Sterling Bancorp
Q1 2020 Earnings Call Transcript

Published: 28 Apr 2020

[Operator:]

Good day, and welcome to the Sterling Bancorp 1Q 2020 Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Jack Kopnisky. Please go ahead, sir.

[Jack Kopnisky:]

Good morning, everyone, and welcome to our first quarter 2020 earnings call. Joining me on the call is Luis Massiani, our Chief Financial Officer and Bank President; and Rob Rowe, our Chief Credit Officer. On our Web site, you will find the slides we are referencing in our presentation.Before we review the first quarter performance, we want to start by recognizing that these are extremely challenging and difficult times for all of us, especially those on the frontlines of this crisis, and those that have been affected by COVID-19. We have been very focused on aggressively and proactively supporting our colleagues, clients, and communities in these uncertain times. Our priorities have been to ensure our colleagues are safe and secure, while providing uninterrupted value-added service to our clients. Given our well-developed information technology platform, at the onset of the pandemic, we were able to quickly transition roughly two thirds of our employees to work from home. We have ensured our financial center colleagues are safe and are operating with reduced hours and have maintained 85% of the offices open. Though, we are adjusting closures as safety dictates and have changed hours and access protocol across the institution.We have provided additional compensation and adjusted benefits to all employees to support their families and communities during this difficult time. We have proactively reached out to our commercial and consumer clients to support them as they navigate this challenging time. For consumer mortgage clients, we are providing 90-day grace period relief as well as waiving certain fees. For commercial clients, we are working to extend interest and principal payments as needed. In total, we are providing relief on $1 billion of loan balances, or approximately 5% of the loan portfolio. We are providing the support necessary for the SBA's paycheck protection program, and have approximately $650 million in applications and funding working through the process. We intend to participate in the Main Street Lending Program in conjunction with the Federal Reserve. We have focused our philanthropic action on communities that are most vulnerable and hardest hit by providing funding to 14 food banks in our markets and providing technology resources to schools in low and moderate income areas. I am extremely proud of our colleagues as they have worked exhaustively to support our clients, communities, and each other during this crisis.Moving to the financials for this quarter, on an adjusted basis, we incurred a net loss available to common shareholders of $3 million and adjusted loss per share of $0.02. Our results were most impacted by the elevated day-two provision, which was made more severe by the pandemic-driven disruption to our economy. We adopted CECL on January 1, 2020, and the day-one adjustment increased our allowance for credit losses by $91 million. Given an increasingly uncertain outlook for the economy beginning in March, we added a $138 million to our provision for credit losses at the end of the quarter, bringing our allowance for credit losses to 1.5% of total loans. Our base case for CECL utilizes a blend of Moody's scenarios, reflecting moderate and severe recessions, and anticipates GDP will shrink by an annualized rate of 18% in the second quarter, not returning to prior levels of production until 2022. We believe our allowance reflects the current economic outlook as of today.We adopted the regulatory relief that provides for two-year delay and subsequent three-year phase-in for regulatory capital impacts of CECL. The credit exposures we are focusing on, given the disruption of the economy are on page 15. First, we have a commercial real estate exposure, primarily to hotels in the Greater New York Metro area that have national flags and are supported by long-term liquid operators in the amount of $395 million. These properties have a loan to value of 54% and strong historic cash flows. We also have a small real estate secured portfolio of restaurants with $48 million outstanding. The hospitality commercial real estate represents 2% of the overall portfolio, and we have been working with these clients to modify $110 million in balances or 25% of our portfolio.Secondly, our commercial real estate book has exposure to retail operators in Metropolitan New York in the amount of $1.3 billion. The majority of these properties are anchored by grocery, drug, and other essential tenants and have a weighted average loan-to-value of 50%. There are no regional malls or lifestyle centers in this portfolio, and these properties have been operating over the past month given the essential nature of the anchors. Retail commercial real estate represents 6.1% of our loan portfolio and has traditionally had strong debt service coverage. We are working with clients to modify $78 million in balances or 6% of the portfolio.Third, our equipment finance and ABL portfolios have $654 million in outstandings to the transportation industry. The majority of these loans are to national shippers. Of the total balance, we maintain $122 million to smaller localized specialty transportation businesses such as towing services that have an average outstanding of $83,000. Transportation exposure represents 2.3% of total loans, and we are working to modify $90 million in balances or 14% of this portfolio.Fourth, our franchise finance business is primarily to larger, quick service national franchisees that have continued to operate during the pandemic. The loans are secured by real estate and equipment, and we're modifying $77 million in loan outstandings, and finally we have very low exposure of $64 million to the oil and gas sector through our equipment finance and ABL portfolios.Turning to our performance for the quarter, on an adjusted, pre-tax, pre-provision, net revenue basis, we grew by 3% over first quarter 2019. Recall our slower pace of growth over the past year reflects our shift out of commoditized asset classes into targeted relationship-oriented portfolios, this transition is essentially complete.From a balance sheet perspective, commercial loan growth for the quarter was strong. Our commercial loan portfolio grew $412 million over the fourth quarter of 2019 or 8.7% on an annualized basis. The portfolio increased 13.7% from the same period last year. As we adjust our capital allocation, we will only fund loan relationships that yield accretive risk-adjusted returns. Credit spreads and yields for new loan originations and commercial finance, asset-based lending in certain sectors in commercial real estate are not currently achieving our targeted return hurdles.Given the historically low rate environment, we will be very selective in what opportunities we fund and we trade superior return characteristics for growth. We estimate net commercial loan growth to be in the $500 million to $1 billion range for the full-year. The Mainstream Federal Reserve Program should enhance the viability of middle market commercial borrowers. The first quarter traditionally has a lower growth rate in core deposits given the annual runoff in deposits, resulting from tax collections and subsequent usage by municipal clients.Total deposits increased approximately 1% over the linked quarter and 6% year-over-year. Since mid-March to the present, we have seen increased deposit flows as clients have moved funds from the market into safe bank havens. We'll also continue to expand our funding channels and have been encouraged by the growth in relationship balances and digital deposits. We estimate deposit balances will match loan growth over the course of the year. Given this historically low Fed funds rate and dramatic downward shift in the yield curve, the net interest margin declined in the quarter.Loan yields declined by 37 basis points over the linked quarter due to a decrease in accretion income and as short-term rates declined significantly. Deposit costs declined eight basis points and interest bearing liabilities declined nine basis points. Based on the actions we have taken to date, we expect the total cost of funding to decline 10 to 15 basis points in each of the next three quarters to end the year down to 35 to 45 basis points. This should allow us to stabilize the margin throughout the year as our focuses to match asset yield declines with funding cost decreases.In addition to deposit repricing, we expect to reduce our cost of wholesale funds by 25 basis points per quarter through the balance of the year and we have $170 million in senior debt and senior note maturing in June that we pre-funded with our sub debt issuance in December. Core fee income for the quarter was strong increasing 19% over the linked quarter turn primarily by loan fees and commissions, including operating lease income of $4 million acquired in our portfolio purchase we closed in the fourth quarter. Expense levels were essentially flat to the prior-quarter. Our efficiency level continues to be among the best of peer banks. It is most essential to provide added support to our colleagues and clients during this difficult time, which may result in a temporary increase in costs. However, we will continue to focus on controlling expenses where we can and making investments to ensure superior efficiency in the long-term.Net-charge offs declined $7 million or 13 basis points of loans. Delinquency levels were similar to this quarter one year ago, but nonperforming loans increased by $82 million driven by credits in commercial real estate, ABL and equipment finance. We were more aggressive in moving credits to substantial, substandard and NPLs given the environment and potential risks in the future. We have provided significant detail on our CRE, ADC and ABL and equipment finance portfolios on pages 16 and 17, which represents the majority of our criticized loans. We are comfortable with these portfolios given diverse industry exposure, strong levels of collateralization and individually underwritten borrow relationships.Capital and liquidity ratios remain strong. Tangible common equity to tangible assets was 8.74% and Tier 1 leverage ratios were 9.41% at the holding company and 10% at the bank. We have targeted a minimum of TCE to TA range at 8 to 8.25%, and Tier 1 leverage at the holding company of 9.25%. Even with this meaningful increase in the allowance for loan losses, capital levels were similar to last quarter and will build throughout the year.During the quarter, we repurchased 4.9 million shares, although we have decided to temporarily suspend our share repurchase until the long-term impact of the pandemic is known. Our liquidity levels are extremely strong with core low cost deposit funding, untapped FHLB borrowings, Federal Reserve Liquidity Majors, bank lines of credit, and wholesale funding of nearly $9 billion. In addition, we have minimal exposure to unsecured committed lines of credit.To summarize the quarter and provide our thinking for the balance of 2020 for what we know today, I want to make the following points. We are a strong diversified and profitable. On a pretax pre-provision basis for the quarter return on assets was 170 basis points, and return on tangible equity was 20%. We have a diverse mix of credit portfolios to ensure that we are not highly concentrated in any one area and that we have multiple options to allocate capital based on market dynamics. We have robust levels of capital, a diverse mix of liquidity sources and substantial earnings, which will continue in this cycle. We have historically generated net capital through earnings of approximately $350 million after dividends with strong returns and we ever accreted significant tangible book value over the past nine years.We will adjust our models and meet the challenges facing us with thoughtful, proactive strategic actions to ensure continued level of high performance. We expect to grow tangible book value in 2020 by high single digits. Our leadership team has been through many cycles over the past 30 years and we will successfully navigate through this one. It's one of the reasons why we decided to go to 150 basis points on the allowance because our view is that given the challenges in the market, we would prefer to provide a significant buffer upfront to deal with the pandemic as time goes on.Finally, I want to recognize our amazing colleagues and clients. Our colleagues have adjusted to this challenge very quickly and find ways to support each other, add value, and provide great service to our clients. Our clients have been terrific partners in working through the unknowns in our economy. This is the time when you need us most and we will deliver for them.Our relationship based team model has enabled us to comprehensively be a hands-on advisor in confidant. I am very confident that we will collectively find a way to defeat this challenge, we are all fighting and create an economy that thrives and prospers in the future.Now, let's open up the line for questions.

