Q2 2020 CIT Group Inc Earnings Call
Good morning, and welcome to CRP second quarter 2020, <unk> earnings Conference call. My name is Rocco and I will be your operator today.
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I would now like turn the call over to Barbara Callahan <unk> Investor Relations. Please proceed ma'am.
Thank you Rocco.
Good morning, and welcome to see I teeth second quarter 2020, <unk> earnings conference call. Our call today will be hosted by Ellen Alemany chairwoman and CEO and John thought that our CFO also joining us for the Q and a discussion, it's our chief credit Officer Murcia Hardy.
This call we won't be referencing a presentation that is available on the Investor Relations section of our website at C.I.T. Dot com are forward looking statements disclosure and non-GAAP. Reconciliations are included in today's earnings materials and within our SBC filing. These cover our presentation materials prepared comments and the question and answer segment of today's call.
With that I'll now turn it over to Ellen Alemany.
Thanks, Barbara Good morning, everyone and thank you for joining the call.
The coated 19 pandemic has continued to affect the broader economy and that is carried over to our financial results in the second quarter, although to a lesser degree than we experienced in the first quarter.
As a result, we posted a net loss this period of 98 million or 99 cents per diluted common share.
Yes. He began this year in a position of strength, but the multiyear strategic transformation reinforcing our foundation and the completion of the recent acquisition, adding to our franchise capability.
That's right along with the agility and her team will help us to continue to navigate through this unprecedented time.
John will go into a detailed account of the drivers in the quarter, but some key factors and the performance were lower net finance revenue, primarily due to lower interest rates and holding elevated levels of liquidity during this turbulent period.
Lower factoring commissions due to retail store closures and 73 million net charge off related to a single factoring bankruptcy exposure.
We also continued to build our allowance for credit losses.
The substantial reserve builds on the first quarter the impact on our provision was much lower.
Despite these factors there were also pockets of strength in the quarter. Our average deposit cost declined by 27 basis point, and we were able to use some excess liquidity to repurchase 235 million of unsecured bank notes at a discount.
Our average loans and leases were up 2% from last quarter, which included defensive draws on results in March as well as new originations and stronger segments something commercial market.
Our capital and liquidity positions remain strong.
Our integration plan from the recent acquisition is on track and we are unlucky greater operating efficiencies than originally anticipated.
Our operations continued on abrupt and on the interrupted with all their branches remaining open at our customer operations running smoothly many in a remote model.
And we are proactively managing our credit risk through this dynamic Terry.
I want to spend some time on what we're saying in the business and how we're leveraging our stress in the current environment.
First and foremost see I teach business model is very diverse.
We operate across a variety of commercial segments and have deep industry, an asset class expertise to support those segments.
That is a tremendous advantage across market cycles enable us to pivot quickly take advantage of attractive opportunities and manage our exposure in areas that are more directly impacted by the current environment.
That's exactly what we've done for this pandemic, let me focus on a few of the opportunities first.
The power and renewables business has continued to be very active with virtually no disruption through the pandemic. It's the I.T. as a leader in the space ranking third in the league table.
We close to five deals where we were the leader coli since March we have another 10 lead deals in the pipeline for the second half.
Most recently, we announced $118 million deal for hundred 12 megawatt solar facility in North Carolina, which demonstrates the continued demand for renewable power.
In addition, we're seeing strong transaction activity in the technology media and Telecom Division.
Day at home guidelines have supported continued investment in telecom infrastructure cloud based data centers as well as additional streaming media content production and distribution.
Our capital equipment Finance Division had a record quarter as borrowers were looking to leverage their fixed assets, we were able to finance several investment grade and your investment grade farmers, given our deep asset class expertise.
There are good yields in this asset class and we were also able to opportunistically purchase small portfolios from larger things looking to manage public warrant limit.
Yes, he has a long history and the asset based lending business and this is an area, where we are expanding as we see some solid opportunities in the pipeline for the second half that align with our capabilities.
And on the business capital friends, we begin to see an uptick in applications and volume toward the end of the quarter at certain businesses started to recharge their operations.
As a result, our volumes in June were consistent with where they were a year ago.
In short we are seeing opportunities open up and our agility expertise and balance sheet strength have allowed us to capture those opportunities.
Credit of course does remain a challenge in this environment, but many of the qualities I mentioned that help us originate business also helped us manager risk.
Our size industry knowledge, it asset class expertise allow us to adapt quickly and proactively manage issues when they arise.
