Regions Financial's RF CEO John Turner on Q1 2020 Results

Good morning and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Shelby and I'll be your operator for today's call. I would like to remind everyone that all participants' phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. If you wish to ask a question, please press star 1 on your telephone keypad. I will now turn the call over to.

Thank you, Shelby. Welcome to Regions' first quarter 2020 earnings conference call. John Turner will provide some high-level commentary, and David Turner will take you through an overview of the quarter. Earnings-related documents, including forward-looking statements, are available under the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments, as well as the Q&A segment of today's call. With that, I'll turn it over to John.

Thank you, John. Let's start with our quarterly highlights. First quarter net income totaled $139 million, resulting in diluted earnings per share of $0.14. Items impacting our results this quarter include a significant CECL provision in excess of net charge-offs and a large increase to our CVA associated with customer derivatives as interest rates moved down substantially during the quarter and credit spreads widened. Partially offsetting the negative adjustments, our MSR note and hedges performed favorably during the quarter. In total, the adjustments and additional selected items highlighted on the slide reduced our pre-tax results by approximately $280 million. Let's take a look at our results starting with the balance sheet. Adjusted average loans increased 1% while adjusted ending loans increased 7%. Loan growth was driven primarily by elevated commercial draw activity late in the quarter. Utilization rates increased from 45% at the end of the year to 54% at the end of March. As a point of reference, our utilization rate is typically around 45%, and during the global financial crisis peaked at 51% in the last week of the quarter. The pace of increase then slowed. We expect utilization rates will remain relatively stable for the time being. The draws we experienced have been primarily defensive or cautionary in nature and were broad-based geographically and across all industries. Approximately 60% have come from investment-grade companies, so we anticipate a portion of these customers will eventually seek permanent financing through the capital markets. However, it is too early to try and predict timing of any refinancing. As a result, predicting loan growth is challenging. However, I do want to remind you that on April 1st we closed our purchase of Ascentium Capital, which included approximately $2 billion in loans to small businesses. We look forward to leveraging the technology, speed, and convenience Ascentium is known for, in combination with our broad spectrum of banking solutions, to meet the needs of small businesses during this difficult time. Let's turn to deposits. Average deposits increased 1% while ending deposits increased 3%, as many of our corporate customers drawing on their lines are keeping that excess cash in their deposit accounts. We expect these balances will come down over time as customers secure financing in the capital markets or gain more clarity regarding the economic impact of the health crisis. As we have experienced in previous periods of stress, consumer deposits increase as customers seek the safety and soundness of a regulated and insured financial institution. We expect total deposits will continue to increase both at Regions and across the industry on an ending basis. Corporate segment deposits increased 8% while wealth and consumer segment deposits each increased 3%. These increases were partially offset by a decrease in wholesale broker deposits within the other segment.

Shifting to net interest income and margin, which is a strong story for Regions. Net interest income increased 1% linked quarter, and net interest margin increased five basis points to 3.44% as expected. Net interest income and net interest margin have been a source of stability under an extremely volatile market interest rate backdrop. Specifically, lower loan yields were offset by lower funding costs and the benefit of forward-starting hedges becoming active in the quarter. Now that most of our forward-starting hedges have begun and given our ability to move deposit costs lower, our balance sheet is largely insulated from movement in short-term rates. Loan hedges added $10 million to net interest income and four basis points to the margin in the quarter. This will increase going forward as the benefits are realized for the entirety of future quarters. Further, all of our hedges have five-year tenors and a quarter-end market valuation of $1.7 billion. Another relative differentiator of note: net interest income was supported in March as LIBOR rates remained elevated at a time when other short-term rate indices which are a large driver of deposit costs moved close to zero. The benefit of elevated LIBOR is projected to normalize by mid-year. Additionally, higher average loan balances increased net interest income but reduced net interest margin, while one fewer day in the quarter reduced net interest income but increased net interest margin. Total deposit cost declined six basis points compared to the prior quarter to 35 basis points, and interest-bearing deposit costs declined nine basis points to 55 basis points. Regions continues to deliver industry-leading performance in this space, exhibiting the strength of our deposit franchise. Over the coming quarters, we expect deposit costs to migrate back down into the 10 to 14 basis point range. Looking ahead to the second quarter, let me start by saying these expectations exclude the potential impact from the Fed's Paycheck Protection Program, but are too uncertain to include in the forecast at this time. We expect second quarter net interest income and net interest margin to benefit from the Ascentium Capital acquisition, and net interest margin is anticipated at roughly 3.4% excluding Ascentium. A larger average balance sheet in the near term is anticipated given increased loan and liquidity needs from our customers. While this will benefit net interest income, it will slightly reduce net interest margin.

