Q2 2020 BankUnited Inc Earnings Call
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Thank you for standing by welcome to the Bankunited Inc. second quarter earnings Conference call. At this time, all participants are in listen only mode. After the speaker presentation. There will be a question answer session asking question during the session you'll need to press star one on your telephone. Please be advised the today's conference is being recorded do require any further assistance. Please press star.
I'd now like turn the conference over to your Speaker today, Susan Greenfield Corporate Secretary. Please go ahead man [noise].
Thank you Josh good morning, and thank you for joining us today on our second quarter results conference call on the call. This morning are rushing our chairman President and CEO Ledley, Lou NACHER, Chief Financial Officer, and Tom Cornish, Our Chief operating officer before we start I'd like to remind everyone that this call may contain.
Forward looking statements within the meaning of the private Securities Litigation Reform Act with 1995 that reflects the company current views with respect to among other things future events and financial performance.
Any forward looking statements made during this call are based on the historical performance of the company and its subsidiaries around the company's current plans estimates and expectations. The inclusion of the forward looking information should not be regardless of representation by the company, that's a future plans estimates or.
Patients contemplated by the company will be achieved such forward looking statements are subject to various risks and uncertainties and assumptions, including without limitation those relating to the company operations financial resolved financial condition business prospects growth strategy and liquidity.
He including this impacted by the Cobiz 19 pandemic. The company does not undertake any obligation to publicly update review any forward looking statements, whether as a result of new information future developments or otherwise.
Number of important factors could cause actual results to differ materially from those indicated by the forward looking statements.
Information on these factors can be found in the company's annual report on form 10-K for the year ended December 31st 2019, and any subsequent quarterly reports on form 10-Q or current report on form 8-K, which are available at the Fccs website Www Dot I see sedaka with.
I'd like to turn the call over to rush.
Thank you Susan a welcome everyone to earnings call. Thanks for giving up your time.
Let me make a few comments about the environment before we get into the quarter. You know three months make a big difference a this is not a traditional economic downturn, it's not caused by anything other than you know the virus.
It is still fairly serious situation, but we feel a lot better today than we did 90 days ago there've been some encouraging signs and the economy over the last three months, where that its employment data from me in June or retail sales are home sales and capital markets generally, but there was still a lot of uncertainty unemployment is still very high there are mixed signals about.
Certain sectors and see I read a the virus, obviously is still not paying and there are number of states that are reporting high levels, including Florida.
The impact of all of this them get further compounded by the fact that though we are 100 days away from election and the political.
Scenario in the country will make it even harder to do due to read what the economy is headed in the next hundred days and beyond but overall, we are much more optimistic today, but I would still say we are cautiously optimistic that'd be were.
Three months ago.
When all the started we started having board meetings.
Early on it was actually on a weekly basis to inform our board, but then eventually every two weeks and in one of the early board meetings. A question was brought up which I want to share with shareholders.
Which was about how are we going to deal with this crisis and but over the over the course of the next year or so and what's the what are the principles around which we will react to all this and three principles already laid on the table, which we have used and doing everything that we're doing the bank force.
Intellectual honesty with yourself, which is to say don't try and be overly optimistic and sale of this is okay. It'll all be fine so be intellectually honest with yourself second be transparent with all stakeholders that includes a force shareholders. But also includes our regulators rating agencies, even our customers our employees.
Be transparent provide more information than usual and don't try and hide anything heard.
The proactive.
Or or put differently going try to pick the came down the road because eventually going to have to deal with issues to be proactive and deal with them early get in front of the issue is thriving behind them. So we've used the three principles.
In all the decisions that you've made over the course of the last three I guess for months now.
And with that.
Let me quickly turn into what the earnings.
We're for the for the for the quarter, we've reported 76 and a half a million dollars of earnings this quarter 80 cents per share.
This compares to 81 cents per share last year. This time, a the annualized our OE and our way was 11.6% and 90 basis points, where our away.
We told you.
Last time, when we spoke to you that the PPNR will trend favorably. We told you that NIM will increase the cost of funds will decline will probably be the biggest decline in the history of the company. We told you operating expenses would trend downwards and all of those things that happened PPNR is up $37 million or 44% quarry.
We're over quarter.
Tenant that 40 37 million came from net interest income 15 came from non interest income and 12 came from expenses are less people got into the details of all that but overall across the board all lightens went the right way.
Unlike peers.
Mostly have reported declines in NIM, our NIM actually improved from 35 to 39 as we had.
Indicated.
Months ago.
Driven mostly because of cost of deposits total cost of deposits declined 56 basis points from last quarters. We went from 136 down to 80, I don't know slot bases us at the end of the quarter on June Thirtyth, our anyway, our deposits was already down to 65 basis points and into July. It continues to drop so next quarter you have.
We expect another drop.
In cost of deposits, maybe maybe not 56 basis points, but it will be a nice drop again and that trend. We expect that to continue into all of this year into early next year.
So they can also declined to $25.4 million.
From 125.4 million last quarter last year, we've got into all the details around provision and reserve, but at a high level.
No I would say that.
Our reserve build from the end of December so for that for the year, we have more than doubled our our reserve and they're now I think that was 130% increase we quickly yesterday looked at our peers have you looked at banks between kind of 100 billion to see just how much was our bill people have actually done them.
The average or the median was somewhere around 60%.
So this is what I'm, referring to in terms of getting in front of these issues and picking your medicine early which we did in the first quarter, which is what resulted in the loss that we posted last quarter.
Up quickly switching to some.
Balance sheet items noninterest DTA grew by $1.3 billion.
28% basically.
Not annualized just 28% quarter over quarter.
Now DDS stands at 23% of total deposits last quarter I think we were at 18% so very healthy trend.
Average non interest that India was up also by $944 million compared to last quarter interest, earning assets were also up for the quarter loans and leases grew by 656 million and securities portfolio grew by 819 million and again less the will get you a little more detail on that.
We also saw a very substantial recovery in the unrealized loss on securities in the second quarter. So if you remember the first quarter.
We had a 250 million dollar Mark a negative mark obviously on the securities portfolio and we had.
Talk about how that was recovering nicely and debt over the course of months, we expected to pull all of that back. We're happy to report every Claude most of it back we're down to only 2.6 million. So from negative to 52 negative 2.6, that's almost a 99% I'll come back in.
In a three month period.
It's still some unrealized losses in the CMBS since yellow asset class and there can be to get continuing to get better and where all this had been very.
Very comfortable with the portfolio.
Book value.
<unk> increased by $2.59 this quarter so.
Overall couldn't be happier with the performance capital our capital position remains robust our second ratios 12.2 at the Holdco in 13 for the bank.
Oh, yes, we did issue or $300 million in hopes of sub debt this quarter at 508.
And that helps our total capital.
Ratio, which now stands at 14.3%.
The dividend we in evaluating our dividends we are fortunate that two things to look at our capital adequacy and we look at our.
Medium term that meet our near term they'd be income earnings you feel good about both those things and so we paid out of 23 cents dividend.
In the second quarter and management at this time expects to recommend the same going forward.
A few remarks about credit.
And Tom and Leslie will get into it more DP more deeply but.
As we discussed with you know we've been very proactive in identifying the sub segments in the borrowers that flu.
Our estimation.
Be impacted by cold at 19 more than others. So that strategy has not changed.
Our ratios Npis Npls are basically flat.
Two prior quarter end.
Down marginally compared to December 31.