As soon as a pandemic began we implemented heighten monitoring and portfolio management practices.
That included a loan by loan review daily portfolio and industry reporting and redeployment of resources to help manage portfolios that are affected by the economic disruption.
We have granted relief across more than 10000 smaller ticket business capital loans and leases and about 200 commercial finance unrealistic contracts totaling about 2 billion in net investment come by and we are underwriting each larger ticket loan modification to ensure there was a pass to recovery.
We participated in the PPP program with the majority of customers accessing the program the community based small businesses and our branch footprint.
We also recently launched the main street lending program for a midsized clients.
We are staying disciplined to find new opportunities and assist our current customers through this period when possible.
Before I pass it to John I want to touch on some of our strategic initiatives.
The integration of our recent acquisition of the for former mutual of Omaha Bank is progressing nicely and remain on track for this year and ahead of schedule on operating efficiencies.
Despite all the complexity. The pandemic has brought the team is making great progress and bringing together the teams technology products and footprint.
The homeowner association deposit team is hitting their goals with the average age always a positive up 8% to 5.3 billion. This is great progress and was a key driver of the acquisition.
Continuing to build out this channel will give us even greater funding flexibility and at lower costs.
Likewise, the newly integrated Treasury and payment services team is bringing in additional commercial deposits from new and existing clients also at lower costs.
These average deposits are up 18% in the quarter to 3.9 billion with the cost down to 43 basis points.
Build out of these deposit channels complement our consumer deposits in the direct and branch channel and provide greater funding flexibility and diversity.
As part of our integration efforts. We also recently signed an agreement to sell the wealth management business that was part of the former mutual of Omaha Big product offering.
We conducted a strategic review the business, we determined it was not the right fit for our model. It's a very small transaction and it's more about C.I.T. focusing on areas of strength and divesting of activities that are not aligned to our strategy.
We expect the deal to close in the coming month, and we will provide additional detail at that time.
As I mentioned, we are unlocking synergies through the acquisition faster than anticipated and as a result will be realizing about 25 million a burden 2021 cost saves ahead of schedule this year.
[laughter].
In recent years C.I.T. has proven time and time again that we have a culture of performance and the fortitude to deliver on our commitment to continuously improve.
That's fair it remains through the Pandemics.
We understand the economic disruption is not behind us yet. However, we took prudent actions in the first half the year to anticipate the impact of this downturn based on the best available information.
Well the environment remains dynamic based on what we know today, we're cautiously optimistic for the second half the year and our ability to restore a modest level of profitability, assuming the macroeconomic environment does not deteriorate further.
With that I'll turn it to John.
Thank you own and good morning, everyone. As mentioned, we reported GAAP net loss of $98 million were 99 cents per diluted common share and a loss of $61 million was 62 cents per share excluding noteworthy items.
Our results this quarter continue to reflect the ongoing global endemic and low interest rates as we manage through the current environment.
Overall business activity slowed me earlier part of the quarter, but in June we began to see activity pick up in many sectors, where we have strong capabilities.
Assuming there is no significant change in the current or forecasted macro environment already expected credit performance of war portfolio.
We expect to return to profitability and generate modest positive earnings in both the third and fourth quarters of 2020.
Last quarter, we were proactive and our implementation of Cecil and appropriately added substantial reserves, reflecting the covert 19 environment.
Well this quarter's credit provision was considerably lower than in the prior quarter. It remained elevated as we continue to bolster reserves and incurred a $73 million charge related to the bankruptcy of a single factoring customer in the retail industry.
The factory loss was the result of unique circumstances directly related to the precipitous economic shutdown in store closures.
While we have reserved for additional charges in the retail industry, we do not anticipate another single customer loss of that magnitude or factoring business.
[noise] overall based on our forecasted view of the macro environment, we expect to provision to continue to moderate next quarter.
Easily subject to conditions, which remain fluid.
Our net finance revenue and margin were significantly impacted this quarter by lower market rates, primarily Lord of war, which reduced our floating rate loan yields. In addition, we had higher levels of excess cash primarily due to strong deposit growth, which we estimate reduced our margin by 30 basis points as it earned only about two.
10 basis points at the fed.
We took actions to offset some of this margin pressure by lowering our deposit costs throughout the quarter, particularly in our online channel, where we lowered our savings build a rate by 80 basis points to below 1% at quarter. It.