Let's take a look at non-interest revenue and expenses. Almost all non-interest revenue categories were impacted by market volatility and economic uncertainty, resulting in a 14% decrease compared to the prior quarter. After experiencing a record quarter in the fourth quarter, capital markets revenue decreased to $9 million. Excluding unfavorable CVA, capital markets income totaled $43 million. We generated record customer derivatives income in connection with lower interest rates, but experienced decreases across all of the categories. Looking forward, M&A transactions in particular are likely to remain on hold until markets stabilize and the economic outlook becomes more certain. Mortgage income increased 39% over the fourth quarter, driven primarily by elevated sales and record application volumes associated with the favorable rate environment, as well as positive net hedge performance on mortgage servicing rights. Lower interest rates sparked a significant increase in year-over-year production. In fact, our first quarter total application volume was more than double our historical first quarter average. Wealth management revenue remained stable despite market volatility. However, if market conditions persist, we could experience a decline next quarter in line with lower asset values. Service charge revenue and card ATM fees decreased 5% and 6% respectively. During the last two weeks of the quarter, we observed a reduction of approximately 30% in consumer spending activity. Looking forward, if current consumer spending levels persist, we estimate total consumer non-interest income will be negatively impacted by approximately $20 to $25 million per month from pre-March levels. Partially offsetting these headwinds, however, are our positive revisions to anticipated mortgage income resulting from lower interest rates. Mortgage production increased 60% compared to the first quarter of the prior year, and pipelines are strong. Full year 2020 production is expected to increase by approximately 40% versus the prior year. Let's move on to non-interest expense. Adjusted non-interest expenses remained well controlled, increasing 5% compared to the prior quarter, driven primarily by lower salaries and benefits, professional fees, and marketing expenses. Salaries and benefits decreased 4%, driven by lower production-based incentives and negative market value adjustments on employee benefit assets, which are offset by lower non-interest income. Professional fees decreased 36%, driven primarily by elevated legal consulting and professional fees in the fourth quarter. The company's first quarter adjusted efficiency ratio was 57.9%, and the effective tax rate was 20.6%. We continue to benefit from continuous improvement processes, as we have completed only 40% of our current list of identified initiatives. For example, since the first quarter of last year, we have reduced total corporate space by almost 900,000 square feet, or 7%. While it's still early, the pandemic is already having an impact on how we interact and communicate with customers and each other. We've already initiated changes, and in many instances are discovering that not all change is bad. For example, we have teams calling on and winning business using WebEx and video conferencing in effective and dynamic ways. Whether it's through new ways to interact with customers or increased use of hoteling, we believe there are additional opportunities where corporate space is concerned, so we are going to keep our minds open as we navigate through this disruption.

