Q2 2020 Sterling Bancorp Earnings Call
Good day and welcome to the Sterling Bancorp QQ 2020 Conference call Today's conference is being recorded.
This time I would like to turn the call over to Mr., Jack Kopnisky, President and CEO. Please go ahead.
Good morning, everyone and welcome to our second quarter 2020 earnings call.
Joining me on the call is Luis must Siani, our Chief Financial Officer, and Bank, President and Walbro, Our Chief Credit Officer on our website yours, you will find the slides were refer seen in our presentation.
I'd like to first recognize the fantastic efforts of our extra ordinary team.
They have adjusted admired blade to this extremely difficult operating environment and continue to perform in an outstanding level during up particularly challenging period for the banking industry and the broader economy.
Our company's culture emphasize is change and add depth taishan traits that have served us well in these times or colleagues have consistently gone above and beyond for our clients and each other.
For the second quarter of 2020, we reported adjusted EPS of 29 cents and grew our tangible book value per share, 6.2% to $13.17 from $12, an 83 cents last quarter.
We continue to build our allowance for credit losses, given that downward revisions to economic forecasts.
So our conservative assumptions last quarter reduced requiring provisioning for this quarter.
We're particularly encouraged by our ability to grow tangible equity and tangible book value per share in the face of this challenging economic environment.
We continue to service, our existing clients and grow our business in targeted loan portfolios.
In addition to the $650 million in PPP balances, we originated this quarter, our commercial portfolios grew $85 million over last quarter spread across several portfolios.
While we continue to see meaningful new business opportunities current volumes are approximately 50% of its story production, which is reflected in our updated loan growth outlook.
Portfolios. The grew this quarter or like it is likely to be future drivers of growth.
Including traditional Cnine see Ari affordable housing and public sector finance.
We are shifting capital away from National transaction based businesses that do not provide opportunities for full relationships and that are not meeting our targeted risk adjusted returns in current market conditions.
Deposit gross growth was also strong core deposits were up nearly 6% over last quarter. Despite a 2% drag from seasonal run off and the municipal portfolio.
We are optimistic we can continue to exhibit solid deposit growth in the current environment, driven by our commercial and business banking teams.
We are augmenting our traditional growth channels through technology enabled banking initiatives, including the direct banking product, we launched last year and our recently announced banking as a service program.
We view these as efficient ways to grow and diversify our funding sources fee income and total revenue.
The pandemic has accelerated client adoption of technology and validated our investment in digital banking platforms.
The accelerated adoption of technology will also enable us to perform more efficiently in the future as we reevaluate our real estate footprint and leverage automated processes that have been tested and enhance over recent months.
We're pleased with our pretax pre provision net revenue performance, although we experienced pressure in several businesses related to the pandemic.
Net interest income excluding accretion income was $206 million, an increase of $2 million over the prior corridor.
Fee income was lower than expected due to lower transaction volumes in deposit fees wealth management factoring receivable volumes and other loan commissions.
We expect these volumes will rebound as the economy recovers and customer activity resumes and we have started to see positive trends in volumes over the past 60 days.
Regarding expenses, we incurred $3.8 million in expenses to support our colleagues at the outset of the pandemic that should not repeat in the third quarter.
Among those expenses was a 1.5 million dollar charitable contribution via the Sterling Foundation that supported communities affected by the pandemic.
We also had costs of $9.8 million to exit FHLB borrowings and $1.5 million of Oreo expenses to exit properties held on our balance sheet.
We maintained our core net interest margin flat to last quarter at 305 basis points. Despite recognizing lower short term interest rates and the earlier early part of the quarter.
Our team did an outstanding job in lowering the funding costs, which were down 35 basis points well exceeding the 10 to 15 basis points quarterly reductions we were expecting to achieve this quarter and we ended the quarter on an upward trajectory for the core net interest margin in the month of June.
We continue to believe we can achieve a total cost of funding liabilities of 35 to 40 basis points, if not lower in the current interest rate environment, which should help support net interest margin near current levels.
We anticipate generating positive operating leverage through the remainder of the year as repricing of liabilities outpaces pressure on asset yields transaction activity and volumes begin normalizing and we focus on efficiency initiatives and growing our most proud.
Profitable businesses.
This program progress should be evident in the third quarter, where we expect each component of core PPR and our to improve.
Moving on to credit we added another $39 million to our allowance for credit losses this quarter.
Taking the allowance to portfolio loans to 164 basis points as deterioration in the macro outlook increased our estimate of losses.
Our Cecil model assumes the unemployment rate averages in excess of 9% through full year 2021, with GDP not reaching breakeven until early 2021.
Aside from the adjustments related to the macro outlook credit performance was generally reflective of our expectations as of last quarter.
Npls were effectively flat to last quarter.
The increase in charge offs to $17.6 million or 32 basis points of loans annualized reflects our effort to quickly resolve these credits we moved to non accrual late last quarter.
On slide 14, and 15 of our presentation, we provide an update on cobot impacted portfolios, we highlighted last quarter and provide incremental detail on the portfolios that comprised the bulk of deferrals.
