Q2 2020 People's United Financial Inc Earnings Call
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I would now like to turn the presentation over to Mr., Andrew Hersom, Senior Vice President of Investor Relations for People's United financially.
Please proceed sir.
Good afternoon, and thank you for joining us today.
On the call to review our second quarter 2020 results are Jacques Cornet, Chairman and Chief Executive Officer.
David Rosato, Chief Financial Officer.
Walter's corporate development strategic planning.
Tangled President, Jeff Boyer Chief Accounting Officer. Please.
Please remember to refer to our forward looking statements on slide one of this presentation, which is posted on our Investor Relations website.
People Dot com backslash investors with that I'll turn the call over the Jack.
Thank you Andrew.
Good afternoon.
We appreciate everyone joining us today and I hope you in your loved ones.
Our remaining safe and healthy.
Before discussing results I want to take a moment to thank our employees customers and communities, we serve well there perseverance.
The ability during this.
And then.
Since the onset of the crisis. Many of said we are all in this together.
Sentiment is true.
The daily interactions between our employees and customers.
The move forward in a socially distance environment.
And through our engagement with community organizations to provide relief.
So those most in need.
Their ability to confront challenges together has in the past and some 10 yesterday, the board and solidify relationships between People's United and our customers.
We strive to further strengthen these relationships as we play a critical role in supporting the financial health of individuals businesses and communities throughout this crisis and beyond.
As I mentioned last quarter, we entered this crisis in a position of strength.
Our performance in the second quarter.
Oh it was.
Was not only indicative of the strength, but also the resilience of the franchise.
Prequaled vision net revenues.
210 million.
On an operating basis increased 15% from the prior year.
Water and benefited from higher net interest income and ongoing success controlling costs.
We also continued to produce positive operating leverage as evidenced by 230 basis point improvement year over year in the efficiency ratio so 53.5%.
These results are reflective of the material cost savings we have achieved from recent acquisitions.
And help to generate the tangible book value per share of $10, an 18 cents, an increase of 7% from a year ago.
Net interest margin of three or five was seven basis points lower compared to 312.
Reported in both the linked and prior year foreigners.
The margin compression, mostly reflects the downward pricing of floating rate loans, partially offset by meaningfully lower deposit and borrowing costs.
Yeah, I read in loans and deposits increased 3% and 12% respectively linked quarter.
Excluding P.P.T. loans.
<unk> decreased.
3% largely due to lower commercial real estate balances and our planned reductions in residential mortgages.
[noise] deposits, primarily benefited from P.P. funds federal stimulus payments and higher municipal balances.
Notably strong deposit inflows reduce the loan to deposit ratio to 91 cents from 99% at the end of the first quarter.
Really the pandemic has significantly impacted the economy.
Although as the second quarter of progress, we did see a modest uptick in business activity from the lowest earlier in the period.
In particular mortgage warehouse results continued to be strong.
As expected residential mortgage originations were robust and our retail channel.
But were more than offset by payoff.
In commercial real estate and Cnine originations remain modest.
Like many banks, we did not experience a high level of line draws and see an eye utilization rates have remained steady.
This is a reflection of the strength of our customer base and their confidence in our ability to supports their funding needs.
New business and equipment finance has been subdued, but the exception of lease where we have seen signs of increasing activity.
Well new business activity has been modest our focus is on maintaining a high level of communication with customers. We have continued to serve customers and the manner in which they want to be served either in person for the personal social distancing protocols by our digital channels or virtually.
Uhhuh video meetings.
This has enabled our relationship managers branch personnel and wealth management advisors to successfully transact with customers and be responsive to their needs.
We're pleased that effective July 1st.
All of our branches returned to normal operations, given the favorable pandemic trends across our footprint.
With that said our top priority remains the health and wellbeing of our employees and customers.
Consistent with our history I'm, providing support in times of need.
We are committed to helping customers navigate through this crisis.
As of July 15th.
We have funded nearly 18000 TPP loans totaling over $2.6 billion, which have supported the paychex of more than 260000 employees across the northeast.
Companies that we CPP loans.
Through us have an average of 15 employees.
Sop industries funded include social services healthcare retail professional services and construction.
Approximately 80% of these loans were under a $150000.
We also registered for the main street lending program well further such a further support small and midsized businesses.
Where appropriate we granted loan forbearances.
At quarter end, we have improved more than 14000 loans for deferral totaling over $7.1 billion.
Oh $5 billion in commercial and 1.1 billion in equipment finance and 1 billion in retail.
Positively the trends in the initial forbearance requests have slowed materially and we have been pleased to receive payments from 38% of the accounts representing 19% of loan balances.
Since they were in deferral.
We also continued to assess the needs of customers that may require extended release.