So let's shift to asset quality. We adopted the CECL accounting standard as of January 1st, 2020. As permitted by the Federal Reserve, we will defer the impact from the CECL accounting standard on common equity tier 1 capital each quarter until the end of 2021, after which it will be phased in at 25% per year. As of March 31st, this amount is approximately $440 million and represents all of our day one after-tax adjustment recorded directly as a reduction of shareholders' equity on January 1st, as well as 25% of our first quarter provision in excess of net charge-offs. The related impact to our first quarter common equity tier 1 ratio is approximately 40 basis points. Under CECL, credit loss provision expense for the quarter totaled $373 million. This amount includes providing for $123 million in net charge-offs as well as $250 million of additional provision, reflecting adverse economic conditions and significant uncertainty within the economic forecast, including uncertainty surrounding the benefits of government stimulus already enacted and potential additional stimulus, all occurring since the initial assessment at adoption on January 1st, 2020. The additional provision was further impacted by higher specific reserves associated with downgrades primarily in the energy and restaurant portfolios. The resulting allowance for credit losses is 1.89% of total loans and 261% of total non-accrual loans. Charge-offs were 59 basis points this quarter and included the impact from our most recent shared national credit exam. Non-performing loans increased $131 million, primarily driven by energy credits. Total delinquencies and troubled debt restructurings decreased 4% and 9% respectively, while business services criticized loans increased 12%. Recently, regulatory agencies issued guidance stating that short-term modifications to borrowers experiencing financial distress as a result of economic impacts created by COVID-19 will not be classified as a troubled debt restructuring as long as their payments were current as of December 31st. We do not expect a material increase in TDRs in this environment. We are monitoring all of our portfolios closely. However, I want to take a couple of minutes to highlight a few portfolios currently experiencing stress. In most instances, these are the same portfolios we have been discussing for some time now. The energy portfolio: we continue to monitor direct energy balances totaling $2.4 billion, or 2.7% of loans outstanding at quarter end. Since 2014, we have worked diligently to remix the portfolio and reduce our exposure to the oilfield services sector, which is where most of our losses have occurred. During the quarter, we conducted an intensive review of all of our energy clients, including E&P, midstream, and oilfield services, which resulted in a handful of downgrades in both the E&P and midstream space. We have been in the energy business for over 50 years and have always maintained a heavy focus on client selectivity. Our spring borrowing base redeterminations are in process, and we are continually reassessing our price deck at current oil price levels. We do expect additional stress but overall believe the portfolio will perform at least as well as it did in the 2014 crisis, perhaps even better, given a significant remix in the portfolio. Within the hospitality portfolio, which includes restaurants and hotels, we are closely monitoring casual dining and quick serve. Total restaurant balances were $1.9 billion at quarter end. Casual dining restaurants with balances of approximately $550 million are continuing to experience stress due to higher labor costs, oversupply, digital transformation challenges, and general pressure on margins. We expect additional pressure in this space as shelter-in-place orders continue. In fact, we are already receiving requests for mitigation and payment deferrals. Quick serve, which represents 63% of our restaurant portfolio, seems to be holding up well. Our exposure to hotels is primarily limited to a handful of large, well-structured relationships which typically have lower leverage and strong cash positions. Depending on the ultimate duration of the pandemic, we expect most to weather the downturn. However, we have already experienced several requests for relief. We're also closely watching the transportation, retail, and agriculture portfolios, as they also have the potential to be adversely impacted by the current business environment. I previously mentioned the approximately $2 billion of small business loans we acquired as part of the Ascentium Capital acquisition on April 1st. These balances will be reported with our second quarter results, but let me briefly remind everyone that under CECL, you will see a sizable adjustment, currently estimated to be between $100 and $120 million, establishing our initial allowance for these loans which will run through provision expense. This expense will be offset by accretion of the credit discount through interest income over the life of the purchased loan portfolio. Recent annual loss rates on this book of business have been approximately 2.5%. Because they focus on businesses with centralized equipment and high-fidelity guarantors, we believe the business will be resilient through periods of stress. The average yield on these loans is approximately 10%, and they do include certain prepayment protections. So while losses will increase in the near term due to the economic environment, we continue to feel very good about the acquisition and are looking forward to working together to better support our small business customers. The extent to which all of our customers are ultimately impacted will be a factor of the duration and severity of the economic impact, as well as the effectiveness of the various government programs in place to support individuals and businesses. There is a lot that is still unknown. However, what we do know is that we enter this environment from a position of strength and are committed to assisting our customers and communities. As John mentioned, we know we will experience some stress. However, our strong capital and liquidity positions, accompanied by a decade-long journey to enhance our credit risk management framework and our disciplined and dynamic approach to managing concentration risk, have made us better managers of risk and have positioned us well to weather an economic downturn.