We utilize some of our excess cash to tender for our unsecured bank notes repurchasing $235 million at a discount recognizing a $15 million game and reducing interest expense by approximately $7 million annually.
Assuming LIBOR rates remain relatively constant we believe the margin has bottomed and we will see a 10 to 20 basis point improvement over the course of the third and fourth quarters as the benefits of lower deposit costs continued to be realized and we reduced our excess liquidity.
Other noninterest income was impacted this quarter by lower factoring commissions as volumes declined considerably due to retail store closures.
We also had lower gains on asset sales as we suspended some of our portfolio management activities.
Factory volumes improved in the first after July and we had been running at approximately 98% of 2019 levels as retailers replenish inventory.
While we expect factoring volumes and commissions to improve from the second quarter levels uncertainty around the back to school season may temper that improvement.
We're also seeing renewed opportunities to re sue selling pools of loans in our legacy consumer mortgage portfolio and would expect to complete the transaction if existing conditions continue to prevail.
We continue to look for opportunities to improve upon or operating efficiency.
This quarter, we took a restructuring charge of $37 million, primarily related to employee cost in contract terminations.
$15 million was already planned as part of the mutual of Omaha Bank merger and integration costs, while the other $22 million related to cost reduction initiatives that we expect to realize over the next 12 to 18 months.
We are lowering our full year 2020 operating expense target, excluding noteworthy items and intangible asset amortization by $25 million to approximately $1.185 billion. As we are realizing some of our 2021 cost savings ahead of schedule.
This reduction includes the acceleration of cost synergies related to the integration of mutual of Omaha bag as we bring to our two businesses together.
In addition, we're responding quickly to the current environment, which has allowed us to accelerate our plans for rationalize our footprint, including the optimization of former mutual of Omaha Bank branches and the streamlining of office locations.
We plan to reduce our occupancy by 500000 square feet, representing 30% of our total footprint.
These actions are expected to result in an impairment charge of approximately $15 million in the fourth quarter with an estimated payback period of 18 months or less.
We remain focused on continuous improvement and will provide an update to our 2020 operating expense target as we gain more clarity on the operating environment.
I will now provide some additional color on our operating trends and refer to our earnings presentation, starting with net finance revenue and margin on slide seven eight.
As I mentioned, the sharp decline in both net finance revenue and margin were primarily driven by lower market rates and a higher mix of cash.
Average LIBOR rapidly declined by running 100 basis points this quarter impacting margins by approximately 40 basis points as our floating rate loan yields declined.
About 60% of a floating rate loans have interest rate floors and since the downturn, we've been getting LIBOR floors of 75 to 100 basis points on most new commercial loan originations in commercial finance.
And seeing improvement in spreads in many of our industry verticals.
As I mentioned, the higher mix of cash coupled with lower rates also negatively impacted our margin by 30 basis points.
We expect some of this to reverse as we deploy excess liquidity and higher costs terms Cds wrote off.
Lower rail utilization of renewal rates as well as increased storage cost for cars, all fleece reduced margin by 10 basis points in the quarter.
The North American industry railcar fleet continues to be oversupplied with 32% of the fleet now in storage driven by the general slowdown in economic activity.
Well, our fleet is diverse and representative of the broader economy, many car types or reduction in utilization and pricing on new leases.
Our rail utilization declined approximately 300 basis points to 88% and lease renewals reprice down 30% this quarter, reflecting current market conditions and the mix of cars the came up for renewal.
In particular sand cars used in the space weighed heavily on repricing activity. This quarter walgreen cars plastic pellet covered hoppers and certain boxcars continue to renew at above average rates.
[noise] macro indicators in recent weeks are starting to show some real recovery from Covance 18, as many factories have resumed at least partial production late in the quarter and although still well below 2019 levels rail loadings have improved over the past few weeks from the Covidien 18 trough levels.
As the economy starts to recover and commodity prices drift higher we expect real utilization and pricing to improve although with a bit of a leg as excess capacity from cars in storage, what's still on lease will be brought online first.
With that background, assuming the forecasted macro environment, we anticipate a modest reduction in net real yields over the next two quarters as leases continue to reprice there.
We expect utilization to push back up into the low 90% area over the next few quarters and improved to the mid 90% area by the end of 2021.
We believe or young diverse fleet with more high load capacity cars are competitive advantages, resulting in higher demand for our railcars well sand cars used an empty space, particularly fracking are expected to continue to weigh on the recovery.
