Q2 2020 Webster Financial Corp Earnings Call
Good morning, welcome to the Webster Financial Corporation second quarter 2020 earnings Conference call.
This time, all participants Helena listen only mode. A question answer session will follow the formal presentation.
If you would like to ask a question you May proceed star one on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It's now my pleasure to introduce Webster's director of Investor Relations Terry mentioned. Thank you. Please go ahead.
Thank you Donna welcome to Webster.
Presentation includes forward looking statements within the Safe Harbor provisions of the private Securities Litigation Reform Act 1995, with respect to Websters financial condition results of operations and business and financial performance Webster has based these forward looking statements on current expectations.
Actions about future about.
Actual results might differ materially from those projected in the forward looking statements additional information concerning risks uncertainties assumptions and other factors that could cause actual results to materially different from those in the forward looking statements is contained in what's your financials public filings with the Securities and Exchange Commission, including our form eight.
Containing our earnings release for the second quarter 2020.
I'll now introduce websters, chairman and CEO John sealed off.
Hi, Good morning, everyone. Thank you for joining Webster second quarter earnings call.
You know when your loved ones are healthy I'm sorry.
Well My guess is more of your business and financial performance for the quarter.
Provide updates on our cobot 19 related activities and line of business performance also report on key credit metrics I'm trends, including our exposure to industry's most directly impacted by the pandemic and provide an update on loan modification and payment deferral activities. The portfolio specific credits slides that we walked you through in Q.
I want to have been updated for Q2 and are included in the supplemental slides.
After going provides additional information on Q2 financial performance age or say bank President Chad Wilkins I'm, Jason Soto, our Chief Credit Officer will join Us for Q1 I.
Well, we've seen a dramatic improvement in the healthcare data across our fourth street retail banking footprint over the last month, we know that rise in cases of cope with my team continue to challenge parts of the U.S. amid economic activity, including consumer and business demand I'm confident we'll continue to be muted by the uncertainties surrounding the pan.
Well I don't know along with the rest of the executive team continue to focus on prudently managing capital credit and liquidity, considering all the potential macro economic scenarios.
Webster bankers continue to show, great energy engagement, and compassion and they take care of each other our customers and our communities I want to thank each and every one of them for their remarkable contributions during this challenging time I'm incredibly proud of the entire team.
On slide two you can see some examples are the way our bankers have responded over the last several months I'm pleased with the way our employees have adjusted to remote working environment and our organization continues to focus on employee safety and support.
We've worked tirelessly to help our consumer and business customers through loan modifications flexible products and pricing and through participation in the PPP and main street lending programs. Today, we are processed approved and funded more than 10000, P.P.P. loans totaling 1.4 billion for both exist.
And to new customers. We funded every qualified applicants that completed the long process.
Our philanthropic activities continue to be focused on making an immediate and direct impact on those most affected by cobot 19, and in addition, and more recently in helping organizations that are poised to make a difference at the inflection point to racial equality and economic opportunity.
I'll now turn to financial highlights on slide three Webster's second quarter results demonstrate our ongoing commitment to strong execution on our strategic priorities, we feel good about our performance in the quarter, particularly in light of the challenging operating environment.
<unk> net revenue of 107.9 million was down approximately 14% from Q1, driven by lower total revenue, partially offset by a decline in expenses.
Earnings per share on a quarter were 57 cents or 61 cents when adjusted for 5.5 million valuation adjustment that Glenn will discuss in his remarks. This compares to 39 cents from Q1 and a dollar five in the prior year second quarter.
Consistent with last quarter Graham will walk you through the assumptions underlying Cecil process, and resulting provision for the quarter. Our 40 million dollar provision result in a 23.6 million dollar reserve build.
Second quarter return on common equity was 6.8% and return on tangible common equity was 8.5%.
On slide four.
Loan growth was solid at loans grew 13% from a year ago or 6% when excluding 1.4 billion in P.P.P. loans commercial loans grew almost 10% from a year ago or by more than 1.1 billion.
Linked quarter non P.P.P. commercial loan balances declined modestly, but the decline was driven almost entirely by a reduction in line utilization in fact commercial banking non P. P. P origination and payoff activity was largely in line with the prior year second quarter.
The decline in floating and periodic rate loans to total loans reflects fixed rate P.P.P. loans added in the quarter.
Deposits grew 16.6% year over year, driven across all business lines transaction on H. I say deposits now represent 62% of total deposits up from 58% a year ago.
Slide five to seven set for key performance statistics for our three lines of business on slide five in commercial banking.
Excluding PPP loans balances were up 9.4% from a year ago Cree was the primary driver of year over year growth as I mentioned earlier loan balances in the quarter were materially impacted by lower line utilization significant amount of the one Q defensive line draws where we paid and our asset based lending group saw a 20% regard.
During an outstanding loan balances at slower economic activity reduced our customers need for receivables and inventory support.
Deposits were up sharply in commercial banking due to a cash build in our clients balance sheets commercial deposits were up 12.4% linked quarter and 54% from a year ago, marking an all time high for that line. It does much higher loan and deposit volumes drove a 5% year over year increase in net interest income in commercial banking well.
Expenses were down 3.3%.
Commercial PPNR was up 9.1% compared to prior year due to the net interest income increased and strong expense discipline.
On slide six you will notice that we've modified our slide presentation slightly for H. I say back our slide now shows our core accounts and deposits as well as those associated with our TPH partners. We've done this in order to provide more clarity regarding the decision I'm too cheap Yang partners to transition accounts and balances to their internal.
Solutions.
This is what we promised we would do when we communicated the TPH transition to the market late last year.
Covert 19 has had a mixed impact on the overall I'd just say business in Q2 account openings were modestly lower than prior year due to slower hiring trends across our employer customers.
Well outside the T. P. A channel deposit balance growth remained strong at 11.7% year over year due in part to reduce consumer spending in the period.