We have deferred principal and interest on 8% or $1.7 billion of loans deferrals are most commonly for 90 days with an additional 90 day deferral period at our option.
Over the past 45 days, we have received few new request for deferral and are actively working with all borrowers as their initial deferral periods began expiring in late July and August.
I want to detail our current view of each of the impacted portfolios next.
First we are comfortable with our traditional cnine portfolio, which is generally well secured on a borrowing base and we have seen low requests for payment modifications with the exception of a relatively small franchise finance portfolio, whose underlying business fundamentals as.
Typically well over the past quarter and will improve as the economy opens.
Secondly, our national commercial finance portfolio has also performed at or better than expected.
Equipment finance portfolio was more highly impacted by the downturn initially, particularly in the transportation and construction sent sectors, but we are starting to see a pickup in shipping and general transportation volumes, we have seen relatively low volumes of deferrals in our other national portfolios.
Lastly, commercial.
And multifamily real estate is performing as expected and we anticipate that are relatively low loan to values of approximately 50% across the entire portfolio will provide substantial support to the long term performance of these assets.
We are working through the higher impacted sectors of hospitality retail and office, where we will continue to work with borrowers in providing working capital relief given our strong collateral position and debt service coverage prior to the pandemic.
Multifamily is performing well and our low loan to values and debt service coverage on that portfolio also provide a strong degree of credit protection.
We will be pragmatic about each loan portfolio and we'll take aggressive action to recognize and resolve issues directly and expeditiously.
I noted at the outset of my prepared remarks that we were able to grow our tangible book value per share over the last quarter and strengthen our capital ratios are Tc ratio increased eight basis points to 8.82% and our tier one leverage at the holding company increased 10 basis.
This points to 9.51%.
We continue to be on a self imposed pause of our share repurchase plan.
We expect we will continue to grow both our capital ratios and tangible book value per share through the remainder of the year.
On page 16, we update our outlook for the year.
We continue to be comfortable with our net interest margin and core expense outlooks for the year.
We reduced our fee income expectation given some of the near term headwinds caused by the pandemic and expect loan growth to come at the lower end of our previous guide at $500 million of growth for the year.
We also expect to incur a lower tax rate through the remainder of the year.
There are still many unknowns in the economy, given the potential lasting effects from the fact pandemic, we will continue to be aggressive with our operating model to address the financial impacts.
Our primary focus in this environment is twofold.
First to produce strong earnings streams, driven by revenue gains that enable us to build capital.
And secondly to recognize and resolve credit issues early with strong levels of reserve and capital.
Now, let's open up the line for questions.
Thank you.
We would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using speakerphone. Please make sure. Your mute assumption is turned off to allow your signal to reach our equipment again press star one to ask a question we will pause for just a moment hello, everyone and opportunity to signal.
We will now go to our first question that comes from Casey Haire with Jefferies. Please go ahead.
Yes, thanks, good morning, guys.
A couple.
Two questions on.
Credit quality front, the deferrals it sounds like they have slowed.
We have seen from peers, some decent cure rates.
Just some color that you can provide as these as these deferrals hit their 90 day terms.
Based on your conversations with them, what how you expect that to trend.
And then another three months and your appetite to extend another 90 days.
Sure. So I think no consistent what we talked about in the first quarter case, I think that far from an appetite perspective, we're going to continue to work with borrowers where we see that theres, a long term viability to the business and where we think that Theres a.
Good opportunity to have a full relationship.
Long term and but our strategy is going to be the same which is we're not going to provide extensions or new deferrals that just anybody who asked for it. So one of the reasons again and as a reminder, in the first quarter. We had some migration and credit is that the strategy has been identify who has long term viability worked with those borrowers.
That's for the appetite is and then if we don't see that there is a long term viability to it then we decide to go to move the exit the relationship moving into different directions. So the appetite remains the same now from where the early feedback and Jack alluded to in his remarks late July and August as when the majority of that those into.
We will 90 day period start coming due so we're going to know a lot more in the next 30 to 45 days with that said early feedback across several portfolios like equipment finance like franchise finance is pretty good and we are we feel good that theyre going to be a substantial amount of those initial deferrals that are going to move to some.
Form of either full payment or some modified payments agreements are going to begin cash flowing again.
Is it 40%, 50%, 60%, we don't know yet, but we feel very good at the early feedback as many of those sectors is quite positive places, where you're going to see a Neil the majority of the called re extension is hotel in lodging the entirety of our portfolio and hotel lodging is pretty much concentrated in the New York area.
That industry is not back yet so you're going to see extensions there you're also going to see expenses and CRT retail. So those are the two sectors, where we see the majority of the expenses happening or kind of recurring for the second 90 days and on aggregate you're talking of approximately 300 $400 million or show of.
Hi, deferrals that you see in those and payment deferrals that you see in those in those two sectors. So those are the two places we're focusing on the most and did not to say that others, you're not going have fair amount of extensions as well, but those are the places we got those two sectors will you see the most amount of.
