how extract before if there are some recovery in the economy because it doesn't take action the dividend we're in Lahore per day on equivalent putting others. That's right. It does seem to have bottomed out and we're preparing for the fact that it may not go up but that would certainly be a big benefits extend it to.
Helpful. Thank you so much.
Thank you Erica.
Your next question will come from the line of Mike Mayo with Wells Fargo.
We're going to high.
Just to compare to clarify if you were see car bank you'd probably be forced to cut the dividend since you're not to see car bank you don't need to because you have such strong capital ratios that can help you weathered the storm and maybe that's a benefit of being a a smaller more simple company is that correct.
Yes.
Okay.
There's not an easy answer to this but carbon cases of bid on the rise and two of your three markets, Texas, California, and so you mentioned as the economy improves then it does seem to be improving in some ways on other hand, yeah. There's the risk that koby cases lead to death that lead to.
To shutting down like you're seeing and in California, and some other parts. So.
What's your best Yes, some of the course of co bid in specifically you know some of your markets.
Yes.
The thousands are question, Mike It really hard for us to predict and as you pointed out we are seeing a rise in several of our markets also remember that we have operations in Arizona, and Florida as well and they were seeing a rise or there are the Michigan market did a really good job of Oh.
Addressing the shut down early all that does not seem quite the same a resurgence.
Texas, and California, or what I would say just overall is that you're talking about two very strong economy that came into this situation from a position industry, California remains the six largest economy of the rural extremely diverse Texas has had tremendous inflow of population and net job.
Creation and strength in real estate values et cetera. So there's a lot of positive that both of those economies, bringing ended this situation. It does question that your weathering the storm right now and I think your with your located in California, So you're experiencing it first Dan I do think the governors in most states.
Local municipalities are doing the right thing to trying to step back.
Creates especially with this is seeing and trying to reinforce some of the guidelines around mask right right. So I think there's a through short term retrenchment of Walker no, but we feel good about slightly longer term a perspective, all showed that there's markets again, a lot of that Todd could you see ever straight overall straight to those two economies.
Alright. Thank you. Thank you.
Thank you Mike.
Your next question comes from the line Peter Winter with Wedbush Securities.
Good morning, Peter Good morning.
Morning.
You mentioned loan deferrals hub stabilize and only a modest.
Number of pass for a second a deferral.
My question is at what point do you make the decision to move the loan to nonperforming status and maybe taking some charges.
Yes.
The question. So I'll start my comments really the commercial portfolio and we had about 1400 borrowers.
Great and payments are all for a relatively small percentage on the total but probably most importantly, many of those requests came at the very beginning of the pandemic and they were really insurance policies for our customers. They did not know what to expect going into shelter in place. They also did not know that several key program with the launch so they have.
For them and where they did we granted them 60% of both commercial borrowers resumed pain. After about 60 day in the pandemic and the majority of these payment deferrals for the commercial book will roll off in July and August we do not back to see any credit losses I'm proud of these particular action.
Again, I think as Jim mentioned the level of request for a second deferral has been extremely low.
I'm going to consumer but again this is not a big space for us, but we did have about 600 customer at for payments apparel and it's only about $250 million again principal balances. The vast majority of those will be rolling off between amounts on August.
In October and second request there has been modest.
Great. Thank you in just a follow up on on the securities portfolio, what are the reinvestment rates on on those cash flows of securities and.
And what are you looking for in terms of the environment to two used some of that excess liquidity and put it into securities.
Yeah, obviously, it's a bit of a challenging rate environment. So we're going to consider a mix of securities.
Obviously, we want to keep any excess liquidity tied up in vehicles that are very liquid. So we would see the majority of the going into treasuries, which are in the 20 to 25 different and trade now which doesn't sound like lot, but it's better than attentive to the fed and again. It is very liquid we don't really see long term rates over that.
It's one to two years taken any kind of significant boot mobile blended with that some mortgage backed securities which are also somewhat liquid and are yielding as I mentioned in my opening script well over 1%. So we think we get a weighted average that would be meaningful helping us just a little bit in terms of the run rate.
Utilizing some of this excess liquidity.
And really if you look at the prepayment rates on both are the prepayment maturities coming up both were treasury portfolio, we have about 1 billion and a half dollars coming up over the next you know your past two years and of course them to gay Prepays are significant right now for the whole industry. As I mentioned you can almost view. These is just a pre investment.
For maturities coming up in the near term.
So we feel pretty good we think it's an elegant way to I'm just pre purchase and also get a few extra dollars into the keeping our run rate.
Got it thanks very much.
Thank you Peter.
Your next question comes on line nine of Gary Tenner with D.A. Davidson.
Morning, Gary.
Hey, good morning. Thanks, I Hope you guys are all doing well I'm just a quick question on your soul of method called you Slide I think slide nine.
You highlight your unemployment and GDP assumptions could you just remind us where those assumptions stood when we had this phone April.
Yeah. This is melinda I'd like to yeah remind everybody that in Q1, we is the most severe economic scenarios that we could in fact, we kept our books out then a couple of extra days to make sure I mean as you recall there were so many things unfolding right at the time, we were working on.