Second round forbearance requests are subject to a more extensive due diligence and credit analysis to confirm additional relief is needed as well as viability of the business and this new economic environment.
While still early in the process based on conversations across our customer base, we expect second round forbearance levels will be meaningfully less than the first.
We believe this is a testament to our approach to relationship banking and reflects the strong capital liquidity profile of our customers.
Turning to slide three clearly the during the duration of the pandemic.
It is unpredictable.
And the total impact on the economy is unknown.
However, we remain confident and our long held underwriting philosophy and diversified loan portfolio comprised of high quality cycle tested customers will once again differentiate people's United.
Our conservative business model is advantageous.
Especially in the challenging economic conditions.
One of the strategic objectives of our risk management is running a diversified portfolio.
The not overly exposed the bank to a single line of business.
Our overall.
All of our relationship managers are highly credit trained and remain with customers through the entire lifecycle of the alone.
This enables our sales force to develop significant knowledge of each relationship and facilitates detailed conversations with borrowers.
As such in times of economic stress. These deep relationships allow us to quickly transition from a new business mindset to a capital preservation focus.
That is.
With the needs of the customer.
With that background in mind on slide three we have once again provided our exposure to second significantly impacted by corporate 19.
Similar to last quarter, we have included the retail hospitality and restaurant sectors.
As an update this quarter, we have refine the retail disclosure to display only loans managed by our commercial real estate lending teams.
It's important to reiterate our conservative view.
Underwriting enables us to enter this crisis in a position of strength.
Metrics across each of our portfolios, including these sectors.
Were very strong levels.
Balances in the Creek retail portfolio, our $3.6 billion.
Importantly, we do not have material exposure to enclosed retail malls in a central tenants comprised approximately half of the portfolio.
These include grocery stores pharmacies, and big box home improvement locations.
In addition, we have been pleased to see a meaningful improvement in rent collection trends for retail customers, we deemed at risk.
Three pandemic rent collections were near 100%, but declined to 35% by the end of May.
Based on conversations with customers, we expect run collections to be approximately 70% by the end of July.
The barrels at quarter end were 1.5 billion dollar for the Cree what retail portfolio.
Given the portfolios concentration of essential tenants, we expect second deferral requests will be significantly less and the initial route.
Balances in the hospitality portfolio, a $1.1 billion, which 90% is managed by our Cree lending teams.
The majority of the portfolio is flag by major hotel brands and comprised of economy to upper mid scale properties.
In terms of occupancy these properties have fared better than upscale and luxury properties across the industry.
Our top 10 clients account for over 70% of our pre hotel exposure.
Each of these sponsors are cycle tested have extensive hotel experience and our long tenured customers of People's United.
The pearls were 876 million well the total hospitality portfolio at quarter end.
While occupancy has steadily improved since the onset of pandemic.
We expect most customers to apply for a second deferral.
Balances in the restaurant portfolio, our $513 million of which approximately 85% or managed within cnine, including the traditional C and I and the segments franchise finance specialized industry vertical.
The remainder of the portfolio is managed in equipment finance.
The majority of the franchise portfolio is in quick service restaurants, which have experienced a lesser degree of disruption.
Actually where drive traffic remains strong.
The pearls at quarter end were $290 million for the total restaurant portfolio.
Many of our customers are coming to an end of the first 90 day deferrals and presently only a few have requested another round of relief.
Before moving on its also worth noting continued high collection rates in our multifamily an office building portfolios.
The average collection rate for our top 15 multifamily loans in the high 80% range.
And in the high 90% range for our top 15 office building loans.
Looking forward undoubtedly the near term impacts of the pandemic on top of mind for every bank management team.
However, it is clear to us coming years, we'll look much different from.
Therefore, we remain keenly focused on investing in the franchise for the long term.
In particular, we are actively pursuing ways to further strengthen our digital capabilities and enhance our already broad array of products and services offerings.
Meet the ever changing needs of customers.
As such we are excited by the recent formation of our business transformation office, which is responsible for digitization product strategy management.
Process automation and tech partnerships.
Business transformation office is unlike any other group, we have had a people's United.
And we will further drive our ability to innovate and reconceptualize off.
His team will not only provide competitive advantage by enabling us to stay ahead of customer needs, but also ensure that our strategic plan successfully advanced the franchise.
Consistent with the theme of meeting customer needs. We're pleased to produce always checking earlier this month.
We are offering this premium digital identity protection service free to all personal checking account customers.
Peoples United is proud to provide this level of digital identity production benefits that will further differentiate the banks this offering builds on our for value proposition of service and protection and we are confident always checking further attract and retain customers throughout the franchise.