[Operator:]

Thank you. [Operator Instructions] We can now take our first questions. This comes from Casey Haire of Jefferies. Your line is open, please go ahead.

[Casey Haire:]

Yes, thanks. Good morning, guys.

[Jack Kopnisky:]

Good morning.

[Casey Haire:]

Maybe just start off on the credit migration, it sounded like you guys were a little bit more aggressive given the environment. It was a decent amount though. Could you just provide a little color on what you were seeing in asset-based lending, equipment finance, and the construction portfolio? And then secondarily, were these from acquired portfolios?

[Jack Kopnisky:]

Yes, so let me start off, and then I'll turn it over to Rob on this. One, given what we see in the future, we were very aggressive about moving credits through this cycle. So, whether it's substandard and NPLs, probably half of what we moved through the cycle, we wouldn't have moved in a normal time, but we decided to be aggressive in this process. The other thing I would tell you is, all of the credits on the NPL side that were increased ended up being secured credits. We have very good collateral on all of them. The loss given default cushion of just the ones we moved in is extremely low. We don't believe we're going to lose much of anything on these if they go through a default scenario. So with that, I'll turn it over to Rob, and maybe add some more color to this.

[Rob Rowe:]

Sure. In terms of most of the NPA increase, they were not from the acquired portfolio. There was a little bit of that that's transportation related. And then in terms of more commentary, the construction, and we did highlight it as ADC, but it really is a -- it is a deal that has already been constructed. It's in lease up now. The lease up was slower than expected, although reasonable. Now, with the COVID though, that’s going to change the dynamics in that particular deal, which was a $30 million deal, and so that's why we moved that into nonperforming. The bulk of them are really diffused in terms of industry, so we don't want anybody nor ourselves to extrapolate from anything in particular. It was a pretty good [indiscernible]about it.

[Casey Haire:]

Okay, great. And just switching over to the loan growth guide and NIM guide, so it sounds like there's not much on the loan growth side that's hitting your hurdles, so I guess what kind of categories are hitting your risk-return hurdles, and then where are new money yields on those categories versus the 4.47% in the fourth quarter -- in the first quarter here as well and then your -- versus the origination yield of 3.82%?

