People's United Financial, Inc.
Q1 2020 Earnings Call Transcript

Published: 24 Apr 2020

[Operator:]

Good day, ladies and gentlemen and welcome to the People’s United Financial, Inc. First Quarter 2020 Earnings Conference Call. My name is Joelle and I will be your coordinator for today. At this time, all participant lines are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People’s United Financial, Inc. Please proceed, sir.

[Andrew Hersom:]

Good afternoon and thank you for joining us today. On the call to review our first quarter 2020 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our Investor Relations website at peoples.com/investors.With that, I will turn the call over to Jack.

[Jack Barnes:]

Thank you, Andrew and Davis. Good afternoon. We appreciate everyone joining us today and hope that you and your loved ones are remaining safe and healthy. These are uncertain times for everyone, but we are on this together. I believe we can collectively emerge from this pandemic more united and stronger than ever.With that, let’s begin by turning to Slide 2. While the economic impact of COVID-19 will have a meaningful effect on the results for the remainder of 2020, our first quarter performance marked a strong start to the year and we entered the crisis in a position of strength. As a community-oriented bank, we have a responsibility to protect colleagues, support customers and care for communities, especially in the current environment. I would like to take a moment to say thank you to our employees, their dedication, professionalism and resilience during this unprecedented period has been remarkable. Despite challenging conditions, they have continued to provide the level of support and service customers have come to expect from People’s United.I am particularly proud of the terrific efforts displayed by the employees in the completion of the core system conversion and full integration of the United Bank in early April. The health and safety of our employees is always a top priority for the company as the seriousness of the pandemic became clear we immediately implemented a company-wide prevention and social distancing policies that included a remote-enabled workforce. We also adjusted branch service, including reduced hours and appointment-only banking to limit the potential spread of virus. Frontline employees and those and positions where telecommuting is not possible, were given additional paid time off for flexible – further flexibility to care for families and stay home if feeling sick themselves. For additional support, we enhanced benefits for all employees covered under our health plans. So the cost of COVID-19 related illness, including diagnostics, testing and any further related treatments are covered.People’s United is committed to assisting those individuals and businesses impacted by COVID-19. Consistent with our long history of providing support in times of need, we instituted relief initiatives designed to mitigate hardships to customers caused by the pandemic. Such relief measures include waiving of certain fees, implementing a 90-day foreclosure moratorium on eligible residential loans and offering individualized support to both consumer and business loans.People’s United is a relationship-based bank and as such, we believe it is critical to work with our customers to help them manage through difficult financial times. We did this during the financial crisis over a decade ago and many of those customers have grown, prospered and remained with us today. As a result of hardships caused by the pandemic, we have offered forbearance for both commercial and retail customers to once again help them navigate the challenging economic landscape. As of April 20, we have approved forbearance for approximately 7,200 loans totaling $2.9 billion comprised of $1.8 billion in commercial, $387 million in equipment finance and $657 million in retail.People’s United is also participating in the CARES Act Paycheck Protection Program. We accepted nearly 11,000 applications, of which more than 9,600 loans totaling greater than $2.1 billion have been submitted to the FDA and approved. We have currently funded $1 billion of these loans. And the feedback received from businesses we have worked with has been overwhelmingly positive.Finally, we are also engaging community organizations and government officials to ensure a coordinated approach to COVID-19 relief efforts. Through the bank and its charitable foundations, we have granted more than $3.5 million in support. This includes providing monetary support to response funds and non-profits that are meeting the basic needs of vulnerable populations, including low income residents, first responders, healthcare workers and small businesses.Moving to Slide 3, we are pleased with our first quarter performance. The results benefited