At June Thirtyth, NPL ratio was 60 basis points, but again, if you exclude the guaranteed portion of XP loans that was 47 basis points Npls were 86 basis points, but again, if we exclude the guarantee portion of SPD loans and 67 basis points.
The efforts, we've made to assist the borrowers with PPP loans and other deferrals are likely helping to mitigate and keep these numbers down.
Annualized charge off for the quarter was 20 basis points.
The majority of this was linked to one loan into franchise portfolio. This loan.
Has been had been showing weakness before cold.
But it got resolved or worked out in the middle of the pandemic.
They filed for bankruptcy just before I think was in February so just before the up endemic to off.
The worst time to work out alone, which limited our son, what cut solution. So that's actually a large part of the cargo from just step one loan.
As you know, we've been very accommodating and granting mega data for girls. We aside of can do that in the last week of March most of our deferral came in over.
Over a three week period from last week a margin. The first two weeks of April and then it really tapered off after that.
We initially granted deferrals on $3.6 billion in loans about 50% up our portfolio.
However, far fewer people are asking now for every deferral. So the request that we've received so far for Redifer old is only $748 million. So think of it and as you know early on.
50% of our portfolio of 3.6 billion elsewhere deferral and now when it comes time, because you want me to 900 deferrals, we did not do anything more than that so now that 90 days are expiring or have expired.
For a lot of these requests coming in at a much lower clip only 748 million or 3%. So that's a big drop and this is a very important number I want to stress on this because these are hard numbers. This is indicative of customer behavior and these are not our estimates or a model telling us anything this is actually.
What customers are doing so I see that at a very positive number of course if changes.
But.
Where we are.
At the end of July this is actually a very good place to be visibly deferral rate.
We did see an increase in special mention and substandard accruing loans, we did a deep dive into commercial portfolio. This quarter and we reached out to individual borrowers, especially those were we talked were impacted and.
Weve increased monitoring of the portfolio two totally different level something we could we have never done I never thought of doing the three months ago, but now we're monitoring this in a weekly basis monthly basis.
And we use all of this information to reverse the portfolio. So this increase I think of it as lagging the Cecil numbers because less seasonal is a essentially a modeling exercise, which we did at the end of March. This is a very manual exercise. This is literally you have to pick up along file.
Re that analyze make the judgment about the risk has gone up or not and then rebate.
So this happened over the course of the.
The quarter and in some ways, it's catching up to the reserve that we put up at the end of the last quarter.
So going forward strategy quickly.
This quarter, let's talk a little bit about this quarter.
Our safety and well, let's hope our employees as a primary the number one focus and I'm happy to say, if and when it's fine that happened in some cases of.
Cobot positives, but nobody's as seriously ill.
And the bank operationally is working just fine there are no issues on liquidity.
As a lot more focus around.
Around the entire system last year last quarter, but.
But I think the fed and everyone else has done a great job liquidity is not an issue at all anywhere.
I will be directed Muszaphar efforts this quarter towards PPP and and due to say that it was a herculean task in the month of vehicle would be an understatement.
We did do 3600 loans in a month.
Just thinking about it.
Even gets a price now even though we have achieved that it was an unbelievable task.
The.
Bu 2.0, which is a has been that ongoing initiative for the last year and a half continues to move forward as we told you last quarter we are.
Going to overshoot on the expense side and on the revenue side, there will be some delays simply because launching some of these new efforts new revenue efforts does it become a little hard when everybody is locked down and it's hard to get in front of new clients.
But in terms of expenses and think our target was 40 million. We're already at 47 and this will be still some more that will come and comes of revenue. Our numbers are still pretty good in terms of what you're shooting for $20 million, but the timing is delayed.
We are just to talk about some of the hiring at high level initiatives. We are launching the commercial credit card this quarter. The small business initiative that also proceeding.
We are going to launch automated underwriting platform later this year that was a little bit delayed.
And other initiatives include we did sign up a fee generating agreement with Goldman Sachs. This quarter, just a few days ago.
And also a.
Strategic shift in direction towards more treasury management enhancing those products.
It's all on track, we've also launched a new customer derivative program, which also will generate revenue on the commercial side. So overall very happy with where we are let me turn it over to Tom will then walk you through and a little more detail loans deposits credit and so on Tom Gray Raj. Thank you so just to Apple.
Some of the comments Roger made earlier excellent quarter overall for deposit growth total deposits were up 1.1 billion for the quarter.
As Roger mentioned not interested.
We grew by $1.3 billion looking into those numbers a little bit while it's difficult to be exact about this as we finished the quarter. We estimated that we had somewhere between 400.
$600 million of noninterest DTA.
On the balance sheet that was related to the PPP loan proceeds.
We're still residing in the operating accounts.
Clients remember, we funded a little bit over $800 million, so while that was.
Part of the growth, we still saw strong overall growth and then ITDA across all geographies in business lines.
That's a good portion of our deposit growth this quarter actually came from new client relationships. We had over 700 do business relationships generated over the quarter and remember that this was a very different quarter for us in terms of generating.
Business in a remote environment, we're learning how to do that and I think we did a really great job and we had close to $500 million in deposit growth that came out of those 700 business relationships are dead. Each each line of business contributed to that significantly.
With this growth in our liquidity position, we're able to pull that some higher cost deposits runoff during the quarter total time deposits actually declined by $811 million in the quarter as we've reduced our CD rates, we do believe that some of that money moved into the money market product.
As Ross mentioned, we continue to very systematically reduce our deposit costs.
Spot rate on total deposits declined by 47 basis points for the quarter to 77 basis points year to date is still there are 2.3 billion of Cds that have not yet repriced since the last fed rate card with a weighted average rate of 1.9 months or you can see from that we still have.
Opportunities as we renew or Cds at substantially lower rates.
Loan growth, which started about loan growth just a bit loan growth primarily was concentrated.
The PPP loans in the mortgage warehousing area, we had $827 million of growth and PPP and $308 million in mortgage warehouse RCM business was down by $317 million.
Quarter, mostly due to lower than normal.
Production and also we have seen fairly substantial reductions in line utilization as we got into the second quarter.
Well below what we saw pretty covert sort of.
Line utilization numbers and most other categories experienced either marginal increases or declines for the quarter. Those are really the three big.
Change items for the quarter from a PPP perspective, as Rob said, we did over 3500 loans totaling 876 million.
Almost all of these loans were made to existing clients at the bank and we were able to accommodate all existing customers are came to us for PPP alone. So that was a particular source of pride for us as the quarter, making sure that we took care of our clients.
Our average loan size was $245000 as of today, we have not yet started started processes for forgiveness applications, yet, but we expect.
To do that starting shortly.
Just a few comments on growth and short term growth opportunities from a strategy perspective, obviously the first half for Q2 was focused on on PPP loans as Raj mentioned, there was a herculean effort to essentially do 3500 loans over a couple.
In a week period of time.
But we also saw good growth in the mortgage warehouse and some opportunities existing or the residential side pretty much everywhere else. We're taking a cautious stance. We're focused on the existing client base right now and I would I would deem our overall current strategy to be strategically selective.
We do have a number of clients that were looking at increasing credit facilities, where they have resilient business models and are actually seeing growth.
Revenue, we're also starting to see some M&A opportunities within our client base evaluations that are pretty attractive to what we're seeing them on a historic basis. So we do expect to see some opportunities there.