[Luis Massiani:]

Yes, so it's about - so Casey, it's -- on the new origination front, the yields, high 3s to low 4s is what we're trying to target, and we think that there are opportunities like that out there across the entirety of our portfolios, but you have to be selective in identifying those. So, it's not that we're necessarily earmarking one loan portfolio over another for growth, it’s just that we're going to be selectively growing across the board all the portfolios whenever we find opportunities from a credit spread perspective, in particular are over 250 basis points to 275 basis points or better than that. So maybe we don't want to fall into the trap of absolute yields, we are very mindful, essentially continue to maintain a discipline around origination yields, and particularly related to credit spreads, and when the credit spreads make sense regardless of the asset class. And in many respects, a little bit agnostic to the industry as well, we will continue to execute on that. The reason for essentially lowering that guide is the fact that, yes, we would anticipate that in order to get the right types of deals and that sell activity [ph] that we're talking about, we have to step off the accelerator pedal a little bit there. We need to focus on again just places where we're going to find full relationships that are doing -- going to be overall more profitable over time.There's also a component, as Jack alluded to, of a substantial amount of our borrowing -- of our borrowing clients are going to be eligible for various programs, Main Street being one of them. So, it's uncertain and unclear as to exactly how those programs are going to continue to work, and in particular how Main Street is going to work. But we do envision that some portion of originations that we would have had over the course of the year are going to be offset by some of these programs as we continue to move forward. So, there's going to be more details on that, we think, shortly, and we'll be able to get our heads around a little bit more of how those are going to impact the pipeline of business.On the NIM front, we are – there’s positives and the negatives. You obviously saw pretty substantial earning asset yield compression in the first quarter. That's driven by the $6.5 billion to $7 billion of floating rate loans that we have. Those loans are largely concentrated in four business lines which are traditional C&I, asset-based lending, warehouse lending, and then about $1.5 billion to $2 billion of loan swap transactions that we have that are in our commercial real estate and multifamily portfolios. That $6.5 billion was -- so it felt -- a lot of pain in the first quarter. There's going to be some additional earning asset pressures as LIBOR continues to converge downward towards fed funds [ph], and we've started to see that in the early part of the second quarter.With that said -- that being the negative, and the positive being that we've also -- this has also given us the opportunity to re-price pretty meaningfully across the board everything that we do on the funding liability side. So we provided in the slide deck there what we consider to be a pretty good guide of how we see that cost of funds evolving because when you think about the difference between the weighted average cost of deposits and the weighted average cost of funding liabilities for the first quarter relative to where deposits and funding liabilities exited the quarter on a spot basis at 3/31, you're getting about a 17 basis point to 20 basis points pickup in funding cost reduction.We're going to continue to see that over the second quarter because you have three things that will continue to happen. And first and foremost, our CD book is going to continue to re-price down. We have another $1 billion -- of just over a billion dollars of CD that re-prices in the second quarter. And the difference between the weighted average yield or the weighted average cost in those CD and where they are going to re-price today is about 100 to 125 basis points, depending on the term of the CD. Second is the FHLB advances of we had about $500 million of FHLB advances that mature in the second quarter. There's another billion that mature in the second-half of this year. The funding pickup on FHLB across the board, if you essentially take the rate curves today relative to the weighted average cost of the FHLB cost, is about 150 basis points on average.And the third component is that we have been very aggressive in starting the cut down, particularly in the month of March we started to cut down pretty meaningfully all consumer commercial deposit client rates as well. We are not done with that yet. You are going to continue to see that happening over the course of the second quarter and over the second-half of the year. So our weight average cost of funds of total funding liabilities, which was 98 basis points in the first quarter on a weighted average basis. We exited the quarter at 81 basis points, and we think that that -- and we're targeting that that 81 basis points from here to the end of the year is going to get down closer to 35 to 40 basis points. So there is a meaningful re-pricing of about 40 to 45 basis points that will happen on our $26 billion of funding liabilities, and that is what we think is going to create some pretty good NIM stability as we move through the rest of the year.

[Casey Haire:]

Great, thanks. Luis. Just one more, the TCE ratio, down to 8% - 8.25%. Well, it doesn't sound like there's a lot of balance sheet growth coming, so I don't -- it doesn't seem like there's a lot erosion from the, say, 74 level. Why sort of lower that a little bit, is it just a nod to the PPP participation?

[Luis Massiani:]

Yes, it's not really a lowering, like if you go back to probably the last two years of earning calls, we've been essentially guiding to -- we're comfortable at running the company at 8% to 8.25% TCE ratio. Based on where we stand today from a reserving price, so with the $326 million in allowances direct to the capital ratio that we have, when you combine allowance plus tangible capital we have plenty of capital relative to what we have established are the hurdles that we can run the company at. So if anything, this isn't about pointing to the fact that the tangible common or the TCE ratio decreases. It's actually the fact that we think that we still are in a pretty kind of robust exit capital position relative to where we would be comfortable running the company, because we either get there from a gross perspective or when we decide to turn back the share buyback as the environment becomes clearer, we continue to have excess capital where we would be comfortable running the company at a lower ratio than where we are today. But it's not about decreasing the ratio per say because of losses.

[Jack Kopnisky:]

Yes, just want to emphasize the same point because we have a lot of write-ups that miss in total. We're not intending to move it to 8% to 8.25%; we're just saying that that is the minimum level that we're comfortable with. If anything, capital will build in our forecast for the year. So we want to create capital flexibility as time goes on.

[Casey Haire:]

Yes, sounded that way. I just wanted to clarify. Thank you.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Thanks, Casey.

[Operator:]

Thank you. We can now move along to our next question. It comes from Alex Twerdahl of Piper Sandler. Your line is open, please go ahead.

[Alex Twerdahl:]

Good morning, guys.

[Jack Kopnisky:]

Good morning, Alex. We didn't -- they didn't butcher your name too badly, right?

[Alex Twerdahl:]

Twerdahl.

[Jack Kopnisky:]

Yes.

[Alex Twerdahl:]

A new one, only took me about 25 minutes to dial in, so I'm happy to be here.

[Jack Kopnisky:]

Yes.

[Alex Twerdahl:]

It seems to me that you guys -- going back to the reserve here, it seems to me that you guys took about a severe scenario as you could justify, tried to put as much weight as you could on that scenario, and then tried to frontload as much of a pain as possible that potentially could result from this whole crisis. Is that a fair characterization of the way you guys thought about the reserving here?

[Luis Massiani:]

That is a fair characterization. The one caveat being that there's -- as everybody has said and we think so as well, there is still uncertainty out there, right. So we have always taken the approach that we think it's better to kind of hit these things head on and get them behind you as quickly as you possible can. That's why we didn't take advantage of determining that things were COVID-related, essentially not migrate credit and so forth through the classification grade. That the end of day we are -- we're very confident in the composition of the book of business, and we have always been very cognizant of the fact that when you go into environments like this you are going to have some additional charge-off content. We have been pretty -- you know which ones are the portfolios that are going to have some of that lost content.Those are portfolios that have now been in our view for the most part very fully reserved. And we are -- not to say that we're not going to have incremental reserving requirements going forward because it will depend on what happens from a macro environment, that how those forecasts -- continuing forecast assumptions change. But we have based our forecasts, and we based our modeling off of mid April data, which I do think is slightly different to what others have done that we were, again just from a timing perspective, there was a use of forecast scenarios that we're just earlier on. So we do envision it and we do think and believe that we have essentially gotten ahead of it a little bit more just because we used more up-to-date information where again we were a little bit more draconian in the assumptions that we were making from all things macro.