from both organic growth and recent acquisitions and reflected a stable margin, continued strong fee income as well as solid loan and deposit growth. Other highlights includes operating income of $141 million increased 15% from the first quarter last year and generated an operating return on average tangible common equity of 13.2%. Total revenue of $520 million was up 22% from the prior year quarter. Pre-tax pre-provision net revenue of $218 million increased 32% from a year ago on an operating basis. The efficiency ratio of 54% improved 330 basis points year-over-year as we continued to produce positive operating leverage. The provision of $33.5 million increased $26.4 million or 371% compared to our 2019 quarterly run-rate reflecting the application of CECL and the impact of COVID-19. And finally, tangible book value per common share increased 7% from the year ago even after closing two acquisitions and repurchasing 20 million common shares.People’s United has always had a long-term view predicated on conservative underwriting philosophy, superior service, a diversified business mix and prudent liquidity and capital management, which has served us well through various operating environments. Sustained exceptional asset quality is a hallmark of our institution and we firmly believe it is an important lever in building long-term value. As we have grown the company from $14 billion in total assets at the end of 2007 to over $60 billion today, we have never wavered from our conservative and well-defined underwriting approach. The experience of our senior credit officers is significant with an average tenure over 25 years. This same team successfully steered People’s United through the prior financial crisis with a low level of losses.As you can see on Slide 4, our average charge-off as a percentage of average loans from 2008 through last year is only 16 basis points, well below the peer median of 53 basis points. Another driver of our exceptional asset quality is our high-quality cycle-tested customer base. Our local market expertise enables us to identify and develop long-term relationships with highly coveted, strong business owners and operators. Many of our customers were with us during the prior financial crisis as evidenced by the average tenure of our top 25 relationships being over 17 years. These long-term relationships provide us with deep knowledge of their businesses and operating performance through economic cycles. The diversification of our loan portfolio is displayed on slide five. And it is always important, however, during economic downturns, the value of this diversification becomes even more prominent.One of the strategic objectives of our risk management is running a diversified business model that does not overly expose the bank to a single line of business. We have provided our exposure to sectors significantly impacted by COVID-19 on Slide 6 and our conservative approach to underwriting is evident. Our hospitality portfolio had $1 billion in balances at the end of the quarter. The majority of the portfolio is flagged by major hotel brands, and most of the properties are managed and owned by operators in this space as their primary business. In addition, the properties are primarily located in the main cities within our footprint, such as Boston, Portsmouth and Burlington. In addition, our top 10 clients account for over 70% of our commercial real estate hotel exposure. Each of these sponsors are cycle tested and have extensive hotel experience. In our $540 million restaurant portfolio, nearly half of the exposure is concentrated in quick-service establishments, which have experienced lesser degree of disruption. At the end quarter end, balances in our retail were $4.7 billion. We have no material exposure to enclosed retail malls, and over half of our retail exposure is with grocery store anchored properties, pharmacies, big-box home improvement and gas stations and convenience stores. Finally, it is important to note that we have immaterial or no exposure to airlines, cruise lines, casinos, energy, student loans, auto lending, and consumer credit cards.Before passing the call over to David to discuss CECL and the first quarter results in more detail, I want to mention that due to the uncertain economic outlook caused by COVID-19, we have withdrawn the full year 2020 goals we outlined in January. As I commented earlier, People’s United entered this crisis in a position of strength with exceptional asset quality, strong liquidity and capital levels and a diversified business mix. We are confident in our strategy of operating with a long-term view will once again show the strength of the franchise as it plays a critical role in supporting the financial health of individuals, businesses and communities throughout this crisis and beyond.With that, here is David.