Of an additional 90 day period is going.
Just had a little more color on this too we when were granting deferrals, we're asking for updated financial projections things like that were not but we're not doing is we're not blanketing any deferrals said, it's one of the advantage of this this the single point of contact structure. We have with the teams is this is one by one.
And they have the borrower has to justify the the deferral based on their projections and all that so we're not we're not saying just a category we're moving moving forward on on that.
Second thing is if where we also are addressing those that don't have viability going forward. So we're not going to sit back and watch things in late in the first things until.
And I hope and pray that something goods going to happen if theres an issue, we're going to address it right upfront and we're going to take the once things we've learned over many many many years of doing this is the sooner. The your your best outcome is your soonest outcome. When you take action on this so we've tried to.
To be aggressive in if there is an issue and there is not viability out there.
Moving forward and addressing this situation upfront.
Great Thanks for that color.
The retail CR rate on slide 14, that's obviously, a big concern among many banks.
What what can you tell us about that bucket.
Billion three.
Qualitatively how much of it is is what you think is viable going forward to be an essential retailer versus stuff that you're worried about just a little color on the retail CRT bucket, which is a little bit bigger than most on that on that slide view.
Well as we've discussed in the path, we do not have exposure to regional malls. So from that perspective that that's a good thing when you think about our Cree retail community based I mean, you can say strips that it really is a lot of community base I think about 80% of the portfolio.
The the borrower amount would be 10 million or less.
Okay. So it's really consistent with sterling's supporting its businesses and supporting stuff in the communities and so we all could I guess conclude that what we want to our view is pretty strong.
After the pandemic that people go back to shopping and their community based shopping centers.
Because that's what they've done for a long time, and that's not really where online is necessarily attacking but certainly to your point today because of the pandemic. The tenants themselves are being challenged probably about 25% to 30% of them are having a hard time paying our borrowers and so thats why you see the deferral rate.
And for the most part these are also founded in central business. So the majority of all the retail our grocery stores Pharmas banks, along the way. So we're comfortable with the loan to values versus how people are paying now and.
We would assume that that will get better over time, but we're pretty comfortable bought.
Kind of the equity we have in those those properties.
And the types of tenants they have in.
And in those properties given the LTV, we have the case even.
Everyone, which probability of default increases.
Loss given default when you have 50 or 55% ltvs not to say that you're not going to lose some youre not going have some charge offs, but loss given default given you have true equity substantial equity under you because again. These are not large regional mall. These are not institutional kind of retail credits, where you have mezzanine tranches and other sorts of kind of.
Junior capital stacks that does that create very little equity under you are true equity. So these are these are going to be this isn't.
Any scenario, we don't see this as a from one quarter to the next things going bad across a substantial chunk of the portfolio. Because this is the likelihood of a lot of the owners. This is where they have their network. So this is going to be a longer drawn out this to the extent that on some of these go bad it'll be a longer progression to that happening and we'll be able to.
You know kind of work our way through it overtime.
But the the kind of anchored all this is the fact that this is conservative low LTV and that gives you it will give us options as to how we either work with the borrower work out of these credits overtime.
Very good.
Last one for me just.
The charge off rate.
At 32 Bips.
And there was some migration should we expect charge offs to sort of what's the near term charge off outlook should we expected to kind of hold this this level going forward or did you just do some cleanup this quarter.
We're going to be aggressive in cleaning up so there's still clean up the do we have.
There is obviously mpls EUR $250 million or so.
No, particularly related to specific portfolio credit or no portfolios in residential mortgage and some small balance smaller balance equipment loans.
We were going to continue to address those very aggressively going forward. So you should anticipate that we will have charge off but.
Vast majority of those are already covered with the reserves that we have and have been identified in our seasonal modeling and.
Again, the position that we could that we've talked about since the first quarter, which is the faster we get the things that a year and we get.
Focus on kind of the parts of the business that we want to long term the better. It is so yes, you should anticipate that charge off activity is going to continue the third and fourth quarter is it going to be 30 basis points or 40, 30, or 40 basis points, not not 100% sure yet, but yet we do we're going to continue to aggressively manage out of that deals you know when one of the things that we all.
Kind of forgetting the last 10 years, the credit quality has been so pristine that everybody is used to having charge off levels of less than 20 basis points normalized charge off ratio is based on over many many years is more in.
20 to 50 basis point range. So we don't think this is.
We think this is becoming more of a normalized.
Environment, where.
You have certain risk in the.
Vital positions and all that so that's I think thats the guidance for the future of this is more normal charge off levels as an abnormal time, but the that level charge offs are more normalized and we think about a cases more of a timing issue. So that this is a good example, we were talking about before.
Substantial amount of the credit migration that you've seen has been driven by equipment finance book, the small balance equipment into book and some of the residential components of residential mortgage those are all loans that we could have modified or deferred if we wanted to essentially dealt with them later on in the year early next but that is the type of business that we're talking about where.
