Q2 2020 M&T Bank Corp Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time. Your line. We can be placed on music cold. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the M.T. Bank second quarter Twentytwenty earnings Conference call.
At this time, all participants in place and they listen only mode and the four will be open for your questions. Following the presentation. If you would like to ask your question at that time. Please press star one on your Touchtone phone if at any point. Your question has been answered he may remove yourself from the Q by pressing the pound key.
I ask that won't pose your question that you. Please pick up your hands that will allow optimal sound quality. Lastly, if you should require operator assistance. Please press star Zero I'll now turn the call over to Don Macleod Director of Investor Relations.
Thank you Laurie and good morning, I'd like to thank everyone for participating in M.T. second quarter 2020 earnings conference call, both my telephone and through the webcast.
Not ready earnings release, we issued this morning, you may access it along with the financial tables and schedules from our website www dot M.T.D. dot com and by clicking on the Investor Relations link and then on events and presentations link.
Also before we start I'd like you mentioned that comments made during this call might contain forward looking statements relating to the banking industry and two LNG bancorporation.
M.T. encourages participants to refer to our SEC filings on forms 8-K, 10-K and 10-Q.
For a complete discussion of forward looking statements in risk factors.
Now I'd like to introduce our Chief financial Officer guarantee.
Thanks, Don and good morning, everyone.
As we noted in this mornings press release amenities results continued to be impacted by the economic slowdown brought on by the Cobot 19 epidemic and the return to a zero interest rate policy by the Federal Reserve.
Our clients, both consumer and commercial have adjusted to the new economic reality, which is reflected on our balance sheet by slow down in some loan categories, and notably higher levels of deposits.
In light of the challenging economic environment, our focus has shifted somewhat from capital distribution to capital strength.
As far as the impact on him and he goes the low interest rate environment resulted in a decline in our net interest income.
Payment related fees suffered from the reduced level of economic activity due to the pandemic related locked down.
However, lower rates also led to a 13% improvement in mortgage banking revenue compared the first quarter.
Trust income remains solid and operating expenses were well controlled.
The net result provided a solid foundation to support expected credit costs, while also improving our capital ratios.
In connection with the Cecil loan loss accounting standard, which reflects our assessment of the future economic conditions as of the end of the corner, we added $254 million to our allowance for credit losses.
The common equity tier one ratio improved by 32 basis points to 9.51%.
Indicating that empty is well positioned to meet the needs of our customers and our communities.
Now, let's review the results for the quarter.
Diluted GAAP earnings per common share were $1.74 cents for the second quarter 2020, compared with $1.93 cents in the first quarter of 2020 and $3.34 in the second quarter of 2019.
Net income for the quarter was $241 million compared with $269 million in the linked quarter and $473 million in the year ago corridor.
On a GAAP basis.
Amity second quarter results produced an annualized rate of return on average assets a 0.71%.
In an annualized return on average common equity of 6.13%.
This compares with rates of <unk>, 0.9% and 7% respectively in the previous quarter.
Included in GAAP results in the recent quarter. We're after tax expenses from the amortization of intangible assets amounting to $3 million or two cents per common share little change from prior quarter.
Consistent with our long term practice M.T. provide supplemental reporting of its results on a net operating or tangible basis.
In which we have only ever excluded the after tax effect of the amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions when they occur.
[noise] 17, net operating income for the second quarter, which excludes intangible amortization.
Was $244 million.
Compared to $272 million in the linked quarter and $477 million in last year's second quarter.
Diluted net operating earnings per common share were $1.76 cents for the recent quarter compared with $1.95 cents in 2021st quarter and $3.37 in the second quarter 2019.
Net operating income you'll at annualized rates of return on average tangible assets and average tangible common shareholders' equity of 0.74% and 9.04% for the recent quarter.
The comparable returns.
We're 0.94% and 10.39% in the first quarter of 2020.
In accordance with the SEC guidelines. This mornings press release contains the Taboola reconciliation of GAAP and non-GAAP results, including tangible assets an equity.
Turning to the balance sheet and the income statement.
Ken taxable equivalent net interest income was $961 million in the second quarter 2020 down by $20 million from the linked quarter.
This primarily reflects the lower interest rate environment. Following the federal reserve emergency reduction to its fed funds target late in March.
These cuts let in turn to a 105 basis point decline in averaged one month LIBOR compared to the first quarter.
Overall average interest, earning assets increased by $15 billion to 123 billion.
While the net interest margin declined by 52 basis points to 3.13%.
Compared with 3.65% in the linked quarter.
The government's fiscal and monetary policy actions were the primary drivers of our significant balance sheet growth in the quarter.
First loans made through the paycheck protection program or PPP added $4.8 billion to average loans for the quarter.
A significant portion of PPP funds currently sit income in customer deposit accounts waiting to be deployed.
Those PPP derived deposits in combination with other stimulus programs, let in turn to a 10 billion dollar or 170% increase in our placement of cash at the Federal Reserve Bank of New York.
Those large balance sheet movements had a similarly large impact on the net interest margin.
Cash held at the Federal reserve reduced the net or reduced margins by an estimated 25 basis points, while having little effect on net interest income.
The PPP loan portfolio was additive to net interest income during the quarter, but the combined impact of income and balances diluted the margin by about three basis points.