[David Rosato:]

Thank you, Jack. We started the year with another strong quarterly financial performance. As Jack just referenced, we entered the crisis in a position of strength. Our diversified loan portfolio has high-quality, cycle-tested borrowers, low LTVs and strong cash flows. We certainly did not underwrite our portfolios with an assumption of a global pandemic. However, we are confident our conservative underwriting approach, significant and cycle-tested risk management experience and deep customer relationships will continue to serve us well as we move through this unfolding situation.With that background, looking at Slide 7 and 8, we highlight the adoption of CECL and its application in the first quarter. The day one impact of the adoption of CECL was an increase in the allowance for credit losses of $72.2 million or 29% from year-end to $318.8 million. This increase was primarily driven by the higher reserve requirements associated with the company’s longer duration retail portfolio, partially offset by shorter duration commercial portfolios and our low historical loss experience. The day two impact of the application of CECL further increased the allowance by $22.9 million or 9% to $341.7 million, which effectively was off due to COVID-19.Our quantitative modeling reflects a baseline economic forecast as of late March, which is indicative of a U-shaped recovery in the second half of 2020. The forecast is inclusive of COVID-19 and the government response at that time. In addition, underlying the allowance is a two-year reasonable and supportable forecast period as well as a one-year straight-line reversion to historical losses.Our allowance at March 31 provides significant coverage as it represents more than eight times our annualized first quarter net charge-offs and 142% of nonperforming loans. Furthermore, the ACL represents 65% coverage of our December 31, 2019, severely adverse internal stress test, which was inclusive of the recently acquired United portfolios. It is important to note the current allowance reflects the view of the loan portfolio’s credit quality at quarter end. It represents our best estimate of future losses at that time. However, since we finalized estimates, the economic environment has continued to deteriorate and a high level of uncertainty remains, as to the duration and ultimate impact of the pandemic. As such, we might experience another elevated provision in the second quarter.Moving to Slide 9, net interest income of $396 million increased $13.3 million or 3% from the fourth quarter. Net interest income benefited from lower deposit and borrowing costs of $6.9 million and $2.8 million respectively. In addition, higher balances in both the securities and loan portfolios collectively added $5.8 million. Conversely, net interest income was lowered by $2.2 million due to one less calendar day in the first quarter.As displayed on Slide 10, net interest margin of 3.12% was two basis points lower than the fourth quarter. The loan portfolio negatively impacted the margin by eight basis points driven by the downward re-pricing of floating rate loans and new business yields coming in lower than the total loan portfolio yield. During the quarter, loan spreads widened but were more than offset by lower benchmark interest rates. In addition, one less calendar day in the first quarter lowered the margin by 2 basis points. Largely offsetting these negative effects was our continued disciplined management of deposits and lower borrowing costs, which favorably impacted the margins by six basis points and two basis points, respectively.Turning to loans on Slide 11, average balances of $43.5 billion increased by $1.5 billion or 3% from the fourth quarter, primarily driven by higher average balances in commercial real estate and residential mortgage of $922 million and $217 million, respectively. On a period-end basis, loans increased $688 million or 2%, driven by a $1 billion increase in C&I balances, which benefited from strong results in the mortgage warehouse and large corporate businesses. While large corporate benefited from approximately $200 million in line draws, the overall C&I line utilization rate was consistent with the fourth quarter at 50%. The largest offset to the C&I increase was a $236 million decline in residential mortgages as we continue to remix the balance sheet with a focus on higher-yielding portfolios. Approximately, 46% of the loan portfolio at quarter end was either 1-month LIBOR or prime based, up from 44% at year end and $3.2 billion of these floating rate loans have floors. Balances in the transactional portion of the New York multifamily portfolio, which is in runoff mode, ended the quarter at $692 million, down $45 million from year end.I would like to provide an update on the United portfolios we have chosen to runoff. In January, we stated we would runoff $1.346 billion. Since then, upon further evaluation, we decided to retain certain relationships associated with $233 million of these loans. After run-off during the first quarter of $71 million, the balance of these portfolios was $1.042 billion at March 31. We now expect runoff in these portfolios to be $200 million to $300 million for the full year.Moving on to Slide 12, deposit growth for the quarter was primarily driven by solid results in both our municipal and commercial businesses. Average deposits increased nearly $2 billion linked quarter benefiting from $1.1 billion in higher interest-bearing checking and money market balances as well as $483 million in higher non-interest bearing balances. On a period end basis, balances increased $1.2 billion from year end to $44.7 billion. We remained focused on managing pricing as evidenced by an 11 basis point reduction in deposit costs hit during the quarter. Our funding and liquidity profile remains strong, with secured borrowing capacity of $8 billion comprised with $4.2 billion in Federal Home Loan Bank capacity and $3.8 billion in un-pledged securities. We also continue to experience strong deposit inflows in the second quarter. Since quarter end through April 20, deposit balances have increased a further $2.6 billion.Looking at Slide 13, non-interest income of $123.8 million marked another strong quarterly result, although down $400,000 from a record level in the fourth quarter. As a reminder, the fourth quarter included a $7.6 million non-operating gain net of expenses from the sale of 8 Central Maine branches. As such, on an operating basis, non-interest income increased $7.2 million or 6%. Non-interest income benefited from a $15.3 million increased in a net gain on the sale of loans and $3.4 million in higher insurance revenues, reflecting seasonality of commercial insurance renewals. The net loan sale gain was driven by a $16.9 million gain related to the sale of $492 million of loans acquired in the United transaction and held-for-sale at year end.We also recorded another strong quarter of customer interest swap income, which was up $300,000 from a high level in the fourth quarter. These increases were largely offset by $1.2 million lower investment management fees and an aggregate decline of $1.7 million in bank service charges and commercial lending fees. In addition, other non-interest income was unfavorably impacted by a $3 million write-down of an MSR asset previously acquired from the United and by a $2.4 million lower income from the mark-to-market of one equity security position. As you will recall, other non-interest income in the fourth quarter benefited from a $3.3 million gain on the sale leaseback of our office building in Burlington, Vermont.On Slide 14, non-interest expense of $320.1 million declined $5.6 million linked quarter. The first quarter benefited from $21.2 million in lower non-operating costs, which totaled $17.9 million and were in the following categories

[Operator:]

Our first question comes from Mark Fitzgibbon with Piper Sandler. Your line is open.

[Mark Fitzgibbon:]

Hey guys. Good afternoon.

[David Rosato:]

Hi, Mark.

[Jack Barnes:]

Hi, Mark.

[Mark Fitzgibbon:]

The first question I had was on commercial line utilization rates. What those look like today maybe versus the start of the year?

[Jack Barnes:]

Yes, we so very similar. They’ve generally been in about a 47%, 48% kind of number. They’ve gone 40%, depending on the portfolio, 49%, 50%. Really kind of across the board on the different commercial portfolios, our middle market business banking, utilization is pretty stable, same with our home equity on the consumer side. So we have been watching that, and we’re obviously wanting to monitor that, and we’ve been very pleased with how it’s behaved actually, because I think it’s a sign that our customers are in good shape and not panicking, but and also that they’re comfortable that we will fund if they need it. So it’s a good sign.