[Jack Kopnisky:]

The other reason why we're comfortable with what we've done on that basis, if you step back, and this is one of the points I have not done a good enough job of getting across. One, we are a secured lender. So we have two big portfolios. One is a commercial real estate portfolio that's about a 48% loan-to-value in total, and was a debt service coverage of 168, and we have a C&I portfolio that is 97% secured within margin. So we don't have things like many committed unsecured lines of credit. So we had the minimus amount of draws on lines of credit because all of our lines of credit -- the majority of our lines of credit are secured, and they're based on the assets that secure them as to the advance rates.We don't have very much leverage lending. We have some degree of three and four times leverage deals, but we have a very small amount, and frankly, we have virtually no SNICs, so the shared national credit. So we tend to be a bread-and-butter, although diverse bread-and-butter secured less leveraged type of portfolio. With that said, as I mentioned in the comments, I've been -- all of us around the table have been around this -- challenges like this in the past. Not exactly this one, but similar economic shocks to the system. And our experience says take as much medicine as you can upfront, and hopefully it gets better going forward than you estimated, but in case it doesn't then you have to deal with that. So we're tried to use experience and history to look at this thing. And as Luis said, the benefit we have about announcing earnings now is we've been able to see all the models work through this. So the numbers we're using are very up-to-date and very directive, so -- thank you.

[Alex Twerdahl:]

Great. And then just as I think about the 1.50% reserve today, and then just knowing that so many of your portfolios were acquired and marked on acquisition. Is there a way to kind of characterize the reserve and sort of say if you had included those loan marks on there, that instead of being a 1.50% you would go to X.

[Luis Massiani:]

Yes, about another 30 basis points to get closer to about 170, still 175 to 180.

[Alex Twerdahl:]

Okay, very helpful. And then this is, as you think about loan growth going forward and you cut the guidance justifiably for 2020. And it sort of I think about that as it stacks up versus the expense targets, expense service hadn't really changed. However, I know that a good chunk of the expenses were supposed to be branch rationalizations, et cetera kind of wheeling into business development on the loan growth side and if we might have less business development in loan growth side, shouldn't expenses come down a little bit more than it was in the guidance?

[Jack Kopnisky:]

Yes, the way we've looked at that, Alex, frankly because it's the right moral and ethical thing to do. We decided to create full employment this quarter. So we would normally cut costs and personnel. I'm not going to cut people in this quarter in the middle of pandemic. When we get through this quarter, hopefully, the economy turns around, and we will adjust our expense models into the third quarter and the fourth quarter along the way. So, there's one of the things that I think is like a little bit of a moral imperative to take care of your folks during this period of time, but your assumption about expense reductions and by the nature of what's happened in the economy, they're going to be businesses that we need to put more people against and businesses we have to take less people from. So that's how we see it. So, those will improve through the year. We're just, we're doing in our view the right thing in this particular year-to-date and in this particular quarter, so that's how we view.

[Luis Massiani:]

I did anything that's been there's any positives that have come out of that the current situation that we're all going through. But one of the positives has been that if anything we're actually more bullish on return on how many financial centers and how many kind of locations you actually need to continue to operate and provide services to the same level and value as we've been providing the clients through this. So, we've actually been very encouraged by the fact that we've seen a substantial amount of migration from folks that traditional use the financial centers to going onto our online systems and using our online banking tools, we've seen a substantial, we have seen, it's becoming clear as to where the opportunities are, and continuing to rationalize the entirety of financial footprint.So, we as Jack alluded to, we've made the decision that it's not the, it's not that we're putting it on, it's not that we're not going to continue to rationalize expenses, but we're putting that on hold for a short period of time as we continue to work through this longer-term, if anything, we're going to actually be substantially more bullish than what we have been up until this point in continuing to reduce the number of locations and continuing to shift how we essentially staff all of our businesses and particularly our consumer bank to make it substantially more efficient than what it's been. This has proven to us you can actually be even more aggressive than what we've been up to this point. So, long-term, this is actually a great opportunity.

[Alex Twerdahl:]

Thank you for taking my questions.

[Luis Massiani:]

Got it. Thank you.

[Operator:]

Thank you, we can now move along to our next question. It's from Steven Duong of RBC Capital Markets. Your line is open, please go ahead.

[Steven Duong:]

Hey, good morning guys.

[Jack Kopnisky:]

Good morning, Steve.

[Steven Duong:]

Good morning. Have you guys run internal stress tests recently and if so do you mind giving us what your loss rates were on those?

[Jack Kopnisky:]

Yes, so the detail on loss rates, we're not going to provide Steven, but we have run stress tests, we run severe recession scenarios and not necessarily OCC or DFAS driven scenarios because we don't think that those necessarily kind of really apply in this instance. But we have run stress scenarios that have severe recessionary environments, even more severe than we are modeling out, and we are very confident and comfortable that we continue to maintain substantial buffers rather than devolve capitalized threshold across the board. So, one of the positive things about being having the types of PPNR profitability that we have and not being as big dividend payers, the fact that we have a substantial amount of internally generated capital that if you've shut off or decrease the trajectory of balance sheet growth, we get to a place where we create tangible capital ratios very, very quickly. So, even under severe recessionary scenarios that we're running, we're very confident that we could continue to run at levels that are well above what capitalized threshold and well above our internal capital requirements as well.

[Steven Duong:]

Great. And just curiously in these stress scenarios when you're looking at your PPNR. Generally is there a sense of how much of the decline peak to trough your PPNR goes to? And is that primarily from just purely from a rate shock, or is it affected by delinquencies as well?

[Jack Kopnisky:]

It's combination of both, it's mostly rate shock, and it's mostly sorry, we put phone on mute for a second, so we're primarily from rate shocks and as you could imagine, if you continue to have a prolonged environment with a rate curve, like the one that we're in right now, where you really have no steepness to it, that's where the biggest amount of pressure comes from, and that will be the biggest part of the kind of severe stress scenarios that we continue to model is that to the extent that you don't get any steepness to the weakness to the curve, you are going to be in a place where over some period of time you continue to feel some margin pressure, and if you extend that out for a period of two or three kind of like two or three-year window, you do get to a place where PPNR decreases by about 15% to 20%.

[Steven Duong:]

15% to 20%, is that right?

[Jack Kopnisky:]

Correct.

[Steven Duong:]

Okay.

