Associated Banc-Corp

NYSE:ASB

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, everyone, and welcome to Associated Banc-Corp's First Quarter 2020 Earnings Conference Call. My name is Molly and I'll be your operator today. [Operator Instructions] We will be conducting a question-and-answer session at the end of this conference. Copies of the slides that will be referred during today's call are available on the company's website at investor.associatedbank.com. [Operator Instructions]

As outlined on Slide 2, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures, mentioned in this conference call, please refer to the Page 21 of the slide presentation and to Page 8 in the press release financial tables. Following today's presentation, instructions will be given for the question-and-answer session.

At this time, I would like to turn the conference over to Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

[Philip Flynn, President, CEO & Director]

Thank you, and welcome to our first quarter 2020 earnings call. Joining me today are Chris Niles, our Chief Financial Officer and Pat Ahern, our Chief Credit Officer. As you can see from our materials Associated continued to meet the needs of our customers, grow and generate net profit during the first three months of the year. We continue to benefit from a resilient core funding base, a strong market presence and a high quality lending portfolio.

But I'll start by discussing our response to the radically changed environment, we are now experiencing. The past two months were extraordinary, let me highlight the actions we've taken to help our customers and protect our colleagues. We closed our branch lobbies on March 17th becoming one of the first banks to transition to drive through and by appointment only service. Our branch operations and IT teams have responded wonderfully to meet the needs of our customers. We began to send people to work remotely on March 13th, and now have about 70% of our colleagues performing their jobs from home. We are continuing to pay all of our colleagues, including those whose jobs were curtailed by our social distancing measures.

We are also quick to offer our own COVID-19 relief program providing customers, waivers of certain fees and deferrals of loan and mortgage payments. Through Tuesday, approximately 1,450 primarily consumer and small business loan customers have been granted some form of payment or fee relief. From a financial perspective, we were ready to meet all of our customers' needs with both lending availability and transactional liquidity as our core deposits increased even faster than loans. Our loan to deposit ratio strengthened during the quarter.

In addition, since quarter-end, we've continued to support our small business customers through the SBA Paycheck Protection Program, as of April 21st we have funded nearly $900 million of loans for more than 3,600 businesses. We are ready to support our customers in the second round of the PPP program and other programs that may come from the Fed, the Treasury or the SBA. We've also continued to support our communities in these difficult times, we continue to donate over $3 million a year to support local housing programs, food banks and other essential services. In addition, we recently donated 3,000 to the United Way and other local COVID-19 relief efforts in our footprint. Standing up new loan programs and processes, while working remotely has been hard, but we've met these challenges and stand ready to help our customers get through this difficult period.

So, now let me turn to the financial results. On Slide 4, our first quarter GAAP earnings were $0.27 per share, driven by a resilient net interest income and reduced expenses, excluding First Staunton acquisition-related costs, our earnings were $0.28 per share. We had strong loan growth, particularly in our commercial and business-lending portfolio as customers draw lines of credit for their own liquidity. The line draws in turn drove increased deposits as customers built up cash positions. The First Staunton acquisition, which closed on February 14th also contributed to loan and core deposit growth.

Our net interest margin increased 1 basis point from the fourth quarter, driven by a lower cost of funds and elevated LIBOR rates. The slightly higher margin coupled with loan growth resulted in a $20 million increase in our pre-tax, pre-provision income from the fourth quarter. Our CET1 ratio was 9.36%, giving us ample capital to fund our commitments and support additional loan growth, even after repurchasing $71 million of common stock in the quarter. We also implemented CECL as of January 1st, resulting in a one-time $131 million increase to our allowance for credit losses and the first quarter provision of $53 million, reflecting our economic outlook going forward.

Average loan balances are shown on Slide 5. Total loan balances were up $525 million from the fourth quarter, as we saw increases in residential mortgages, commercial and business lending and commercial real estate. Residential mortgage growth was driven by solid origination trends and lower payoffs in the first two months of the quarter. While we anticipate payoffs to be elevated in the second quarter due to lower rates, our pipeline continues to be strong. We've taken about $2.5 billion in mortgage applications this year through mid-April, which is about double the pace we saw over the same period last year.

Growth in our commercial and business portfolio was driven by our power and utilities vertical. Additionally, general commercial lending and REITs had strong growth in the quarter, while customer draws in March contributed to the increase, we also had strong pipeline production, offsetting these gains were seasonal decline in mortgage warehouse pretty much of the quarter and the purposeful run off of our oil and gas portfolio. We expect to continue the reduction of our oil and gas book, as we pursue additional credit risk mitigation opportunities. We also saw solid results from our focus on growing commercial real estate term debt, particularly in January and February, commercial real estate construction loans also increased as we funded construction loans in our pipeline.