Before turning the call over to David to discuss the second quarter results in more detail I wanted to congratulate Dave Barry are now former Chief credit Officer.
Who is well planned retirement earlier this month concluded more than 28 years with People's United.
Thoughtful leadership has been instrumental to the bank.
As his many many contributions thank you Dave for your dedication and we wish you all the best.
We are excited to welcome rich Barry.
As our new Chief Credit Officer.
Rich joins us from before.
He was chief credit officer, and he brings with him more than 25 years of proven experience managing risk and growing businesses, including during times of adverse conditions.
His deep knowledge of our northeast footprint and experience working at larger peer banks.
Which also includes holding the role of Connecticut market, President that chip citizens will significantly benefit peoples United.
With that is Dave.
Thank you Jack.
Our second quarter financial results compared to the prior year quarter were highlighted by 15% increase in operating pre provision net revenue and a 230 basis point improvement in the efficiency ratio.
We also maintained excellent asset quality as evidenced by net loan charge offs to average total loans at eight basis points.
Operating earnings of $101 million or 24 cents per common share included a provision of 80.8 million, which reflected the continued impact of cobot 19.
The 47.3 million dollar increase and the division linked quarter was driven by a weaker economic forecast.
Our current model Wayne current economic modeling reflects both the baseline economic forecast as good late June and a more adverse scenario, which each weaken compared to the under the first quarter, given higher unemployment sharper GDP contraction and a longer expected recur.
Every time line into the first half of 2021.
On slide four we break down the allowance for credit losses by portfolio segment.
Total allowance at June Thirtyth of $414 million up from 342 million at the end of the first quarter provides significant coverage as it represents more than 12 times, our annualized second quarter net charge offs.
40% nonperforming loans.
Notable changes to segment.
Allowance to loan ratios includes seeing high which declined 11 basis points linked quarter to 70 basis points due to the addition of PPP loans.
Excluding TPP the Cnine allowance equals 89 basis points and the total allowance is 96 basis points.
Equipment finance increased 103 basis points to two way one reflected reflective of the portfolio's shorter duration loans.
Average life for the equipment finance portfolio is approximately two years, which under Cecil most cash flows did not report to long long term historical loss rates and makes them highly dependent on the economic scenario model.
Moving to slide five net interest income of 405.6 million increased 9.6 million or 2% from the first quarter.
The loan portfolio unfavorably impacted net interest income by 38.3 million.
In addition, lower yields in the securities portfolio reduced net interest income by 3.2 million.
These headwinds were more than offset by lower deposit and borrowing costs, which benefited net interest income by 37.2 million and $13.9 million respectively.
Oh, no net interest income benefited approximately $12 million pre PPP during the quarter, which reflects $9 million and related fees and $3 million and net interest income.
As displayed on slide six net interest margin of three of five seven basis points lower than the first quarter.
Loan portfolio negatively impacted the margin by 40 basis points, driven by the downward repricing of floating rate loans.
In addition, lower security yields reduced the margin by seven basis points.
Partially offsetting these negative effect was our continued discipline managing deposit pricing and lower borrowing costs, which favorably impacted the margin by 29 basis points and 11 basis points respectively.
Across the franchise our line of business leaders that are remarkable job working with customers and managing deposit costs lower.
Average deposit costs were 34 basis points in the second quarter compared to 71 basis point in the first quarter, while borrowing costs improved 115 basis points over the same period.
So that the net impact on the margin from PPP was negligible in the second quarter as the loans were not on the books for the full three months.
Looking ahead, we expect PPP will have approximately a three basis point unfavorable impact on the margin in each of the next two quarters.
Turning to loans on slide seven average balances were up 1.7 billion or 4% in the first quarter, while period end loans increased 1.2 billion or 3%.
Growth on both an average and period end basis was concentrated in the seeing eye portfolio driven by the addition of PPP loans and strong mortgage warehouse resolved.
Average balances also benefited from equipment finance due to the continued growth in lease.
It is important to note in connection with United Bank core system conversion in early April approximately $400 million of loans secured by owner occupied commercial properties were prospectively reclassified from commercial real estate two CNS [noise].
Excluding PPP loans declined on both an average and period and basis.
Average loans decreased $66 million or less than 1% in the first quarter, while period end balances were down 1.3 billion or 3%.
The largest driver the decline in period end loans was a 458 million dollar reduction in residential mortgages as we continue to remix the balance sheet with a focus on higher yielding portfolios.
In addition, adjusting for the reclassification middle market seeing at all I was down over $280 million walk free and asset based lending balances declined approximately 250 million and 190 million respectively.
Balances in the transactional portion of the New York multifamily portfolio, which isn't runoff mode ended the quarter at 621 million down $71 million linked quarter and 116 million year to date.