Steve Gold reserve process.
So we have very severe.
Excitement in the GDP.
And oil and particular in the 20 and I'm pretty extended period of time it would've been 30. So for our current forecast you know again, we consider a range of third party generated forecast as Jim mentioned all of those weren't recessionary with varying degrees of severity trends.
Right.
Yeah, we took our biggest hit in the first quarter, which is why our reserve build and provision with higher than many of our here. After the current forecast period, we have unemployment at 10% oil at about 30 in stabilizing at 50 by the end of 2022.
And <unk>, GDP, which was fourth quarter 2019 being recaptured by 2021.
Thank you.
Thank you very your next question comes from the line at the Brian's ran with autonomous research.
Hey, Brian.
Hey, good morning, I cylinder on TPP and this is as much in industry question is a comerica question, but curious for your views you know there's one school of thought out there among investors that's definitely strip out PPP net interest income underlying trajectory is not great 2021 has a problem earnings.
But there's another school of thought that's kind of late look these grants to kind of grants they lowered the probability of default for a lot of borrowers maybe some deposit stick around maybe some new clients were acquired and maybe even some of these businesses borrow more as they survive and recover.
So per per people, having that to be the around you know how should we think about TPP is it one time, they get stripped out or is there maybe more ongoing business benefit than people realize what are some of the puts and takes you comment too.
I'll, let me, let me, Brian, but a couple of comments in the front ended up water to Jim for a little bit more detail. There first of all we were honored to participate in the program and we said it was the right thing for our country and it was writing for so many of our customers, especially those smaller businesses. It just really would not.
It had an alternative and our team worked extremely hard to make sure all of our customers, we're taking care of and we.
We do believe there will be some additional stimulus we don't know what it looks like it could be a second round or triple B, we're prepared to respond to that so that's the case it could be stimulus checked it could be something else that may be forthcoming. We are prepared we are participating in the main street lending program, we do not expect demand there to be.
Hi, but we will be using that to be accommodative wherever it makes sense for our customers and then Jim if you want to add on to that.
I'm, just gonna had any kind of hearkens back to Eric as question in terms of what could be lost revenue and triple B goes away and I would say, there's a time in a purpose for every type of lending and for right now our customers want to make sure. They can manage the crisis and that's really the purpose of the triple P. loans and as Curt said, we're honored deal to do that for customers and.
For the country as a whole they'll come a time, where those loans are forgiven or customers are ready to start investing again at that point in time will start hopefully investing capex in borrowing increasing their working capital levels. So I think you'll see one type of London just transition into another eventually I think it's necessarily a whole that's going to increase it.
Thank you and maybe in a similar spirit you know it's interesting on your slide on credit.
The divergence were seen in criticized assets versus charge offs in Npls and again. This is something not unique to you at lot appeals are selling that as well I.
I mean, you talked to some of the good experience. So far in deferrals. You mentioned just now maybe more government support coming do you think all of this is just delayed the normal relationship between criticized and loss or you think it's fundamentally.
Altered in lowered it I mean, you know the criticized they're not going to flow through the NPL and charge offs.
In the magnitude they would in a normal recession or I guess this isn't a normal recession, but given the economic numbers were seeing.
Yeah. This melinda thanks for the question I think I started out by saying that you know comerica long history of kind of conservative and disciplined approach to underwriting certainly.
Played well for us when we do have economic cycles, you know, we're not the most aggressive a in the good times, but we are very very disciplined and that gives us the flexibility to continue to support our customers through these types of situation.
Overall, again X charge off our ex energy charge offs were only four basis points. We started a into this cycle from a position of strength as Curt mentioned them into portfolio with about as good and clean other than energy as we've seen on our borrowers reacted to the pandemic.
Better than I think we all would have expected they've demonstrated resiliency. The triple P. program was really really impactful to our customer I don't think we can't underestimate that $3.8 billion went into the majority of that went into our middle market in business banking portfolios, which is where a lot of our.
While business customers reside on and if you look at the percentage of triple, peaking money versus what those customers have in terms of lending relationships with our it's a very very meaningful number you can almost think of it as clubs I equity coming in once those loans on our forgiven, where we are seeing strap and deterioration we are.
Adjusting our risk ratings appropriately most of the stress that we've seen so far hasn't really been centered in our leverage but automotive and to a lesser degree that social distancing portfolio.
We're monitoring their performance very closely we look at liquidity, we have great visibility into each of these borrowers and you know we would expect any losses that we do experience to be manageable and again, we've got a billion won in reserves and a 2.15 coverage ratio to really a handle pretty much anything on that.
Thank you I appreciate all the boss.
Thank you Brian.
Your next question comes from the line of can you just did with Jefferies.
Good morning, Ken.
Can you maybe I lived.
Oh is that better sorry about that good morning, everyone Brock.
Yes.
I just wanted to ask <unk>, given that mortgage banker and dealer floor plan are among the most followed all the above or below mines and given that those two businesses are going through some.
Unique cyclical things positives and negatives can you just kind of walk us through what's happening with each of those businesses and what you're expecting in terms of normal seasonality and the outlook for each thanks.