[Mark Fitzgibbon:]

Okay. And then secondly, are buybacks likely on hold given what’s going on in the environment in your current capital position?

[Jack Barnes:]

Yes.

[Mark Fitzgibbon:]

Okay. And then, Jack, I’m curious, does M&A necessarily stop until we get sort of further along in determining how this current crisis plays out?

[Jack Barnes:]

Yes. I would say definitely for everybody, right, it’s just way too uncertain for everybody.

[Mark Fitzgibbon:]

Okay. And then lastly, on the securities portfolio, you had really strong growth there. I guess I’m curious, what was the impetus for that? Was it just sort of a temporary parking place for some deposit liquidity coming on the balance sheet?

[Jack Barnes:]

So David, do you want to take that?

[David Rosato:]

Yes, sure. Thanks, Jack. Well, there was a little bit of a backup early in the first quarter in rates, and we’re getting a sense that the economy could experience a bit of a slowdown, not, we certainly didn’t have a sense of what would eventually happen. So we decided it was more of an asset liability move just to put some duration on the balance sheet.

[Mark Fitzgibbon:]

Great, thank you.

[Operator:]

Our next question comes from Steven Alexopoulos with JPMorgan. Your line is now open.

[Steven Alexopoulos:]

Hi, everyone.

[Jack Barnes:]

Hi, Steven.

[David Rosato:]

Hi, Steven.

[Steven Alexopoulos:]

I wanted to start on CECL, so if you look at the day two adjustment, yours was one of the most modest we’ve seen through earnings season. Can you talk about how your economic assumptions change from Day 1 through Day 2?

[Jack Barnes:]

Go ahead, Dave.

[David Rosato:]

Go ahead, Jack.

[Jack Barnes:]

Well, I...

[David Rosato:]

Yes. I mean there was a significant change. January 1, we were living in the past life, right? Which was somewhat business as usual and expectations for normal growth in the next couple of years, low unemployment levels, etcetera. Day two, toward the end of March, obviously, the world had changed. I would I go back and say that besides the changing economic environment, one of the other changes was that most of the growth in the quarter was in our mortgage warehouse business, which really carries a very small reserve. We kind of broke that out on Page 7. So really, the entire provision on Day 2 was COVID related, not loan growth related.

[Steven Alexopoulos:]

Yes. But David, could you share the economic assumptions underlying Day 2, maybe just GD economic assumptions?

[David Rosato:]

Sure. Well, we ran a base case scenario, which was reflective of a U, which is a recovery within the back half of 2020. We also ran lots of other multiple scenarios, a), an elongated U where recovery didn’t occur until the back half of 2021. We also ran what people would call an L, which is basically a multiyear recovery to where we were at the beginning of the year. And then we ran a fee as well. And then the way our models work, those different scenarios get weighted based on judgment of management.

[Steven Alexopoulos:]

Yes, okay. But you did callout that your risk of another reserve build in 2Q just given how those assumptions had changed do you think we could see another adjustment similar to the Day 2 around $23 million you saw this quarter?

[David Rosato:]

Yes, I would say, it’s entirely possible. As you know, almost everyday, the economic situation is changing. This is – it’s fluid. Your own bank when they announced talked about if it was being redone, some of those statistics they were citing were substantially different when they pencils down. I would say the same is true for us, but not only are there, I would say all of us getting more concerned about unemployment levels, GDP for example, but there is also positive things, where we have got the second stimulus bill, that’s about the PP program is going to start slowing next week. Some of the states are opening up, some states are not. So it’s much too fluid to give any real color to what the 22 from the second provision will look like. But so that’s why our comment is we could see another large provision in the second quarter and really can’t give much more color than that.

[Steven Alexopoulos:]

Okay. And then just one separate question on expenses, I know you guys pulled the full year guidance, when you look at expenses where you do have more control over that less impacted by environmental factors, is there any reason the prior goal you gave last quarter $1.19 billion to $1.22 billion our expenses why that would no longer be intact?

[David Rosato:]

As always, Steve, it’s a good question. What I would say is the fluidity of the situation is the reason that we are pulling guidance and not giving more clarity. As we see the year unfold, we certainly expect fee income headwinds. We are waiving a lot of fees. At this point, we had fee increases that we had planned that we have now decided to defer. Our wealth management business is facing headwinds just because the markets are down. Offsetting that will be expense reductions. We are thinking about the pace of technology investments will be a bit slower, just because we are all working remotely. Some of what we will wind up doing this year will be technology to support our employees remotely as well as technologies to help our customers. So I think our – the way we spend money going forward in the balance of this year and the next will change a bit, but I also think we will do our best to lower expenses as much as we can relative to these headwinds as well as margin headwinds.

[Steven Alexopoulos:]

Okay, terrific. Thank you for the color.

[David Rosato:]

Yes. I would, Steve, just one last comment on that is so this is the quarter that at the beginning of the quarter as Jack said we completed the systems conversion for United. So I would like to say that we promised 55% cost saves in that transaction and we are right on track to where we should be.