So higher balances helped eni, while they're spending decline had a negative impact on our interchange revenue.
Interest say consumer spending did begin to pick up late in the quarter a trend we see continuing as elective medical services continue to open up across the country.
We saw strong increase in new business opportunities late in the quarter, winning more new age or say RFP is then we did last year specifically in the large employer space. This is a positive early sign for 2021 in our D E channel.
In the quarter TPH accounts imbalances declined 68080, 9 million respectively, representing the beginning of the anticipated loss of accounts in that channel as we've mentioned several times in the past the TPH channel has materially lower average account balances that are core accounts due to our limited interaction with.
The account holders the accounts that left in Twoq, you had an average deposit balances 1400 $42 per account compared to 2300 $69 for our core customer accounts.
As disclosed last quarter, we're on track to close an onboard 23000, new account holders from state farm bag early in the third quarter related deposit balances approximate 136 million or about $5900 per account.
Although the pandemic has introduced some volatility in day to say bank performance metrics. The fundamentals of age I say back and the broader HFSA market remains strong with ample opportunity for continued growth.
I'm now on page seven community banking loans grew by 13% year over year and by 2% excluding P.P. loans.
Mortgage originations were strong and the pipeline remains robust.
In club balances totaled just a 163 million at June 30, and down another 13 million from March 31st and that portfolio continues to be in runoff mode.
Community banking deposits grew by 14% year over year with consumer and business deposits growing by 6% and 40% respectively. Our total cost of community banking deposits was 38 basis points in the quarter compared to 71 basis points a year ago.
Non interest income went down 15%, primarily driven by lower deposit service charges, resulting from higher average balances and lower retail spend due to cope with 19 mortgage banking in business banking swap fees, so meaningful year over year growth.
Reflecting the continued shift in consumer preferences, 77% of total transactions in the quarter were self service and mobile banking households grew by 13% year over year.
Turning to the next two slides I'll talk about credit.
Our June Thirtyth reported credit metrics remained relatively and remarkably stable, reflecting the increased level of economic stress, partially offset by the impact of government stimulus and loan modification and deferral programs. We expect to see continued pressure on credit as our forward forecast of economic conditions remains less favorable.
And we anticipate the continuation of a challenging business environment due to the pandemic overall delinquencies classified assets nonaccrual loans and net charge offs modestly deteriorated from prior quarter, but remained within recent Rangers Glenn will talk specifically about these metrics in a moment.
On slide eight with respect to commercial loans, we've updated our disclosure on the sectors most directly impacted by Covance and included updated modification information.
Key takeaways are that overall exposure to these factors have declined.
Offensive line draws in these sectors and across the commercial bank have largely been repaid.
New modification requests have slowed dramatically and the absolute number of loan modifications in force has declined from its peak.
On slide nine we provide more detail across our entire 20 billion dollar commercial and consumer loan portfolio I think there's a lot of good information on this slide at the end of the second quarter, approximately 2.29 billion or 11% of our funded loan portfolio was under some sort of modification on.
Hey, when we filed our first quarter 10-Q modified loans represented just under 2.9 billion or 14% of our portfolio as you can see our modified loans have come down materially.
I think it's also important to note that almost half of the commercial loan modifications in effect at June Thirtyth are not related to modification of payment terms, meaning the borrowers are still paying principal and interest as originally contracted in these instances, we provided covenant relief borrowing based adjustments.
Additional liquidity or other concessions.
With respect to payment related modifications, we've seen more than an 800 million dollar or 38% decline and modified loans dollars since may.
Well, it's way too early to declare victory overall modification trending is encouraging.
Overall portfolio weighted average risk rating has deteriorated modestly as a result of the economic stress. However, the vast majority of our risk rating downgrades have occurred within the past rating categories. We are actively monitoring risk, we're making real time credit rating decisions and addressing potential credit issues proactively.
Attached to the virus the pace of reopening or re closing the economy across geographies and the potential for additional government stimulus actions will all helped determine the ultimate outcome of credit performance not only for us but for the rest of our industry. We continue to feel good about the quality of our underwriting our portfolio management capabilities.
And our capital position.
Finally, before I turn it over to Glenn I'd like to comment on capital management.
First we remain completely focused on internal execution.
We have a strong capital position, enabling us to continue to support our customers and assist in the broader financial recovery as we announced Tuesday, Our board has approved a quarterly dividend of 40 cents per share given our current economic baseline forecast anticipated earnings and capital position, we anticipate continuation of the dividend.
Its current level if conditions deteriorate significantly we will make the appropriate decisions relating to our dividend as we will always im sure. We can take care of our customers our bankers are communities and our shareholders.
And we will not repurchase our stock until a pandemic is behind us I'll now turn it over to Glenn said the financial overview.
Thanks, John I'll begin with our average balance sheet on slide 10.
Average loans grew almost 1.3 billion or 6.3% linked quarter. Our commercial portfolio grew by 1.4 billion driven primarily by 940 million in PPP loans in the second quarter. We funded over 10000 PPP loans loans had an average balance of 135000 with a median balance of 34000.
Over 80% of the loans were less than 150000. The DPP loans include around 70 million to new customers with the remainder going to the existing Webster customer base, we expect 75% of the loans will be forgiven over the second half of 2020, the timing will depend on final SPD guidelines and.
Customer preferences, we believe that approximately two thirds of the Pete if these funds remained in customer deposits accounts at quarter end outside of PPP loans commercial loans grew 458 million.
See an eye loans grew by 319 million reflective of line draws which began late in the first quarter along with growth in public sector finance.
In addition, commercial real estate loans grew 139 million as a result of higher activity in our investor Cree and middle market businesses on a year over year basis commercial real estate loans have grown by more than 1 billion.
The 114 million decline in consumer loans is the result of reductions of 67 million, a residential mortgages and 41 million in home equity.