So let's take a look at capital and liquidity. During periods of stress, liquidity management is critical. Like the rest of the industry, we experienced a spike in credit line draws late in the quarter. These were primarily from companies being prudent and wanting to ensure they had adequate cash on hand. We did the same thing through additional advances at the Federal Home Loan Bank, which we used to increase our cash at the Federal Reserve. Liquidity at Regions really starts with our granular and stable deposit base, which provides superior liquidity value. Regions has traditionally maintained one of the lowest loan-to-deposit ratios in our peer group, and at quarter end this ratio stood at 88%, and includes the impact of increased line of credit draws observed by customers late quarter. Further, our risk management and stress testing framework ensures our liquidity positions are prepared to meet customer needs in turbulent times such as these. Beyond deposits, Regions also has ample sources of additional liquidity which can be readily used to meet customer needs. Our primary liquidity sources include cash balances held at the Federal Reserve, capacity at the Federal Home Loan Bank, and unencumbered highly liquid securities. These readily available sources totaled approximately $28 billion at quarter end, and when combined with another $15 billion of availability at the Federal Reserve's discount window, total available liquidity stands at $43 billion. FHLB advances remain the primary tool we use to fulfill short-term funding needs. We have seen great interest in the SBA's Paycheck Protection Program loans, and we are endeavoring to meet the needs of customers. While we will use liquidity resources on hand to meet those near-term needs, we're also looking at the Federal Reserve's new Paycheck Protection Program lending facility as an alternative funding source. With respect to parent company cash, we also maintain a conservative position. By policy, parent company cash must always exceed 18 months' worth of debt service and dividend payments, and current cash forecasts remain above our management target of 24 months. Let's turn to capital. Regions continues to maintain strong capital levels. Our common equity tier 1 ratio is estimated at 9.4%. Our quantitative target for this ratio is derived mathematically and, as we have previously discussed, is 9%. We believe this is the appropriate level of capital to withstand the severely adverse scenario and still remain above post-stress limits. We've also maintained approximately 50 basis points as a strategic management buffer, which could be deployed opportunistically. We used a portion of the management buffer on the Ascentium transaction, which closed on April 1st. As we go forward, future economic performance and its impact on earnings will be the primary driver of near-term capital levels. In addition to the negative implications due to COVID-19, it is also important to keep in mind that we have never seen the volume at which fiscal stimulus and government lending programs have been implemented. The ability of these programs to effectively work to help support the businesses and consumers within the economy will dramatically impact credit performance for us and the industry. During this period of uncertainty, we will continue to work with our customers to help them navigate these uncertain times. Additionally, we will lean into our early warning and key performance indicators that we have built over the years, which give us a granular view into the performance of our portfolios. Where we see indications that a customer will continue to face stress once the short-term relief is over, we will move those credits into more adversely rated categories and will continue to review their performance. As you know, we have a robust capital planning infrastructure and perform a range of stresses on credit performance within our portfolio. Whereas this environment is unlike anything we have ever seen, our stress testing gives us confidence that we have the capital to withstand the stress. During the quarter, the company declared $149 million in common dividends. We had no share repurchases during the quarter and have announced plans to suspend share repurchases through the second quarter. Because we established our dividend to withstand adverse conditions, we currently have no plans to reduce or eliminate our dividend. However, we will continue to exercise prudent capital management and monitor the business environment. So in summary, our robust capital and liquidity planning processes, which are stressed internally as well as externally by our regulators, are designed to ensure resilience and sustainability. This gives us confidence that we can continue to meet the needs of our customers and communities during this exceptional period of economic uncertainty. As John mentioned, considering the unprecedented environment we are facing, we are suspending our financial targets for this year as well as our three-year targets previously announced in 2019. We have a good strategic plan and are committed to its continued execution. When the economic outlook becomes more certain, we will provide you with updated targets. In the meantime, we are focusing our attention on helping our associates, customers, and communities navigate through this difficult landscape, which in turn benefits our shareholders. We believe strongly in the concept of shared value. In order for us to thrive, the communities we serve also need to thrive. Rest assured, during this extraordinary time, Regions stands ready to help and support all of our stakeholders. With that, we're happy to take your questions.

Take your questions. In light of the current environment, we do ask that each of you ask only one question to allow for more participants. We will now open a line for your questions. Thank you. The floor is now open for questions. If you have a question, please press the star key followed by the number 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Betsy Graseck of Morgan Stanley.

Good morning. Hey, good morning. One question is just regarding the decision to pull the medium-term guidance. I totally understand the 2020 guidance, but when I see that you're pulling the medium-term guidance, I'm wondering: is that because of the concern you have around the depths of how tough 2020 could end up being? Or is there some other rationale for that? Certainly that's in the environment right now, which is prudent for us to just remove it.

Your next question comes from Kennison of Jefferies. Morning, Ken. Thanks.