The lower interest rate environment caused an estimated 22 basis points of pressure to the margin.
The net impact of lower rates was somewhat mitigated by a 38 basis point decrease in the cost of interest bearing deposits.
All other factors amounted to another two basis points of margin pressure.
Average total loans increased by $6 billion or 7% compared with the previous quarter.
Looking at loans by category on an average basis compared with the linked quarter.
Commercial and industrial loans increased by $5.4 billion or 22%, including the $4.8 billion of average PPP loans.
Cnine loans grew by nearly $600 million, excluding the PPP activity.
Largely the result of having line draws on the balance sheet for a full quarter net of repayments.
We saw somewhat unusual decline in dealer floorplan balances as customers returned to showrooms faster the manufacturer inventory could be shipped.
Commercial real estate loans grew by 3% compared to the first quarter.
Residential real estate loans declined by just over 2% or $332 million, which primarily reflects the continuing measured rate of paydowns on acquired mortgages.
Loans purchased from servicing pools pending resolution, partially offset those paydowns.
Consumer loans were up less than half a percent, reflecting higher indirect recreation finance loans, partially offset by lower auto loans and home equity lines of credit.
On an end of period basis.
PPP portfolio more than offset net contraction of other commercial and industrial loans, reflecting paydowns of about half of the line draws that occurred late in the first quarter and a 1.3 billion dollar decline in floor plan loans.
Siri.
And consumer loans, each grew a little over 1%, while consumer real estate loans declined slightly.
Average core customer deposits, which exclude deposits received at EM, and Ts Cayman Islands office and Cds over $250000.
Grew 17% for over $15 billion compared with the first quarter.
That figure includes $10 billion of noninterest bearing deposits.
The factors driving the change included cash from the government stimulus programs held in both commercial and consumer accounts and higher levels of mortgage servicing escrow deposits.
These and turn led to the higher placement of cash at the fed.
On an end of period basis core deposits were up $14 billion or 15%, reflecting those same factors.
Foreign office deposits decreased 39% on average basis, and 29% on an end of period basis as on balance sheet sweep rates return to historic lows.
Turning to non interest income.
Noninterest income totaled $487 million in the second quarter compared with $529 million in the prior quarter.
The recent quarter included $7 million, a valuation gains on equity securities largely on our remaining holdings of GFC preferred stock while the first quarter included $21 million losses.
Also recall that during the first quarter 2020, Mg received cash distribution of $23 million from baby lending group.
There was no such distribution in the second quarter.
Mortgage banking revenues were $45 million in the recent quarter compared with $128 million in the linked quarter.
Residential mortgage loans originated for sale were $1.1 billion in the quarter up 25% from $919 million in the first quarter.
Total residential mortgage banking revenues, including origination and servicing activities were $111 million in the second quarter improved from $98 million in the prior quarter.
The increase reflects the higher volume of loans originated for sale combined with stronger gain on sale margin, partially offset by lower servicing income.
Commercial mortgage banking revenues were $34 million in the second quarter compared with $30 million in the linked quarter.
Comparable figure in the second quarter 2019 was $36 million.
Trust income was $152 million in the recent quarter up slightly from $149 million in the previous quarter.
The rebound in equity markets from first quarter lows.
Good capital markets activity and $5 million of seasonal tax preparation fees were all factors during the quarter more than offsetting the emerging impact of money market fund fee waivers in the zero interest rate environment.
Service charges on deposit accounts for $77 million compared to $106 million in the first quarter.
Cobot 19 related waivers of many of the consumer service charge categories, and a slowdown and overall payments activity were the primary factors contributing to the decline.
The 46 million dollar linked quarter decline in other revenues from operations reflects the Bayview lending group distribution, I mentioned earlier as well or little bit lower payments revenues that are not included in service charges, such as credit card interchange and merchant discount.
Loan related fees, including syndication fees also declined given the reduced pace of non PPP commercial loan origination activity.
Operating expenses for the second quarter, which exclude the amortization of intangible assets were $803 million down some $100 million from 903 million in the first quarter.
Recall that operating expenses for the first quarter included approximately $67 million of seasonally higher compensation and benefits costs.
The largest of which related to accelerated reckoning recognition of equity compensation expense for certain retirement eligible employees.
As usual those seasonal factors declined during the second quarter.
In addition, we reduced our level of incentive accruals to reflect lower levels of new business activity. Following the pandemic related lockdowns.
The impact of the pandemic also led to an noticeable decline and certain other expense categories advertising and marketing costs declined by $13 million compared with the prior quarter to under $10 million.
Other cost of operations for the second quarter included a 10 million. Dollar addition to the valuation allowance on our capitalize mortgage servicing rights. Similar sized addition was made during the first quarter.
In addition.
Travel and entertainment expense and professional services declined by an aggregate $12 million.
The efficiency ratio.
Which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 55.7% in the recent quarter compared to 58.9% in 2021st quarter.
56% in the second quarter of 2019.
Next let's turn to credit.
Net charge offs for the recent quarter amounted to $71 million.
Annualized net charge offs as a percentage of total loans were 29 basis points for the second quarter compared to 22 basis points in the first quarter.
The increase charge off activity largely relates to problem loans identified at the end of 2019, but whose deterioration was likely accelerated by the pandemic induced economic slowdown.