Deposits increased 1.9 billion linked quarter, reflecting substantial endemic related commercial and consumer liquidity demand deposits represented 1.3 billion of this increase commercial and business banking demand deposits grew 1.1 billion or 31%.
The average consumer demand deposit increased over $1000 per account or 13.2%, representing a 161 million of growth.
As a result borrowings declined 100, and by 186 million with <unk> with FHLB advances representing the majority of the reduction.
Borrowings included 373 million a balances from the utilization of the PPP liquidity facility.
Regulatory with risk weighted capital ratios increased due to growth in equity and a decrease in a risk weighted assets risk weighted assets decreased as a result of the addition of zero percent risk weighted PPP loans as well as a decline in 100% risk weighted commercial loans.
The increase in asset balances impacted our tangible common equity ratio by 27 basis points, which was more than offset by retained earnings and an increase and the net unrealized gain in our area that's portfolio.
Tangible book value per share at quarter end was $27 in 40 cents, an increase of 3.6% from March 31st and 6.9% from prior year.
Slide 11 summarizes our income statement drivers of quarterly earnings.
Net interest income declined 6.4 million from prior quarter lower rates resulted in quarter over quarter decline of 30 million in revenue from earning assets.
This was partially offset by 8 million due to balanced growth and 16 million due to lower deposit and borrowing costs.
As a result, our net interest margin was 24 basis points lower quarter over quarter.
40 basis points was the result of earning asset yield partially offset by 12 basis points from lower deposit cost and seven basis points from lower borrowing cost.
In addition, PPP loans represented another two basis points of the linked quarter NIM decline.
Versus prior year net interest income declined 17.4 million 44 million of the decline was the net result of lower market rates with a partial offset of 29 million from earning asset growth.
Noninterest income decreased 13.3 million linked quarter, and 15.8 million from prior year deposit service fees declined 6.7 million quarter over quarter with overdraft fees declining threemillion.
Hey, just say deposit fees decreased 3.3 million linked quarter with interchange representing 2.4 million of the decline as a result of lower spend.
We also saw quarter over quarter pressure on wealth management related fees, which was partially offset by higher mortgage banking activity.
Another 5.5 million of the quarter over quarter reduction in noninterest income was due to a discrete fair value adjustment on our customer hedging book.
The decrease in noninterest income from prior year reflects the lower level of deposit service fees, the fair value adjustment with a partial offset from higher mortgage banking revenue.
Reported non interest expense of 177 million decline, both linked quarter and from prior year and is reflective of continued expense discipline.
Pre provision net revenue was 108 million in Q2. This compares to 125 million in Q1 and 137 million in prior year.
The provision for credit loss for the quarter was 40 million, which I will discuss in more detail shortly.
The efficiency ratio of 60% compares to 58% in Q1, reflecting lower quarter over quarter revenue with an offset from lower expense and our effective tax rate was 21.8% compared to 22.6% in Q1.
Turning to slide 12, I will review the results of our second quarter allowance for loan losses under Cecil.
As you can see the allowance for credit losses to loans increased to 1.64% or 1.75% excluding PPP loans.
For the quarter net charge offs were 16.4 million our loan loss provision a 40 million consisted of two components first a reduction of 8 million driven by lower loan balances, primarily due to lower commercial credit utilization at quarter end and second an increase of 48 million, which is reflective of our updated.
Economic forecast.
The provision reflects the Moody's June economic forecast the forecast has unemployment, peaking at 14% in Q2 declining to 9.5% in Q4 and 9.3% on average for 2021.
GP GDP is forecasted to decline of the full year basis by 5.6% in 2020.
Annualized year over year GDP growth will not turned positive until mid 2021.
Key drivers for the provision or changes in the economic forecast.
Risk rating migration loan modification, a deferral trends as well as the impact of the fed stimulus programs.
The 359 million allowance reflects our best estimate of life of loan losses as of June Thirtyth.
We will continue to assess the macroeconomic environment and the impact on our credit quality as we move through the pin debit.
In addition to our quarterly Cecil process, we continue to run several stress scenarios reviewing the results with management board and regulators.
The results inform our thinking on future performance liquidity, and operating capital, which remains strong and in excess of well capitalized levels.
Slide 13 highlights our key asset quality metrics as of June Thirtyth.
Nonperforming loans in the upper left increased 11 million from Q1 residential mortgage and consumer loans represented 7 million of the increase was 4 million driven by smaller exposures in Korea and middle market.
Net charge offs in the upper right increased from Q1 total and totaled 16.4 million in the quarter see an eye increased 10 million, primarily reflecting two restaurant chains and our sponsor portfolio that were experienced and difficulty prior to the onset of the pandemic.
Commercial classified loans into lower left represented 295 basis points of total commercial loans. This compares to a 20 quarter average of 314 basis points.
The allowance for credit loss increased to 359 million as discussed on the prior slide.
Slide 14 highlights our liquidity metrics, our diverse deposit gathering sources continue to provide us with a strong days for loan growth.
More than 1.8 billion of deposit growth in Q2 funded more than 900 million in loan growth and lowered the loan to deposit ratio to 83%.
We are predominantly core deposit funded with no brokered Cds at June Thirtyth. In addition, our sources of secured borrowing capacity totaled 11.2 billion at June Thirtyth. The increase of almost 2.2 billion for March 31st reflects 1 billion of unused PPP collateral at the fed and to pay down.
Of FHLB advances.
Slide 15 highlights our strong capital metrics, our regulatory capital ratios exceed well capitalized levels by substantial amounts our common equity tier one ratio of 11.2% exceeds well capitalized by more than 1 billion Likewise tier one risk based capital exceeds well capitalized levels by 850.
853 million.
With respect to our outlook the impact of that endemic on the economy continues to present near term challenges.
Average, earning asset growth net interest income and NIM will be influenced by the timing and amount of PPP forgiveness and repayment activity.