On the liability side to offset the impact of lower rates on our assets, we have been aggressively lowering deposit costs.
We improved our margin by 21 basis points in the quarter as CBS repriced, lower and we lowered our non maturity deposit rates across all deposit chose.
The biggest rate decline in the quarter was in our online channel, where we lowered our savings builder rate by 80 basis points ending the quarter below 1%.
We also grew average lower cost eight your way in commercial deposits by about $1 billion further contributing to lower deposit costs.
The age away deposit channel reached its highest level ever at $5.3 billion and growth in commercial deposits was driven by both new and existing commercial employees, while costs declined by about 20 basis points.
As Ellen indicated we are pleased with the progress, we're making expanding these channels and remain on pace to realize growth projections in the trade show.
As I indicated earlier, we expect the margins will improve over the course of the third and fourth quarter by 10 to 20 basis points as the full impact of the recent rate reductions are realized all with continued downward repricing for reduction in maturing Cds and growth of lower cost HR way commercial deposit channels.
In addition.
We continue to look for opportunities to reduce non maturity deposit rates, while balancing for liquidity needs.
Slide 12 provides more detail on average loans and leases by division.
Average loans leases grew by 2% this quarter, which includes the impact of increased defensive revolver draws in commercial finance at the end of March new business volume in key sectors, where we are seeing opportunities the current environment and a lower level of prepayments.
End of period balances declined as repayment of factoring invoices outpaced new factory volume and the defense a revolver draws in the last quarter were repaid.
While origination volumes were down reflecting the current environment. We continue to close deals for our clients that are seeing opportunities in certain industry verticals and equipment leasing lending, where we have strong weekly strong leadership as well as industry and asset class expertise.
New business activity and commercial finance was driven by key verticals, such as power in renewables and technology media and telecom, which included opportunities for capital markets and derivative fees.
As Ellen indicated we're also seeing good opportunities in the current environment within capital equipment Finance.
Overall pipelines and commercial finance or lower than last year, reflecting the business slowdown what we continue to see increased activity in the areas I just mentioned along with health care and asset based lending.
We're also seeing wider spreads and structural improvements including of LIBOR floors on new originations.
In business capital equipment Finance is taking market share is other small ticket equipment lenders have paused or exited the market.
We're also seeing increased demand and programs, where we partner with technology manufacturers to provide financing to their customers.
Small business solutions, we're taking a more focused approach and providing lending in industries less impacted by the covert baking pandemic, while pulling back from certain higher risk industries.
Overall business capital applications, which had slowed considerably earlier this quarter have seen a pickup in the past several weeks as June origination volume increase to June 2018 levels.
We remain cautiously optimistic for an increase in origination activity in the third quarter in select areas.
As Alan mentioned, we continue to work with our customers to provide payment deferrals for qualified customers impacted by the economic events brought upon like over 90.
As of the ended the quarter, we had granted relief will cross to about 1700 consumer customers with the carrying value of approximately $630 million.
We also granted about $1.4 billion in relief requests for over 200 commercial transactions across commercial finance and real estate fund is as well as $550 million, representing approximately 10000 smaller ticket equipment contracts in business capital and another $180 million.
Over 100 contracts in our small business administration business.
It is still early days as some of the first deferrals or just expiring, but so far the trends are relatively consistent with our expectations and we have been stay close with our customers.
As an example, we conducted a comprehensive calling campaign, making about 9000 outbound calls to our small business solutions customer over the quarter and continue to be in touch with them as a deferral period ends.
In our middle market loan book, we have not experienced a large second wave with deferrals.
But expect deferral request in third quarter as borrowers begin to refining their 12 to 18 months financial forecasts.
We are closely monitoring this activity and have provided some additional information on slide three of the presentation.
Overall, we think average loans and leases will be relatively flat next quarter, reflecting the lower end of period second quarter balances and as we continue to support our customers and folks so our originations activity on strong risk adjusted opportunities that play to our streets.
Slide 15 at 16 highlights our credit trends in provision.
Net charge offs increased significantly this quarter to $170 million apart from the one factor in customer bankruptcy of $73 million that I previously mentioned.
Net charge offs rural.
$87 million or 1.02% of loans about three quarters of which were already reserved for and therefore did not have a specific impact on our provision.
The retail sector had been facing headwinds prior to this current prices and we had been actively reducing exposure to troubled retailers prior to the onset of Kobe team.