We see that there isn't really long term viability to itself might as well just clean it up now rather than have to deal with it as a charge off later on so that's a perfect example of we think about more of the loss content in aggregate would be the same and this is just a matter of how quickly you get it behind you reserve for you get behind you and you can you you did from a timing perspective.
It's just how the charge offs come up but we're very confident that over a two year stretch are going to see that the credit quality from.
From an annualized charge off perspective on humor base is going to hold off or hold up very very well.
Great. Thank you.
Got it.
Thank you we will now go to our next color that is Alex Twerdahl with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Morning, Alex.
First off I was just hoping you know as we look at the reserve here could you remind US 164, I think last quarter, you kind of gave the adjustment for what the reserve could have been.
If you had excluded the purchase accounting adjustments are including the purchase accounting adjustments and the overall number.
Yes, theres still another from an absolute dollar amount the $365 million of Hcl. The fair value adjustments on loans are still about $30 million 30 to 35 million. So the 365 would be close or just under 400 million.
Okay. That's that's helpful and then how should we think about.
Sort of thinking what you said.
And your last response to to net charge off levels and as we think about the reserve build versus higher charge off levels.
And I think your comment was that that a lot of the charge offs are already incorporating the seasonal model how should we be thinking about the reserve from here in terms of building.
Some releasing things like that you know in comp in the context of C.. So on the charge offs et cetera.
Well more so in the charge offs I think that the reserve build is going to be driven near term by the progression of the deferrals and that we were talking about before right. So to the extent that we start seeing meaningful improvement that credit to the and the sectors that we were talking about the reserving requirements will will essentially start coming down.
In lock step with that right. So we feel very good about credits that are able to continue at a minimum play pay interest and stay current through this right. So if you've identified a commercial real estate or seen I borrower that either has not requested a payment deferral or has essentially been able to continue to meet obligations and pay interest and so forth.
Then those are those are credits that we feel very good about because they demonstrated that they can withstand pretty significant.
Unforeseen impacted their business model. So the focus is on the deferrals to the extent these deferral rates that stay level decreasing youre not going to see a large reserve build.
To the extent that you see either deferrals that in the second go around don't really come down or for whatever reason start increasing which we don't think that would be the case, because as Rob alluded to in his prior response, we've seen a pretty substantial we really have seen a slowdown for the last 30 to 45 days in new client requests on that front then we feel.
Pretty good that.
And again, you should be able to maintain that reserve, we don't see that increasing that means that the portfolio is holding up better than not and what the models are anticipating or but the models are estimating today. So.
Sure.
As it is it more driven by charge off no. This is more driven by what we're seeing from the perspective of.
Those deferrals and then once these kind of these deferral period and what happens from of migration of credit at that point. So as a reminder, right now for all these loans are in deferral, you're not migrating them from a credit perspective, so that would be the bigger driver of a reserve build is if these mods and payment deferrals come off deferrals and they do not returned to paint.
But status in the third fourth quarter that would be a driver or getting reserves higher.
Great. Thanks for that color and then just final question you know in the guidance is and things like the margin loan growth are you, including or what are your assumptions for PPP in terms of loan balances and how you accounting from the fees for PPP in terms of the amortization schedule.
80% so.
Three things there first one we only originated PPP loans to existing clients. So we have we think pretty good visibility.
Because through our commercial banking teams and business bankers, we've been able to reach out to a pretty much substantial majority of all these folks to understand what their intentions are regarding prepayment.
Forgiveness process. So we feel good that we have a good.
The mid of what the waterfall of forgiveness and payments is going to be.
We think that by the ended the year over close to 80% if not more will have been fully forgiven.
And you can we think that that is going to be more weighted to the third quarter versus the fourth quarter. So from here to the end of the year $650 million of balances will be closer to about 150 call. It 200 million if not lower and then a good chunk of that lets say about two thirds of that would be for given the third quarter and then the remainder of it in the fourth quarter, So you're only going to have.
Tale of about $150 million that goes into 2021.
Okay and are you amortizing the fees on a two year schedule until they get repaid okay.
Yes, so we are.
Yes, you got.
Great well go next to David Bishop with D.A. Davidson. Please go ahead.
Hey, good morning, gentlemen.
And David.
Looking at you know obviously.
Multifamily REIT collection efforts remain in the news of the National media local media.
Just curious maybe you can update as to what you're seeing in terms of the ability to collect across the different segments within multifamily.
Yes, generally generally our multifamily businesses in the boroughs.
Of the city. So the we have very low so macro very low deferral levels on multifamily. We also have low loan to values.
In the boroughs, we're seeing kind of in the 65% to 70% recollection.
Range.
Is the feedback we're getting from this so folks have continued to make current principal and interest payments out of that so there is that there's enough buffer in terms of.
Cash flows out there. These are also for the most part rent controlled.
Buildings. So there is some stability that way so the rents are lower than obviously market rents.
I would add that we did we have heard from our borrowers that the tenant.
Hey through improved.
Through June and they expect it to improve some more in July as unemployment rate.