So many market rates did not go low go below zero PPNR has modest risk to further declines in short term rates noninterest income will be influenced by the pace of deposit service fees and age you say bank and community banking.
We will continue to remained disciplined on our expense management and our share count should remain relatively flat as we do not anticipate any near share share repurchases.
With that I'll turn things back over to John.
Thanks, a lot Glenn I'd like to provide some perspective on our longer term operating goals and execution strategies before we open it up to questions. As you know our goal is to allocate capital and focused business strategies for the purpose of maximizing economic profits overtime.
For 40 consecutive quarters, we were able to grow revenue period over period distinguishing ourselves from our peers differentiated strength of our company has been deploying low cost high growth HFSA and core consumer deposits into a market, leading specialized and sophisticated Cnine Creek commercial loan growth across an expanding.
Set of industry verticals and geographies, our view of the macroeconomic environment over the next several years as that rates will be lower for longer and economic growth will be modest as I mentioned the beginning in our January earnings call. We believe we have meaningful opportunity to change the cost structure supporting our delivery of products and services to our customers across.
All business lines without limiting the effectiveness or growth or value of our differentiated businesses. We have been and remain focused on operational efficiencies and revenue enhancement across the organization beginning well before the onset of the pandemic and with a pandemic accelerating changes in customer preferences and shifting workplace.
Dynamics opportunities to fully aligned expenses with our business line execution only get broader our goal continues to be generating returns in excess of our estimated 10% cost of capital over the medium and long term and we'll work diligently to achieved that goal.
Don or would that Glenn Chad, Jason and I are prepared to take questions.
Thank you the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time.
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[laughter] do you think speaker equipment, and maybe necessary to pick up your handset before pressing the star. He's once again that is star one to register questions at this time.
Our first question, it's coming from Steve.
Okay P. Morgan. Please go ahead.
Hey, good morning, everyone Hey, Steve.
I can start on credit Sofia look of the deferral slide most of the trends were favorable the <unk>, but the one that does stand out as the most scrutinizes leverage lending, which saw modifications rise since may eightth could you give color what you're seeing there and should we translate higher deferrals into eventual higher losses in that bucket.
Yeah, I mean, it they've done this the big question is the translation of embedded loss from the modifications right. We obviously look carefully if customers need some sort of modification that shows that they've got some sort of potential weakness I'll, let Jason comment on some of this stuff one of the thing Steve on the leverage portfolio again its.
Not all of the modifications or payment related and if you think about both in our general sponsor book and those leverage loans within sponsor the things. We're encouraged by our work we're doing a lot of modifications that are simply providing the customer with some more flexibility with respect to covenant or liquidity or some of the other you know.
Covenant based modifications and we know that we have sponsors behind the vast majority of those deals who have significant equity in the transactions and how we're working with US really closely so for me I don't get alarmed that that's one of the higher categories. You would expect in a leverage situation that that would be a company that.
I need a little bit more modification and flexibility, but we're not seeing sort of a systemic weakness in that portfolio at all and Jason maybe you want to give your perspective.
Yeah, No happy to John I think you're right. If you look at the amount that slide 70% of it is not payment related right in there. So the other 30% is even break down that 30% further there's a portion of that that's just the principal deferral, but they continue to pay interest. So so ultimately we worry a little bit less about becoming.
Modifications versus the payment modification and what I'll also tell you is that a lot of sponsors have indicated that they are willing to support these companies even in sort of the most impacted sectors right, but they want sort of a short window to assess the situation and environment and how quickly the bars will recover before just.
He decided to cut a check and figure out what the long term solution is so you know right now the I'm cautiously encouraged by the conversations we're having would be sponsors and I think the right point is that a good 30% of the only 30% of them are actually payment related.
Okay. That's actually helpful. And then if we look at the slide on the with the updated Cove at 19 exposures can you walk us through what reviews. We've now done on those portfolios that now that you've had more time to assess the risk there how do you think about risk and those buckets. Thanks.
Sure. So when you take that one directly.
And so you're talking specifically about the SEC theirs or yeah, Okay slide that calls out restaurant hotel leisure et cetera, yes, well that was impacted sectors.
Okay.
The regular review around these sectors is I'll call. It significant right. We have on normal course review of problem assets. We've had separate special reviews, focusing on just yes, things like restaurants travel and leisure hotel and multiple.
We required a an escalation of decision making modifications in on any deals that you know carry a certain risk rating, which in the past would've been done without coming into my level. So we've we've been very very proactive in looking at all these exposures and challenging ourselves.
To make sure we don't have any blind spots of future problems in these sectors and my most of my comments are around our larger structure businesses, which carried a higher exposure, but I will tell you that also on some of our smaller flow business. We've also taken approach on things like restaurants that you know if if you.
You over 50% of your revenue is gone as a result in a situation. We just got to treat to a downgrade who can't had the same level or have you and Gregor auto $200000 loans, we cannot at $20 million bone. So I feel really good about the weekly rhythm almost that we have on all these accounts and all the all the controls in place to make sure that we don't have white spots.
Yeah.
Okay.
That's helpful. And then if I could just said maybe at Stratoni, just say bank just a big picture question, what what you're seeing how lay offs impact. The contributions you know our employees that are still working still contributing like in the past I know we've talked about employers maybe looking at full replacement or you're seeing that that's how how's it going.
And in fact impacting that business. Thanks.
Yeah, Thanks, Steve I'd say that the.
We haven't seen a lot of impact from but furloughs and the way off so really not a big uptick in closed accounts, we have seen the I guess a slowdown in.
New accounts with existing employers so as as employers are kinda paused on hiring as we've gone through the pandemic and John spoke to the slowdown in our our spend levels that was a drop down to about 60%. We're currently in June we came back to about 80% and that.
Conversely is added I'm, a little bit of growth two or more growth to our deposit chosen folks aren't spending as much contribution levels have remained about the same and that's why we're seeing an up tick in growth on deposits are we really haven't seen much of an impact on the contribution level just really the spend levels.