And we're looking at new client businesses with companies that have strong financial conditions and operating performance industry segments that are part of our longer term strategic growth plan. So we've identified some areas even prior to covert where we wanted to grow the portfolio and we're still looking for new opportunities there beyond that were being we're being.
Cautious at this time until we can see some longer term.
Stability in the economy, and the trajectory of where the healthcare crisis is going in the markets, particularly that we're in.
It's likely overall, excluding any forgiveness activity with PPP, which we think will be more of a Q4 Q1 2021 type of event. There, we'll see the loan portfolio down just slightly for for Q3.
We continue to see opportunities to onboard new deposit relationships across all business lines, our pipelines from all of our teams and our Treasury management businesses is very strong we're seeing movement of.
Relationships to the bank and very significant numbers, we expect deposit growth in Q3, again, but probably not to the extent we saw this quarter. Our emphasis continues to be on creating for banking relationships that include non interest DTA.
So a shift from that a little bit and talk about loans on the deferral basis.
Slide 21 of the supplemental deck provides more detail around this as well.
Again too.
The size were Raj said.
Deferral rate has dropped significantly from the initial deferral rate that we saw so we look at different parts of the portfolio in the commercial portfolio, we granted 90 day deferral loans.
For the first time totaling $3 billion, which represented about 17% of the total commercial book.
This point, we've received second deferral request on loans totaling only 696 million or 4% of the commercial book through July 17, So thats, a very strong and promising reduction and the level of second deferrals that we've seen.
Our initial deferral requests for mostly heavily concentrated in decree book were 29% initial deferral rate that franchise finance with an initial 74% deferral rate the read deferral rate in those segments are now as of as of the 70 down to 6% for.
For the create portfolio were 25% for franchise.
Decree initial deferrals were mostly concentrated in the hotel and retail property types are again, a substantial improvement and both of those numbers.
I also want to emphasize that the reader for already.
The Cnine portfolio was only 1% of the portfolio. So that was not large to begin with it it's it's.
That's very very minimal at this point, so and each of these cases also when we look at.
The deferrals.
The initial deferrals, we basically gave fairly readily these for the most part we're looking at improving our collateral position.
Guarantees or other credit enhancements that we're looking at as we're going forward through the second level of deferrals.
The substantial majority of the initial referrals were processed in late March or April. So have recently reached are coming to the 90 days.
More second deferral requests may still calm and Theres, obviously, some changes going on in different parts of the economy. We think we've probably received.
Most or all of them at this point do first time deferral requests trailed off materially after April and it really been pretty negligible such during the first.
Switching to the residential portfolio.
We granted approximately 594 million an initial 90 day deferrals, excluding the journey may early buyout portfolio that represented about 13% of the overall portfolio.
These 42% or 252 million of actually continued to make payments during the deferral period 52 million or 1% of the portfolio had been deferred for another 90 days other either by request or automatically by operations of the new regulations.
Trying to give you a little data on rent collections, particularly within the create portfolio in terms of what we're seeing and this is this will take you through June it's not 100% of the portfolio, but it's representative of a very.
Large percentage that we are reaching out to read collecting this data. So if you go by product category.
And the office.
Segment, Florida's collection rates were in the 80% range.
Range, New York was in the seventies.
Multifamily at Florida was into nineties.
Mark was in the eighties.
Retail overall average were 62% little bit more dispersion of the mean and the retail area, depending upon the product and where it is but 62% was the average generally higher in Florida and in our warehouse and industrial segment really minimal collection.
On rates and then.
And the 90% range.
I will talk a little bit about hotel occupancy in the hotel market right now substantially all hotel properties in both Florida, and New York are open Theres, a couple of still close but the majority are open Florida expected occupancy for June for July I mean, we're seeing ranges from third.
8% to close to 60% trending up since April square averaged about 20%.
Having seen a number of occupancy around holidays weekends.
Where numbers have been higher than that.
Summer season in Florida does tend to be at a slower season. So we're tracking that carefully to see how occupancy moves up as the is the fall and winter season start to come into play.
But this is an area that will be will be challenged and this is one area, where we expect to see some restructuring this longer than the typical 90 day deferral. We don't have any collection, we don't have any occupancy data for New York. Yet. This hotels are just really opened up recently, our largest turnovers up tomorrow as a matter of fact.
What's kind of all time on the franchise side.
Franchise restaurant fairly wide range performance, there, but some good news overall.
It really is based kind of off more on operating model to the extent your open in having established drive thru and delivery model results have been pretty favorable in many cases, we've actually seen year to year increases in same store sales revenue for the April may timeframe.
Full dine in concepts, which is a much smaller portion of our portfolio as struggle.
No that that is a tougher recovery from it all in dying type concept.
But in all cases, where we have data may results.
All showed an improvement over April results and while trends are still looking better it's a bit it's a bit early to see but the second level of deferral requests to drop dramatically in that portfolio as well.
Fitness as another portion of what's in our franchise business.
Stores are beginning to open up.
And many of the markets that we lend to so it's still a little bit early to state that but overall the re deferral rate in franchises seven has 25% compared to the original 74% for.
For the first level of deferrals, so we're seeing much better performance.
And we going to be able to vote for at that point, 25%.
And just really excellent. So we'll turn it over to less laid out to get into a little more detail on c. So on the quarterly results.
Good morning, everybody and before I dive in I'm, just going to where we're not really doing a walk through with our deck today with you bet. We did put a supplemental deck out there for you that update a lot of the information that we've given you at the end of the first quarter. So is there for.
Reference and so now diving into Cecil when the allowance for credit losses.
There are a lot of moving parts to the reverse reserve estimates for the quarter and I'll try to walk you through to more significant one.
For your later reading pleasure slide 15 in our supplemental deck walk through the changes to the reserve by major portfolio segment.
You can look there's I'm talking if you want here, but let me speak first to the economic forecast assumptions.
So the loss estimate is impacted by the economic.
By economic factors into different way one is it takes into account economic conditions as they existed at the balance sheet day, which were significantly worse at June thirtyth compare to the model input at the prior quarter end.
The second ways the forward path of the economic forecast, which was in some respects worse and others better compared to the March 34 first forecasting one thing to note here is that at June Thirtyth. Unlike at March 31st the worst point of the forecasted trajectory the economy with behind Us clarity.
At March 31st it was in front of that.
To give you a few high level.
Data points that forecast for this quarter incorporated unemployment starting at 13.4%.
Climbing to 9% by the end of 2020 and to 7% by the end to 2021.
Annualized GDP growth started at a negative 27% recovered pretty significantly in Q3, and ultimately returned to pre recession levels by 2023.
The VIX trailing average start started this quarter 32, it stays elevated 320 20 and moderate from there although it remains pretty choppy throughout the forecast horizon.
S&P 500 started at about 2900.
Clients to about 2700 at the end of 2020 and in 2021 over 3000 again kind of choppy.
This quarter with a tale of three cities so to speak with respect to the reserve.
At a high level, we used three different models to estimate expected losses, and we do that at the loan level.
We used one model for residential one for Cree and yet the third one for Cnine and each of those models works, a little differently and has greater sensitivity to different economic variables and factors and I'm looking now at slide 15, if you want to go there if not.
Listen and you can look later.
So let's start with the easy one residential there wasnt a material change in the level of residential reserves this quarter.
Residential model is sensitive to HP, which actually improved in the GM forecast compared to the March forecast. The model. It also pretty sensitive to unemployment, which was worse in the June forecast. So those factors moved the opposite direction.
And update you expect a prepayment speed also reduced the residential reserve margin way this quarter.