In addition, the period and balance for the United loans, we have chosen to write off was 962 million.
Klein of 80 million from March 31st Am 151 million since year end.
We continue to expect run off of 200 million to 300 million for each of these portfolios for the full year.
Moving onto deposits on slide eight average balances were up 4.3 billion or 10% from the first quarter, while period end deposits increased 5.2 billion or 12%.
Growth on both an average and period end basis is primarily driven by inflows PPP funds and federal stimulus payments as well as higher municipal balances.
Notably a 2.8 billion dollar increase and non interest bearing deposits was the largest driver at the higher average balances in the quarter.
At June Thirtyth noninterest bearing deposits accounted for more than 27% of total period end balances up from 23.5% at the close of the first quarter.
Looking forward as customers further utilized ERP funds and federal stimulus payments, we anticipate deposit balances to abate in the second half the year.
Our funding and liquidity profile remains strong with a secured borrowing capacity of 13.3 billion at quarter end comprised of 6.8 billion in federal home loan Bank capacity 3.2 billion in Unpledged Securities and 3.3 billion in February.
Sure Bank pledged loans.
Looking at slide nine non interest income at 89.6 million down 34.2 million or 28% strong first quarter results.
The largest driver of the decline was a $15.1 million and lower net gains on sale loans.
As a reminder, the first quarter included a $16.9 million gain related to the sale of loans acquired in the United transactions.
Excluding gains on the net sale of loans noninterest income decreased 19.1 million was primarily driven by lower levels of customer activity and fee waivers related to cope with 19 relief measures specifically this decline reflected a 7.7.
$10 million decrease in bank service charges inclusive of fee waivers.
6.1 million and lower customer interest rate swap income.
1.9 million and lower insurance revenues, reflecting the seasonality of commercial insurance renewals and a one and a half million dollar reduction in commercial banking lending fees, primarily due to lower loan prepayment fees in equipment finance.
Overall, the net impact on noninterest income in the second quarter from fee waivers was approximately $4.7 million.
On slide 10.
Non interest expense of 304 million declined 16.1 million linked quarter.
The second quarter included 18, and a half million dollars non operating costs up 600000 from the first quarter and we're in the following categories 13.7 million in other noninterest expense, primarily driven by branch closures related to the United transaction.
3.6 million and professional and outside services.
1 million in compensation and benefits and 200000 in occupancy and equipment.
Excluding non operating costs non interest expense of 285.2 million tons down 16.7 million or 6% compared to the first quarter.
Largest driver of this improvement was a 6.7 million dollar decline in compensation and benefit due to lower payroll and healthcare related costs.
Occupancy and equipment costs were favorable by 2.7.
Travel when meeting related expenditures were lower by 2.4 million, primarily due to the impact of cobot 19.
And advertising and promotion and professional and outside services costs collectively decreased net interest expense by 2.9 billion, primarily as a result of timing.
Briefly on slide 11, you can see the efficiency ratio improvement compared to the prior year quarter, our 53.5% efficiency ratio is a product of our ability to generate positive operating leverage and in particular realize the projected cost takeouts from.
Acquisitions.
As referenced earlier, we sustained excellent asset quality and entered the pandemic in a position of strength.
As displayed on slide 12.
Net loan charge offs to average total loans for eight basis points, an improvement of two basis points from the first quarter.
Nonperforming assets as a percentage of loans and Oreo 69 basis points was 10 basis points higher linked quarter.
The increase was primarily driven by two accounts one represented a C N I account, which was experiencing difficulties prior to the pandemic.
The other what's an acquired commercial real estate loans.
Turning to slide 13 return on average assets of 58 basis points or 65 basis points on an operating basis and return on average tangible common equity of 8.1% or nine in half percent.
On an operating basis were down compared to recent quarters.
The decline in these returns in the second quarter is primarily driven by the elevated provision, resulting from the impact of cobot 19.
Finally on slide 14, we remain comfortable with our capital structure and balance sheet strength.
Capital ratios continue to be strong given our diversified business mix long history of exceptional risk management.
It's important to note adjusting for PPP loans, the pro forma tier one leverage ratio at period end would be 8.3% for the holding company and 8.7% for the bank.
Additionally, the TC ratio, excluding PPP would be 7.6% first the reported 7.3%.
This concludes our prepared remarks, we'll be happy to answer any questions you may have.
Operator, we're ready for questions.
Ladies and gentlemen, we are ready to open the lines up for your question.
If you wish to ask your question. Please press star followed by one on your touched on telephone.
If your question has been answered or you wish to withdraw your question Chris pound.
Again press Star one to ask a question.
Please standby for your first question.
No first question comes from the line of Ken Zerbe with Morgan Stanley.
Great. Thanks, Good evening guys.