I look to the rest of the year I think the the economy's still a in difficult <unk> spot.
The enrollments with new employers remain a little bit depressed.
You know you had a dip in our.
Pipeline as we went through March and April, but it came back really strong.
In June and a in July and we've had actually happens or whatever best sale season to ever in the large employer market. So is looking good for for one one too early to tell whether that's indicative of a you know some tailwinds coming in the Anders industry as a result of the impact on the economy. So we'll see how that unfolds we get into.
2021.
Okay.
Terrific. Thanks for taking my questions Steve Thanks.
Thank you. Our next question is coming from Collyn Gilbert of KBW. Please go ahead.
Thanks, Good morning, everyone.
Just a follow up first on Steve's question about HSH. That's had a you know with July one being obviously, a big enrollment period are there are you see any or any employers are they capable of doing it number one and number two are you seeing it whether extending enrollment periods.
Out by say quarter. So because of just you know the work at home environment, that's occurring or is there not a lot of flexibility and some of the way. These plans are structured that they can extend that July one enrollment period.
Yeah. Thanks, Collyn, we'd have not seen any changes in the the timing of enrollments and I don't anticipate seeing any changes to the to the point you made it a little inflexible. There. We thought we were seeing a pause and folks putting their benefit packages out to bid.
Because they were just so distracted with everything that was going on I'm just responding to the pandemic. However, that's just come back and I feel like we're.
Head of last years levels at this point in terms of bids in opportunities because of you know everything up that got pushed back a little bit.
Okay. Okay. That's helpful. And then just in terms of on potential M&A within within that the sector. You know are you guys see any other opportunities coming your way similar to what you have closing with state farm or how this current environment maybe has impacted.
You know portfolios in the sense that have that have come available for you in each that they space.
Yeah, I'll take a crack and then and then let Chad follow up I mean, I think we remain committed to looking at inorganic opportunities to grow this special business. So from our perspective. We're still is engaged I will tell you given the sort of you know overhang of the pandemic lower value perceived value of dips.
Positives and growth trajectory I think sellers are maybe more reluctant to engage in a transaction at this time. So you know I would sort of say the odds of us executing on a more inorganic opportunities are lower but our desire remains you know just as a significant as it was before.
Try to I don't know if you have a perspective there.
Yeah, the only thing I'd add to that John because I agree on a percent with everything we said is that there may be some players in this space, who are going to struggle with the lower interest rate environment. As you know you see it.
Sizeable decrease in revenue that might create some opportunity, but but otherwise I absolutely agree with everything.
Okay. Okay. That's helpful and then.
<unk> expense side, we think about this a little bit longer term.
You know.
Are there I know you guys had alluded to maybe at some point, if there's something you might be able to deal with the Boston franchise or just.
Let me give us an update on how you're seeing your branch network.
Infrastructure set up now and if there's areas where you think both in the near term and long term you can look to rationalize.
Sure.
Well I was pretty purposeful in my final comments there were no work, we've been working across the entire organization on things like automation on looking at whether or not our entire infrastructure and expense base is fully aligned with you know kind of our narrow targeted a growth opportunities in businesses and obviously our fifth.
Nicole footprint, both both office space and banking centers is something that we review as we talk about all the time and I do think that coming out of this pandemic gets really put a highlight on the fact that consumer.
Preferences are changing them, we can deliver more effectively digitally and there's less reliance on the banking centers. So I do think you'll expect to see us along with a lot of other players in the industry be a little bit more aggressive or reducing square footage, making sure that we still can deliver our products and services to our customers.
And what I'd say a to follow up on on my prepared remarks earlier is that we'll be able to quantify that a little bit more as we head into the third and fourth quarter for for the market.
Okay. That's helpful. And then just lastly, just on the on on the loan activity in the quarter and if you. If you covered this in some of the initial comments I apologize I missed it but I guess you know the declines that you saw a loan balances and maybe what your expectation is for for activity in the back half of a year.
Yes, sure I mean, it with a really interesting quarter actually we onboarded some great new customers one of the strengths and its fortunate in terms of the people how we've reflected risk one of the strange not sponsor business is is that you know our largest concentration is around technology infrastructure data centers fiber those kind of transactions, which are just actually benefiting.
From from the marketplace. So we've continued to on onboard.
Some really good credits one of my comments I did make earlier is that the non PPP reduction in commercial balances was entirely driven by line utilization. So repayment of defensive line draws along with a probably the biggest reduction I've ever seen or contraction in a b L utilization.
And given whats just going on with working capital. The actual stated numbers of originated dollars and pay offs. We're almost exactly in line in commercial banking with a year ago second quarter, which which is kinda remarkable when you think about the economic slowdown. So I think going forward now that was kind of balanced out the utilization.
You'll see you'll continue to see modest loan growth from us obviously, the economic environment impacts it but we have a decent pipeline as we head into the third quarter and you know we're open for business understanding that our underwriting criteria changes a bit with the overhang of a pandemic.
Okay, that's great I will leave it there thanks, Thanks Collyn.
Thank you. Our next question is coming from Mark Gibson of Piper Sandler. Please go ahead.
Good morning, everyone.
Morning, Mark right here.
Likewise.
Given the differences between states on the cobot shutdowns I'm curious or are the credit dynamics for business customers markedly different sort of across your footprint and could you maybe give us some color on that.
Yeah. That's that's a great question I you know I don't think there's sort of they are a systemic or what kind of repeatable or underwriting you know a change as we go throughout our footprint I do think.
Interesting dynamics, even with what's been happening lately, we've been seeing you know boosted real estate prices in Fairfield in Westchester because people are leaving the city. So what I'd say Mark is I think that when we're underwriting transactions. If you think about.
Small businesses, which is more volume driven I think we're looking out systemically for industries that may or may be more vulnerable to this economic landscape and the pandemic and some of that the dish shifts in geography.