Yeah sure Ken This is Peter I'll talk to mortgage first you know what we're seeing there is a bit different I think than maybe pattern in the past where in the third quarter, we're projecting yet to come down a little bit along with the projections for the industry at Rifai.
Particularly maybe up a little bit in purchase and so we've seen amazing activity in that business in the second quarter I'm across a across the industry and we're not necessarily thinking that that will continue in the third quarter were in the past maybe it has but.
So that'll be a little bit of a divergence and then on dealer you just continue to see less maybe vendor car lot lately, there's not a lot of cars out there for plan continues to be coming down I.
I do think that there's the possibility of best picking back up as we start making cars again in Michigan and and so you know to the extent that there's more.
Funding for consumers and ability to buy cars than you'll start to see turnover of the loss, but I don't know that that's really means to more increases in floor plan lending in that space either so the normal trends are a little bit off maybe from what we've seen in prior years, probably be next year before we get to kind of a regular seasonal.
Pattern in those businesses.
Got it and one follow up on the capital front.
As you mentioned you raised the 400 million a preferred.
As did much of the industry this quarter when spreads tightened given that preferred there's still a very small part of our away and you've always had no teach you wouldn't be a major part of your capital stack is this the beginning of trying to get that into better balance overtime or was this episodic and kind of a onetime given where market was.
Yeah. This is Joe we're going to leave were options open there we have no immediate plans to fill in the rest of the stack procure one with preferred but it's something that I could see we could see happening over time I don't see it in the near term, but we'll continue to monitor the market and our own arkady linked growth in capital levels and.
The appropriate assessment.
Sure.
Okay got it thanks very much guys.
Your next question comes from the line of the Terry Mcevoy with Stephens.
Good morning, Gerry Hi, Good morning, I'm, just a question or two on the other social distancing loans, it's a little over $1 billion I was just looking at the footnote it looks like wineries in breweries were removed I was wondering are there were there any changes in the second to second quarter at all in any portfolios within that that other category that experience.
And elevated increase in criticized loans.
Oh, the short answer to that is no again, it's a very granular portfolio and migration really in that whole social doesn't mean category has been relatively modest.
Thank you that just a quick follow up for Jim I was wondering if you could quantify the covert 19 in PPP related expenses last quarter. They were called on a couple times. So on the call today and in the presentation.
Yeah. There of course, it gets a little bit squishy in terms of what do you include an exclude because there were expenses realize some are very obvious. So not of course are some savings that would offset that I'm not or some of those mentioned earlier, but broadly speaking I would characterize it as we had about $10 million cold and triple expenses that were.
We're extraordinarily in the second quarter, we actually see the majority of those continue but it will come down, but we will see a little over half of those continue some of the form of contributions, which we consider part of the overall covidien triple team firemen.
But it was meaningful in the second quarter, we goals to those come down gradually over time this year.
Right is that Jim that we're going to deepwater whatever is necessary to continue to support our employees through this crisis is do you agree that there are things that we need to do from a benefits perspective to support are employed we what we will do that into your.
Area I'm proud of it which were making around give you back to the community you know that that's an important necessary thing right now, especially related to a small businesses will be efforts that we've made too.
Communities that we serve.
Great. Thanks for taking my questions.
Your next question will come from the mine of abroad Vandervliet with you be yes.
Hey, good morning.
Thanks for taking the questions you get some good disclosure in on energy I was just wanted to return to that just roughly speaking where would you say you're borrower base is really making.
Able to cash flow these loans is it.
Is it as low as $40 a barrel or is it realistically 45 50.
Hi, Thanks Melinda in General you know, we have it's really quite turnover that a good portion of our portfolio is very well hedged in fact, we actually saw hedging go up in the second quarter as prices kind of rebound going into that $40 a barrel.
Do you have a portion of our portfolio that can cash flow absent any capex at $20 away, all and $30 Elfa, it's really unique and specific to each company balance sheet and our hedging strategy. So I couldn't really give you an exact percentage on that.
Okay and as you.
You touched on this and that in earlier in the call in terms of the conservatism of your underwriting.
Historically.
As you look at this at the energy sector now.
Does it continue to kind of meet your meet your criteria or do you see that the entire sector under real secular pressure that may make this something you want to kind of.
Extract yourself from over overtime.
Well I'll start by saying that you know again, we are we are committed to the energy business and although this is obviously been a challenging time, we've been in this business for decades, we've been through many cycles and although this one Tom has the added benefit a pandemic a worldwide pandemic.
Yeah, we feel really good about our participation in this industry is fine on continuing that so no change in strategy and Peter is there anything else you that I would just reiterate that again, we've been in this business for years and I think through that there's probably three or four cycles that we've been Bruce So we're committed to it and intend to stay in business.
Okay. Thank you.
I'll now turn the call back over to current farmer, Chairman and CEO for any further remarks.
Well. Thank you always for your interest in Primerica, we continue to wish all of you have your family's good health and safety in the days ahead. Thank you.
Ladies and gentlemen that will conclude today's call. Thank you all for joining and you may now disconnect.
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