Hey, Ken.
I guess first question just in terms of the TPP load.
If I heard correctly youre expecting a three basis point negative.
Yeah over the next couple quarters PPP loans.
Kind of assuming Theres, obviously, no. So are we passed on there and you're probably not assuming anything other than to your.
Hey off I guess are full amortization of these loans, but even on those assumption.
Like your NIM is call it roughly 3% I think most other banks, where we're hearing from say the fully I guess amortized.
The full youre on these loans to something over 3%, assuming any kind of accelerated past I'm just trying to understand like why is this negative tier now what do you assume.
In terms of like the loan yields for the past those that is resulting in such a low or hit thank you.
Sure sure can so.
I mean, you're correct. We're basically assume then that the vast majority of love those loans.
We'll be on for two years Theres, a few that could possibly go five just at at the tailwind.
I would say the average loan is about to 75.
Under those assumptions average loan yield.
The reason we made the statement negligible in the first quarter. It was a small negative.
The only difference we I'm, sorry second quarter, not first quarter. They only the only real difference between second quarter versus 34.
Is that the loans weren't all on the books for the full quarter.
In Q2.
I felt we assume they will be in Q3 in Q4.
Thank you.
Your next question comes from the line of Dave Rochester with Compass point.
Hey, good evening guys.
Hi that union.
Just a quick one on the credit that was really purging to hear your expectations on the the retail CRT collections. Just wondering what you guys are hearing from your customers.
That gives you confidence that collection rate is going to effectively if I heard correctly double.
By the end of July are you getting like weekly cash flow data from these guys are seeing anything else any color there would be great.
Yes.
We are having having a lot of conversation with customers across all of our businesses and.
And that particular area.
Real estate group.
Collecting data.
Those conversations with customers and information.
And and that was kind of tabulated carry forward I don't have you want to describe that Jeff any differently.
No I think that's right Jack what we've been doing is.
Having real robust conversations with all of our commercial real estate customers in particular, focusing on places like.
Retail and so the comments were making is kind of just the.
Collection of all the information we're hearing back from our customers.
I have increasing trends and run collections.
Of course, it's difficult to predict with the second half of the year it looks like but as we sit here today, they've been steadily increasing since the start of the pandemic. So currently in a much better position today than they were three months ago.
Yeah definitely.
Just one quick follow up are you seeing any difference in either collection activity or just underlying metrics between your originated book and your acquired book.
Hi, This is Jeff I think it's difficult to.
A break it out like that short answers I don't know by my intuition is I don't think though but we.
But we haven't analyzed it that way.
I would just add if you look at our if you look at our delinquencies nonperformers et cetera, well, we've really Phil not something but.
It is yet very low so there's nothing showing up.
And our acquired portfolios that are changing those numbers.
Okay, Great and maybe just one last one on expenses.
So there is so good expense control.
This quarter.
Just wondering what.
Looking about for the puts and takes as we expense run rate going forward I missed this.
It's a good run rate just excluding all the.
The charges and whatnot. Thanks.
Sure, Dave I'll take that so.
The way I would think about is as you know, we we gave guidance and in January guidance around expenses was a billion, while 92 billion to 20.
Our thinking today.
Is that will be.
Right around the lower end of that guidance by the time, the Irrs, all said and done.
Alright, great. Thanks, guys.
Thank you Dave.
Thank you.
Next question comes from the line of Jared Shaw with Wells Fargo.
Everybody good evening.
Is there.
Just wanted to say congratulations to today I hope you enjoy says his retirement.
Yes.
[laughter], maybe starting with with credit can you give an update on you know what you're seeing from deferral levels. As we entered here in July and it seems like most other places or.
Seeing pretty substantial declines you have any updated numbers on on where deferral stand either today or or recently.
Yeah, well aware.
Well I guess I'd say, we're cautiously optimistic we Jeff just described those conversations that we're having across the business isn't it certainly includes the people that got deferrals, we were 16% overall.
And the deferral level, which I think reflects that our funding to be very accommodative to.
Customers that initial phase.
Most of the deferrals were granted.
In late March early April and.
So right now.
And as we as we see there's a.
Pretty significant number of those.
Conversation has taken place in the last 30 days to try to gauge anticipate.
How many will be asking for a second and we mentioned in our comments, we think the hospitality group definitely will need it.
And we'll and we'll definitely accommodate them we've been talking to them.
There as we've described you know very good long term customer so we.
We want them in the properties.
And the other kind of water levels.
We would say I think it's going to be meaningfully below 50%.
In terms of second request and a lot of the portfolios, we're not anticipating lots at all.
So the conversations have been positive many many people that told us.
Now that they've gotten so the initial shock and they kind of reevaluated their operation and the impact there they won't be asking for a second that's also.