As we get into the commercial bank underwriting works really you know credit by credit by credit I think we certainly take into consideration the dynamics in the geographies. So what you've seen in our branch footprint you know, our fourth, Massachusetts, Rhode Island, New York and Connecticut is.
Consistent sort of slow March to reopening and a little bit more activity and so we're seeing a little bit more loan activity I don't think theres a differentiation.
Between those four states I think those four states are doing pretty well there are areas you know our national restaurant restaurant franchise business. You know, we're not originating there now there's just too much variability and there's just a you know too much uncertainty as it relates to specific geographical challenges. So I can't really give you any trends.
We haven't seen it in credit performance in delinquencies and consumer we haven't had sort of hot spots and I hate to use that phrase because it particularly situation. We're in what we haven't seen kind of hot spots of poor credit performance in commercial or business banking based on geography, it's more sector driven.
Hey, John could I ask nothing short of what I would say if you're looking at our modification book and you look at those customers that are asking for a second round you know accommodations. If you will in within our business banking portfolio, we've had well over and over $100 million mature of the initial 350.
Yourself and only 15 million of that.
It's actually asked for a second round deferral and so I take that as cautious encouragement within our footprint. We're hearing from borrowers are you know look we're not quite sure how things are going to play out, but we've got some good liquidity and so we're comfortable resuming payments at this point. So you know ticked up what it's worth but I do view that as a slight.
Indication of some part of the positive trend.
Okay, Great and then just a follow up for Chad Chad I was curious if you think you still have room to push HSH deposit costs down even further or are we sort of bottoming out here at 15 basis points.
Yeah, I think that we've seen spend some more movement in the market were being really close attention to to what's going on across our competitors and I think we have room to move still.
So markets, but if I could add to that as they sort of 15 basis points for the quarter, but that's reflective of changes mid quarter. So you'll get a full quarter or that going into third quarter will probably be closer to 13 between 13 around 13 basis points.
Okay, and then Glenn I know, you're not giving guidance, but I wondered if you could help us think about some of the major moving parts on operating expenses in Threeq.
So John sort of touched on the operating expenses I I would think you know all things considered you would you would think it would probably be into 176 to 178 range somewhere around there.
Excluding any significant investments that we make.
And then just going forward, obviously I was a you know if you. If you think about guidance going forward alive, it's predicated on the PPP forgiveness, and and our thoughts on that I indicated 75% by year end, but you know, it's anyone's guess at 20% comes in the third quarter, 25%.
Thank you.
Thanks, a lot mark.
Thank you. Our next question is coming from David Chiaverini of Wedbush. Please go ahead.
Hi, Thanks, Good morning couple questions David.
So starting on credit a commercial real estate I see how 9% of it as shopping center in retail can you talk about how you're feeling about this portfolio and you know modification activity or deferral activity there.
Sure I'll give a quick overview and then let Jason a drive home. Some points you know I've always said when asked about the commercial real estate portfolio that Weve, you know being a sort of low risk low return business Bill Wrang that runs that business I always mentioned his name on earnings calls because I.
I think we deal with hot top notch sponsors and we have a very much of an institutional book My view is I feel comfortable given the debt service coverage ratios the sponsors and the LTV is where we are now.
But I would acknowledge you know as CEO one of the long term concerns I have is what happens with some of the commercial real estate sectors overtime with changing you know work dynamics with changing retail dynamics and so I really like where we are now both from a property type distribution and from an underwriting just.
Fusion and sponsor support perspective.
But I think if anything you know I mentioned earlier, you kind of have to wait and see how credit plays out with all of these macro variables I didn't commercial real estate is going to be the last one to kind of figure out what happens there just given some of that maybe the long term long term shifts Jason maybe you want to.
Address that questions more specifically, yeah, no happy to John and you mentioned sort of the the ratio than the metrics overall in that book, Yeah within commercial real estate, where we you have a lotta at weighted average 60% loan to value and you know sort of a one oneseven debt service coverage going into the environment, obviously that'll that'll season input.
I think the more important thing.
As you know, 72% about commercial real estate portfolio is non discretionary versus nondiscretionary anchoring anchored by pharmacy in retail and so we've seen a real difference in turn to rank in terms of rent collection rates in those sectors and so far we provided relatively modest accommodation.
Polio six loans about $70 million and exposure. So again I'm I'm never going to claim on this call that were out of the without anything just given the environment. So far our performance in that book has been relatively strong.
Great. Thanks for that and sticking with credit its good to see the provision down in the second quarter versus the first quarter, how should we think about provision for the second half of the year given all the uncertainty.
Yes, so I think with respect to see so you nailed it I mean, there is significant amount of uncertainty at this point and so we just continue we'll update our models will continue to look at the macroeconomic factors risk ratings loan modification trends.
As well as you know as we get further clarity on the impact the stimulus on the portfolio. So I think it's you know it's sort of hard to it's hard to give a a number go forward, but you know we will continue to monitor that.
Dave I mean, it's interesting right to simplify it as much as you can if the forward economic forecasts deteriorates that that leads to higher provision.
Risk rating trends within your portfolio, depending on which way they go impact it and then other sort of more qualitative borrower behaviors like.
Modifications and other things.
Got to factor in there. So those are the variables the high level variables and then of course throw in government stimulus and other you know customer behaviors and that's where we go. So you know this was a pretty simple one that's Glenn one through you know we had a we had a reduction in our forward outlook. We had some good news on modification or a activity.
And Ah you know we had some slight a downtick in our in our risk rating and we ended up where we are here and so those are the things that will give you some directional sense as to where we might be going forward.
Okay. Thanks for that and then on the net interest margin and clearly that is going to be a lot of noise in the near term you mentioned about the uncertainty around you know when the P. PD Lone Star forgive me, but we were at a fast forward to say you know the second quarter of 2021 or the third quarter 2021, if we were to assume.