Come down.
Got it and then just turning to the.
Hey, Jack you noted in terms of loan guidance.
Most of its going to be traditional theory traditional fee and I are so maybe a migration maybe from the national platform.
In terms of maybe just with the credit performance year any any surprises here.
In the equipment financing from the other specialty finance portfolio.
Obviously don't purchases you know expecting a pandemic, but just curious in terms of just the overall credit surprised credit outlook and maybe just.
Longer term holistic view for some of those business.
Yeah, you know it's interesting I.
Things that we thought would be problems going into this are the ones that are problems, we really have not been surprised about any of the portfolios.
You know things like.
Hotel or some of the small ticket equipment finance stuff.
Some of the hospitality related.
The restaurants and things like that tourist related things, we really have not been surprised about any of the categories are kind of given the situation. They're performing as we would have would have expected.
The.
One set of held up a little bit better the national commercial finance businesses outside of equipment.
Have generally held up pretty well also.
We have relatively low deferrals on everything outside of kind of the equipment space and maybe a little bit of a BL out there, but generally the rest of its held up pretty well see an eye traditional cnine has held up extremely well.
Our book to we tend to be a middle market Cnine lender, maybe lower middle market, we don't have a big business banking concentration.
My own personal view is.
One of the bigger challenges is if you had kind of micro business banking lending platforms with big portfolios, we do not.
So.
Those those are longer tail kind of workouts.
Out there so I.
In the end I don't think theres anything necessarily surprised us out there.
That from a gross standpoint, you know there are sectors definitely on the C Eni side.
Definitely in the public finance piece.
I think as the country spends more money on infrastructure public finance will continue to become a bigger and bigger.
Lending opportunity and the CR east side of it or they're going to be.
Specific areas, where we can land anything distribution.
Warehouse, frankly medical health care related certain types of those types of facilities will will lend themselves to opportunities going forward, but on the flip side of it there are areas, where we're just not going to get the rate risk adjusted returns out of and have not for the last.
Year, or so places white like some sectors of equipment finance.
Sums PBL is in my our view mispriced right now.
Mortgage warehouse is getting close to being mispriced as as as a result of the the the yields coming in those areas still good business and good opportunity, but there are sectors, especially on the national basis, where we have walked capital away from.
So long answer to your question, but what what one on no there's no surprises to theirs.
Theres still some some good opportunities going forward all that said, we are being more cautious I mean, we want to land.
But.
The volumes are about half of what they have been in the past impart because of demand, but in part because we're just being more cautious given the situation in the unknowns with the with a pandemic.
Great appreciate the color.
Sure.
Our next question will come from Collyn Gilbert with KBW. Please go ahead.
Thanks, Good morning, guys.
Colin just.
On the credit front.
So as you do you think about kind of your strategy here and how you manage the bulk.
Obviously right strategy here as you get aggressive early you know kind of differentiate between sort of transactional relationship versus not.
And as you as you indicated Jackie that's a pretty good handle on book and it's performing as you would have expected Bubba.
What do you think.
Sure.
I like your blood.
[laughter] I'd say, it's all good very Allison.
[laughter].
What I mean in terms of a trend here I guess on on losses rights and you've already identified that you know the LTV is on the core bulker really low I'm just trying to reconcile your aggressiveness early with the fact that we still really haven't seen stress in the overall economic environment from a loan credit loss standpoint. So.
You indicated normalized losses, and the 2050 basis points I mean, you sitting with a book that's going to see peak losses, north of 1% or do you really not Sidoti.
And being a possibility.
Well a couple couple of things. So one no one knows really what's what the future until someone can tell me when the pandemics going to be solved the healthcare crisis is going to be solved everybody every economist accounting consulting investment banker.
There were just trying to work our way through this thing. So there is there's a big unknown out there for everyone.
So that's that's one for what we see today in the early good for what we see today, we don't believe that we're going to get the anywhere close to the 1% charge off ratio is things like that we think that we're working from what we see today in the cash flows with.
Clients through a variety of the portfolios are estimates are there. So for example, calling.
I should as you guys should you in your model you have about $200 million or reverse reserve build in 2021.
Right now we don't see that for US we don't we don't see that kind of.
Estimate but.
You know until the healthcare health crisis get solved that has caused the credit and the economic crisis.
No one's going to be absolute us included on this the estimates we're giving you is what we see today, we are trying to be aggressive do charge offs, if people arent going to make it where we're addressing this now taking the charge now and moving forward, we're working with the clients on the deferrals and as Luis said, if as the day.
For Rolls turn.
And whether it's the ended the first extent first round or the second round, we figure out that they're not going to make it we're going to be aggressive about addressing that.
And Collin part.
Aggressiveness in part of the proactive working with our customers as an example in hospitality space all but one of those loans have guarantors in those guarantors many of them have significant net worth a significant liquidity and so we work with them and say listen you pay US interest maybe we'll give you something on the principal.