The provision for credit losses.
Second quarter amounted to $325 million exceeding net charge offs by $254 million and increasing the allowance for credit losses to $1.6 billion or 1.68% of loans.
The allowance currently reflects an updated series of assumptions, reflecting a somewhat more adverse economic scenario than either of the scenario is used at January onest for March 30, Onest 2020.
As well as the impact of proactive risk rating changes within our portfolio to reflect the current economic environment.
Our macroeconomic forecast uses a number of variables with the largest drivers being the unemployment rate and GDP.
Our forecast assumes the quarterly unemployment rate falls to 9% in the third quarter of this year from a peak at 13% in the second quarter, followed by a sustained.
Hi single digit unemployment rate through 2022.
The forecast assumes GDP contracts, 6.7% during 2020 and recovers to pre recession levels by the second quarter of 2022.
Non accrual loans as of June Thirtyth amounted to $1.2 billion, an increase of $95 million from the end of March.
At the end of the quarter non accrual loans as a percentage of loans.
Was 1.18%.
It's important to keep in mind that some of the usual credit metrics have been affected by the PPP loans on the balance sheet, which are zero risk weighted and carry little or no credit risk.
Excluding the impact of ERP loans, the ratio of allowance for credit losses to loans would be 1.79%.
Similarly, the ratio of non accrual loans to total loans would be 1.27%.
Annualized net charge offs as a percentage of total loans would be 31 basis points.
Loans 90 days past due on which we continue to accrue interest were $536 million at the end of the recent quarter and of those loans $454 million or 85% where guaranteed by government related entities.
Consistent with agency guidance loans that have received some sort of relief whether payment deferrals covenant modifications or other form of relief as a result of cobot 19 related stress are not reflected in our non accrual or delinquency numbers.
As the virus spread in mid March to early April our customers reached up for really factions and support from the bank.
From that peak period request for relief from both commercial and consumer customers are down by about 95%.
Empties booked relief actions in the commercial portfolios have been heavily influenced by auto and recreation finance dealers.
Those dealer relationships the vast majority of which are floorplan inventory account for $4.4 billion of relief requests amounting to nearly 80% of total dealer balances.
Hi levels of forbearance for dealers has been an has been seen industry wide.
And given the strength in sales activity towards the end of the quarter.
We expect further extensions of relief to be limited.
Excluding dealer relationships really provided to commercial customers totaled $9.8 billion, comprising some 16% of balances.
For the consumer portfolios, we provided assistance to approximately 30000 accounts, representing $3 billion and balances of our combined mortgage home equity line of credit in indirect recreation finance or auto portfolios amounting to about 9% of total balances.
Of interest approximately 30% of that population made a payment in the month of June.
For mortgage loans that we don't don't and that we serviced for others.
Relief was provided to approximately 70000 accounts totaling $13.2 billion.
Turning to capital.
MTS common equity tier one ratio was an estimated 9.51% as of June thirtyth compared with 9.19% at the end of the first quarter.
This reflects the impact of earnings in excess of dividends paid and lower risk weighted assets inventory did not repurchase shares during the second quarter and will not be doing so in the third quarter.
Turning to the outlook.
Yes.
As we sit here today, our outlook is somewhat clear than it was 90 days ago. However, there's still a fair amount of uncertainty.
As far as the balance sheet goes our liquid our liquidity assets short term investments and deposits at the fed rose somewhat beyond our expectations with both rate and volume driven impact on the net interest margin.
This was driven by inflows of deposits from the PPP loans and other government stimulus program.
While the pace is uncertain, we believe that recipients, we'll use these funds and excess reserves will trend downward somewhat as we go forward.
Any additional government stimulus programs would of course have an impact on those assumptions.
Excluding the impact from cash and PPP loans, the net interest margin experienced a 22 basis point.
Rate driven decline.
Following a 105 basis point decline in LIBOR.
We expect average LIBOR in third quarter to fall a little further as well deposit rates.
Given all factors, we expect printed margin will improve somewhat in the coming quarter.
We expect average PPP loans will increase from the $4.8 billion average in the quarter toward the $6.5 billion outstanding at June Thirtyth.
Beyond that the rate of prepayment and forgiveness will significantly impact the balance retained.
As you know forgiveness under the program is not currently automatic and is subject to review by the FDA.
While we expect significant numbers of forgiveness request before the end of the year.
It's difficult to handicap, how much will occur in the third quarter versus the fourth quarter.
Commercial loan growth, which is to say, excluding PPP loans has slowed and we expect those balances to remain flat to slightly down over the remainder of 2020 compared to where we ended the quarter.
In a normal environment, we'd expect to see a seasonal slowdown in inventories and a corresponding decline in our floorplan loan balances during the third quarter.
Recent vehicle sales volumes might necessitate dealers, adding inventory against the backdrop of constrained production that the manufacturers and the upcoming model year changes.
Residential real estate loan should continue to experience a measured pace of run off as the vast majority of our loans originated for sale.
However, as I touched on earlier, there are circumstances under which we can pursue buying delinquent loans or loans under forbearance out of the MBS pools, we service.
As a result, we have stepped up buyouts from the Ginnie Mae pools, which will lead to temporary growth in our residential mortgage loan portfolio.