[Jack Kopnisky:]

That is bigger reset. So, to be clear, that's not what we envision is going to happen, so to be clear on that, but that is when you essentially think about what are the pressure points that we have in our business model in the severe recession scenario, or a severe stress scenario is the fact that we do generate about 85% to 90% of our revenue spread lending in an environment in which we continue to have a kind of lower forever type of rate dynamic with five-year and 10-year treasuries that continue to be at somewhere between 45 to 65 basis points, that would cause a little bit of pain as we continue to move through an environment like that. That's not we're modeling, but that would be the, what would be truly a real stress scenario for us.

[Steven Duong:]

Right, and I guess, so is that 15% to 20% a decent amount that's from a rate shock, and we've kind of already gone through a rate shock.

[Jack Kopnisky:]

That's right.

[Steven Duong:]

So that kind of baked in already, is that fair to say?

[Jack Kopnisky:]

It's baked into, it is definitely baked in on the floating rate loans, no doubt. Now, you also the one part that's not baked in that is and that's why I say that it's over two or three year window is the fact that new origination yields, for example in the first quarter worth 380, just under 385 basis points, right. So we could say, as the book of business, the existing book of business rolls off, there would be some continued margin compression from the perspective of that same type of asset class not having might have a bigger credit spread, but it doesn't have necessarily the higher absolute yield than where we were before. So there's always shifts on that too Steven, so it's not easy. No those assumes static portfolio doesn't assume that we really move balance sheet compositions on both the asset and the liability side was a difficult question to answer, but that there's no doubt that that type of environment would continue to cause some pressure from an NIM compression perspective. But there are various levers that we could pull that would essentially alleviate some of that longer-term that are not factored into that 15% to 20% that I mentioned to you long-term.

[Steven Duong:]

All right, great, appreciate that. Just good luck with everything, thanks, guys.

[Jack Kopnisky:]

Great, thank you.

[Operator:]

Thank you, we can move on to our next question. It's from Matthew Breese of Stephens Inc. Please go ahead.

[Matthew Breese:]

Hey, good morning, guys.

[Jack Kopnisky:]

Good morning, Matt.

[Matthew Breese:]

Going back to the substandard loan migration, can you just talk about the process for identifying loans that were or were not impacted like COVID-19 here? I mean, even the construction loan that Rob mentioned, it sounded like you may you could have interpreted that that as COVID impacted. Why didn't you decide to use some of the latitude you've been given to put that loan to forbearance into the forbearance bucket versus NPL? And the reason I ask is, is I think the interpretation of the deterioration isn't necessarily aggressive versus non-aggressive as you put it, but that has occurred pre-crisis pre-COVID?

[Jack Kopnisky:]

That's correct. I agree with what you're saying from pre versus post, with that said, Matt this is we are whatever we're going through a modification process or forbearance process, we are not just taking the pre versus post and saying and draw on the fine line of saying that that's the defining factor as to why something becomes a migrated credit or not. We're looking at every one of these things individually, potentially getting updated financial information for commercial real estate, multifamily deals are getting everything updated with rent rolls and tax returns and everything that you need to be able to make a decision for commercial type credits we're essentially looking at models and updated projections and understanding what are the true underlying dynamics of the business just because we're not taking the approach of saying just because the business was current prior to pre-COVID, it means that this is a forbearance loan that doesn't migrate through credit as well. We're looking at the long-term impact of COVID on that business in the long-term, what we consider to be the long-term viability of that business. The reason for migrating those credits and putting them into the buckets that we did as the fact that those are not credits that we have determined that we're going to run through and get a managed as if they were a workout credit and we're essentially going to focus on executing our collateral position and getting our money back as quickly as we possibly can. Don't want to sound pulled harder than that. We're not working with borrowers because we obviously are, but that doesn't mean that we're essentially just getting prep launch to our commercial banking teams and our credit folks essentially work with everybody. We're making individual decisions and whenever it makes sense to provide food grants, we will and we will work with borrowers. Do -- to help them through this and provide some relief. But at the same time, we identify situations that need to essentially continue to run their course from a credit perspective, we will absolutely do that. And that's what we decided to do with those three credits. We could have those four credits. We could have taken the position with those credits of essentially saying don't migrate in this quarter. We decided not.

[Matthew Breese:]

Understood. Okay. You were one of the few banks to use the April economic forecast and your provisioning, as you went through the quarter and Moody's provided updates, how much of a difference in the outcome in the provision was there from using the late March data to the mid-April data?

[Jack Kopnisky:]

Increased by about 35%, and one of the challenging factors that we went through and all banks that use Moody's went through this and the fact that for a period of time, Moody's is essentially producing a new forecast scenario every day, right. So, we started running model in mid-March with some impact, where you had started to see already that macro assumptions were changing and therefore there was some changes to reserves already. Those started - the Moody's models kept on getting worse over the course of the end of March and into April. We finally decided to put a kind of a line in the sand and kind of the stake in the ground on April 11th and say that is the scenario that we're going with. And subsequent to that, Moody's has come out with some additional scenarios where you continue to see some deterioration, but it's much more the level of grade of decay in the forecast assumptions is actually been has subsided somewhat relative to the scenario that we use. So, we purposefully decided to wait as long as we could to essentially get the most updated information. We ran multiple scenarios, we ran the scenarios that included the pretty recovering impacts of COVID, and we'll continue to manage them as we have go over the course of the year.

[Matthew Breese:]

Understood, okay. And then just one more on the reserve, as I look at the breakdown on page seven by the different buckets, one thing that stood out to me was that your traditional C&I bucket, there is about 129% reserve versus CRE, which is 172. I would think it would be the opposite. Could you just help me better understand why the C&I portfolio is at a lower reserve level than your commercial real estate?

[Luis Massiani:]

So look at the historical loss content that we've had in C&I. If you take out medallions, which are embedded in that traditional C&I bucket. We have essentially had zero losses in traditional C&I that is bread and butter, commercial banking. The input for commercial banking that all of our relationship managers and commercial bankers do. Those are long tenured relationships with the bank where we have had a history of -- we have very, very strong cash flow dynamics and underline borrowers there. And that is not a portfolio that even under severe stress doesn't get through this. And so a little bit of what Jack was talking about before, we don't have in C&I a whole lot of unsecured exposures. So, all of that is driven for the most part off of borrowing basis with a substantial chunk of that borrowing base being based on adventure. It's off of accounts receivable. So the nature that's C&I booked is maybe not, is not unsecured cash flow base funding, which is the reason after where the loss content has been, again, if you set aside some specific verticals like medallions, the loss content in that book has been very, very strong throughout, and that's reflected in the long-term model.On the CRE side, you have - listen that is one of the portfolios where you would have essentially seen the numbers that we were running in mid-March. That's one of the portfolios where the increase of 35% that I alluded to as forecast assumptions change, that's one of the portfolios that was most severely impacted by that. So in the last history that we have had in commercial real estate has been very strong throughout all of the legacy providence bank as well as all of the banks that we have merged with and acquired over time have always been very good commercial real estate lenders. The history and track record of CRE performance has been very, very good. That is a portfolio that under changing macro assumptions, that is a portfolio that felt into the vast majority of that shift or increase at 35% as a macroeconomic assumptions decade in the various stuff, modeling scenarios that we put forward.