[Steven Alexopoulos:]

Okay, terrific. Thanks, David.

[Jack Barnes:]

Steve, I would just – I don’t think that prior guidance is necessarily that we think of it as unreasonable right now based on where we are. There are some moving parts that David is trying to describe to give you a sense that when we pulled the total guidance, maybe that’s less dramatic. And we are and I don’t want it to be misunderstood on the technology side, we’re moving forward on a bunch of projects that we have in flight. But I think David’s comment is about pace. And when the pace is challenged, then the timing of those expenses hitting is changed. So there are different things like that, that we really just need to reassess and understand how we’re feeling about them.

[Steven Alexopoulos:]

Got it. Thanks for the call,

[David Rosato:]

Yes okay.

[Operator:]

Thank you. And our next question comes from Jared Shaw with Wells Fargo. Your line is open.

[Jared Shaw:]

Hey, good afternoon. Maybe David, just circling back on the baseline economic assumption, can you just share with us what, I guess, what your expectations under that are for unemployment and GDP?

[David Rosato:]

Sure. So as I said, the most important thing is the variety of scenarios that we ran. So we have GDP across those scenarios from no growth in 2020 to growth down 6% in 2020, varying by quarters, unemployment rates and for example, in the second quarter from down 12% to down 16%. Hopefully, that’s helpful. I mean there is – those aren’t the only two drivers to our models, as you can imagine. Commercial real estate prices, levels of interest rates, credit spreads, home prices, there’s a multitude of econometric data that goes into our modeling process. I would our models, our CECL models are essentially have been developed from our stress testing models that we’ve spent seven plus, eight years, I think now at this point, putting together, building teams, getting ready to cross the $50 billion mark to be a CCAR bank. So I would say they are all loan level and they are well-developed and actually quite sophisticated.

[Jared Shaw:]

Great. That’s good color. I guess one question I had. You talked about the loans that you’re considering that you are retaining from UBNK that you thought you would get rid of. What type of loans are those that you’re holding on to and I guess how?

[David Rosato:]

The ones that I called out $233 million of relationships, they are mostly commercial real estate loans that I would say, originally, we didn’t understand the full extent of the relationship. As we got a little deeper under the covers, we do and think there is they are high-quality relationships that have growth potential for us.

[Jared Shaw:]

Okay. And just finally, I guess with the broader move in bank stock prices, what’s the risk or the chance of a goodwill impairment charge on the books at all as you look out the rest of the year?

[David Rosato:]

It’s a good question. There was no risk in the in Q1. I think a primary driver is, obviously, our stock price and where we are. But what I would say is it’s really it’s not something we’re highly concerned about because the when we look at the goodwill on the books by acquisition, we have nice cushions across those acquisitions. And we believe we will be profitable every quarter through this, and that’s also a large driver.

[Jared Shaw:]

Thank you.

[David Rosato:]

Welcome

[Operator:]

Thank you. And our next question comes from Dave Bishop with D.A. Davidson. Your line is now open.

[Dave Bishop:]

Yes, good evening gentlemen. You noted the participation in the secured Paycheck Protection Program, just a bit of an update in terms of the fundings to-date and how much we expect to fund from the program and just curious what you are assuming in terms of fees related to this and are they going to have a NIM impact as well? And just how you are thinking about actually the funding of the program?

[Jack Barnes:]

Yes. So this is Jack. As I said in the comments, we got approval for $2.1 billion. We have funded as of today something just I think a little north in the day of $1.0 billion. So we have funded just about 50%. We have actually through the good thinking in some of our technology folks we have put a bot into what was the manual process when we started and the pace of closing and funding the loans has picked up markedly. So we are actually hoping to be fully funded with the first PPP program closed by the end of the week here. So we feel good about that strong effort from hundreds of people in our company and a lot of work over the weekends. So we have felt strongly we needed to respond for our customers and we were all-in on that. There will be some margin impacts, the 1% loans. So I know David and crew have been doing some thinking and we are forecasting on that. I would comment, we have also put some additional automation in dealing with this Phase 2, so we are also feeling good about continuing to support our customers. We have been focused on our customer base to this point in the program.

[David Rosato:]

Just a couple other digits or points of reference on that, so about 30% of the loans that we have done are at a 5% loan origination and servicing fee about 40% are at 3% and about 30% are at 1%. We are all – we have been focused on taking the apps and getting them funded and now I think us and all the banks are starting to think about exactly how the length of time these loans will be on the books and the impact to fee income and interest income, the fees that we are paying are actually part of the way the legislation reads their part servicing and their part origination. So if you really think about them, part of that fee is supposed to be amortized over the life of the loan, which technically are 2 years, but should be forgiven in 8 weeks and then part is for servicing which you can take upfront. So I would say us and everyone else is really getting our head around the margin impact and the fee income impact. We don’t really have a clear answer to that yet. These were also blowing up our balance sheet if they are on at the end of the quarter. So yes, just thinking forward I don’t think our thinking would be different than anyone else’s from the point of view. I think we will all be talking about fee income and margins with and without the PPP loans in the second quarter.