These are government guaranteed loans, so our credit risk is extremely limited.
We'd expect to see some improvement in the growth of consumer loans compared with the recent quarter as recent indirect inch and recent indirect originations are on the balance sheet for a full quarter.
Our outlook for net interest income is also somewhat dependent on the eventual resolution of the PPP loans.
While we expect net interest income to improve in the third quarter from the second the rate of improvement is also heavily dependent on the pace of forgiveness for prepayments on the PPP loss.
Turning to fees.
Residential mortgage applications continue to be very strong with rates as low as they are and purchase activity has held up well.
Waivers of money market Mutual fund management fees will continue to impact trust income, while the zero interest rate environment persists.
We will see a larger impact in the coming quarter than we did in the second quarter.
Service charge income was impacted by lower levels of customer activity higher balances and state mandated waivers of certain consumer fees.
Payments activity recovered by the end of the quarter, however, certain categories of retail fees continued to be waived.
In addition, higher commercial deposit balances have enabled those customers to offset the hard dollar fees arising from the treasury management obligations through the use of earnings credit.
As we noted seasonal increase in salaries and benefits we experienced in the first quarter largely normalized during the second quarter, we have curtailed hiring and have been redeploying team members around the bank to address shifting business needs.
We're in a similar situation to last year, where we expect expenses in the second half of the year to be roughly the same as the first half excluding the first quarter seasonal salaries and benefits figure.
The third quarter is off and higher than the fourth quarter from an expense perspective.
In the Cecil loan loss accounting environment, our allowance for credit losses at the end of the quarter reflects the macroeconomic variables I referenced earlier the impact of the government stimulus and the characteristics specific to our portfolio.
As GAAP requires we will reassess the allowance at the end of third quarter based upon updated macroeconomic scenario and MTS specific credit data.
Finally regarding capital as noted at the beginning of the call we're focused on capital strength.
Consistent with the C. CCAR results, we don't expect to repurchase any shares during the third quarter and we continue to meet the federal reserve earnings threshold for dividend distributions.
Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth changes in interest rates political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.
Now, let's open up the call to questions before which Lori will briefly review the instructions.
Thank you as a reminder, if you would like to ask your question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Gerard Cassidy of RBC.
Moving to earn good morning Gerard.
Question for you on the net interest margin obviously, you've cited the reason why the margin came down so much this quarter and the PPP loans in the excess deposits certainly will be contributing factors as you pointed out when you look at your asset yields a loan yields in particular.
Came down quite steeply your cost of funding not as much as we go forward.
Since that the asset yields in the loan portfolio decline will start to diminish.
Finally see continued reductions in the cost of funding.
Yes, John let me look through the the composition of the balance sheet. I think you saw the yield on the the Cnine loans in particular came down with the CRB loans that tends to be where the hedging impact those and we'll see those.
Come down through time.
We also did see a nice decrease in the deposit costs.
A significant portion of our deposit costs now are linked to the index and so they came down proportionally and so when we look forward.
The cash in the PPP aside and look at what we would consider to be the core margin.
We think we wouldn't expect to see a drop like the 22 that we saw this past quarter that it would be more tied to movements in LIBOR, which given how close we are deserve we would expect to be pretty minimal and so we would see.
Relatively small movements in the yield on loans and similarly small yield in in the deposit costs with probably notable exception of some of the managed costs were time deposits are still repricing and there'll be some of that go on through the second half of the year.
As well as some of the other managed deposit costs like some of the money markets and the like so probably.
You know all else equal, we follow LIBOR and maybe trip trickle down a couple of basis points in the core margin.
But as we kind of pointed out the printed margin will bounce around depending on how the cash balances move in the quarter as well as the PPP fund.
Very good and then as the following a quick question.
You, obviously built of your reserves loose quarter inventory is distinguished itself is one of the best things through a full cycle on credit.
If the economic outlook does not deteriorate from the period that we just came through in which you made your assumptions for the reserve build up and granted Youll have some reserves through any loan growth.
Should we anticipate provisions for loan losses coming down in.
Third and fourth quarter's assuming this economic outlook doesn't deteriorate from this quarter under Cecil again.
Well I guess, the the math would save the if the economic assumptions are identical than the provision wouldn't really change with the exception of reflecting loan growth net loan growth and perhaps by category. So if you had a mix of meaningful mix change.
See an increase but all else equal as you point out you'd probably see the provision not moving much.
And that the action would be predominantly.
Actual charge offs.
But with the provision still be at this level, though I mean could you built up reserves. So much assuming life of loan provision the provision would only be impacted by net loan growth if the assumptions macroeconomic assumptions were unchanged.
Okay. Thank you.
Your next question comes from the line of Dave Rochester of Compass point.
Hi, good morning, guys.
Good morning.
I appreciate the detail on the deferrals in some of those loan buckets.
It was just wondering what the total amount was at the ended the quarter. If you happen to have that where the current total.
In terms of total amount of loans and deferral and then if you happen to have the the criticized or classified asset trends for the quarter.
Good to hear as well.
So.
We will get to the at the some of the the loans in.
Forbearance or with some kind of payment relief.
When you look at the the non accrual loans the non accrual loans.
Bumped up.
By $95 million for the for the quarter more action was in the criticized space and a lot of that was related to some of the forbearance activity and so as we went through the portfolios and we looked at.