All size. It gets you through the next year or so in the pandemic, but you have a good fundamental asset they agree with that and as a guarantee in place. So right you don't there you're not going to try to take a big box on anything right away. There's no reason to for our perspective or no reason for the borrowers perspective, yeah that you know that portfolio is a perfect example, it's probably our highest.
That risk portfolio that we have geared towards that are very very liquid that will step up and have already stepped up to make payments.
There are couple of properties that.
That have reinvented themselves have use it for a housing healthcare workers and theyve used it for.
Some of the homeless shelters there are some that.
Our.
We'll be a challenge because they when they may want to walk away from this and we don't want them to walk away.
From from this so the that's sequence that portfolio boils down the borrower by borrower and where we have supporting guarantors and liquidity.
Feel very comfortable so our our comments come from the accumulation of all that we will have probably problems in that portfolio. I don't think that we have good loan to values and we can repurpose some of that I think the majority of that portfolio will end up being okay because of the liquidity the borrowers and.
And the the loan to values and the repurchasing of that.
Those things, but being able to look into each client and each situation and being aggressive in being proactive with them allows us to have make the comments that we've made again the giant asterisk on this is tell me tell me how long the economic crisis and allow.
And I'll tell you exactly what our charge offs for your whole looked like in 2021, two and beyond.
Okay. That's great color that's very helpful.
Shifting to the NIM. So Luis can you give annual guidance, obviously on the NAND and where you think funding costs will go can you talk about.
Kind of how you're seeing the asset side trend over time and kind of again kind of a longer term structural thought on what where that NIM ultimately settles out or bottoms out.
Yes, sure so I think that positives and negatives they're right on the positive side. We have now felt the vast majority of the pain on the floating rate loans and so one of the good things that that we saw is that the NIM associated with all of our one month, our prime one month in three month LIBOR based portfolios the.
It yields in the month of June actually held in very nicely relative to what the were in April and May. So when you think about the asset based lending portfolio. The warehouse lending portfolio substantial chunks of traditional see Eni all of those you've seen a pretty steep decline in the late first quarter into the early part of the second quarter in that now it has.
That has largely abated so as long as lives 115 were stays at call. It 15 to 18 basis points, where it's been hovering for the past kind of 30 or 45 days or so and that continues to progress over it and stay stable for the course of the year.
The credit spreads are staying or handing in are hanging in very nicely and those portfolios and so therefore, we should have seen the vast majority of the near term floating rate loan pressure already being impacting asset yields. The that's the positive side the negative side on the asset yields is is that you're now going to be we're going to be in that same position that we were 2000.
13, 14, et cetera, where the fixed existing fixed rate book of loans, which today has call it somewhere between a 375% to 45% yield on it.
You'll see in our slide deck that we had loan origination yields in this quarter of about 3% to 5% so you're going to start running into as you see greater prepayment activity you see greater refi activity the exceed the existing fixed rate book will run off at some deep kind of lower rate. The the new book of business will come on at some low rate than that existing book.
But that is not something that impacts NIM quarter to quarter or even through the through the back half of this year. That's the longer term progression that we had been kind of the two or three year window of 2012. The 2015, where you just continue to get to that point, where new origination yields are going to be 25.
50 basis points lower than what the existing book of business rolls off on so a much longer term impact to asset yields from that perspective. So we think the for the back half of this year, we're going to be at around 375 to 380 for earning asset yields you are going to see that the cost of funds was about the spot cost the fund as of June 30 was.
About 12 basis points lower than the weighted average cost of funds. So we already start the quarter with about a 20 basis point difference for us for cost of funding and that will continue to trend down because we are still repricing deposits. We still have Cds that are maturing we still have FHLB borrowings that are maturing you'd get a full quarter of the senior.
Note that we paid off now being off the books, so you're going to continue to see the liability side move into right direction. So we're guiding to three to 310.
In the month of June we were slightly over that 310, so we feel pretty good that you're going to have NIM stability to slightly increasing them for the second half of this year.
Okay. That's great Super helpful. And then just one last housekeeping question. So.
I just want to make sure. The guide that you guys are giving in your opex on the slides I know it that's out amortization expense, but I just want to make sure the cost the amort expense related to the lease acquisition and there.
Is that that do we backed that out of the Opex guide as well.
Yes that is correct.
Okay. That's correct number again, it's about through an act of 3.5 million to 4 million Bucks at quarter roughly so if you go to the in our press release there is a in the press release in the GAAP reconciliation tables in the back you've got a full reconciliation of how that Opex is calculated you can see the but it's about $4 million on the on the lease.
Okay got it alright, alright, thanks, guys I appreciate it.
Thank you.
Thank you we we'll next go to Matthew Breese with Stephens. Please go hey, good morning.
Good morning, Matt.
Just practically speaking for the loans that they go up for re deferral in late July in early August if if they don't cure how are you going to handle those from a NPL or classified classified loan.
Perspective should we expect those that don't cure to start moving into traditional.
Nonperforming asset quality buckets.
Not in the second go around so the under the under the regulatory guidance.