[Dave Bishop:]

Okay, got it. From a funding perspective, what are you envisioning you from that, from your loans?

[David Rosato:]

We will be funding the loans between probably 15 and 35 basis points. Yes, I saw something today or last night that home loans are actually going to accept these loans as collateral, that’s new news. So every bank can just go under their current capacities or you can use the 35 basis point facility or you can just fund it as part of your short-term funding position.

[Dave Bishop:]

Got it. And then just in terms of some of the forbearance actions, just maybe some details in terms of what you’re doing in terms of the forbearance programs on the commercial loan side?

[Jack Barnes:]

Sure. On the commercial loan side, it’s roughly 12% of the total commercial book. It varies, commercial real estate and some of the equipment finance areas are most active there. And it does appear to be slowing, I would say definitely appears to be slowing from what we are being told by the managers in the different business lines. We had that [Technical Difficulty]. Hello?

[David Rosato:]

Yes, we hear you, Jack. Move on to next question please.

[Operator:]

Thank you. And our next question comes from Dave Rochester with Compass Point. Your line is open.

[Dave Rochester:]

Hey, good evening, guys. For the loans you guys talk about on Slide 6, which is a nice breakout here, I was just wondering what some of the underwriting metrics are on those LTVS, debt service coverage ratios and whatnot, if you have that available and if you could talk about what the reserves are you have against these segments, that would be great?

[Jack Barnes:]

Yes. So I want to ask Jeff to talk some about our approach to the underwriting on the different segments. And then David can maybe comment some about reserve levels.

[Jeff Tengel:]

Yes. This is Jeff. As Jack and David both mentioned earlier, coming into this from a position of strength. And these portfolios would be similar. Going in debt yield and debt service coverage ratios and loan to values were, definitely the hospitality space and the retail space, were on the conservative side. Debt yields in the mid-teens, debt service coverage, 1.75x to 2x, LTVs in the 50% to 60% range on average. But as David also pointed out, we didn’t underwrite to a pandemic, which is why having the customer base that Jack described is being cycle tested. And in the case of hospitality, having multiple hotels within their portfolio and having been at this for a long time, give us comfort that we’ll be able to kind of weathered the storm. But clearly, if you have a hotel that has 0% occupancy, it doesn’t matter what your going in debt yield was. You’re going to have challenges, and that’s what we’re working through.

[Dave Rochester:]

Great. That’s good color. And then on the reserving aspect?

[David Rosato:]

Yes. And Dave, I’d really just point you back to our CECL slides. The dollar reserves, Page 7, but then the allowance to loans by portfolio is on Page 8. You can see a commercial allowance of 67 basis points, inclusive of the mortgage warehouse ABL at 8 basis points, retail, which under CECL because of the long nature, the long durations, requires a higher allowance at 103 basis points, total reserves of 77.

[Dave Rochester:]

Okay, great. And then you had mentioned a nursing home credit earlier. I was just curious how large that segment was. And then I know your leverage loan exposure is really low. I just wanted to get a confirmation of that, what that number looks like?

[Jack Barnes:]

Jeff, do you want to take a shot at total nursing home exposure? I don’t have that in front of me.

[Jeff Tengel:]

Yes. So yes, it’s not given the size of our portfolio, it’s not significant. The healthcare vertical that we manage has about $700 million or $800 million in it. I think nursing homes are maybe a third to less than half of that. The thing that we’ve heard most in kind of the CCAR, the senior housing space is on a go-forward basis, they expect occupancy to fall just because of the lack of people moving in. And operating expenses to drift higher because they’re having to increase their compensation for their employees and pay for a lot of the PPE purchases in caring for all of the people in those homes. But I think here, again, the portfolio is with large operators who have multiple homes who do this professionally and in the line of business. So it’s with cycle-tested sponsors. The one nursing home that got called out as part of our charge-offs, it was a very old legacy loan, not part of this portfolio per se, and has been troubled for quite some time.

[Jack Barnes:]

Yes. Meaning like five or eight years, it was a unique situation that the state ended up getting involved with as well. And we worked through with them and finally came to closure. So I would call that one very unique. And with regards to your leverage lending question, we don’t really have a sponsor-financed private equity vertical or group. So we don’t do a lot of private equity sponsor-financed lending. I would say our exposure to in that type of business is modest. We do have leverage loans, but they’re leveraged they’re called leverage loans because of the OCC definition, not because it’s an underlying sponsor finance-type transaction.

[Dave Rochester:]

And that how big is how big would that be, relatively small?