The $73 million charge related to a single factoring bankruptcy was unanticipated and a direct result of the retail shutdown, which precipitated a voluntary bankruptcy.
While there were a number of retail bankruptcies this quarter with the exception of the one I just mentioned we did not have exposure to those names or we had previously exited or reduced our exposures to low levels prior to the bankruptcy.
We expect continued pressure in this industry and we are monitoring the developments in this sector closely and remain in constant contact with our customers and clients.
Our current factoring exposure in the retail sector is approximately $1.7 billion down considerably from $2.9 billion at the end of last quarter as collections have outpaced new factory volume driven by store closures brought on by the Kobin 18 pandemic.
In addition, only $250 million of receivables had extended terms at the end of June down from $900 million in April.
Our top 25 exposures include traditional retailers as well as well as well known online big box in discount retailers.
The top five customers, which are rated single eight to double play comprise a little over 40% of total factored retail exposure.
The next 10 largest exposures are between 25 to just under $50 million of which fiber investment grade with the largest being non investment grade.
After that the remaining customer base, comprising approximately $600 million exposure is very diversified across approximately 28000 accounts.
As I mentioned, so far July activity has been surprisingly strong as retailers look to restock depleted inventory levels.
We're also seeing strengthen the furniture sector and increased factory volume with discount retailers that said as second wave of covert day team, which could result in reduced traffic and or store closures remains a concern.
We have a robust approval and monitory framework in place to review customer exposures on a weekly and monthly basis, where appropriate we continue to implement risk mitigation actions and priced enhancements.
With respect to our credit reserves. This quarter, we established reserves of $58 million on individually Ll evaluated accounts and increased our collectively evaluated reserves by $107 million for on balance sheet exposures.
This quarter, we utilize the June baseline scenario from a provider well known in the industry that assumed the more be shape.
Recession and longer recovery than the March baseline scenarios that we have used to determine our credit provision in the first quarter.
We also applied a qualitative overlay for other factors that include macro uncertainty model uncertainty at sensitivity to changes in assumptions as well as additional risks to specific industries for portfolio segments, such as oil and gas factor as small ticket commercial loans.
As a result, our coverage ratio increased approximately 40 basis points to 3.5% our commercial banking lows.
30 basis points to 3.2% for totals.
Assuming no significant change in the outlook, we expect the provision to continue to moderate next quarter.
Non accrual loans increased significantly in the quarter, primarily driven by loans, the commercial finance and real estate finance.
As Ellen indicated we have put in place heightened monitoring to carefully watch specific industry trends and indicators of delinquencies.
In commercial finance real estate finance and rail we have conducted the loan by loan review identified higher risk exposures performed stressed analyses and prioritized our most vulnerable accounts.
We are monitoring revolver advances and bar relief requests for vulnerable borrowers on a daily basis.
We have also adjusted our underwriting to reflect the current environment.
We are individually underwriting each transaction request for modification in commercial finance and real estate finance and rail to ensure the borrower has a path to recovery.
We have restricted our underwriting and the most distressed industries and suspended auto decisioning in acute areas of risk.
We are staying disciplined in our pricing and structures, while continuing to evaluate opportunities that utilize our capital most efficiently.
We have updated our slides in the appendix for additional information on portions of our portfolio expected to be more impacted by the current environment.
Slide 17 highlights our liquidity position at quarter end.
Our liquidity remains robust at both the bank and the bank holding company.
During the quarter, we issued $500 million of unsecured debt at just 3.9% to 9% at the bank holding company in our next maturity is not until March of 2021 and as for the same amount with a coupon of 408.
At the bank, we increased our available borrowing capacity at the federal home loan Bank.
With the assets acquired for mutual of Omaha Bank substantially increasing our sources of contingent liquidity.
Turning to slide 18, our common equity tier one ratio advanced 30 basis points in the quarter and remains strong at 10% well in excess of the federal reserves minimal levels, including the capital conservation buffer.
The growth in the ratio this quarter was driven by the decline in the end of period loans and a mix shift to lower risk weighted assets, including cash in PPP loans, which have risk weightings of zero.
As the economy starts to recover in business activity improves we expect risk weighted assets to increase from the deployment of excess liquidity and a lower level of ERP flows.
We also expect positive earnings will offset the deployment of capital.
Over the next two quarters, assuming the current forecasted macro environment, we expect our common equity level to remain at north in the 9.8% to 10% range, depending on the mix of lower risk weighted assets and with that it will turn it back over to element.