You are saying, we feel pretty good about.
That's great color when you look at the ones that you are more concerned about or that that may need a longer term deferral would your.
Would you are.
Would you would you be more inclined to try to come up with some type of a formal restructuring and move it off of deferral by year end or would you be more inclined to do.
Utilize the longer duration deferral that the care is actually allows.
Yeah, So if we.
If we were to grant that second for all of them or we're hitting that one on 108 days.
Which we would use I would I would say and then during that period.
We'd be evaluating.
What kind of restructuring if any is needed.
So I would say you know different types of businesses different types of properties, probably kind of difficult to describe what kind of restructuring would do but we would use the 180 day period, and then we would kind of have to go from there.
Unless unless the regulators.
Account.
Extend that hearing.
And then just finally from me when you look at the equipment finance.
And having to put a big Cecil provision on that does that really.
Make it less attractive to put on any new equipment finance loans right now or would you you know.
Yeah. It would you still be putting on equipment finance loans today, even though you may have to put a bigger provision associated with that day one yeah.
Yeah I am.
I would I'll give you an answer I'll, let David ADESA.
Contributed.
First of all know that doesn't discouraged me at all.
With leaf and the.
The equipment finance groups.
They were actually performing very well, they're doing well.
Their credit history is really really good that's much better than the industry.
And.
I really have no reason to think that assess the performance isn't going to continue this is kind of a case, where cecil drives you because of the short duration period on the economic scenarios to that higher provision one once things calm down hopefully they do then that requirement will be ill.
For us higher provisions will be reduced and will will recover no provisions in my mind.
Yeah I would.
I would say that the perfect answer Jack it's just it's one of those nuances of C. so similar to.
We're carrying a reserve for residential mortgages larger than we think you need to but thats driven by the long duration of the assets, where it's the opposite wed.
Equipment finance it right now.
Great. Thanks, a lot.
Thank you.
Your next question comes from a line of Steven Alexopoulos with JP Morgan.
Hi, Good evening this is Alan small on for Steve.
I've started off with reserves how much of the reserve build this quarter was tied to the changing economic forecasts as opposed to fully specific changes and were qualitative overlays material factor this quarter.
I would say essentially all of the reserve Bill was due to economic scenario modeling.
They.
There are qualitative overlays as part of our process.
But the dry that's that's not wasn't really the driver. It was just a as we referenced in our comments a weaker economic.
Forecast that last quarter.
Thanks for that and onto a fees. Just one question is on the 4.7 million in waive fees. You mentioned I can you talk about what you're doing on that front and how long you expected to continue for thanks.
Sure so the.
Similar to forbearance.
In the first round, we tried to be as accommodating as possible to our customer base to help them through this this time period of economic uncertainty, we saw a as the quarter.
Unfolded the there was a reduction in fee waivers given across.
And this is mostly our retail base.
So they were still occurring.
Well as late.
Last year, so I would expect the impact.
To be substantially less in Q3, and what you saw in Q2.
Thank you.
And our next question comes from the line of Steven Dawn with RBC capital markets.
Hey, good evening guys.
Yeah, just a quick one do you have your the Ltvs and debt service coverage ratios for your deferred retail Siri and are hospitality portfolios.
Not that weren't prepared.
This fall to share.
Got it okay and basic and this is Jeff I would say that going into the pandemic. We had underwritten really all all of our commercial real estate.
Portfolio, but those segments in particular on a pretty conservative basis. So we felt good as good as you can be going into a pandemic, obviously, we didnt underwrite to a pandemic.
But feel pretty good about the going into the depends on in terms of the the leverage in the real estate portfolio.
And we actually talked about battle on the call last last quarter.
Great. Thank you and then just on the the PDP sees how much in total fees that you guys book.
With in the quarter, we booked 9 billion up.
And how much is remaining.
The total fees were in.
Good to upper Seventys.
No.
Right as Jack referenced in his comments already at what we did was at the lowest tier.
Those sites, which at the highest.
Great and then just the last one.
You guys are the reserves are based on the latest economic forecasts. So I guess is it fair to say if the economic forecasts if the actual.
Economy plays out similar to what the economic forecasts.
Our right now.
Then your provisioning should go back to.
What it was before.
<unk>.
Yes, yes.
Settle down subject to loan growth of course.
Right.
Right, Okay, great I really appreciate thank you guys.
Welcome.
Thank you.
Next question comes from a line of William Wallace with Raymond James.
Thanks for taking my question I just have to brief questions on deferrals.
You you stated that the the experience or you're optimistic that the cure rates will be high won the deferrals that have come.
Do or rolled off the deferral and then I've had a payment what percentage of those have made their next payments versus gone too.