In the aggregate for the pre portfolio.
There have increased from 57 basis points at March 31st% to 1.54% at June Thirtyth.
The Cree model is highly sensitive to unemployment as well as to commercial property forecast by property type and geography, both of those deteriorated from the prior quarters forecast in terms of the starting point and the forecast a trajectory.
As a result, the economic forecast increase to the Crane reserve by $48 million this quarter.
Additionally, we applied a qualitative factor at $24 million, increasing the reserve based on data collected from individual borrowers that reflected a deterioration in current revenue levels or financial condition as compared to the most recent financial statements that warehouse in the model.
We collected this information from a substantial representative sample and borrowers and we extrapolated to resolve across the relevant population and coming up with the qualitative factor.
In contrast, the reserve on the see an eye portfolio declined from 2% to 1.38% this quarter.
C. III model is very sensitive to changes in the volatility index and to the S&P 500.
While it's also sensitive done employment. This model is less sensitive to unemployment in the three model.
And while the starting point of all of these variables was worse at June Thirtyth and at March 31st before it passes the VIX and the S&P 500 actually improved.
In the June forecast compared to the March forecast as did expectations for credit spreads so that offset the deterioration in unemployment.
Similar to the Cree portfolio, we may qualitative adjustments, increasing the commercial reserve based on data collected from a representative sample of our borrowers.
One other thing that affected the commercial reserve this quarter at 331, we made an assumption with respect to prepayment effectively assuming zero prepayments for a period of time sitting at March 31st our thought process of kind of no one kind of pre pay alone in the middle of a pandemic. So we set prepayments to zero.
While undersea sell the reader is very sensitive to prepayment expectations irrespective.
This is at the state of the economy, because it's a lifetime reserve estimate.
Net zero prepayment assumption turned out to be very inconsistent with our actual experience for the second quarter prepayments for the quarter actually picked up from our historical averages. So we removed that zero prepayment assumptions.
For the quarter and that did have the impact of bringing the reserve downside, particularly in the CIA segment that affect at all segments, but the scene I segment was much more sensitive to or much more impacted by it.
The franchise portfolio continues to carry the highest reserve level at 3.12% followed by Cree and then see Eni.
The franchise reserving a little bit down this quarter as a percentage of alone, but thats, mainly because of the large charge off that rash refer to that we have reduced the reserve this quarter.
These relative reserve levels higher in franchise inquiry than lower occupancy and I are consistent with our deferral rates are read deferral rate and our other observations about relative levels of stress being limited and those different portfolio segment.
I would also like to point out that at June Thirtyth, Our reserve was sitting at 60% of 2020, the fast severely adverse losses.
And under stress, our capital ratios remain comfortably above well capitalized level.
As to expectations about the pre provision in the reserve going forward.
[music].
There are a couple of things that could lead to additional reserve build other than new production line would be it the overall economic outlook deteriorates materially.
From what our current forecast would suggest.
The main cattle, if we can see to that happened is some sort of return to widespread shutdowns or loss of confidence related to spread of the virus.
Serve levels at June Thirtyth art predicated on an expectation of a widespread returned to shut down for the economy.
As we could also have some more granular borrower specific or sub segment specific.
Digital Bill.
Response of individual borrowers to the pandemic differ from Patrick our current expectations or what our model currently protecting.
But outside of significant deterioration economy, I wouldn't expect material reserve build any of these things could also in theory than the other direction.
Next I'd like to give you a little bit of color around risk rating migration garrison slides in the deck on this let me start by restating the guiding principle that Ross called out.
When it comes to risk rating, we call. It the way it is and we attempt to be both proactive and objective.
We started the downgrade process early we called out any weaknesses that we saw we believe that calling it what it is and recognizing an increase in risk when we see it is the only way to do this.
I think it's difficult to.
Conclude that given the current state of things with the pandemic that credit risk has not increased and we believe our risk rating methodology reflects that.
Peering risk ratings from bank of bank can be pretty difficult, particularly in this environment. Because every bank takes a different approach to this we know there are some banks that have decided to wait to rerisk like their portfolio for example until all their deferral periods are over.
But that's not the approach we decided to take another thing I'd like to say real quick about risk weight ratings in relation to the reserve, we believe that the risk rating distribution of our portfolio.
Reflective of where our reserve sat at 331 in effect, our risk rating process, it's kind of catching up this quarter with our reserve.
Having said that to get into some of the detail total special mentioned loans increased significantly from $288 million to 1.3 billion during the quarter.
The segments, where we saw them a significant increase where those where we expected to see it pretty retail and hotel within C and I, we thought in the cruise line credit in retail trade food services and also we saw in franchise finance.
Yes, Cree increases special mentioned with $527 million most of that was in retail at 168 and hotel at 270.
C and I, we saw an increase in special mention of 329.
We saw that as I said, mostly in the cruise lines retail trade and services franchise. It went up $147 million not unexpectedly.
We consider special mentioned ratings to be a transitional rating for loans that have potential weaknesses that could result in deterioration of repayment prospects at some future date, if not checked our corrected.
Total substandard accruing loans increased from 239 million to $561 million. This quarter again the segments with the largest increases were Cree, primarily hotel in retail and within Cninety. The most significant increase related to a couple of borrowers who supply or operate airport shops are concessions, which.
For six months ago looks like the great business.
[music].
Let me shift now and talk for a minute about the NIM.
The NIM increased by four basis points this quarter from.
To 35 to 239 to get into the components of that the yield on interest, earning assets declined by 44 basis points.
Reflecting a decline of 47 basis points in the yield on loans and a 33 basis point decline in the yield on investment securities.
Reset of the coupon on floaters with the most impactful contributor to the declines in yields on securities.
And overall the decline in asset yields, resulting from declines and benchmark rate, including turnover in the portfolio at lower prevailing right.
The cost of interest bearing liabilities declined by 60 basis points quarter over quarter with the cost of interest bearing deposits down by 65 basis points in the cost of borrowings down by 54 basis points.
Our expectation currently is for the NIM to be relatively stable for the third quarter, we believe both deposit costs and the yield on interest, earning assets will decline further but on balance the NIM will remain stable.
We don't expect to see much recognition of fees from ppb PPP forgiveness.
In the third quarter, we don't really expect to see that start to happen before Q4.
So specific items that impacted non interest income and non interest expense securities gains were $6.8 million this quarter compared to a loss of $3.5 million last quarter last quarter. If you recall, we had an unrealized loss of $5 million on marketable equity securities that ran through the piano this quarter that component was again.
One of 1.1 million.
Other securities gains arose from our just our ongoing management and positioning in the portfolio.
Deposit service charges declined a little bit compared to the preceding quarter in the comparable quarter of the prior year there was some forgiveness.
Service charges this quarter related to co bid and there was also just lower volume of activity in some fee areas. This quarter, which we believe is related to the pandemic as well.
Employee compensation and benefits decreased by $10 million compared to the immediately preceding quarter some of that a seasonal payroll taxes far away for when take contributions and HSH seating are always elevated in the first quarter and additionally, variable compensation costs were lower this quarter reflective of lower levels of production and hurt.
Things, resulting from the pandemic, probably a more valid comparison, because there's a lot of quarter over quarter noise is the six months ended June thirtyth 2020, compared to the prior year, where we saw common comp and benefits decreased by $14.7 million, we're really starting to see here the impact of all of our bank United 2.0 expense initiative.
[music].