Thanks, John as I've mentioned before the work we've done to transform CHP over the last few years has strengthened does.
Tested at best positioned us to navigate this period.
The business is diverse and adaptable.
Company is as strong as it's ever been and our deposit costs are declining.
Management team, a seasoned agile and resilient.
We sat with the considerable appropriate reserve in the first half to increase our allowance for credit losses and actively manage risk.
And we are heading.
Half cautiously optimistic but also mindful that this is a rapidly changing environment.
With that we're happy to take your question.
Thank you we will now begin the question answer session.
To ask a question in your press Star then one on your Touchtone phone.
Areas in the speaker phone, we ask you. Please pick up your handset pressing the keys. So majority. Your question. Please press Star then too.
Today's first question comes from Moshe Orenbuch with Credit Suisse. Please go ahead.
Great. Thanks.
Hi, John you talked about.
The the 10 to 20 basis points recovery in the margin I guess, given the cuts you made in deposit costs like I'm surprised that addition, bigger could you just talk a little bit about what we might see in Q3 in terms of fat in terms of trends in the in the margin and net interest income in dollars or net finance revenue dollars. Thanks.
Yes.
Yes, so moshe it's important to I think to have a perspective on when the cutting began its so I think very early in lift in the second quarter, we put our total in the water a little bit and we've had some very minor cuts across April because we're concerned about that will be significant.
Amounts of attrition as we've gone further and further we've realized that a lot of strategy that we built out in the non maturity portfolio in the online bank is actually taken a hole and across 13 weeks in the quarter, we've actually reduced rate 80 basis points across 10, plus and actually had consistent.
Growth across all 13 weeks, which is kind of interesting. So to answer. Your question. We expect that a lot of the benefit that will go through.
That we.
In terms of the cuts that we did in second quarter, we'll continue to play through into the third quarter and beyond separately. What I would say is is that we think that there is continued opportunity to drag pricing down even further, especially in the non maturity deposit space, but I think across the board we've done actually a pretty good job.
In terms of all of the deposit channels.
In terms of the broader question around net interest income.
The second quarter was pretty challenging I think it was clearly the bottom for us and.
You know just in terms of business volumes I think in my script, we talk about business capital kind of coming back on line, we're starting to see some.
So shoots Cup green shoots come out of the factory business through the first.
I want to say 17 days of July factory volumes were 97% of what they were last year business capital, which was down 30% in the first quarter actually hit.
What it had done in June of 2018, our business capital guys are now thinking that notwithstanding the impact the second quarter, we expect to get 90% of origination volumes and so the business feels like this transition and these are essentially use equipment in business capitals, our fastest growing business in terms of imaging technology.
Those systems.
As I said more runway and deposits. We think there we know that there are some deposit clips and Cds that will reprice down substantially.
It also lead to some run offs.
And I think the lower rates may push some of the excess liquidity out at the same time as business starts to Reinflate, hopefully it'll consumer some of the excess liquidity.
In terms of.
No I'm not going to give you dollar amounts in terms of what expectations are in the third and fourth quarter. It's obviously.
Incredibly fluid and as we've said these are modest levels of returns of profitability.
I think the last driver in the net finance margin in net interest income is obviously going to be around rail and so we've again started to see some green shoots in rail it and it got wax pretty good the second quarter.
But coming into June and.
In July, but we've seen in terms of rail loadings.
Thats actually started to go up and so we expect that utilization will continue to roll up we've seen the hopefully the worst in terms of storage freight and switching costs.
And.
Renewal rates notwithstanding the fact that utilization will increase renewal rates, where I think we're still forecasting to be down.
Around 20% until we see some of the larger North American.
[music].
Excess capacity utilization.
Maybe if I could just take us from a slightly different angle you had PPNR that was about $200 million in the fourth quarter down to 180 million in the first quarter, maybe 110 million or so this quarter.
That that would benefit from some of the things you talked about on the fee income side and expenses I mean.
I guess are you confident that number will be higher.
In the third quarter.
Yes, I am confident timing based on what we're seeing now look these are very fluid times and so at this nanosecond I feel pretty confident that the third quarters can be better as you start to look in non interest income as I said, we're seeing factoring volumes kind of ramp back up.
Rail sales in the second quarter were slightly diminished a little bit off of what our forecast was a 20, we expect will be on 20.
As some of the dislocation in that market of normalizes.