[Matthew Breese:]

Very good. Last one for me just on the accounts receivable business. Can you just talk about what you're seeing in terms of aging of the receivables? Is there any deterioration there? And I know you have a look at the books every couple of weeks or are you seeing folks starting to stretch a little bit and not pay on time?

[Luis Massiani:]

So I'll answer first, and I'll turn it over to Rob. I think that you're -- so those -- that we have not seen migration and deterioration trends from an aging perspective. What we have seen and what we are going to see over the course of the second quarter and into the third quarter is that the balances are going to decrease pretty substantially. So the both from an end of period perspective as well as an average balance perspective, if you look at our payroll finance and our factory businesses today, there has been a decrease of about 15% to 20% in the balances or volume of receivables that are being factored. Not surprisingly, when the economy has shut down and there isn't kind of the turnover of new goods and services being produced, you're going to have less invoices to provide financing on. So you started to see a volume decrease that has been pretty substantial. We hadn't yet seen a significant aging of the delinquencies and you'll see that, we actually have had up until this point, no modification requests in factoring their payroll financials until this point because we have been able to continue to collect on accounts receivable.

[Rob Rowe:]

Yes, there are a few accounts in the factoring business though that as you imagine, we are watching very, very closely and we are working with our clients where we risk sharing with them more than we would have done in the past on specific retailer names. Our total exposure on the factoring side that we're watching exceedingly closely is around $5 million of exposure. But nonetheless, it is exposure.

[Matthew Breese:]

Understood. Great, that's all I had. Thanks, guys.

[Rob Rowe:]

Thanks, Matt.

[Operator:]

Thank you. [Operator Instructions] We can then move along to our next question comes from Collyn Gilbert of KBW. Your line is open. Please go ahead.

[Collyn Gilbert:]

Thanks. Good morning, guys.

[Luis Massiani:]

Good morning, Collyn.

[Collyn Gilbert:]

If I could just start on the reserve and the CECL adoption, Moody's adoption, so did you - in your Moody's input, did you use them their April baseline outlook? Is that right?

[Luis Massiani:]

Yes.

[Collyn Gilbert:]

Okay. And then, so just within that, right, so I know that their April baseline was weaker than what their March baseline was, but they did have other more severe scenarios in their outlook within that. But just again, I recognize April 11th, but I guess where I'm going with this, is it the economics, what we see in to 2Q, I think it's going to reflect even greater deterioration than even what perhaps their April baseline set are. The qualitative and quantitative parts of that, I mean, is it reasonable to think that your reserve could even increase even more into queue than what you guys posted in the first quarter?

[Luis Massiani:]

What's reasonable for one person might not be reasonable for another. So that's an impossible question for me to answer it that what's reasonable, but is there something else…

[Collyn Gilbert:]

Sorry, I was just going to say, with just based on your -- the way you guys have looked at it relative to where…

[Luis Massiani:]

So that's a better way to phrase the question. So, the way that I agree with you there, so how we're thinking about it. So, in addition to the -- remember that CECL has two components to it. It has a quantitative aspect and it has a qualitative aspect. So, the models -- the Moody's models and how we're using it for CECL and give you a quantitative approach to the estimating loss factors. On top of that, we put some pretty significant qualitative factors on specific portfolios where we find the -- we see today there is going to be the potential risk for incremental kind of lost content. So the numbers that we're coming up with there are not reflective of what the models say is the lost content that -- it's not what the Moody's models are saying lost content is that allowance is higher than what Moody's is telling us, and the reason that it's higher is because of exactly what you're suggesting, which is there is greater uncertainty out there. Could there be incremental reserves? Yes, absolutely. There's a lot of uncertainty as to how this is going to play out. With that said, in the portfolios that we have earmarked as you know, potential, kind of the places where we're seeing, kind of the issues right, which is the small balance equipment finance on the asset based lending front. We've taken Moody's plus a substantial qualitative factor approach to get to the loss rates that we have with -- to get to the loss coverage and the allowance coverage ratios that we have in those portfolios. So we've tried to get ahead of that. We like very much. For example, if I pointed to the small business and we put this out in a couple of slides, the net carrying balance of the small business portfolio today when you factor performing and non-performing transactions is just over 70% of a par value. So we've gotten ahead of a lot of this, not to say that there won't be more reserves, but we are taking a pretty conservative view from a quantitative and qualitative perspective to get to the numbers that we got to on the reserve.

[Collyn Gilbert:]

Okay. And then, I know you sort of alluded to this, but I don't know if just break down where in terms of the dollar of deferrals of $1.1 billion of modifications that you made versus the increase in classified, and then the PPP program. How much is there overlap there that you're seeing with the modification requests that were also in your criticized and PPP?

[Luis Massiani:]

Yes. With modification requests that were in the criticized. So let me answer it a little bit differently. So as you would imagine, 50% of the portfolio is in commercial real estate type multifamily. So the larger percentage of the $1 billion of month that we have done up until this point reside in the commercial real estate/multifamily portfolio. So that's the first one. Second one is where the second one behind it is on the C&I side. Our franchise finance businesses reported inside of C&I and that franchise needs business, which is largely quick service restaurants. There's also -- we have been pretty vocal in saying this for quite some time, which is those are all concepts that are going to make their way through this and they are going to get back to more solid footing, but there is going to be a substantial amount of that portfolio that is going to have to be modified to provide some working capital will be through this. So the two components of the portfolio that have, let's say 50% of the loan modifications a little bit over 50%. So, about 60% of loan modifications today are commercial real estate, multifamily, and then the franchise, the franchise finance business. On the construction side, which was one of the - our ADC book was one of the criticized classified migrations we've had, we did not have -- we've had no loan modifications there, and then on the public finance, warehouse lending, factoring and apparel financing, we've had no modifications either. The rest of the portfolios are pretty evenly split between equipment financing on the asset based lending side. They're pretty evenly split from the perspective of modification requests that have not necessarily been approved, but what had been requested at this point.