Loans that were in forbearance.
We took them down a greater to depending on where they started and that was really the primary driver of an increase in criticized but most of them are just Pat just over the threshold that we would start to consider.
Criticized.
Back to the the balance figure.
What's in.
What's in forbearance in aggregate for loans that we own it's about $17 billion.
Above 14, commercial and about 3 billion for consumer which would include the mortgage portfolio that we own and then if you add in what we service for others.
There is another $13 billion, but thats not our our credit risk and I guess, it's important to point out that as we've come to the ended the quarter, we're getting close to the end of some of the 90 day forbearance period and within that commercial portfolio. There's a large.
Amount $4.4 billion are around there of.
Commercial or dealer Floorplan balances and we are not seeing a lot of activity in the extension requests and so we would expect that number to start to come down as we go into the third quarter.
Okay, and then for the total amount of criticized loans you have at the end of the quarter with those.
We typically don't disclose that until the 10-Q comes out.
Okay.
Got you believe it sounds like those were up against Mr. With some of the deterioration that you guys. Yes, yes, yes, yes, yes, thats, probably because of the dam rate that we talked about.
Yeah got it and then just switching to the NIM quickly just so I understand youre, saying that the core NIM.
A little bit lower but the reported them with all the impact on cash and whatnot can actually be higher if cash those actually decline.
The next quarter to is that what you're saying Thats right yep Okay.
Just curious is looking at the balance sheet, we have.
Amount of borrowings there your cash grew more than your entire borrowing balance. This quarter are there any opportunities where you can whittle away at that balance over time I realize you may have some builds in prepayment penalties that you'd have to.
Going into.
But any opportunities on that side.
Yes, I guess, if you look around.
We probably given where rates are.
Be taking on any duration risk at this point has with converting into mortgage backed securities, but would prefer to stay short.
We'll have some long term debt that will mature and rollover, we will replace that in the short term. We can we can take advantage of those balances for funding.
And then we'll probably use some of it as we mentioned in.
And.
Balances in the mortgage servicing business, where we would buy out some of the loans that are being modified and take them out of the pools and we'll use.
Some of the excess cash to fund those in the short term.
And going back to the roll off of the borrowings what's the schedule.
For that looked like over the next year.
Lumpy roll offs that could really help the NIM these quarters.
There is there's.
Everything is swaps so.
Hi.
The savings is not materially large.
Okay.
Got it.
Great. Thanks, guys appreciate it.
Your next question comes from the line of Johnson Pari of Evercore ISI.
Good morning.
Martin John.
On the.
On the on the reserves.
Have you actually on the loss expectation, but have you run your internal company run stress test chip for 2020.
So have you disclosed.
We don't run and companies stress anymore as part of the.
In a category for bank.
Okay.
Alright, so the so I guess I just want to see if you could help us think about the reserve level now 1.68%. That's that's about half of the of the last time you did run to publicly disclose company run stress test in 2018 and.
So how should we.
Help us kind of triangulate that.
Serve coverage, where it stands now versus the stress loss estimate.
Really the macro assumptions behind it and dialing in of stimulus that that you can attribute that difference.
Well I guess I'd Theres, a number of factors, John and think about when when when looking at that level of.
Of allowance.
I guess, the first place that I start as we think about it more as 1.8 as opposed to 1.7.
Which is I know splitting hairs, but just because of the.
The PPP loans, and the fact that Theres no credit risk there.
Or very little and then when you compare the C. CCAR process to the Cecil process. There a couple of key differences. One is the assumptions that you mentioned there are.
The stress test is specifically designed to really put the bank under stress and so when you look at some of the assumptions the depth of the decline in GDP and the length of time it stays at those depth the drop in unemployment, while we saw a bigger drop in unemployment.
In the short term when you look at where that trends out over the over the last.
Four to six quarters.
Of the projection, it's actually not as bad as what see car would have and so there are some parts of the macroeconomic assumptions that are different.
A key difference would be HP and that we've seen HP I pulled up really strong right now and the decrease in HP.
There's a lot different.
In our economic assessment today than than what it would be under under stress.
Another really key difference is within seek are.
You assume that all are we assume that all non accrual loans charge off and we know that's not our experience in the Cecil allowance.
Our Cecil process would would reflect.
Our experience at.
Ed recovering or during those customers that are in non accrual and so.
Those are some of the differences between the two I guess the thing that we look back to two is how the portfolio and the underwriting performed under the great financial crisis, and what the actual losses were during that and with the peak losses work.
And when we when we compare the portfolio to what we saw in that crisis, which was more financial driven prices obviously than than as widespread as the pandemic.
We look at where our reserving ratios are relative to what happened then and and so Cecil.
More still reflects our underwriting experience then see carmike.
We are use a little bit more of industry information and industry level losses, and so those are a bunch of the things that go on underneath and.
We're doing work I think we talked about it during the quarter Rene talked about it.
Of the portfolios, where we see the forbearance.
The highest really literally going bottoms up and credit by credit understand what we think there their cash flow as and their ability to sustain.
You know revenue shortfalls for periods of time and looking at the values of the collateral and how they might hold up under stress and all of those different things.
Our factors in our thought process when we when we set the allowance and so it's.