[Jack Barnes:]

Yes. I think it’s less than $1 billion over there.

[Dave Rochester:]

Okay. And maybe just one last one on capital, I know you originally talked about a target CET1 in the 10% to 10.5% range, excluding the buybacks. Now you guys have completed the buyback, it’s lower because of that. So, just wondering if you have any kind of revised target there? And then just a Tier one leverage ratio specifically at 8.4% now, you’ve got the PPP loans coming on. I was just wondering how low that can go? And what your comfort level is there? That would be great.

[David Rosato:]

Yes. So obviously, both ratios impacted because of the depletion of the buyback. So and below the original guidance we put out. The build we just expect to build from here back to prior levels as quarters unfold. So really no more color than they’re we took them down because of the buyback. Depending on the level of the provision going forward, that would determine ultimately how much retention of capital we have. The PPP loans, as I said, may or may not be on the balance sheet come 6/30 just because if they are forgiven, they are forgiven within 8 weeks and they are funding now. Just as well as a reminder that all those loans are 0% risk-weighted for regulatory capital purposes. So the only real effect that they will have is on tangible common at 6/30.

[Dave Rochester:]

And then I guess, the Tier one leverage ratio, right?

[Jack Barnes:]

Yes.

[Dave Rochester:]

Yes, alright. Sounds good. Thanks, guys. Appreciate it. Thank you.

[Operator:]

Our next question comes from Collyn Gilbert with KBW. Your line is open.

[Collyn Gilbert:]

Thanks. Good afternoon, everyone. David, I guess just a question for you. On the Slide 7 of the CECL breakout, which is super helpful, if we that $342 million now where your reserve sits, do you have that, what that is as a percent of and you may you might you may have said this in your initial comments and I missed it, but of when you would go through sort of the DFAST severely stressed loss scenario?

[David Rosato:]

Yes. It’s 65% of DFAST losses under the severely adverse scenario.

[Collyn Gilbert:]

Okay. Okay, that’s helpful. And then….

[David Rosato:]

And Collyn, just to be clear that’s not what’s out on our website, the 2017 number, that’s at 12/31/19 inclusive of the United.

[Collyn Gilbert:]

Okay. Okay, got it. And then just lower on that slide, I know you had indicated obviously duration has an impact on the CECL formula, but just can you give a little bit more color as to what drove the $20 million reduction in the allocated reserve for C&I?

[David Rosato:]

Sure. Under our previous incurred loss methodology we included ABL and mortgage warehouse within C&I and treated it as a homogenous portfolio. Under CECL, we have a specific model for those two asset classes. So that’s why it’s approximately $3 billion of loans that only carries a $2.4 million reserve FDA basis points that you see on Slide 8. So it’s actually interesting if you back those loans out as well as the $2.4 million, what you will see is for the commercial reserve, it would go from 67 basis points to 73. And if you did that for the whole allowance, it would take our reserve from 77 to 82 basis points.

[Collyn Gilbert:]

Okay, okay. Got it. And then just in terms of the loans that you guys have identified is kind of significantly impacted so on Slide 6, what – how much of those have been would you say acquired either through some of your finance acquisitions or through your bank acquisitions over the last 5 years or so?

[Jack Barnes:]

So, Collyn, this is Jack. I will take a crack at that and then Jeff if you have anything to add, feel free. We described the relationships on the hospitality side, those are long-term relationships that have been with People’s United for a long time, so that 70% of the exposure. And on the retail side, the description of the grocery anchored pharmacy, big box, all of those relationships are long-term People’s United relationships. We have financed, for instance, a lot of the Stop & Shop anchored properties throughout Connecticut. We have got a couple of customers that have done a lot of CVS-type pharmacy. So, all of that stuff is long-term tenured customers. And those are all the big dollars in those relationships.

[Collyn Gilbert:]

Okay. Okay. Okay, that’s helpful. And then just lastly, just on the can we just dig into the equipment finance book a little bit, so the $5 billion there, maybe just walk through some of the credit metrics. I know obviously restaurants are within that a little bit, but just sort of how that portfolio is faring and how you see that? I mean obviously, the slide gives you kind of maybe Day 1 impact to COVID, but if we are in this longer slowdown from an economic standpoint recession, how maybe that equipment finance portfolio will do?

[Jack Barnes:]

Yes. So you are asking about restaurants in the equipment finance?

[Collyn Gilbert:]

Well, well, just generally just the $5 billion, just all of the equipment finance.

[Jack Barnes:]

I’m sorry, I am sorry. I got it.

[Collyn Gilbert:]

No, that’s okay.