Noninterest expense for the quarter does include $1.5 million a cost related directly to the pandemic that could be everything from equipment to facilitate people working from home to some costs, we incurred standing up our PPP program.
Supplies equipping branches things like that there will probably be a little bit more this to calm.
Our expectation is that operating expenses will be relatively flat for Q3 compared to Q2.
And with that I'm going to turn it over to arrive for some closing comments.
Thank you lastly, the problem with transparency and providing you a lot of information is on these calls stay forever. So.
So valuable taking so much a bit high but we'll open it up for QNX.
Thank you as a reminder to ask a question you need to press star one and telephone to withdraw your question first about Keith Please stand by probably tuning roster.
First question comes from.
Stephen Scouten Hypersound you May proceed with your question.
Yeah. Good morning. Thanks.
Right.
I'm curious maybe first on the expense run rate I mean are really impressive quarter over quarter change there I know your guidance kind of.
Previously, which you know obviously no one can be too specific but was just for expenses to be down year over year. So wondering if you could dig deeper into the salaries migrations and what really caused that if it was ft reduction door or more just the things you noted in the release and then just lastly, if there was a fas 91 impact within salaries as well.
Yes, so I think the salary reduction the most significant component of that Stephen is in fact, FTD reductions year over year.
Theres, a little bit of an element of that as I mentioned in my remarks, this reduced variable compensation as to the Fas 91. If you look at Q2 compared to Q1, yes, there were a little bit more Fas 91 cost deferred and Q2, because the PTP. However year over year that actually went the other way that was significantly more Fas 91.
Deferrals in 19, and 20 because loan growth was higher in 19.
I don't have I'm, sorry, I would have those exact numbers in front of but that's okay that yet know that thats really helpful. Okay, and maybe just the one other question really I have it. So you guys gave a ton of detail on the migrations in the movements in the loan loss reserve, which is extremely helpful. But I guess, maybe generically how would you respond to the.
Maybe a feeling is somebody looked at your reserve on a standalone basis call. It the 127 without the PPP in the mortgage warehouse that on an absolute basis may look below peers would you just kind of highlight I guess all that you already said and say that leave the the risk rating changes or are the lagging indicator or or how can you maybe frame for us.
I think you take into account the portfolio mix. So when you compare bank data bank. The there's often a very big difference in portfolio mix, we have a big revenue portfolio we have.
Other large portfolios that are not really impacted by this so.
Municipal portfolio. It is there's hardly reserve against that's a billion and a half so.
If you normalize for those things then you will.
That explains that.
More than anything else. We've always said our portfolio was never really created for high yielding owns doesn't have the high yield component in other words doesn't have the high risk components, which is why.
You know you see that difference if he had you know a couple ability now the construction loans or some other leverage loans a couple of billion on that you'll see a much higher reserve.
Yes, I would echo that I think it's largely reflective of what we believed to be the quality of the portfolio and Stephen Yes, I do think the risk rating.
Migration is a lagging indicator I think the risk rating distribution at 630 is much more reflective of where the rates I think the reserve at 331 quarter ago is more reflective of the current risk rating distribution than of the risk rating distribution at that date, it's kind of catching up.
Okay, I make a lot a sense. Thanks for all the color guys appreciate it.
Thank you. Your next question comes from Brady gave me with.
KBW Sir you May proceed with your question.
Hey, Thanks, Good morning, guys right.
So if you look at the banking at a 2.0 plan I mean clearly your your comment ahead of where you thought you'd be on the expense side I think you said.
You're already at 47 million versus I think the initial assessment was around $40 million how much how much better do you think you can do on the expense out it feels like the world is changing there's probably some more.
Our branches and maybe people.
There were planned back when people you was initially.
Okay.
Yes, but any we have not gone back and major leave read on the initiatives to say, okay. Let's take a second look at this end.
3.0 for for lack of about award we Havent done that because the last two three months have been.
Rather sort of alluded foot was tactically on everything PBB and everything else and we're doing in this environment, but we will take a look at it is as a business model changes as customer behavior changes.
If there is an opportunity to look for more stuff.
Branches of the simple example of that we are going to look at that but thats not going to happen in the next quarter or to those would be longer term because a decisions you make that a meaningful do take a year or to do really.
Not to analyze but due to operationalize Reg either side is one more banks, we did close if we decide today, you're not going to fee based back of that for at least a year if not longer.
Okay, and then looking at the cost of funds or the cost of deposits and it's nice reduction there, but you have the cost of deposits is still 80 basis points, which.
Feels like there's definitely room to move that we've got lower how low do you think you get the cost of deposits in this kind of zero interest rate environment.
Well, we're kind of showing you a little bit of what it's already looking like by telling you at June Thirtyth. It was down to 65 already right because it was 80 for the quarter, but the point in time at June 30 to 65, and it's already down from there in the first three weeks of July.
I think we bottomed out in the high 50 basis points last time federalism zero, we're pretty confident that we will go well past that now do we get it how do we bottomed out in the 40 for the Thirtyth, it's really hard to say.
What we're focused on is basically beginning in operating accounts and.
And that actually more than anything else more than it ended a highlight numbers, that's really little driver of long term value what having a lot of success PBT was again.
You know as people is that wants to go through it and but looking back at it was such a big gift and the reason was a big gift is a lot of big banks really really picked off their clients and that has given an opportunity for us to go in even though we didn't do that you loans, but if you were not treated well.
So bio bank in April.
And even if you got to PBB long eventually, but you have to go through a month of not knowing whether you'll get the money or not and not getting phone calls return that creates an opportunity for banks.
Like us.
And would already capturing that some of the numbers you see here some of the growth that we've gotten is because of that and the pipeline as Tom said is robust is because of that so that'll be a gift that will keep giving for the next few months into next year.
Okay got it thanks guys.
Thank you. Our next question comes from Gary with Wells Fargo. You May proceed any question.
Hi, good morning, Marty.
Just wanted to circle back on the allowance and credit.
First I guess on the deferrals what percentage of the portfolio has already gone through.
First 90 days I see no we're down to 4% but.
Is that 4%.
Good indicative level, the whole thing or Thats, just where we are right now.
Yes, most of the where strong deferrals happen in a three week period, which was my last week on March and the first two weeks of April. So here. We are sitting at the end of July. So I don't have the exact numbers, but I'd say a pretty large majority has already hit that 90 day window and I remember they start talking to us about asking for another deferral not on the last day.
So some efficient generally started that sort of a two month or two and a half month period.
So we feel that we have fielded a lot or most of what has to come.
In terms of lead deferrals.
There may be still some that trigger led but.
A majority was I know, we're showing you is actually not approved deferrals, what you're showing you the beautiful rate on the requests, but there's still some of them are still in process I'm not every one of them will be granted.
Most of them will be granted but some may not be granted wishing you. The request that accompanies that's actually a larger number and what will actually get process.
Okay, and then just looking at the allowance and the provision level and looking at slide 14, where you have the the reduction in allowance of 8.4 from economic forecast, that's definitely not what we've seen.
With the other banks and Joe I haven't really hurt other banks focus on the under mix and the essence, Pete and I look at the baseline.
GDP expectation for 2021 from March to June it's actually gotten worse so.
I guess it was or change in methodology from first quarter second quarter on C.. So can you just give a little more color on.
Broader economic view, yes, I would actually to flip to slide 15, which I think is going to answer your question better on slide 14, because it really breaks it down.
But in my remarks asset as a tale of free city.