It's it's thorough but it reflects both the economic environment and the view we have of of our portfolio.
Thats very helpful. Thanks for all that color.
And then separately just wanted to see if I get a little bit more.
Granularity around.
The underlying commercial demand that you're seeing on the loan book it sounds like understandably given that.
You expect commercial balances remained flat to slightly down.
Sounds like now the not a lot of underlying commercial demand, but just wanted to get your updated view on what youre seeing lives in terms of.
Borrower demand given where we stand right now on the pandemic.
Yes, we've definitely seen a slowdown in demand I think PPP helped create some of that slowdown because the customers were able to take advantage of.
Those program.
But really what's encouraging to us that we've seen is a really rapid reaction by the customers to the new operating environment and we've seen them make changes to their to their business to manage the burn rate of expenses and so when you look at how they're running their business.
Part of this you see reflected in the deposit balances the pace of turnover in their operating accounts isn't what it was pre pandemic and so when you factor that in along with some of the PPP funds and their ability to manage.
Very liquid and that's a great thing from a credit perspective.
Because they can withstand.
A longer slowdown in economic activity.
But it doesnt necessarily lead to a lot of loan demand in the short term and so that's really what what's going on there, but from our perspective when when we look at.
How the customer base has actually responded.
We're quite pleased with what we see and the customers.
I would say or are quite sanguine about what's going on I think we're in that period right now where for our part of the the country.
We got through.
The hard hit that happened in April and May.
We are starting to see a rebound and our customers are our guardedly optimistic about how things are how will they will unfold but.
Cautious and all that is what's leading to that forecast.
Got it thank you.
Your next question comes from the line of Steven Alexopoulos with Jpmorgan.
Hi, good morning there.
Turning.
Start just to follow up on the reserve how much of the reserve build this quarter was tied to the change in economic forecast as opposed to portfolio specific changes and were qualitative overlays and material factor this quarter.
So if you look at the allowance the biggest driver of the increase in or the provision was the the economic forecast when when you look at the moves in the in the grades.
[music].
In some cases, the grades move by by one or two and those aren't generally the PD the loss assumptions under those changes aren't big enough swings to cause a meaningful move in and what you think your loss rates. So be it is really as you get up into the criticized and even beyond the criticized and non accrual where you.
Really start to see an uptick in those in those rates.
I would describe it as the grading that happened this quarter kind of caught up a little bit to the.
The macroeconomic assumptions that were in the model at the end of the first quarter and so.
Those are the.
Those are the though the drivers there and when you look at the qualitative overlays.
We really didnt change the overlays.
From a economic perspective in terms of the impact of the stimulus we use that was pretty consistent from quarter over quarter.
I'd say the place where if there was a qualitative overlay was looking at some of the instances in the models, where they havent seen these types of inputs in terms of GDP changes and unemployment and in worse economic conditions tend to over predicts losses, and so for certain portfolios, where we went through.
Bottoms up and looked at what we thought our loss was we kind of took that into account and made an overlay, but really not.
Not much change quarter over quarter and not tremendously significantly.
Okay. That's helpful.
Then one of the areas that as a focal point for you guys as New York City commercial real estate exposure as you know yes.
Could you give us what's the balance today, what are you seeing there what are what are deferral requests in that bucket because it would be helpful. Thanks sure.
So within New York City.
I think when you look in the in the in the 10-K.
Including construction the balances or.
Right around $9 billion, actually sorry, a little bit and little bit I $7 billion.
And when we look at the request for forbearance.
They haven't increased since what we saw in the first quarter and when you walk down the portfolio.
Bye Bye category.
If we look at the industrial.
Type of space, it's really quite small and thats. The least impacted segment, we're still seeing rent collection rates of 95% plus there.
And low levels of forbearance.
Excuse me the multifamily portfolio.
Which in total exposure, including construction is about $2.5 billion.
We're still seeing rent.
Receipts above 90% in fact.
We went up slightly in July compared to what they were in April.
And we havent seen any increases in request for forbearance there.
The office space continues to also see some slight upticks in rent.
Being collected slightly over 90%, which is up from what it was.
In April allophone, not totally meaningfully.
Hotel.
Is probably one of them some more challenged portfolios in aggregate at least in terms of the economic impact although the ability of the declines to handle things has been quite strong.
And so the forbearance rates there.
Are the highest.
Upwards of 70% plus.
But what's interesting is when we look at the forbearance rates across the whole hotel portfolio, they aren't materially higher in New York city than they are across.
All other geographies.
And we have seen through our our card activity.
That that hotels are people are going back to hotel.
The.
In the retail world, which is another.
Relatively large portfolio.
And where there is probably the next highest level of forbearance activity. After the hotel portfolio. So about 1 billion three.
And interesting, that's probably where we've seen the biggest increase in rents being paid since April and now is up over 50% from being slightly above 30% before and so.
The New York City portfolio is so far holding up well, we're seeing some some trends that are positive in terms of.
Payments ultimately to the landlords and then I guess the other thing that we just we keep an eye on is what the loan to values are in that portfolio versus.
Any other and.
The loan to values across all those categories in New York City.
Tend to be.
Five to 10 percentage points lower than what the LTV might look like in a similar asset class.
The rest of the footprint and so.
It's still early days.