Good morning, guys. So I just a question on just all the moving parts around your NII forecast. Understanding that there's the lower PPP, there's the ascent. I guess with the persistence of your hedges, do you still believe you've got that general sustainability past Q2 in terms of the ability to support net interest income as you look past these ads as you get in from first a second? How would you help us understand that, you know, going into the second quarter?

Your next question comes from Brian for ran of Autonomous Research. Oh, hi.

Maybe a follow-up on those hedges. You know, this is interesting. I mean, all the regional banks generally opted out of including AOCI in capital as a form of regulatory relief, but now especially for a bank like you where you've got the outside thing, it kind of understates your capital ratios in a way. So wonder, you know, you just remind us what the capital ratios look like if the unrealized gains were included. And you know, is there any scenario where the hedges are so valuable you would actually monetize that, you know, invest them some way in an acquisition or a buyback, or is that just too far out there?

Your next question comes from Matt O'Connor of Deutsche Bank. Morning, Matt. Morning.

If you just talk about some of the expense levers that you can pull. You know, while a lot of things are shut down and there's obviously a lot of emphasis on employees, but you've had kind of continuous improvement on expenses for several years. Just talk about some of the things that you can look at in the environment here. Thanks.

Yeah, Matt. So you know, we've continued to be focused on expense management. I think we've done a really good job there. If you look at our top category salaries and benefits, occupancy and furniture, fixtures and equipment, the places we've been able to reduce expenses have been attached to our branches. We've consolidated a whole lot more branches than we've opened up. We continue to look at that and continue to have a whole group of people focused on our retail network strategy to make sure that we're optimizing that network from a revenue and growth generation as well as cost optimization. So you should expect us to continue there. We have continued to reduce square footage. We're down some 300,000 square feet in the quarter. We'll be down another 600 to 700 for the full year. And we're learning some things working from home. You know, we've really not missed a beat in terms of efficiency and effectiveness. I had mentioned in the prepared comments kind of hoteling, and maybe there's an opportunity for us to continue to ramp that up even more. So our vendor spend, we continue to have programs in place to control and reduce vendor costs, particularly on the demand management side of things. You know, so I think we have 73 initiatives that we've identified for continuous improvement. I had mentioned we're through 40% of those. Actually, we're through about 32 of them. We'll complete another 14 this year. So John has asked us to figure out how we get better at whatever we do, wherever you are in the bank. How do you do it better tomorrow than you did today? And so I think you should continue to see us look for ways to become more efficient and effective over time. So we have some ways to continue to work on the expense side.

Your next question is from Jennifer Demba of SunTrust. Morning, Jennifer. Good morning.

You mentioned energy and restaurant lending being particularly stressed. What kind of loss content do you think you could see in these two buckets considering a range of possibilities of economic recovery? Or you want to take that question?

Sure. Good morning, Jennifer. You know, as we look at the energy buckets as an example, we know that right now there is acute demand dislocation. However, on the other hand, you also have OPEC which came out and reduced the supply by 9.7 million barrels. And then you combine that with the opening of the economy, which we're hoping will help and should happen soon, and that's going to help with demand and with some stabilization in prices. I'd also point to with the book that we now have, the fact that the majority of it is now midstream and primarily E&P in a senior secured position, no second lien position, etc. That we're feeling pretty good about bedrock. We actually stress the portfolio down to $24. We also know in a contango market, we do anticipate higher future prices as well. So we also know that food storage is an issue. So we've got our eyes on energy. We're managing again on a day-to-day basis. Are we going to see some more energy losses? Probably. But you know, heretofore over our E&P book, we've only taken $5 million of losses since 2012 for E&P. The one that we have this quarter, you saw the loss number was roughly $21 million loss to an E&P customer. It's about grouping, but it was a master limited partnership, not truly E&P per se, and a shared national credit as well. So we do see some of our non-performing loans going to increase, some criticized and classified. But in terms of charge-offs, well, we know they'll increase. We think they'll be well under control. Let me talk to you a second on restaurant loss. You know, primarily for restaurant, it's going to be some of the full-service, casual, etc. What we know is our quick serve is down 20% to 30%. Our full-service is down 32% right now. Most of our restaurant outstandings are all secured. And we know that the full-service restaurants right now are experiencing the greatest impact. So again, saying that we know there's going to be some more loss or some kind of retro feel, but they're going to be pretty well controlled. Given, 1GR. Thanks, Barb.

Our next question comes from Peter Winter at Wedbush. Morning, Pete. Good morning.