[Collyn Gilbert:]

Okay. That's helpful. Thanks. And just on the construction side, can you just remind us what percent of your construction book is in the sort of the housing tax credit business?

[Luis Massiani:]

30%.

[Collyn Gilbert:]

30?

[Luis Massiani:]

30%. Yes 30% of the affordable housing where we are our own in those projects, we essentially are our own takeout because we essentially ended up investing in the low income housing tax credit programs longer-term. So we're running, the risk that we're running there is that for whatever reason, the developer of the project doesn't perform and all that happens is the developer gets taken out and somebody else comes in to finish the project. So the perspective of converting that construction loan into a different type of into that equity investment, there really isn't much risk. And so we keep very close tabs on how those developers are performing, but that's not a -- we're not concerned with in any way shape or form of that percentage where that component of the book. The vast majority of the rest of the book is just multifamily construction, which is in footprint or, New York, New Jersey, Connecticut area with very strong LTVs, and it represents less than 2% of the portfolio. So we're monitoring closely, but we're not construction aside from that one transaction that we have taken a conservative view on that we have migrated into NPL status. We're not concerned about the construction book at all.

[Collyn Gilbert:]

Okay. Okay, great. And then just on the NIM. Well, let me start by saying I feel like the coordinator outlook is pretty optimistic. And I hear what you're saying on the funding side, obviously you have control over that, but then I guess just thinking on the asset side, right? I mean the live or drop is going to sell detail more harshly in the second quarter than it was in the first quarter. What kind of gives you confidence in that core NIM guide? And then part two of that question is also, how do you see, I mean, I guess the assumption is that these classified substandard loans are really actually not going to get into any kind of like non-accrual status that will end up impacting the NIM as well. I'm guessing or just if you could kind of speak to that core NIM guide.

[Jack Kopnisky:]

Yes, so we are going to see that where you're going to continue to see some credit migration that you're going to continue to see near-term, so called second and third quarter. It is going to be largely driven by the small balance equipment finance portfolio. So that component of $120 million bucks of loans that will continue to migrate through because those are businesses, a little bit of what we're talking about in when Matt Breese asked the question of how we were individually looking at these credits, when we essentially decide to make a forbearance or a modification. Those are credits that again, it's not to say that we're not going to work with borrowers provide relief, because we are but those are credits for the viability of the business and sustainability of that business long-term is going to be in substantially greater doubt than in pretty much every other portfolio that we are working on right now. So, we should not see, the vast majority of the payments you are going to see, you're going to see from the migration of credits that would then go into non-accrual that would impact our yield which was pretty significant in March that has for the most part happened already because all of those credits, the four credits that we're talking about, which continue to be performing today actually have already impacted ours. We've already reversed. We put them on non-accrual and reverse out an interest income in the quarter which had a little bit of an impact on what earning asset yields were in the month of March.Why are we confident? I think there's two reasons. I think that first and foremost, we are still in the very early stages in early innings of repricing the entirety of the funding stack as we talked about. So that is, you have not seen the impact of that on our financials yet. The difference between the weighted average cost of funds for the quarter relative to where we exited the quarter is the biggest difference that we've ever had, since we've been here, and it's the biggest difference by a lot, using the difference between weighted average and spot is somewhere between five to 10 basis points for that, we're double that 17 to 20 basis points in this quarter, and we have the pricing strategies in place to get ahead of this and continue to move those cost of funds across the board substantially lower as we move into second quarter. Second component of that is that on the earning asset side, we have $6.8 billion of floating rate loans. The vast majority of those floating rate loans did not hit, had not breached no loan floor provisions in the first quarter just because of where the starting point was relative to where asset yields ended up in the quarter.We don't have loan floors on every one of those. We don't have I will call meaningful loan floors on the $6.8 billion worth of loans, but we do have a substantial chunk that as we continue to move down and LIBOR continue to reprice, we will start hitting some of those loan floors and that's going to represent approximately a third of that $6.8 billion. So even though there's a bigger drop in LIBOR in the second quarter, you do start to offset that longer-term from the perspective of starting to breach some of those loan floors where you don't get the impact of the full impact of LIBOR continue to move down. So the way that we're thinking about it is if you essentially take a similar effect of drop in earning asset yields in the second quarter relative to what we saw in between the first and the fourth quarter, which was about 20 basis points on earning assets, and this is including accretion income on loans, it should be pretty stable as point relative to the first quarter. So you essentially take earning asset yields that are 20 basis points lower in the second quarter than they were in the first and you're already starting from 20 basis points lower on the cost of funds, and you're continuing to move that cost of funds lower, you get to a place where again, there's always going to be some uncertainty on that, because what happens with rates, we can unfortunately don't have a magic crystal ball, but the starting point for where funds, where cost of funds and earning asset yields are in a much better place in the second quarter than it was in the first and we're pretty confident that we continue to manage those types of earning asset yield dynamics, we can offset that with cost of funds reductions longer-term.

[Collyn Gilbert:]

Okay, okay. That's helpful. Thank you. And then just lastly the movement in the securities book, can you just sort of explain tell your strategy there. I know some of it was called away from you, but just for the tranche that you guys sold and just how you're seeing that positioning the security book going forward?

[Jack Kopnisky:]

Well, that's one of the things that's also going to help the NIM going forward. We've been, I think for the past three or four calls we've been talking about and alluding to, to continuing to move the balance of securities down as a percentage of total earning assets. The strategy behind the $400 million is largely NPS that was sold in the first quarter is the fact that those were securities that were we had some substantial long-term premium amortization risk that we wanted to get rid of. So, yields or securities that we had on the books that were yielding 2.5% to 2.7%, when you start accelerating, if we would have essentially waited and just had those securities continue to run-off over time and prepay, they would not have yielded to an aptitude 2.7%, because we would have had a substantial amount of premium amortizations that would have been accelerated. So we're going to continue to manage that percentage of the securities book down, we would be comfortable running at somewhere between 12.5% to 15% security total, total earning assets we were at 17% this quarter. We will get to 15% by the end of the year. So we're going to do that through a combination of some incremental kind of reducing of specific components of the portfolio, and we're also going to do it because there is going to be some earning asset that, and loan growth that did happen over the course of the year, but we will hit that 15% target by the end of the year.

[Collyn Gilbert:]

Okay, great. I will leave it there. Thanks, guys.

[Jack Kopnisky:]

Thank you.

[Operator:]

Thank you. And we can take one final question. This comes from Steve Moss of B. Riley FBR. Your line is open, please go ahead.