We completely suspended legacy consumer mortgage portfolio sales in the second quarter the pricing it just completely collapsed and we're not distressed sellers and so we just took a pause we expect that the activity that we didnt see in the second quarter will transition into the third quarter, you probably see a double size sale will comes with.
That is not only the gain on the disposition of the LCM portfolio, but also a provision release related to.
The growth of purchase accounting accretion securities gains should hold in in capital markets fees I think we'll.
Continue to kind of trend.
As the market starts to advance and then I think on expenses.
We're all over expenses, reducing our footprint by 30% and taking out.
Another body of heads.
We're very focused and so we're driving and another 25 right expenses this year.
On that six amount next year.
I would say business overall.
Inefficiently up in June I would say in commercial April and May were very slow, but we really started to see increased activity in here.
In certain industry verticals and business capital we had the same volumes in June as we had to last year.
And it's technology related mostly.
Lender finance and business capital.
So we think we're really well position.
Statements is right now.
And as John mentioned rail, we think we've seen that trial and Ralph.
Basically with the US China phase one trade agreements, we're seeing renewed activity in rail we had really large order.
We've seen the largest point.
Quarter from rail from China recently.
And we also think that the train one agreement it's going to.
Impact other markets like crude oil refine products and housing activity bounces driving some demand for lumber product.
So we're seeing some activity there.
Thanks very much.
Both.
Your next question today comes from earns forget a bridge with Citi. Please go ahead.
Thanks.
Net finance margin.
Thank you mentioned was with depressed from excess cash I think you said around 30 basis points.
How much of that will is being incorporated in the improvement of 10 to 20 basis points and.
I guess, how do you expect to deploy that cash over the coming quarters.
Well hopefully it'll does two things that are the principal dynamics. One is is that as we continue to reduce pricing on deposit products. You would expect to see some deposits attrite and I think thats. Okay. I think the other thing is that we've got some fairly high deposit cliffs that are actually coming in terms of Cds across.
The third quarter and so some of that will attrite.
What would be best is if we could actually put the deposits to work.
In the growth.
That we're seeing on the balance sheet as we kind of refer Reinflate I think the interesting thing about the whole deposit phenomenon as the list on this happened it happened during the financial crisis of.
Nobody 10, and if you look to surge deposits, which is I guess.
What they call it now.
The hoarding cash flight to quality exit of equities in money market funds delayed investments all that kind of activity.
That actually ran its course over four or five years and so hypothetically you know this could be something that we're living with for a long time, not just us, but all banks as cash continues to be trapped in the balance sheet.
I think what's different about vis financial crisis is this one's bacterial the last one was.
From a real financial crisis, and so as.
Vaccines, we start to live with this maybe it will be a little bit different.
But right now, we're sitting with $2 billion to $3 billion of excess liquidity and cash on the balance sheet and.
[music].
The expectation is it will start to moderate but it's anyone's guess as to how low it will take we will be aggressive in terms of lowering our rates and I think that that'll take care of some of the problem, but it might be a multi quarter issue.
For sure.
Okay.
And then.
In the on the payment deferral side.
Frankly, a little bit surprised that some of the deferral numbers are low just I guess for example, real estate finance I think there's only 5% of the total.
Compared to some of the other.
Statistics actually in from other banks.
It is and then I guess things.
Okay and grow that at the NPS rising.
What are the situations where you have.
Moving to NPK versus getting a deferral and what are those situations where.
So dire that you.
Can't seem to be able to even come up.
A plan from a deferral strategy.
All right. So you want to comment on that.
Yeah, I think there were three questions and then when we see if I can get them on the the low level of deferral.
I would say we took an early approach.
Two.
I don't know how different we are from others I've had some anecdotal feedback, but we were pretty.
Pretty cautious.
Granting deferrals for example on.
You can have a deferral for up to 180 days, we chose to do a 90 day deferral with that subsequent 90 days upon further information.
We also have a commercial book that have a lot of private equity.
Structures and that and in many cases on ball.
You know the operation of the company might it struck due to the pandemic no sponsor continues to have liquidity to support.
This is particularly from real estate finance to support those borrowers and so.
We chose not to automatically granted deferral or to push of the for all know situation, but rather to prop.
Investors to.
I try to follow that with some liquidity.
And that in particular is true and military opinion, which tends to be a more institutional book and therefore have more.
Yes, well heeled sponsorship behind.