Second round.
Well most by that activity most most of the activities. The first the formal kind of what to just ended the month of June.
July.
The opportunity to see one.
Payment.
You've only you only had one loan that's that's had a that's come up to a payment because everything.
No I don't know the loan.
The loans that have gone into deferral, but but I'd just coming out there just coming out.
In July so I thought you asked if they want it made a second payment and I'm, saying that we haven't had an opportunity you see the second thing no no I'm, sorry, I'm, saying what percent I've made the next payment there first payment after coming off of the ones that have come up on that payment due to now they're just coming off now.
So this is the first Bob.
And so yes, we at all.
To me that will know that.
Well, what I would focus I think what's probably more important as Jack's comments he referenced.
The deferrals, we granted while loans were end deferral, approximately 40% of the accounts at 20% of the balances.
Most of the pay even though we granted deferrals and they also.
That would say the amount of deferrals will we'll.
Significant net debt was decreased and we'll probably be less than half.
The original deferrals.
During the second.
Okay.
[music].
Okay.
So okay yep.
Tom.
As you think about reserve builds and can those loans that do go onto a second deferral do you think they would you anticipate you'd have some continued though milder reserve builds that due to downgrades above those loans.
Yeah.
What I would go back to is the level of provision expense, primarily governed by the economic scenario right number one.
Levels, a lot of cotton metric.
Add up that goes into our models. Some of our models are dependent on risk rating external that's right, but not all while both.
Okay, all right, but bank, but just one further comment our allowance process does incorporate some downside.
Risk of lower internal risk ratings as well.
Okay.
Thank you very much appreciate the color.
Thank you.
Our next question comes from the line of Dahlin Gilbert with KBW.
Thanks, Good afternoon guys.
Ill.
I'm not sure just started that was a b or C, but nonetheless.
[laughter].
Yes.
On.
On the borrowing paydown. So yes that was had a pretty dramatic pay down in the quarter, there and obviously really meaningfully reduce the cost I think you probably something like 27 basis points on borrowing costs.
David how is that setting up.
The margin for the third quarter and then what was.
You know kind of whats the strategy or the reasoning behind that or at what point did you decide to kind of pull the trigger on paying down the borrowing.
Good question College, what I would say as.
Most of our.
Treasury borrowing fourth we tend to keep relatively short so it was it could we could just naturally pay at all.
Yeah, we didn't have to extinguish long home loan bank borrowings or anything like that.
The.
So.
You make a decision either to learn the balance sheet right or just kind of let that deposit inflows.
Pay down those borrowings, which is what we chose you can not on what you did see a small increase and cashin due on the balance sheet. So we did have a higher levels of cash with.
With the federal reserve, but the more important part.
A question I think is how thats set up the margin for the back half of the here.
They we were very successful on that in deposit cost lowering them.
The they're still some opportunities, though not as great, but from an acute from Q1 to Q2, it'll be we have lots of opportunity obviously from Q2 to two three and four.
Probably the biggest driver will be just RCD books.
Pricing.
Down as well as customer preference is for liquidity. So you saw we saw balances go from CD and money market and Oh checking accounts as well so we still have some positive.
Tweaking to do there and some natural role.
On the deposit side.
Okay and that just the timing of the borrowing pay down I guess is another kind of part two of that question to determine what the impact might be in the third quarter on the NIM.
<unk>.
Yeah, I mean, it but the level of borrowings.
If the deposit inflows growth that we had roughly stays the same the borrowing base isn't going to change unless.
It's it's really going to.
Be dependent on on loan growth in the back half of the here, we're not robust loan growth for either.
Better loan growth bio.
To loan growth, albeit funding eight.
I thought I thought column was trying to ask how how rapidly you paid down the borrowings during the second quarter without it so yes I yeah.
Where that yeah, where the savings right I mean, if you're starting it I think you started borrowings that 142 and first quarter. They dropped to 27 basis points. So is that.
Just just trying to understand how much more fastenal savings can be seen in the third quarter.
Those borrowings came down they were more frontloaded in the quarter than Backloaded. Okay number one were driven by the P. P. P loans coming that has that money sat there and then lastly, Boston.
All right, so sorry about that no no no no. That's okay. That's okay. That's helpful. Okay, and then just going back to credit.
So I know this has been asked a lot, but just curious I think it was probably is late in the quarter. It's maybe early June where I thought the view was perhaps and consistent with what you guys said falling one quarter, that's a provision would likely kind of being the same range in the second quarter as it was in the first quarter and I guess.
If we look at where the Carney wise in early June.
Well, maybe you had not implemented your actual economic forecast at that point I guess just qualitatively.