[Jack Barnes:]

So I would say and again I will ask Jeff if he wants to add anything. But so we have kind of got three distinct businesses in that in those portfolios, the old PCLC which is a leasing company, we have probably operated within the company for 25 or 30 years. Those are kind of larger mission-critical pieces of equipment. Many of those companies have definitely been impacted by the virus and we have gotten forbearance requests, but many are not, many are more insulated at least now. I would say, I would think of those as kind of cash flow focused in the underwriting higher percentage on the original loan to values. That’s the way that business functions competitively in the market, but in the typically 5-year loans. So you would think of kind of pretty evenly running out those periods. The next one is the old FinFed. And those guys do more of smaller companies, variety of cranes that are think about cranes on top of trucks that can move them around the different sizes, some construction equipment, transportation they have had an incredible record with us. They know their clients really well and they have long-term relationships.And then LEAF is small ticket item, wide variety of vendors that they work with in different industries and then a very tightly controlled credit box that’s focused on the Fair Isaac small business module and then they add a lot of attributes that they work with. Probably, the most what we think one of the quickest ways we can explain the LEAF history with you guys is these are – it’s a a management team that’s been working together for 30 years. They have been in the business through cycles. There is a ton of public information out there about their securitization they have done over the years, which is a big part of our underwriting and due diligence on the company. So again, there is going to be some companies in there that are going to be affected, no doubt, but I think the core going in underwriting approach is very sound and cycle tested. So we are that’s the way we are viewing it. I don’t know Jeff…

[Collyn Gilbert:]

Okay, that’s helpful. And then sorry, go ahead. Yes. Jeff, did you have any?

[Jeff Tengel:]

No, you described it perfectly, Jack. I wouldn’t add anything.

[Collyn Gilbert:]

Okay. Can I just – yes…

[David Rosato:]

I was just going to share some historical loss numbers to what Jack said in perspective. So in Jack’s slide where we talked about the 16 basis points of charge-offs through 2008, well, PCLC, the first one Jack talked about is included in that, because we have owned it the whole time. They have averaged over that period of time, 29 basis points of charge-offs. The old FinFed, People’s United equipment finance, we have owned since 2010, they have averaged 5 basis points of charge-offs because they are so close to the collateral. And then LEAF who we haven’t owned since 2011, but they have public securitizations out over that time period. So, from 2011 through last year, their average annual charge-offs were 72 basis points.

[Collyn Gilbert:]

Okay, that’s great color. Alright. Thanks, guys. I will leave it there. Appreciate it.

[Jack Barnes:]

Thank you.

[Operator:]

Thank you. Our next question comes from Matthew Breese with Stephens, Inc. Your line is open.

[Matthew Breese:]

Hey, good evening everybody.

[Jack Barnes:]

Hi, Matt.

[Matthew Breese:]

I just wanted to follow that last line of questioning there. So, could you remind us of what the size of the overall LEAF portfolio is? I just want to frame a reference for Page 20 where we see a lot of equipment finance loans with forbearance, but not a very large amount of it outstanding. I would assume that’s a lot of LEAF related loans?

[David Rosato:]

Yes, LEAF’s current portfolio is $1.8 billion.

[Matthew Breese:]

Got it. Okay. And then do you have prior to 2011 for LEAF what they did through the great financial crisis in terms of charge-offs and the same question for FiF?

[David Rosato:]

Well, FinFed, we have owned since 2010. So no, I don’t have their data prior to 2010. For LEAF, some of that information is publicly available, because they secure – they had public securitizations outstanding. We don’t usually reference that, because the business model coming right out of the crisis was different than what it was since 2011. So, it’s not really applicable. When we went through some of that early on, their charge-off history averaged about 90 to 95 basis points.

[Matthew Breese:]

Okay. And then can you remind, yes…

[Jack Barnes:]

Matt, it’s Jack. I just want to make sure you don’t, I heard how you started that out and it is not accurate that the majority of forbearance requests in the leasing business are all in lease at all. It’s quite mixed across the board.

[Matthew Breese:]

Okay, understood. Last question for me, just you mentioned assets under discretionary management obviously post quarter that could change, do you have what that number is down to as of April versus that quarter what you use for the first quarter, I know sometimes that’s marked off of an earlier part in the quarter?

[David Rosato:]

I don’t. We can come back to you with that, Matt. I just we don’t have it available right now.

[Matthew Breese:]

Understood. Okay. I appreciate it. That’s all I had. Thank you.

[Jack Barnes:]

Thank you.

[Operator:]

Ladies and gentlemen, since there are no further questions in the queue, I would now like to turn the call over to Mr. Barnes for closing remarks.

[Jack Barnes:]

Thank you, operator. While the economic impact of the pandemic will meaningfully affect the remainder of the year, our first quarter performance was strong. The company entered this crisis well-positioned. We are confident in the strength of our franchise with its excellent risk management capability, deep customer relationship, diversified business mix and strong liquidity and capital levels. People’s United will successfully navigate this uncertain time and play a critical role in supporting the financial health of individuals, businesses and communities throughout the crisis and beyond. Thank you all. Stay safe and have a good night.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.