With respect to NPK is we took the approach is that.
Yes, yes business.
Operation was in.
Shutdown or had significant disruption due to the pandemic. However, we felt that the.
Period.
Whenever and wherever that might be with going to be particularly extended.
And would result in that particular business not being restored.
It's for lack of a better term normal whatever that is saying that that we would handle that as we would normally handle.
I'll credit that was destroyed. So for example, you say if hospitality.
Property is close we feel that the hospitality industry has a long recovery ahead of it. That's also true for passenger Airlines for example, and in those cases and those those are two areas that drove.
Drove our NPS this quarter increase and gave us.
Okay. Thank you.
Sure.
And ladies and gentlemen, as a reminder.
The question. Please press Star then one at this time.
Next question comes from Vincent changes with Stephens. Please go ahead.
Hey, Thanks, good morning.
Two questions first one quick one on just how you're thinking about the dividend. So your capital levels have remained strong but I'm wondering.
Is there any changes to your thinking about the dividend level.
Just given that.
Yes, coverages them, though with the past few quarters.
I think it's a quarter to quarter exercise I think it's obviously a conversation we have with our board I think it's obviously a conversation that we have with our regulatory partners.
My view is that we're in a good place I think we've been very good stewards of capital. When you think about the mutual of Omaha Bank transaction well ahead of that transaction, we suspended share repurchases, we've always maintained a fairly modest dividend payout ratio.
To the extent that we believe that we're returning to modest level of profitability. It feels like the horses are out of the board we've kind of done.
Of this significant amount of reserving in the first quarter and took so our lumps in the first quarter augment that in the second quarter.
The impact on common equity tier one ratio is about seven basis points.
We have ample liquidity at the holding company liquidity at the bank and the principal driver of the first half financial performance has been provisioning, which essentially is a transfer of loss absorbency from capital to Hcl and if you actually want to get wonky about Ono for which is actually governance.
Our ability to pay dividends in the conversation we talk to the fed about it was written in 2009, when GAAP relied on incurred losses and less on the notion of the crystal ball is embedded in seasonal so.
There's a kind of very fundamental misalignment between supervision and regulation guidance established in 2009 safe gap.
Which accelerated loss recognition in an almost spontaneous way.
And so that's a challenge and I guess last couple of points and you said it is in our capital ratios are strong and above capital conservation buffers, and we've maintained a very robust capital planning process. So notwithstanding the fact that were not a C Corps bank, we're no longer seifi.
I'm not sure why we ever work, but we've maintained all of those protocols and I think our regulators understand and appreciate the fact that we've been throughout the babies and Bath water. We we've continued to operate with very heightened standards around capital and capital plan.
Okay, So long winded way of saying I'm pretty relaxed with it.
Okay. Good one is very helpful.
Yes.
Second question. So so again commentary your commentary on June is.
Very positive and.
Your baseline assumptions for V shaped recovery just wondering if you had maybe any updates.
From July so far if there's been any let up just from what we're kind of seeing in the news about maybe a second wave or some state shutting down to study.
Any updates from what you're seeing here. Thank you.
Yes.
The business Volume Act, we do monthly rate is with the the businesses and.
Most of that activity was.
At June reported that Tivity very very current.
And Marissa can you just comment on the credit side.
Thing in terms of now.
Good.
Yes no.
Obviously, we're watching.
Situation very closely.
Clearly at the end of March.
The economy was shot by a complete shutdown.
My opinion I don't think we're going to see wholesale nationwide shutdown again I just don't think its politically.
Steven yet however.
Local markets clearly.
Experiencing a variety of different strategies.
Probably the the.
Single on the pulse of that isn't our factoring business where.
Clients, who are typically wholesalers to local manufacturers.
I think orders pick up.
As retailing has has opened.
And we're still seeing factoring volume pretty strong in the month at the beginning in late July.
But it's obviously kind of too soon to tell whether we're going to see.
Significant.
Down.
Ordered for involuntary, meaning people, just don't show up and some of the bigger market.
No I don't see anything particular, that's changed in credit between June and July.
Great. Thank you very much.
Ladies and gentlemen. This concludes the question answer session I wouldn't turn the conference back over to emerge would seem pretty funnel.
Great. Thank you Alco and thank you everyone for joining this morning, you have any follow up questions. Please feel free to contact Investor Relations you can find our contact information along with other information on CAC FDIC Dot com. Thank you again for your time and have a great day.
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