And so far too early to declare victory, but the the trends the in the change in that in the trends.
From early in the quarter to the ended the quarter.
I haven't deteriorated and arguably or slightly more positive.
There was more color than I was hoping for thanks for taking my questions shirt than.
Your next question comes from Matt O'connor of Deutsche Bank.
Hey, guys.
Morning.
The TPP loans are pretty big part of your loan portfolio bigger than I think a lot of your peers and if we just think about the origination fee that you get on that seems like a pretty decent chunk relative to earnings capital reserves.
Give us announcement on what you think the blended origination fee.
Is on the six and a half going and then how much you think well be forgive and who are repaid the next few quarters in aggregate.
Yes, so the the blended fee on the on the loans is probably somewhere between 270 to 80.
And the pace of forgiveness is as we said a little bit tough to handicap although.
As we think about Mad Theres, a couple of things there.
Does that change to the program rules.
Extended the time that customers had to actually use the money and so that pushes out the time period for the forgiveness.
We thought a bunch of it originally and we in the industry that it would be starting even as early as late in the in the second quarter.
Now that could push all the way into the fourth quarter and so we expect forgiveness.
In the second half of the year.
Probably in the range of 60% to 70%.
Excuse me, but how much is in the third quarter versus the fourth quarter.
I guess conservatism would lead us to say, we think it's a little bit more backend loaded in the fourth quarter than the third.
But it remains to be seen in the other thing Thats still just kind of hanging out there is the rules for forgiveness are still in consideration and will there be any automatic forgiveness.
We're not for the for the small loans I think those things will impact the timing.
At the longer it takes for the rules to be clear on forgiveness I think that's.
That will have to impacts it will slow down when when that actually happens and when it when those fees get accelerated.
And then the second thing that will happen as I think customers are being cautious about when they use the money and so that sits in on the balance sheet.
Well they want to make sure that they spend it appropriately so that they have a better chance of having their loans for given and so.
It's a little bit fluid in there, but what is relatively certain is is that that.
Amount of origination fee or processing fee.
Will come in over the next couple of years, the timing of when that shows up.
A little bit uncertain.
Gotcha, and then just separately.
Expenses were very well mandates.
Corridor the guidance.
Sure.
Second half some of the first half kind of implies one Q expenses might have been bloating Q expenses might anything.
Unusually low.
Is that a reasonable way to frame it.
The other costs came in a lot lower I think if anyone would have expected into Q and.
It doesn't seem like that's sustainable so I just want to make sure you're framing that right.
Yes, I think your ears, you're in the right ballpark there.
We think that it's closer to Q2, obviously, they don't than it was to Q1.
But this is this is this is 70 and then when we see movements in revenue and headwinds then.
We take action on the expense side, and and that's kind of what happened in the second quarter in many of the things that we impacted.
In the second quarter should continue in the back half of the year.
As we mentioned there might be a little bit of Lumpiness, just because of some seasonal things that happen.
Third quarter versus fourth.
But if you average them out you're in the ballpark.
Maybe slightly higher than.
Than Q2 on average.
For each of those last two quarters with a with a bit of a mix difference between third and fourth.
Gotcha, Okay. That's helpful. Thank you.
Your next question comes from the line of Ken Mucin of Jefferies.
Thanks. Good morning question on the fee side of things Darren just wondering if you can help us understand some of the lines were better some of the lines were worsened as you look out can you just talk about can those service charges rebound what do you see for mortgage and and just what were the fee waivers this quarter in terms and then what do they turn into thanks.
Sure.
So just kind of going category by category. If you look at the mortgage business.
Second quarter was was a bang up quarter for us and for most of the industry.
I, whether we continue at that pace in the consumer space is difficult to say, but it seems unlikely, but I don't think we go all the way down to where we were in the first quarter and now I would expect were somewhere in between.
We should continue to see.
Some gain gain on sale just from where rates are and from some of the.
Portfolios that were servicing where people will re fi.
Which will be offset a little bit by slightly lower servicing fees, but net net I would expect us to be in the range.
Between where we were in the first in the second.
Trust income.
You start to see a little bit of pressure on on the.
That line item just because of the.
Fees that are associated with the.
Money market mutual fund and the management fees and so will we might see a little bit of pressure there and then the service charge line is really the one.
That was impacted this quarter and it's interesting when you look at it that the payment related fees so interchange.
Have come back to where they were and up year over year.
The biggest.
Impacts are on some of the other line items.
Some of the ATM related fees, where we're from some of the government programs to state related program.
A lot of charge for those and so those will be off the table.
Until that changes and then one of the other big categories is NSF and NSF is lower.
Mainly for two reasons, there's less transaction activity also higher average balances and customer accounts.
And then commercial account balances. So I think in long winded way of saying I think we start to see service charges come back up.
Through time.
It probably takes a couple of quarters to get back to the run rate we were at in the first quarter.
And then in some of the other.
Income again, you've got payment fees, Thats, where the credit card related fees are.
Just because they're not associated with deposit accounts and so interchange in merchant should come back with the with business activity.
And then.
And then Thats, where some of the loan origination fees are like syndications and again as the as those markets pickup we'll see those fees come back.
Got it and then just a follow up on the on the fee waivers I think you talked last time that they could get to around 10 million do youve any different view, there and what were they this quarter. Thanks.