[Steve Moss:]

All right. Good morning. I just want to follow-up on the securities book here. Wondering, you have a healthy level of munis and corporate securities. Just wondering what your appetite is for keeping the current misc versus a potential restructuring moving from a more conservative?

[Jack Kopnisky:]

So we like the portfolio where it is, and particularly the municipal book is largely concentrated in state kind of -- state-level -- general obligation bonds of state that are already kind of reopening, and that have a substantial amount of -- they're high credit grade with where we're -- there a -- the finances or the state finances are in, as you know, a very good shape, and they're going to be able to weather through this. So we're not concerned from the perspective of the composition of the securities book on muni side. And on the corporate side, the majority of what we have, that is about 50% of our exposures are senior and subordinated debt holdings of other financial institutions that are in very, very strong shape. So we -- you're not going to see us restructure the book from a perspective of changing the mix of what we have today. We are going to continue to reduce some components, but we see -- we are more concerned from the perspective of reducing reinvestment risk and reducing premium amortization risk versus we're not concerned on the credit risk of the portfolio at this point.

[Steve Moss:]

That's helpful, I appreciate that. And then in terms of the modifications rate, I believe it's $1.1 billion were approved. Just wondering what's the total number of requests that you've seen?

[Jack Kopnisky:]

The total number is about twice that level. And so it's about 10% of the total portfolio. And we are working our way through it, as we said before. We're essentially taking individual underwriting decisions on approving modifications for each borrower. And so it's going to take us some time to work our way through it. We do not anticipate that all of those will be approved.

[Luis Massiani:]

And understand too, we have a lot of people asking for mods that don't need mods. So that's part of the management process. But the 5% number is a good number. And we'll work through some others. But as you would imagine, it's kind of like the PPP program. It's a great program, and why wouldn't you apply for this thing. It's the same thing, there's mods. There are people that are truly in need, and there are other that have the liquidity and the financial sense to continue to pay in as they have been structured.

[Steve Moss:]

I appreciate that color. And then in terms of just the ABL portfolio, I apologize if I missed this, but I was wondering just what drove the migration to any criticizing classified this quarter, if there's any particular segment or a couple of loans?

[Luis Massiani:]

I'm really sorry, Steve. You cut out a little bit. What was the question?

[Steve Moss:]

Oh, sorry. So in terms of the ABL portfolio, just wondering what the level of criticized and classified -- the migration in criticized and classified that -- for this quarter, wondering if it's a couple of loans or any particular segment? And I'm sorry --

[Jack Kopnisky:]

It was two relationships, two loans.

[Luis Massiani:]

And they were not in the same industry at all, but not -- but industries that you would have -- you would say, "Yes, I get it," I mean, retail and trucking.

[Jack Kopnisky:]

Yes.

[Steve Moss:]

Okay, thank you very much. I appreciate that.

[Jack Kopnisky:]

Thank you, Steve.

[Operator:]

We have no further questions. So at this point, I'll hand the call back to the speakers for any additional or concluding remarks. Thank you.

[Jack Kopnisky:]

So we did have a couple of email questions.

[Luis Massiani:]

Oh sorry, yes, I forgot about that.

[Jack Kopnisky:]

You want to read?

[Luis Massiani:]

I mean the first one was PPP.

[Jack Kopnisky:]

Yes, so the first question was what was the -- what kind of yield are we expecting to generate on a PPP loan, if those start to come off the balance sheet?

[Luis Massiani:]

Yes, so for -- so just in case, and so everybody hears it, it's yield on PPP loans that are expected to come on the balance sheet. So first and foremost from a balance perspective, we anticipate that there's going to be between -- not all $650 million of funds that have been requested will be necessarily approved. So, for modeling purposes we're assuming $500 million of that actually hits our balance sheet, and we're assuming a 3.5% yield on that book of business, which is consisting of the 1% fee in addition to a combination of the processing fee that we are seeing with respective to how the mix of loans are coming in from an average balance perspective. So, 3.5% about $500 million of loans, and we are assuming that 75% of those loans actually get forgiven over a period of 3 to 4 months post fourth quarter. So by the end of the third quarter we anticipate that that $500 million will have fallen to about $125 million to $150 million and balance of the some of these loans get -- the majority of the loans get forgiven. So that's the first question on PPP. And the second question?

[Jack Kopnisky:]

Second question, in the outlook we have temporarily suspended our buyback. What would reinitiate interest in repurchases and what kind of environment we have to be in this start repurchase -- repurchasing the stock?

[Luis Massiani:]

Yes. So when we say, "Temporary," we clearly do -- we do mean temporary. That's one of the reasons that we have provided that guidance regarding our tangible common equity ratios and how we are comfortable running at those types of levels is that we have as substantial amount of capital above those ratios today, and we are going to generate a lot of internally generated capital as we continue to move through the course of this year and the next. From a what needs to happen, we need to essentially get back to an environment where we just understand that forecasting macro assumption are going to continue to change every other week based on what's the latest and greatest kind of headline news that comes regarding how we are going to open or not reopen the economy. When you think about locally or when you think about the exposures that we have, we are obviously a New York City bank with about 65 to 70% of our loan book in within a 20 mile radius of the Midtown Manhattan. As soon as we continue to see greater clarity as to how New York State and New York City reopen and how we essentially get back to more normalized times in our local economy. And therefore, we can essentially factor that in with a more kind of crossing Ts and dotting of Is because that's going to represent on the all things modeling for reserves. We would be in a position to essentially move forward and start turning on the buyback again. So, we envision that is going to happen at some point in second or third quarter where we are going to get that greater clarity, and we will able to establish a clear kind of path and guideline to be enable to get back to buying back shares.

[Jack Kopnisky:]

And then just to close it up, first and most importantly, our thoughts and prayers are with everybody affected by COVID and in fact we need to support each other in this process. Secondly, from a business standpoint we think we have been most appropriate in the allowance for credit losses. We have been very up to date in how we have structured this. So the next is on the credit side, we feel very comfortable. We have our arms around the credit. These are secured credits and not levered credits. They are things that we can work through. We are comfortable on any of the loss in the four types of scenarios that we have. And then lastly, we are also comfortable as the year goes for what we know today on the PPNR progression and NIM stability. So we feel like we have our arms around this and can be effective as we go forward and pull the necessary levers. What you have seen from our side over a long period time is we have reinvented the company, and we like all companies in times of crisis and change like this that there are opportunities to continue to invent the company, and we will continue to do so. So, we appreciate the call and appreciate your support. So, thank you very much.

[Operator:]

That will conclude today's conference call. Thank you for participation, ladies and gentlemen. You may now disconnect.