Morning. You just talked about some of your economic assumptions. What you're assuming and just curious if you cut it off on some March 31st because we've just seen the recent economic forecasts have gotten a little bit worse.

Yeah, so Peter, you know, given the significant economic volatility associated with COVID-19, we actually ran several economic scenarios to determine our allowance for credit losses. We also use third-party comparisons, in particular Moody's March 27th comparison. Our models really weren't built for this type of change, so we knew we were going to have to have some overlays on top of that to get to what we thought was an appropriate allowance for credit losses. There's been a lot of discussion in terms of what we think about the recovery and what shape it is. And really, we think a better question would be not the shape of the curve, but at what pace does it actually recover to pre-recession levels? We'll call pre-recession the fourth quarter of 2019. So we have pretty severe numbers: GDP approaching that 20% in the second quarter, unemployment approaching 10%. And while it does, we do expect it to recover, we expect that it's going to be very slow. If you go back to the financial crisis, it took about 14 quarters before we got back to pre-recession GDP. Our expectation is it's going to be somewhere between 10 and 12 quarters before we get back there. So call it the latter part of 2022. So we do not think this snaps back. We think it's prolonged. We get better from the second quarter, all right, so you start to come up, but you're just not going to come up at the pace that you just went down. Therefore, it can't be a V. It's going to be, I don't know what the symbol is, but call it a checkmark more so. And the slope of that will be the recovery, again getting back to GDP in the fourth quarter of '22. Thank you.

Your next question is from Erika Nagy of BofA. Come on in, Erika. Hi, good morning.

My question is for Barb, if I could. So the last time we did the DFAST, the nine-quarter loss rate was 3.9% under severely adverse versus the Fed run test at 6.5%. And I can see the historical bias in the CRE bucket. I'm wondering, Barb, if you could give us a sense of what the difference is, particularly in where they think your C&I loss rate would be in such a scenario versus yours. It's a pretty wide gap there. And in the most impacted industries that you outlined for us, is a cumulative loss rate over two years of around 6% to 7% like we saw in the GFC fair, or do you think there's just strong enough underwriting that would preclude that scenario from unfolding?

Well, we always know, firstly, Jenny, that we're always going to have increased losses during these times of stress. So I'll start with that. And we also know, and I feel really comfortable on this saying, that the fact that our underwriting has changed, our risk management is really strong, the entire company is focused on overall risk management. So we are going to perform better than in prior periods. If we look at what our DFAST losses were, I'll just use 2018 maybe as a bellwether. And somebody had used that in one of their analyses. And at the time, they said... That's currently healthy. I'm sorry, my allowance is $1.665 billion, and the 2018 DFAST walk was at the time with $3.1 billion. So that's roughly 55% in a severe adverse environment. And I think that's pretty good. I think it's going to range somewhere between the high 40s and somewhere into the 50s. So again, generally feeling comfortable with those numbers. Did I answer your question?

Yeah, I guess we just wanted to clarify what you think the primary differences are in terms of what the Fed uses in your portfolio in terms of the worst loss experience, and also trying to figure out the upper bound of cumulative losses in those most impacted sectors that you outlined in your presentation.

I think the biggest difference between what we look at and what the Fed looks at, so even though we take this CECL into account, the Fed models are much more heavily biased towards history, which is the reason I started with recently or changed company. We're not going back to 2009, 10, 11. Note those areas were curious, but those were our highest loss histories, which are currently still in the models in the Fed model. As you know, they don't disclose how they arrived at your model, so we have to make some assumptions. And we know that they still have a fairly heavy weighting on that, whereas we have probably less of a weighting on that, especially given all of our performance since then has been much better.

Your next question is from Sabu Martinez of UBS. Lawrence, all you got. Hey, good morning.

Um, I just have a very specific question on Centium. So you had to take your CECL true-up on that loan, or I'm sorry, on the loan book. What was the credit mark on that? And by extension, how much of an incremental purchase accounting accretion benefit are you going to get on that?

Yeah, so our day one, we are still working through that. We've given you a range of this adjustment in the $100 to $120 million range that will be utilized or set up as a to be amortized to margin over the life of the loan. And that's our best estimate for that adjustment at this time. And just to kind of frame it up as to where that number comes from, losses in that portfolio have been about two and a half percent, and the duration of that book is under three, call it two and a half years. So we will have something in the, we'll have something in two to two and a half times that number that will be recorded in the allowance with the offset and then becoming part of the purchase accounting accretion over time.