And you can see that the impacts were very different in the credit portfolio going into Cnine portfolio, where the economic forecasts really was candidate to the credit portfolio.
And I.
I don't I can't speak to what other banks are doing or what models they're using.
But I can say the model that we use for our Cnine portfolio, which is one of the sweet.
Moody's models.
He is very sensitive to that mix and the S&P I know a lot of other banks are talking about that maybe they don't have a lot of those types of loans in their portfolio that would run through that model I can't speak to that but.
Yes, that's really what's driving it so no theres no change in methodology whatsoever in those particular economic variables in the June forecast actually improved compared to the March forecast.
Okay alright, thank you.
Yes.
Thank you. Our next question comes from Stephen I'm, not so close to.
To be Morgan you May proceed with your question.
Hey, good morning, everybody good morning.
Before I started just have to say your credit related disclosures both the slide deck on this call are really top notch I think the best I see the industry. So thank you for that.
Thanks, Paul.
A follow up on Jareds questioning I tell you I think we're all staring at the slide 15, and looking at the reduction tied to the economic forecast and see an eye in scratching their heads, saying how would the market volatility SVP of 500 impact.
Thank you night, its credit quality I'd see an eye. It just doesnt seem to make sense to us. So it's a correlation I can say the Moody's thousand page white paper on the risk Capt model that you probably don't have time to read that but what Moody's has determined is that with middle market Cnine modeling that those are the two factors that are.
Most highly correlated to perform to credit performance.
And.
I think there's probably a whole lot of complicated math behind that that may be over my head in some respect but.
Those are the factors that Moody's has determined or most of this is from their credit research database millions upon millions upon millions of as observations and these are the factors that they determine that losses for those types of loans are most highly correlated to.
Medically that's how I answer your questions, but to take a step back from that I will tell you that we feel really good about where that reserve is sitting on our particular Cnine book right. Now we think it's in the right place. We know what's in that book, we know the quality of those borrowers we understand their businesses, we understand there their performance and our financial condition.
We spent a lot of time understanding how they're being impacted by the pandemic and we really feel like the reserve on that particular portfolio segment is right, where it needs to be and I think that's the more important thing then trying to have.
We can have a long conversation about the math and the new these models, but I think thats really the more important observation, Steven but I think the 1% referral rate is in fact supports that works that yeah.
Okay. There's another mechanical factor, which also within which is we have made assumptions around prepayments.
At the end of March which were a little too draconian, we have assumed that the like generally happens during recessions that prepayments have come to a grinding halt and that would be no prepayments with the rest of this year.
Now we'd look back at the last three months, if anything prepayments actually picked up.
So it surprises us that's usually not what happens, but we have to then react to the actual data is coming out and we're seeing prepayments across all asset left by the way not just one.
That are at least as much as they were deployed in some cases that actually higher. So these models are also sensitive to the image assumptions, which like I said, we have dialed back to more realistic numbers into draconian once we used in March okay.
I also remind you that we did spend a lot of time in the month of June reaching out to our individual borrowers to find out not as of December 31st or as of March 31st, but today hazard business performing what do you revenues look like what do you know in all of those observations at the loan level informed our reserve estimates that we feel very good.
Not to see an eye portfolio in the current reserve model.
Okay, that's fair.
If I could just follow up to on bank, United 2.0, and looking at the $47 million expense reductions so far because obviously better than expected, maybe one where are you coming in better than expected and to our there do you have you now realized all the cost saves are there's still more to come as part of that plan.
I would say a lot of its comp and lot of is cost even just because I think its expense line on the pan out I mean.
If you're going to save money, you're going have to say that comp.
Because that's where the GAAP dollars are so thats, where most of it is we've had some of its obviously in the real estate spend does come down some of our technology send some other things we've done some of the investments we've made in technology are actually reducing our operating cost level. So as all of that.
As to future opportunities I'll Echo, what Raj said, I think there our future opportunities that you're going to see them not all next quarter, because they would be predicated on decisions that we would make about the real estate footprint. So things that are still to come in the technology areas and things that I still think our to come in the vendor spend area, but all of those.
Are going to take time to materialize and.
Really had an impact on the bottom line.
Steve and I I do want to make a point here.
Please do not seem to have this is coming from starving the franchise from investments that we also.
Making as part of 2.0, so the number $40 million I met number they did a stuff that we're investing in which will pay dividends. The years out it's not like we've decided lets just not do those things so those.
On one have you ever tactically fight the fire, but at the same time, we have to keep building the franchise and you cannot just keep fighting the fire and then have no franchise to us on the road. So those investment assumed going moving forward because once you make a decision on making investments and make it two years should do it.
And you don't stop in the middle but that does that lot of damage may make you feel different quarter or two but but are you really.
Perfect.
So those investments are happening like I said automated underwriting under small business front that was an investment at the year of technology spend in training and hiring people all that we haven't made a single loan on that.
Go live Unfortunately, it's about three or four months later than we originally wanted it to be but we are going to move forward. That's the direction. We're going in fact PPV was the other night will.
Test for US we have to do automated underwriting.
Well on a very high level for PPP, and we learned a lot from that and we're using it.
Due to investment platform and we will launch it like I said, maybe people month delay, but we're not pulling back upside whether dollars are coming from some of it if we lay odyssey when we come your 40 billion, we internally actually for a higher number.
Yeah, I guess it becomes easier to achieve that you know when everything is locked down and people are generally.
Become a lot more sensitive to do due to expenses.
So it's a little easier to achieve.
Okay.
Thank you and maybe just one final one for Tom you talked about all these commercial relationship so you're moving over to the bank I think let Leslie made the comment that we didn't expect anybody to prepay their lower in the middle of a pandemic I wouldn't expect many commercial customers to move their account in the middle of a pandemic either but you're doing it maybe give some color on how.
Yes, I mean, these moving over zoo meetings like how are you moving all of these relationships over I think there zoom baiding driven as I said when I made my comments were learning how to sell.
Right.
And now on the Gulf War.
Okay be allocated to that [laughter] no, but it's as Rob said the DPP process is not all of it but I think how successfully we executed that and also compared to where others failed.
We have picked up new relationships that Ben.
Other major bags for 30 40 50, we got one that was there for 70.
Peers that are very substantial relationships and I think that our.
Each of our business units that are focused on kind of addition market segments.
They are focused on have good reputations in those markets and I think our overall.
Performances has led to this kind of flow of good operating business. This that's coming to us and we have done it in a.
Non contact.
Environment, we've done a lot of internal training around how to do this better.
Getting people to be very comfortable with the technology and clients would become.
As comfortable with the technology as well so it's worked out very well.
Steve for example, BBB loans, you know the two rounds of Pvp run one and brown too.
Important to actually understand how many of those lines, where they can get off the ground, one and how many brown to because anyone who got pushed around too was probably not happy.
Because they had to wait and they didnt know there wouldn't be around two or not so if you look in a bank and figure out the 10% of customers were done in around one at 90%. Ron do you have a lot of unhappy customers, even though they got everybody got the local we're looking for but it's still feel that in one month of actually.
Lumped into needles trying to figure out of fuel bank and do you.
Have you what other banks I believe will decline our numbers, where I think 85% or so a buck lines.
Were taken care off in the first front and the get about 50% or roughly that many who fell into round two and customer satisfaction with those is absolutely lower than in around what it did another bank, which has the numbers flip the other very unhappy customer base, even if they eventually got the loan they haven't forgotten the number.