Interest rates are flat or remaining very low here do you have a sense as to where the net interest margin could could be I'm sure. The p. Beattie sure within a range I mean, I I think if you look at one month LIBOR or we push that out at basically 18 basis points fed funds at 25 basis points and maybe a slight increase in it.
And your you know you can look at the impact of that in our slides, where the you know whether you you you think that that that rate's going to come down, but if I do all that.
And I look at our AR or asset growth I think you'd be modestly below where we are today.
And that's and you pretty much you pretty much bottom out at that separately.
But you're right about PPP I think over the next two quarters that that'll have create a lot of noise within a NIM as well as net interest income.
And just one quick one on each of say you mentioned about how the pipeline for RFP is heading into the 2021 season is picking up for June and July do you have a sense as to how that compares to the pipeline a year ago.
Chad you want to take that one.
Yeah, absolutely I would I'd make two comments on that one is the the pipeline is up modestly year over year, and we started out much stronger.
Down for a couple of months and then snapped back right back actually above prior levels, so little bit above last year. It's the win rate, that's really up significantly year over year in a large employers base because we're in a large employers selling season, right now which has been delayed a little bit as well.
Thanks very much.
Thank you.
Thank you. My next question is coming from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, good morning.
Jeremy.
Just I guess.
Circling back to the the provision the allowance and you know it looks like the Moody's model for July deteriorated, just a little bit incrementally versus June but you know if we if we assume that broadly the economic model doesn't change much and you start seeing actual loan level losses do you think that the the current allowance.
Yeah, I mean, right now Jared it's Glenn we think we 59, we have right now is adequate and it's reflective of loss content in our book in at it and it is you know as John just pointed out on that on the last question I mean, it is it as a matter of looking at risk ratings loan modifications and the macroeconomic forecast and you know and then on top of that the stimulus but.
A big are part of this is looking at the duration of the endemic and the impact to our customer whether it's a retail customer or commercial customer their liquidity profile. So that's something that sort of hard to give you a number but you know I think where we are at the end of the second quarter is reflective of what we see right now.
And and you know so that Moody's stays about where it is a than you. Then you have to look internally you have to look at your risk rating migration you have to look at liquidity on the on the customer basis.
And then mode at modification trends I'm. So there's others that those are the other factors that we'd look at.
Okay. Thanks, and then I guess, keeping without I guess, how were the trends in internal credit migration during the quarter and are all the modified loans automatically downgraded are put on watch list or how are you looking I guess internally yet.
Dealing with those credits.
I'll, let Jason take the second one Jared I mentioned earlier I, just with respect to internal risk rating migration that our weighted average risk rating deteriorated modestly in the quarter, but the interesting dynamic there was the vast majority I mean.
Almost all of it occurred within pass rating categories and so if you think about that if we're accurately risk rating, which we think we do on a regulators think we do.
Those are past rated credits that we would underwrite even at their slightly deteriorated level.
So you know that has an impact on pushing the provision slightly higher but as we said it wasn't a material shift because there wasn't a big inflow into criticized and classified assets and and the reason I mentioned to proactively in my remarks as I also want to market to understand that we're not hunting for.
Forward are kicking the can on risk identification and risk rating. So we're looking at our credits when information is provided to us and we're talking to all of our big commercial customers and we're making the appropriate assessments you know on a daily basis, where we can get information and we take those circumstances and make the right call.
Jason you want to talk specifically about what modification means with respect to risk rating yeah, No I'll just talk a little bit about our overall the problem tried so it's not an automatic downgrade if somebody is be modified it certainly depends on a number of factors, whether it's a payment modification or whether the temporary covenant modifications bridge to a broader solution as I mentioned before.
Youre right in our approach is really a course more forward. Looking then just looking at historical metric even at current environment. You know were specifically assessing whether the borrow has adequate liquidity liquidity to make it moves environment until revenue returns to reasonable levels and as we know overall liquidity liquidity has been enhanced by people.
He deferrals and in some industries advance payments in grants like in health care.
In our largest structure businesses, where are you having a lot of these conversations on meaningful risk ratings.
Getting cash flow projections that will really help influence our decision on on a rating and we're actively tracking the true liquidity on a weekly basis versus what the company's we're projecting into revenue associated with that in some of our smaller businesses were downgrading by by sector. So we'll continue to address.
Addressed and adjust our ratings as we get more borrowers specific information and obviously within the context of the overall economic environment, but you know it's not an automatic downgrade just because they've asked for or deferral.
Okay. That's great color. Thanks, and just finally from me Glenn you mentioned PPP forgiveness assumed to be 75% 2020, what's your total assumption for forgiveness out of the whole portfolio.
So over the life I'm, sorry over the life of the portfolio.
I think you know we go all the way through probably the end of the first quarter 2022. So it drops down if you think about it this way John you know say 20, 25% in Q3 and 50, 55% in Q4.
So that 75% of it right down in most of it sort of just trends down throughout 2021.
Well I guess, so assume like a 90% total forgiveness level yeah by the end. This by the end of 2021 of the that's a good number.
Okay. Thank you.
Sure.
[noise] [noise] next question is coming from Stephens.
RBC capital markets. Please go ahead.
Hey, good morning, guys, Hey, good morning, David.
Most of my question's been answered so just say a high level general question. The the Moody's economic forecasts that you guys I look at how do you in your experience how does that compare to what are you guys went through during the financial crisis.
Yes, it's it's hard to handicap as a different form of a economy a in that you had the sharp real sharp GDP. So you go from a negative GDP in Q1, and minus 33 and.
Likewise on unemployment and so it's sort of very steep and then a snap back in some respects that's exactly right I think it's interesting because obviously the banking the industry as a whole is doing a lot more stress testing that has a lot more capabilities to forecast now than when we went through this during the great recession, but what's interesting is I think.