Okay, so I'm sorry, getting into the details, but my understanding is there's essentially a double hit there. So you'll have a similar-sized credit mark, and then over the two and a half years you would amortize that, you would have that come back as purchase accounting accretion, and theoretically that should all flow to the bottom line given that's correct.

That's correct.

Thank you, thank you.

Your next question is from John Pancari of Evercore. Good morning, John.

A question on the credit side. Based upon that we got new Moody's data that came out after the quarter close, does that point to a likelihood of an additional reserve build in the second quarter? And then separately, could you give us a detail what type of loan loss reserve you have against some of those higher risk portfolios that you mentioned on those slides in the back of the deck? Thanks.

Yes, so from a second quarter standpoint, we did the best we could coming up with what we believe to be an appropriate CECL provision for the life of the loan at March 31st, thinking in all available evidence. Clearly, as John just mentioned, if things persist at this level and the stimulus doesn't work or doesn't work to the degree we think, there is a risk that we provide over charge-offs in subsequent quarters. The question is we just need to wait and see what it looks like at the end of June. We can't, you know, every day is a new day. This is a very volatile environment. So you know, things continue to trend worse at this point in time, but we also have $5.1 trillion of stimulus going into the system, which compares to about $2.1 trillion in the last crisis. And I would remind that the $2.1 trillion came over time, this $5.1 trillion is coming very quickly. And another government is continuing to look at additional ways to provide stimulus. So what does it all mean? It's just hard to estimate. So we can't conclude right now that we would have an adjustment over charge-offs, but that's reasonably possible. Given if things trend like this, that's a likely event. What was the second part of your question?

Was it just, yeah, just the size of the reserve do you have against some of the higher risk portfolios that you flagged, including Webber's lending?

Yeah, I don't have that granularity in front of me on those particular portfolios. Yeah, we're going to have some incremental disclosure in our 10-Q of the major components: business services, consumer, and within that the breakout for mortgage, credit card, indirect auto, and so forth. But I don't have that, John. On that note, we are just... Let me give you the income statement versus business versus consumer. We're holding 150 basis points of reserves against the business portfolio, 260 basis points against consumer, to get you back to the 190.

Got it. Thank you.

Your next question is from Dave Rochester of Compass Point. Morning.

Hey, good morning, guys. Appreciate all the color on the energy and the restaurant books. Just maybe digging a little bit deeper, was just wondering how far along you are in that borrowing base redetermination process at this point. If you have a sense for where the new deck is, how much lines have contracted for those customers. And then just on the restaurant book, if you've been able to do a full review of that book as well, and if you have a sense for how many customers may no longer be operating at this point, how you project charge-offs for that if you assume some of those guys come back into business. Thanks.

Yeah, for the energy books, we are roughly a quarter of the way through the borrowing base redetermination cup season. So far, we've seen that the borrowing base availability is down about 12.5%. So we know that there's reduction impacts there. We should be through the rest of our book in the course of the next month and a half, so we can always get more color at that point in time. On the restaurant, we've also looked at each client individually because they're not that many clients. And so we are talking to them on a regular basis, daily, weekly, monthly right now, to make sure we have our handle on that. We do see some continuous pressures on full-service in particular, as you said. Quick service is a lot better, but the full-service portfolio, which has got, as I said, the most impact, is really because the restaurants are closed. So until the economy opens up, we're going to continue to see some pressure there, and we're going to continue to see some losses. Obviously, we believe they're very manageable and containable. So what portion of that book would be closed right now? And then do we assume they come back later on in your reserving process? I don't have the exact number that are closed at this minute, but you know, in the restaurant book we have 3,600 customers in total, and of that, it would be somewhere a portion of that obviously. And in terms of closed, it's hard to count. Do I count each individual shop in terms of someone who has multiple units and they've only closed one or two? So that becomes a little bit of a tricky answer to that question. But yes, there are a handful, probably in the nature of 10 to 20 right now.

All right, great. Thanks, guys.

Your next question is from Steven Scouting of Piper Sandler. Morning, Steve.