At times, you have to call you in the number of times that you basically said I don't know what we can help you and that creates.
The opportunity for banks like us to be proactive and gather that business.
Yeah, I think if I look back on if we had a really nice blend of automated process.
As Roger mentioned, we ran in the first automated process during this.
Worked well, but we also combined it with high touch personal communication.
A lot of hours, we were all on conference calls until midnight every night doing this but I think that communication that went back and forth to the clients in terms of keeping them its form and making it feels like a high touch automated combination really.
Worked out well for us.
Alright, thanks for all the color taking my questions.
Thank you. Our next question comes from Ebrahim Poonawala with Bank of America, Oh with your question.
Good morning.
Morning.
A follow up I guess, so most of my question living asked and answered it on the margin Octoplus you mentioned I expect to stable NIM looking into third quarter, I guess beyond that I think it just listening to dormant on deposit growth seems like you expect to retain the deposits said you got this quarter and go summit, we do about.
Ooh radio team the margin goals like in the margin actually expand in this environment, but if the eco seems like it is what is the best case outlook for the margin do you mean.
Steady state.
So I think looking out beyond the third quarter. There are just a lot of moving parts. So I'm hesitant to give much more guidance and that the PPP forgiveness will be a factor our level of success and continuing to push deposit cost down will be a factor how much we're able to grow the non interest bearing Diego government.
Course of the rest of the year will be a factor and another factor will be what opportunities, we're able to identify sort of interest earning assets on the balance sheet, it and at what spread and so all in all of those things right. Now I think our are just difficult to predict so.
Hey to not answer your question, but I'm hesitant to put at forecast out there for much beyond the quarter ahead.
Got it and no worries you can remind us as he wants the PPPC. So that you expect doing okay.
I'm, sorry could you repeat that the Doe PPP origination fees that you expect to.
That number here somewhere let me tell me granted I want to say there is $21 million as a 630 remaining to be recognized and.
Like I said, we don't really expect much.
Given this activity in Q3, I don't expect that to start hitting until Q4, Q1 timeframe realistically, but theres a total of 21 million.
And the entire Pvp loans are funded by the fed funding that's correct that goes away even the most bullet yes. Most of it right now we've got 651 million Npls borrowings on the balance sheet, where we plan to position ourselves. So by 930 as any into PPP loans that are left on our balance sheet will play out there and we will have.
Hopefully match funded.
But that's what I had thank you.
Okay.
Thank you. My next question comes from rock manner. We will you be S. You May proceed with your question.
Hey, good morning, guys running.
Just to follow up on Abrahams question. It seems like if you wanted out you've got three catalysts on the funding side you got better mix you got CD repricing.
Continuing and you've got this operating account growth focus.
And on the asset side.
How close are we really to that kind of the burn out on resetting on the.
Asset yields I, if I feel like that's really the the question because I think you've got it on the on the funding side, it's really how much incremental pressure you see.
On the asset side.
Yeah.
Everything held constant I would say this would be the last quarter of that repricing down the wildcard there though is prepayments.
And if we continue to experience prepayments.
The higher yielding assets in the portfolio that cut off so.
Put pressure on asset yield and it's difficult to predict how long that goes on.
Okay. Okay. That's helpful. So that's a wildcard inadequate and I think.
Okay.
And on the expense side.
You've got the.
BK, you 2.0 saves juxtaposed with.
Hopefully more normalization in the economy in an upward bias in some of those expense.
Figures.
How does that.
How do you see that shaking out or I guess put another way.
In terms of a.
In terms of the core pickup in in expenses with higher activity, how much could you dimension that at all.
We really haven't put any guidance out there beyond 2020, and I'm not quite prepared to do that yet I think things are just too much in a state of flux.
For Q3 in Q4, I would expect the run rate sitting here today to be relatively flat and as we get a little deeper into the year, albeit a better position to really answer that question intelligently.
I just don't feel equipped to do that today.
Okay, Okay, but basically flat run rate.
The next couple of quarters, and then than by then we'll have better idea.
The glide path in front of affairs.
Got it okay. Thank you.
Thank you. Our next question comes from Dave Bishop with da Davidson. Please proceed with your question.
Thank you good morning, guys Nordic morning.
Question for you I know is just announced but the the fee income initiative the partnership with Goldman Sachs.
How should we think about that any any guidance you can give in terms of month I think what the the revenue.
Opportunists Matt.
I would probably say, it's too early to think about that but as we.
As we look at the opportunity overall this is the space that we obviously, we're not in previously did not have a product offering and we have a large client base.
In the corporate commercial not for profit areas. So the four on K for three be in retirement services planting area.
There are clearly substantial opportunities in our portfolio and I think that this partnership will allow us to kind of unlock those opportunities at this alliance that we that we announced with.
Gold and the other this earlier this week, but it's we're just starting to.
So now work through the training processes, and whatnot and be a little bit too early to to put out a target on it.
Got it and then Wesleyan I know that can be important.
Got it thank you.
And then lastly, I know in the up the preamble you gave some some good detail in terms of the granularity regarding the uptick in special mentioned loans.
Curiously you just walk through that again that looked like there were some upticks and having them or.
More granular areas in terms of the actually.
[laughter].
Okay special mention.
In the aggregate went from 288 to 1.3 billion. We saw increase that was up 527 million Onesixty eight of that was in retail to 70 of that was in hotel.
Only 50 in multifamily and the rest just kinda drips and drabs in the see an IPO got book. It went up 329 million $60 million that cruise line 54 million within the retail trade sector food services was 53 million and the rest is one of these TZ.
Franchise slip went up by 147.
And there's some detail on that too in the debt. If you want to you know.
Towards the back.
But those are the high level numbers.
Got it.
I'm sorry for that to be it was concentrated in those areas, where you would think it would be which was.
Yes, the Cree retail hotel the franchise a couple isolated credits in the C and I look better connected in some way to those stressed industry. So exactly what he would have expected.
And if I recall the deck.
Cruise line exposure right they have not asked for deferments yet.
Correct, we actually think the cruise lines are pretty well positioned they've all been very successful and raising cash in the capital market. We back to Rogers point about intellectual honesty, we think it intellectually dishonest to pretend that the risk profile that industry has not increased and so just seemed the right thing to do them in those credits to special mentioned, even though we believe they already have to.
In addition to continue to certain from debt.
Got it and then maybe just commentary I know theres, some energy exposure to the the operating leases.
When we acquired outlook there are currently.
I think similar to what we said last quarter oil prices actually seem to have rebounded from last quarter I don't they are awfully volatile though.
Railcar loads are down so what we really think is going to happen. There is as these assets are released they're going to be released at lower rates. So I think we'll see that lease rental income kind of trend downward for the foreseeable future.
Difficult to say longer term, what's going to happen, but these are very long lived assets and are by definition you know.
Having the past withstood multiple cycles. So we'll see how it plays out I think what you'll see it's not really credit exposure. It's really this rental income that is probably going to trail down some for the foreseeable future.
Got it thanks that color.
Thank you. Our next question comes from Stephens along with.
RBC capital markets. He will proceed any person.
Hi, Good morning, guys running Arnold.
I'm, sorry, I apologize if this has been answered jumped on late.
But what do you guys seeing in your overall business activity in your Florida, and New York markets say from the real opening through mid June versus the reach recent spike in cases in Florida.
GAAP.
Well, let's start with Florida.
I would say that well well the case loads are definitely up.
It's created a heightened sense of of issues in the marketplace.