And this again, depending and to the point that Jack and Rob made before in each one of these cases were getting updated financials and business model projections and so forth and so.
The extent that you continue to determine that this is a near term or short term impact because of the pandemic where that business has viability post. This post this period, where you see the ability to put them back on some.
On a on a current payment status. After the second deferral you would not migrated now to the extent that so you have another 90 day window before that would happen right of essentially starting to migrate that credit down.
Realistic what's going to happen realistically here is that you're going to now that we have the benefit of well call a little bit more.
A longer timeframe to being able to make that decision, which is very different in the first go around where essentially everybody was in a mad dash did.
Everybody was up kind of losing a little bit as everybody was it a mad dash to get these deferrals approved and so forth and this go around you have the benefit of having a much more kind of educated decision.
To make based on the the updated conversations with clients and the updated information that you're getting from clients as to how their businesses are going so you, which you should start to see some migration of credit in the third quarter, but I don't think that you're going to see that holistically until the fourth quarter. Once the second go around the deferral period is over which have you think about a loan.
That comes off that deferral nine in the month of August if you have to extended for another 90 days that takes you into October Thats, why I think that it's for the vast majority of these more of a fourth quarter event in the third quarter event, but you should start seeing some migration based on updated underwriting analyses that we will do in the second go around.
Now after that that 180 days, we've learned from a number your peers that it seems like you have a tremendous amount of flexibility to extend deferrals well into 2021, if they need it.
Are you going to pursue that option at all or do you want to essentially wind down the deferral booking putting to work out categories by the end to 2020.
By the end of 2020, you're going to wind this down and put them into the from the the.
For the takes again, Jack with losing so we're in the we do lower middle market to the extent that lower middle market does it have access to capital markets financing doesn't have access to large committed lines of credit right to the extent that you have a lower middle market client that has.
180 to 270 days of of not being able to kind of open and get back to some sort and some some sense normalcy I don't think that that's a situation and what you don't have a credit that starts migrating these are not going to be borrowers that have that amount of financial flexibility to be able to withstand close to a year of not being back to normal David.
So thats not even a I don't think that thats necessarily decision or an option that we're going to have because you're going to see that at that point.
Businesses will have to start moving more towards other forms of either bankruptcy or something like that so I don't think that that is I don't think that there's as much flexibility as you're alluding to that as far understood. It's our understanding that no you will all revert back to the additional type of reading for those credits the only place that banks will be given a lot of.
At this point it could change would be on the residential side right and that could be up to a year, but no for the commercial side, that's not our expectation nor is it what we understand that the detail that's not what we're planning we're going to essentially get these things up for own we've got to put them work out we will.
And and right now what percentage of deferrals are paying you something I O or modify payment versus no payment and is that to a decent way to look at.
Marketing these into low risk versus higher risk loans.
Yes, so the numbers that we've put in the in the press release those that represent the Pmnine referrals, which is the vast majority of our deferrals.
And the again the extent that there was an interest only deferral or modified payment deferral.
Where the vast majority of the payment is being made we feel good about those credits and those were more of a defensive modifications. We wont really common deferral that would be defensive modifications that were done where we anticipate that the vast majority of all those get back to some form of up actually we'll get back to current payment status. If they have havent already we have some components of the residential mortgage.
Is that arent penile referrals are right now to Pete I deferral buckets so about.
15% of that has continued to make payments, but on the commercial side of the house those penile referrals RP high deferrals at this point.
Okay.
And then going back to expenses you know.
Your bank in particular hasn't been shy about.
Cutting branches cutting physical office space as you've gone through Covidien Im sure Theres been some illuminating moments in terms of what you can do digitally and work from home and all that.
As you really assess the branch count in the branch network sits around 80 branches today.
Where might you take that in the out years and have you taken or look at that could it could it come down substantially.
Yeah, you know we.
We are going to continue to make investments in technology and so if you would there's a there's kind of a trade off and the amount of money that we're going to put into technology and digital so the partnerships we have with.
With the Lloyd the banking as a service the online banking side of this thing being able to automate everything in the company are the are the investments that we're making.
In a direct way you kind of pay for that because through the downsizing of the physical distribution system, so being able to have clients. The demand for digital services. As you know this period of time as you said Matt.
Approved a point once and for all that clients want to do business digitally on the transaction part of it. It's also proven once and for all that clients need advice and counsel from their relationship team. So the the team strategy that we've had have worked incredibly well and the digital platform that we have as work.
Pretty well incredibly well.
So the net answer to that is we'll continue to downsize the the physical distribution were where our consumer banking teams are moving to more of a segment approach anyhow and they're doing a great job with that and but we'll continue to take real estate costs out and reallocate people costs from.
One kind of bucket to another bucket.
And then last one from me I'm sorry, Jack go ahead.
The net effect of that is with we there's still room to take on that had enough of your anti now.
Yes, Yes go ahead.
My apologies, that's not what is minimal.