They were well and they were slightly higher than that this quarter and would expect them to be in that range.
In the third quarter, and then we'll see how the how things unfold. The fourth is just because they're more policy related.
I'm hesitant to comment on what they might go beyond the third quarter, Oh Im sorry, Darren I met the trust the trust the waiver is with the money market fee waiver side Oh, okay.
There were small in in the second quarter, I mean, really really not that significant and we'll start to see them go up.
As we go forward, maybe in the neighborhood of 10 million quarter something like that.
Okay got it thanks very much yep.
Your next question comes from the line of Sal Martinez said, yes.
Sir Your line is open please state your question.
Have you gone is on mute please on MULO hi.
Sorry about that we've got announcement.
I thought your head infinitely loan.
No the.
Sorry about that so to make sure I understood the.
The guidance on on expenses and have my numbers grade so.
I think I mean, you mentioned it would be similar to second half versus first half and stripping out some I guess small amount of noncore items in the first quarter by my calculations that gets you little under 1.7 billion or or what should 40, 145, 50 million quarter, which seems a little bit hi.
Versus what you kind of implied in your answer demand. So just wanted to sharpen the pencil a little bit mixture.
I don't have the.
A little bit tighter range in terms of outlook going.
Sure I think I think the difference might be the comment about first and second is it's the same excluding the seasonal salary impact or similar excluding the seasonal salary impact and.
By itself will be about $60 million that you'd exclude and if you were including that in the first equal second thing than you'd get that higher run rate I think if you take the.
Run rate that we saw in the second quarter and and bump it up by 10 or $15 million and think about that on average for the second half of the or you're probably in a better run rate.
Okay got it soon so basically second half normalizing for the seasonality.
Okay.
Does that.
Okay got it.
Yes understood that.
Okay, and I guess on.
Moving to more of a clarification question well I mean, you gave a ton of color on.
On the moving parts around net interest margin probably got lost in all of it but I think the punch line was you do you do expect some uptick in.
The net interest income in the third quarter versus the second and.
First I think just wanted to make sure that was right and.
Are you is that outlook.
Reading any of.
The PPP deferral gain that.
You talked about 60% to 70% in the second half fully realizing it's completely.
And more fourth quarter tilted, but is that you that you'll have some eni growth dependent on some realization of PPP forgiveness gains.
Yes.
And if you go in the in the third quarter, we expect slight uptick in in Eni and Thats, because some small amount of forgiveness starts to come in and then you'll have a full quarter of PPP loans outstanding in the amortization of the of the fee and then really start to see.
More of that.
Weighted to the fourth quarter.
Okay, but there is some so that you that there were some uptick is is incorporating some.
Forgiveness.
And I guess, the 60% to 70% is that I mean, well if we could just if you could just clarified.
Are you do you do you have a view what percentage of the loans will.
We'll be forgiven due to 60% to 70%.
The based on a percentage of forgiveness in other words of those loans that are forgive if you think 67% will.
The second half.
Casey.
Yes, I guess, the so I.
The highest level when you look at the PPP long.
You are probably up to 75% overtime.
Yes, I'm I'm kind of hedging my pet little bit and Ren and thinking that maybe it's more like 60 or 70, but we know is just again because of the rules about one of the the funds are supposed to be dispersed that it needs to happen by and large by the end of the.
By the end of the year and then the question on timing is when the customers go and seek forgiveness and then how quickly the FDA processes.
It's it's likely to be concentrated in the next three quarters and then there'll be some the rest of it will hang on and and show up kind of over over the normal course of those those two year loans and normal.
Amortization.
But thats, that's kind of how we're thinking about it and as I said, a little bit of that is is in the third quarter.
Which helps and then obviously whatever doesnt show up in the third quarter starts to show up in the fourth in the first of 2021.
Got it fully realize its.
It's a very precise signings [laughter] would appreciate that.
Correct.
Your next question comes from the line of Erika Najarian of Bank of America.
Hi, I just had a quick follow up question on on the man I'm hearing you said earlier that.
The net interest margin is impacted 25 basis points excess cash in three basis points PPP I think investors thought it was helpful. In one of your peer said this morning within like with normalized NIM could be could stabilize as we look at your earnings power post all the PPP noise.
So if I exclude that I would I would get to net interest margin.
The 340 range and I think about your outlook for live or decreasing but essentially offset by deposit costs. As you think about second quarter third quarter 2021.
For our high Threethree, a good starting point for the margin.
Yes, I think thats a good way to think about it that we talked about that if we look at the is the core earnings power the bank.
And that 22 basis points gets you down to where we would be absent those large increases in.
In cash balances at the fed as well as PPP and.
Probably see that moved down small amounts.
Per quarter, just as the different hedge.
Activity rolls on enrolls off that the way the hedges were constructed.
Through time that the receive fixed rate on the hedges will will slowly come down and that will create some.
Some headwind.
The flip side is the loan activity that is happening.
We've we've seen some increases in the margin on that and so that will that will help offset so you're I think you're thinking about right you're in the ballpark of how we would see it without.
Without those factors.
Really the one on one of the big questions in the printed margin and I would just kind of hold as to the side is just where the cash settles out.
Got it thank you.
Thank you I will now I'll turn the call to Don Macleod for any additional or.
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