Hey, guys, good morning. And mine does dig down a little deeper maybe into some of the impacts from some of the government programs. I know it's kind of hard to say, but on regulatory release and maybe specifically on the payment deferrals, if you have a percentage amount of your loans that are in deferral currently, and how you think those pan out maybe 90, 180 days down the line, if those do become charge-offs down the line. And then with the Main Street lending program in particular, how might that impact your syndicated loan book and those people's ability to borrow additional funds? Do they not refinance it?

So with our business customers, we've now granted about 4,000 deferrals: 3,000 small businesses, about 1,000 middle-market customers. Our approach there is to treat those customers on a case-by-case basis, to evaluate the ongoing focus of their business. And if prior to the pandemic starting they had a viable business and were doing well or were a good customer, then we'll typically grant them a deferral. In some instances, that might be for up to six months, generally 90-day deferrals, interest only typically, and then we revisit those at the end of that period. But that is specific to customers who were in good standing prior to the pandemic beginning and who clearly appear to have what we believe to be a viable business after the pandemic, whenever that is. On the consumer side, we're generally offering deferrals for 90 days to customers. At the end of that 90-day period, we revisit where we are and consider another 90-day deferral. As I mentioned, we've granted 4,000 deferrals in our balance sheet on-balance-sheet mortgage book, another 12,000 deferrals for the portfolio mortgage portfolio that we service for others, and about 13,000 deferrals of other consumer credit, whether it be credit cards, installment loans, home equity lines, etc. Which is roughly a little less than $900 million on the mortgage portfolio, which is a $14.5 billion portfolio. Look at that number right. So I'll give you some perspective, just to give you some percentages. Based on what John said, on the mortgage portfolio for our own book, it's about 7.5% of our accounts have been deferred. On the commercial corporate book, 6%. And the consumer book is 2.2%, just given a large number of consumers. I think on our mortgage book, Barb, half of the loans that have been deferred, the loan-to-value is less than 50%. That is correct.

No, great. Thanks for the color, guys. Appreciate it. Hope that's helpful.

Your next question is from Bill's Car Cashy of tomorrow. Morning. Hi, good morning.

My main question is on how much you think the Payment Protection Program will really benefit credit performance on the consumer side of your business. I'm curious because employees who are participating in PPP are getting those benefits in lieu of what would otherwise be unemployment insurance, which suggests I think that PPP may be understating the level of initial claims. Was curious to hear your thoughts on that. And you know, since we know historically high levels of initial claims are associated with elevated consumer credit losses, I just wondered whether you had any perspective on whether the payment behavior of employees participating in PPP would help you guys minimize credit losses on the consumer side of your business.

That's super helpful. Thank you.

Her final question comes from Christopher Marin of Janie Montgomery. Morning. Thanks.

Hey, I'll just want to ask about the CECL forecast period. Barb, to walk us through that, does that work against you with the new numbers on unemployment, or was that already factored at the end of March?

Yep. First, CECL, you know, we already did the nine-quarter loss. If you have a two-year reversion period, so we looked at nine quarters. And you know, I've compared to CECL which is nine quarters, it's not a lot different. And really, what we did, we can quickly talk about that. We looked at several different internally developed economic forecasts that we did, as well as industry stress level analysis that included the Moody's critical pandemic scenario that came out recently. And both of those, looking at those, gave us a range of potential losses. And then we took those outlooks, which included again both acute economic stress in the immediate term as well as in a general recession type outlook, and our analysis reflected the key economic variables in our models for our base forecast as well as an abrupt and severe recession, etc. So again, a lot of different inputs to help inform us for a potential range of future charge-offs. And then we performed specific stresses on sectors we believe would be most impacted. As an example, I mean, these are included but not limited to energy, restaurants, hotels, manufacturing, retail trade. And again, came up with what we felt was our best number. Diversity could be overcharge-offs by the redistricting process. And walk you through that, we rely on when we're doing our T-Curve and doing our capital planning, which is why we feel good about the process. Given we've been doing capital planning now for years and years, we have a very strong, very solid process there. It incorporates what we're doing here on the ratification. Another fraud was happening in the prison environment. Great. Thank you, Barb. But thank you, John. Thank you. Okay, that's the last question we have.

Great. Thank you, Barb. But thank you, John. Thank you. Okay, that's the last question we have.

This concludes today's conference call. You may now disconnect.