Glenn hit the nail on the head you know, we're dealing with something here that difficult because there's a big exogenous shock right away and then there's a lot of uncertainty about the path of the recovery, whereas the financial crisis, just had a longer duration.
And it was you know kind of cumulative losses over time and and so.
So I think I think that's what I would say is that it's a different shape of economic forecast with a lot more uncertainty going forward as to the shape of the recovery and Steven I'd, just say look if you look at our worst performing four quarters in 2000 during the financial crisis 2009, and I think our loss content was like 167 basis points.
So you know that's that's just four quarters I mean, I think just as a reference point.
Right right I guess like the snap back that Moody's is forecasting I guess you know we're experiencing such dramatic numbers, you know going like a 40% drop and then you know that that 50% bounce off that that lower base do you ever you guys think.
The absolute level of economic activity matters at all.
What we're talking about such gigantic numbers.
But GDP level is it does that matter into a you know how businesses are run and how they performed going forward.
[laughter].
It's been great philosophical question, I actually think and I'll give you my editorial right I think that all of the <unk>. The whole Cecil framework is or is it you know reasonable modeled framework, but I think what you're getting out and our book our belief is there's a bit of a disconnect right now between the direct correlation on things like unemployment GDP show.
Okay. It's it's not immediately correlated you know and so what you have is we need to wait and see be could particularly with the government stimulus coming in and sort of muting a lot of the impacts I don't think that when you look at GDP or you look at the unemployment posted number that it's it's really reflective of what we're going to see where.
With respect to you know consumer.
Credit behaviors or what's going to have quite a bit whether a small business is going to make a decision. So if that's where you're going I think we need to wait and see how predictive. Some of these variables are going forward, particularly with the bounced back in the end the huge GDP decline you know in Twoq and Stephen I would just add I mean, it is gonna be as as we said a few.
[music] times now, it's it's more duration.
So you look at our numbers and you look at the PTP loans as a percent of total loans is pretty significant so even under that modification numbers that we talked about David modifications significant number had PPP rooms, they look at our consumers and their average D.A. accounts up a thousand dollars, 13%, so they're feeling pretty good or overdrafts are down right.
20, plus percent quarter over quarter, so that can't we know that can't last forever, but you know, it's a matter of looking out on duration, saying, how strong is the liquidity profile of our clients and it can they see either way through the other side of this.
That's what we're focused on that and again just an editorial if your management team. If you are our management team you are less focus on whether all of their well all of these variables are accurately correlated to performance and what the shape of the curve is you're just looking at all of the potential outcomes on the duration and making sure you're making smart decisions you know.
Will that will help you under a wide variety of central economic outcomes.
Great Great point guys are really appreciate thank you.
Hey, Steve.
Thank you. Our next question is coming from Matthew Breese that Stephen Please go ahead.
Good morning.
Hey, Matt how are you did a good just couple of quick ones. So you know it seems like there's a mix view from the industry on how long deferrals could extend and the idea of a long term deferrals emerged as becomes apparent there are parts of their businesses and parts of the economy that could be impacted want to 2021.
Do you think you have this type of flexibility and then practically speaking well you exercise it where should we expect after 180 days of deferral that you cut out a little bit there I think we got there just to the question and I'll give you a quick or thought and then handed over to Jason we were actually talking about this yesterday internally. So I think there's kind of a natural cadence given where we are.
Given the fact that people still view fundamentally that this is a temporary disruption that you'll have your original modifications. Jason gave you. Some indication that were surprised pleasantly that there's a lower number of people who are on modification asking for a second modification, but we're still under the cares Act we're still in a in a in a place we want to help our customers.
We were talking about what would happen if we sort of get into what we would call. It kind of the third wave of modifications and I think our view institutionally is that we really have to take a strong look to your point at what the underlying fundamental strength of the businesses are over the long term before we just blindly grant a third wave modification.
So I think what you'll see in the industry is.
After the first 90 days or second 90 days or 60 days or 60 days. However, the they're they're done a under the the carriers Act protection non TDR modifications I think you know not just because of the way we'll have to to account for them, but also because we really want to look and see whether or not some of these businesses are permanently impaired.
Or impacted I I think you won't see sort of just continued modification after modification as we go into the kind of the third wave if you will or anything to add on that Jason.
Yes I.
I think the only thing I would add is there's probably going to be a bifurcation between the types of businesses types of products right. I mean, if you're talking consumer small business going to Gary what did you have to start thinking about all right. This is permanently impaired and how should we be talking sort of loss mitigation type stuff at that point, whereas the let's just take on a commercial side in spot.
You're right you may have a situation, where we granted an additional waiver the sponsor in the second amendment agreed to put in a few million dollars because the lion share the revenue that they were expecting in the second half a year is gone you know take a accompany that puts on events in conference or that's just not going to happen as you're right and so they put a temporary mandate on but we all know.
No that in early 2020 more when they have their slate of events laid out there may be a third round, which is the broader solution with some equity maybe some incremental deferrals on payments and that's just the way it works more on the structured larger deals. So I think the answer is different depending on what.
Since you're talking about.
Understood. So practically speaking you have the option to carry deferrals well into 2021, but its case by case as to whether you will exercise it more moved to N.P.A. I think that's well said, okay. And then just a real quick one what was the PPP contribution to net interest income this quarter or or.
What was the all in PPP yield this quarter.
So the all in the contribution was somewhere around 6 million and the all in yield is probably around 272, and you got to be careful with that because it's not a full quarter yield right.
Understood what would it be on a full quarter.
So, it's probably closer to like a.
So if you think about this if you think about I said, our average balance or other PPP loans about 135000, the all in yield would be about 350 funding cost about 35, so you'd be around 315.
Thank you Okay. That's all I had I appreciate it thanks I appreciate it.
Yeah.
Thank you at this time I would like to turn the floor back over to Mr. ceiling for closing comments.
Thank you very much thanks, thank everyone for being with US This morning, and B, well and stay safe. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.
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