The commercial market continues to move forward companies, our operating for the most part businesses are open.
Companies and manufacture and distribute goods or manufacturing and distributing goods in the overall market continues to.
To move forward, it's almost a parallel kind of issue. When you look at what's happening you see certain health statistics that are coming out and numbers that are obviously concerning.
At the same time businesses that are essential businesses that are shipping food and components.
Auto parts in any of the myriad of industries that were in healthcare.
Our continuing to operate Foodservices continue to operate the franchise businesses. We have good drive through models and delivery models are continuing to operate.
Occupancy remains.
Strong in the end decree markets.
Florida in the office and industrial sectors, the industrial sector in Florida is actually on fire made industrial purchasing right. Now is very very strong users much more demand for warehouse space and E commerce related space.
Things of that nature.
So overall, it's not.
And we see them in the flow of business that we're getting in the flow of opportunities that we're seeing that it's not negative scenario.
At all New York has opened up obviously slower because it had more of a.
The significant impact early on in the crisis, but we're starting to see the construction industry you don't come back or was it was early identified is an essential industry. We have a number of significant construction relationships and the New York market. That's their off the businesses are running there.
They are projects underway, we're seeing.
Operating businesses in the food and beverage distribution area, just like in Florida, continuing to ship goods and and do well in India in decreased spaces, We're seeing again office, particularly class a office or exposure is a bit more of the class a office side than it would be b.
Collections being very high.
Multifamily business. We're also seeing you know rent collections that.
At acceptable levels right now so I was the economies are functioning.
There are.
Opportunities and we're seeing business revenue.
In both markets you know every business is different obviously, we're in a lot of different businesses with a lot of different companies, but the overall.
Financial results I think are playing out early well and Thats what were seeing the deferrals.
Well done automate on their deferrals or deferrals or the real.
Real test and payments.
Yes.
The Florida economy, despite all the negative news over the last three weeks or so at least to us it doesn't feel like it has slowed down so the numbers, obviously bad other under under healthcare front, there are beginning to level off a gig.
Deep enough infrastructure over the last 10 days or so.
We're seeing them level off at seem pretty high levels, but it has not impacted at least from what we can see the economic activity in Florida.
New York has just been more careful and slower with opening up the economy. There has been numbers are great and the economy is totally opening up.
And I think that trajectory. We're just the slope will be much less than Florida, Florida was very steep increase starting in may 1st just went straight up and and.
But but we don't see signs of slowing down maybe a few buyers will be close in there but I.
We're not seeing any signs of some kind of you know NIPSCO back to a shutdown or slow everything down that is not the the sentiment on the underground.
Yes.
Do you look at the C and I business, particularly in either Florida or in New York, but even more so in Florida.
What is happening in Florida individually is important but if you're doing business for the company. That's a 500 million dollar companies shipping goods around us.
Canada in Europe.
Happens in Florida is not necessarily the only driver in a while ago businesses are located in Florida their national International businesses.
Got it so so let me.
At this way then is it the spike in cases never happened.
Would you say that business wouldn't be that much better and just be similar to where it is now for Florida.
Who knows some kind of hard to say.
That's a tough one of the hard thing to measure is the impact that.
That has on content with more people be traveling to Florida staying in hotels as it has been for that maybe but it's really difficult to now.
Right. So have you guys.
Theres like yeah.
And then ultimately being working as far as your consumer confidence goes.
Our.
Evidence is more anecdotal so.
And maybe it's a little too early but.
You know from what we see from talking to our clients. We haven't yet seen I think your question was a good one that if this had not happen would the slope off this recovery looking forward been better I would think it would have been better I think more people go to Disney if.
If they weren't 10000 patients a day in Florida, and so I'm sure that has an impact on on on Disney and Universal in Orlando.
So it doesn't have an impact but it doesn't have a level of impact when things are backtrack.
That we go back to numbers in May or April no. We're not seeing that so but I'm sure if Florida is not able to control. This.
You will have.
On the margin it will be a slower recovery the healthcare has to enter the Jewish and has to improve.
And if it really gets not a hand and you know it might even go back, but we're not I think the numbers. We monitor these very very carefully as you can imagine.
There is.
Some optimism that the numbers aren't getting worse over the last 10 days or so and not just in Florida, but I think all deals. The sunbelt states have got hit hard in the last month are beginning to curb the no their numbers are somewhat.
Right, Yeah, I guess, it's always hard to try to.
Assess the economic impact.
When these cases rise and so just trying to separate I understand the news versus what you guys are actually experiencing.
I would tell you that on the street and again to Rogers pointed to anecdotal Tom gave you. Some really good data point, if things were hearing from our customers I will tell you that.
Hi, Bill onto an organization called the Florida instituted cfos and when we need and we speak and this is CFO is from businesses all across the state of Florida, all different types of industries.
Yeah, it's an optimistic where their business that none of these people are saying Oh My gosh I think my business may not survive. This you're not hearing that at all people around about people are doing things the level of activity is strong now all of that is anecdotal not statistical.
Uh huh.
Well, we have the do it's got the floridians to wear masks and everything will be fine [laughter] [laughter] well look it's just a final one on this one so let's just say like you know we were just to make some risk assessment, if economic recovery stalls flatlined through the end of next year would you would that make.
You reassess your reserves.
Well of course I mean.
You gave a kind of outlined for you.
What the assumptions are that are built into our economic forecast if unemployment Doesnt go down between now and into next year and GDP.
It doesn't improvement.
Nothing improves it if there is no trajectory of recovering whatsoever, then yeah of course, not only ours, but everybody will have to reassess that reserves if theres no I've not seen one bank is economic forecast. Thus far is not included some trajectory and recovery from here.
So is that if the rate sure I think everybody will have to reassess the level of their reserves.
Right. Okay I appreciate all the color an excellent slide deck.
Thank you.
Thank you our next call My question comes from.
Manner with Janney Montgomery you May proceed with your question.
Thanks, I can keep us briefs since it's been a long call I know there was a lot of focus on slide 15 on earlier questions. I was wondering if we shouldn't just focus on slide 10. In addition to 15, just because your capital stronger.
Chris [laughter], but largely doesn't that play into the whole reserves and capital question. Let me to me to together they are very strong and it really gives you a buffer because of the council.
I think you'd get a lot discussion about that just kind of want to ask that question on I think a capital here.
Yeah, no absolutely I mean, I think slide 10 is very illustrated the our reserves that 60% of 2020 D. Fas severely adverse losses, which a lot of our specific peers don't disclose because we're no longer required to run that the fast scenario and disclose the results publicly but when I compare it to whats coming out for the regional.
Thanks.
Our reserve sitting at a higher level of 2020 de fast severely adverse and align regional the sitting at.
You can see clearly that even with that level of stress you can see where our capital ratios land and its you know.
Comfortably above.
Any well capitalized manner. So I think there's plenty of capital cushion, even if we have further stress from here.
Great. Thank you very much for all the time. This morning, we we appreciate it.
Thank you.
Thank you all know showing no further questions at this time I would now like to turn the call back over to rush Synchrony further remarks.
Thanks, everyone for giving US time, Saudi took so long.
I I wait for the day that we could go back to normal and don't have to provide at 50 big stack.
But until things get normal these balsam digital live longer our disclosure will be a little more extensive but appreciate your spending time with us and we'll see you in three months. Thank you.
Thank you, ladies and gentlemen, and this concludes today's conference call. Thank you for participating you may now disconnect.
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