I'm just trying to connect the dots there because I thought the messaging in early June was that the provision would be comparable the first quarter inch and yet obviously came in meaningfully higher.
Beyond the economic.
Model in place.
Any anything else there that that change that viewpoint.
Well I.
I mean from my perspective on.
The call in April we were Telegraphing.
You know slightly off is the way I would characterize that we'd love to open the possibility for a higher provision in Q2.
You know June economic data is really the driver here, but it was definitely weaker than that in March.
Okay. Okay.
Okay, and then lastly, I think if I'm doing the math right in it.
Numbers are right I thought after the first quarter you had indicated there was like about 6.2 million I'm, sorry, 6.2 billion of loans you identified kind of is risky and then in the any are releasing the Jack this quarter. It looks like 5.2 billion and it looks like a drop was on the retail series I did something happen within that book that you maybe.
That's right.
Yeah that that was actually Jack Jack alluded to it and in his comments. So we we find the definition of commercial real estate.
Retail free and we were too broad in hindsight in Q1. So what we were number we're focusing on is the what is managed by our commercial real estate lending teams. There was some middle market free in the first quarter not work.
Got it okay, yes, okay. Okay that was a little ahead. Thank you.
You're welcome.
Thank you.
And our next question comes from the line of Matthew Breese with Stephens, Inc.
Good evening.
Hi, Matt sorry, sorry, if I Miss it but you did you could you just characterize for us what what the core NIM might look like.
Both in the medium and really you know like a year out from now if if interest rates were to be unchanged you know what could the core NIM migrate to.
Leave it to you that the hardest question they well we've suspended gardens, you know because of the fluid a of the situation.
The what I would say, Matt is there's clearly more or says taking the NIM down than the NIM up.
The the.
Good.
So the shape of the yield curve.
You know that policy I think consensus is rates aren't really going to change or go up anytime soon so there theres definitely pressure.
On the NIM the in the in the quarter I think we were very successful in managing deposit cost I tried to say.
Say in answer to the Collins questions that we still have some more to do on the deposit cost side, but it's not nearly as much as we were able to do the second quarter the loan spreads held up.
In the quarter, but there wasn't a lot of volume at the situation gets worse. The economy gets worst credit spreads are going to our go to widen. So when you have opportunities blend the small customers will be lending that wider spreads.
So I don't want a.
Well talk about where are we think there might be as in 2021 at this point, but I can see yeah, the NIM falling below.
3%, obviously and I can see it in ER.
To 90 280 ish type.
Type range.
Over time.
Understood Okay.
And then.
To what extent did loans on deferral contribute to net interest income this quarter and you know just hypothetically speaking if deferrals were to go to nonperforming asset would therefore be backed out.
Yeah.
I'm, sorry, Matt I missed that question.
Well the loans on full deferral, you're not collecting principal or interest yet you're accruing interest and then interesting comment to what extent that impact the NIM this quarter.
The.
No.
So it was in its into them. So yeah. We as you stated we are on deferral, but we're accruing that interest. So it really didn't have an impact on the NIM in the quarter.
Okay.
And then my last one.
Just on.
Could you provide some color on your goodwill impairment evaluation process, and whether or not that's necessary at this point and then practically speaking if there is the need to taken an impairment would that factor into your ability to pay the dividend.
Couple of questions. They are what I would say is obviously as part of each quarter, we think about.
Good will impairment and and.
Whether it's necessary the factors that we discussed.
That as we go down that path internally and then and then talk with our outside.
Accountants is that the factors are present.
For goodwill impairment for us to have to go into a full analysis.
That's driven by the fact that there are large every last time, we got a full assessment there were large cushions and good well I'm. So we don't think that.
That's an event that I mean, obviously, we have to go through the process each water, but it's not something we're expecting.
As we sit here today, the so I'd, rather not speculate on if that happens.
What impact that might happen.
Or on the ability to pay the.
Okay.
That's only had thanks for taking my questions.
Welcome.
Thank you.
Ladies and gentlemen, since there are no further questions in the queue I would now like to turn the call over to Mr. Barnes for closing remarks.
Thank you.
Our performance in the second quarter demonstrated the strength and resilience of People's United Our employees continued to deliver financial solutions. Despite the many challenges presented by the pandemic and provide critical support to customers.
From a financial perspective, our results were highlighted by PPNR growth will be fair.
Our strong efficiency ratio.
Hi level and the positive.
Excellent asset quality.
While the impact of the pandemic on the long term economy is unknown, we remain confident our long held conservative underwriting philosophy and diversified loan portfolio comprised of high quality cycle tested customers will once again differentiate our franchise throughout these uncertain times ahead.
Thank you all they have a good evening.
Thank you for your participation in todays conference. This concludes the presentation you may now disconnect good day.
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