In terms of the Moody's forecast can you just give us an idea of how the updates kind of progress for the quarter and if you've gotten any updates in July I know is those move in and the GDP unemployment the length of the recession. Those factors change you can it can really move the needle on the provision have you started to see more stability.
Those forecasts and should that imply anything for the provision on our side.
We have seen a lot more stability in decision, especially in these so through the second half of the second quarter, we thought we saw substantially greater stability and.
And kind of a orderly progression.
Of what the Moody's folks were anticipating particularly in their baseline scenarios, particularly related to the longer tailed part of the assumptions, where you've seen a substantial amount were the forecasts are now changing mostly is in the short part right. So if you could roll call. The third fourth quarter and early part of 2021, where Theres still is.
Every every time that one of these comes out it's essentially based on whatever is the latest and greatest numbers that are being touted from you on employment did kind of coming back now coming back so GDP in unemployment rate assumptions very substantially from forecast of forecast on the short part of the of the forecast or that kind of the near term part of the forecast, but the law.
Longer ended tail assumptions of how the economy recovers and hold so how long it takes and when you get back to pre code levels and stayed generally.
Very consistent with each one of the new update that has come out since the mid April forecast that we used for the first quarter provisioning. We have been looking at the assumptions that have a what I'll call. Some sort of a modified Nike swim type of recovery to it which is a recovery that starts at the end of this year bloody recur.
Every that takes a very long period of time to get back to pre cold levels and so as you see in our site that we put there.
We don't get back to Prequaled levels until two ended 2022 early part of 2023, which is slightly worse than we were in April, but it's only worse by about a quarter or too. So it's nice that part is not extending out the longer ended tail kind of risk of assumptions getting worse has not been there in the latest go rounds of the.
Moody's assumptions.
Understood, Okay, and then implies.
Visioning reserve levels are adequate and provisioning should reflect growth in charge offs correct.
Yes, that's correct.
Got it okay. That's all I had thank you.
Appreciate it thank you.
Thank you and once again, if you would like to ask your question. Please press star one.
We'll take our next question from Steve Mous with B. Riley FBR. Please go ahead.
Good morning, guys.
Hi, Stephen.
One follow up on that.
On the seasonal modeling kind of curious.
As the sensitivity regarding your provision and reserve.
New York Gdps.
Unemployment stories around probably 15% kind of if we see something in the low double digits.
Above your 9% forecast in the next six months, what does that do with regard to your reserve.
Yes, that's it that's a good question.
So it's a good question and at the same time, we very difficult question to answer because.
The model literally have thousands of assumptions and I'm right. So just a kind of isolating the impact of just moving one assumption isn't really the right way to think about it because there's no that would have vast majority of invitations for a bunch of others right. So it's it's a difficult question answer and I can give you a specific number that's as for each one person.
Of this it makes it go to that that that I couldnt really provide you get it won't be there wouldn't be a fair way to think about how we are thinking about the estimate of losses. What I will tell you is that a substantial chunk of the seats or reserve continued to be driven by qualitative factors and not just quantitative and so some of the things that we do from.
The qualitative perspective, when we think about the various portfolios is that we do exactly what you're suggesting Steve which is what okay. So the models are saying this we realize the models are not perfect where are the portfolios are we seeing where we're seeing the more kind of the bigger stress and where we're seeing more to kind of deferral requests and so forth and then lets you qualitative factor.
As to cover things like what happens if the unemployment rate gets worse for residential mortgage for example, so if you will see our reserve requirements on or seasonal reserve on residential mortgages. If you look at this slide deck that detail that we have in the back is about 175 basis points. Why is that our models are not assuming that there is 175 basis points of losses the quantitative.
I was not assuming that we're making qualitative overlaid based on exactly that which is what happens if the models are wrong and how do we prefer exactly that and key key assumptions and then lifts essentially allocate.
More from a qualitative perspective to the portfolios, where we see that theres greater risk on on on kind of major assumptions getting getting worse and so that way.
I hate to use the word the smoothing because I know my my external auditors are listening to this call as well.
But that's exactly what the qualitative factors are there to do which is you are essentially reserving today and so the mix and shift between a qualitative versus the quantitative component of an individual asset class would likely change because you were essentially already reserving for some model uncertainty on the qualitative factor.
All right well I was my one question. Thank you very much appreciate it.
Thank you that answered it yes.
[laughter].
Thank you. This concludes today's question and answer session. Mr. Cope Missy at this time I will turn the conference back to you for any closing remarks.
Hey, so thanks for follow on Us.
If you step back a little bit. This is probably the most unique period of time I think we've all lives through so we're working through coming out of this again the two things that we're focused on is resolving the credit challenges as we go through and worry working through that and secondly produce strong earnings driven by revenue.
The pre provision net revenue, we're we're pretty comfortable that each component.
I will continue to improve so net interest income the fees fee portion of it and the expense side of this thing given a number of the onetime items, we took to take care of our folks and the communities and this quarter. So appreciate you. Following thanks, a lot have a great day.
Thank you all for your attention. This concludes today's conference you may now disconnect.
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