Turning to Slide 6, we show end of period loan trends, which highlights activity we saw in March and April in mid-March, we began experiencing a significant uptick in general commercial lending as customers drawn lines of credit and built up cash. We also had a large increase in mortgage warehouse loans, as lower mortgage rates induced a refinancing wave in March. In CRE customers increased line draws and delayed payoffs in March and we expect CRE balances to remain elevated through the rest of the year. Customer demands for liquidity and refinancing activity have subsided in April as shown in the right-hand graph, this chart also highlights the impact of our participation in the Paycheck Protection Program that we further detail on Slide 7.

We began taking applications for the PPP on April 3rd, the first day it was offered by the SBA. Standing up a new loan program is always difficult and this one was made more so by the tight timeline, change in guidance and by working remotely, through great effort and dedication of several hundred of our colleagues, we created all the forms and processes and modified systems to support the program in a matter of days. Through April 21, we had funded over 3,600 customers for nearly $900 million of loans representing about 90% of the dollars and about 70% of the loans that were applied for. We have taken advantage of the Fed's PPP lending facility to fund these loans, we expect our customers will begin applying for loan forgiveness in late June and anticipate the bulk of the loans will be forgiven during the third quarter.

With the expected extension of the PPP program, we expect to fund the remaining 1,300 applications we received, representing an additional $80 million of loans. We've already taken all those applications through the process, so that will be ready to get SBA authorization as soon as their portal opens. In turn we expect to access the funds PPP lending facility to fund these loans, as well.

On March 21, we initiated our COVID relief program by offering loan deferrals and fee waivers to our business and consumer customers, through April 21, we've approved deferrals or modifications for over 1,450 loans totaling approximately $733 million, which is about 3% of our total loans. The approved loans include $303 million or about 5% of the commercial real estate book, mostly driven by our hotel and retail oriented borrowers, $179 million or 2% of our commercial and business lending book; and $250 million of residential and consumer loans we hold in our own portfolio. Additionally, in the first 30 days of our COVID-19 relief program, we waived or refunded 415,000 in fees for consumers and small businesses. We are pleased to be able to help relieve some of our customers' financial stress and to be part of the economic solution to this crisis.

Turning to Slide 8, the current environment has introduced new risks. On Slide 8, we've laid out our exposures to several categories of commercial loans potentially impacted by COVID-19 and lower hydrocarbon prices. These balances represent 9% or $2.2 billion of outstanding loans at the end of the first quarter. We've increased portfolio monitoring activities across the bank, and are proactively working with our borrowers to help them navigate the current environment. Our largest likely area of exposure representing nearly 5% of the loan book is to retailers and shopping centers. Approximately $528 million of the retailer category is in CRE. In addition, we have approximately $453 million loan to predominantly investment grade retailer-oriented REITs.

We continue to monitor our oil and gas portfolio, which now accounts for less than 2% of our loan book with demand disruptions pushing the cost of oil down dramatically. We've set aside additional loan loss reserves against our oil and gas portfolio during the first quarter. While many of our customers have hedged their positions over the near-term and it may take a while for losses to develop, we expect a prolonged period of lower prices that will stress the industry. Our exposure to the hospitality industry is fairly limited with just over $200 million of loans to hotels, representing less than 1% of total loans. We also carry approximately $100 million in loans to restaurants, and other food service companies. Beyond that, we have limited exposures with just one customer in each of the casino, movie theater or fracking sand mining business.

Turning to Slide 9, we've outlined the Bank's transitioned to CECL in the first quarter. We implemented CECL leveraging, Moody's baseline forecast at both the beginning and the end of the quarter. Our Day 1 allowance for credit losses adjustment came in at $131 million, which was reserved as of January 1st. The higher level of Day 1 adoption relative to our prior guidance was largely driven by an increase in identified probable troubled debt restructurings in our oil and gas portfolio and the fracking sand mining company.

With respect to our provision for the quarter, we leverage the Moody's March 27th baseline forecast and identified additional probable TDRs in the oil and gas book, given changes in price and the dynamics in the industry. Further, in response to the overall economic environment we also added additional reserves for our key commercial loan exposures, which we highlighted on the prior slide and bolstered our unfunded commitment provision by $16 million. These factors drove the majority of our $53 million provision for the quarter.

Our net Q1 reserve build of $40 million reflects the provision net of charge-offs and changes in our CECL modeling along with the increased expected prepayments on mortgages. In aggregate, our total allowance for credit losses on loans was $394 million at quarter end, as compared to $223 million at year-end. We believe this $171 million reserve build, a 76% increase adequately reflects the life of loan risks in our portfolio, given the economic outlook at March 31st.

Our current allowance levels also cover over 65% of our potential losses has produced in our last internal severely adverse stress test scenario. $64 million of the reserve build was specific to our remaining oil and gas portfolio, and we ended the quarter with an ACLL reserve of nearly 17% against oil and gas. Our overall blended ACLL, represents 162 basis points of total loans, with nearly 2% set against our CRE exposures and just under 1% set against our predominantly first mortgage consumer loan portfolio.

Turning to Slide 10, prior to the outbreak of COVID-19, the credit environment remains benign outside of oil and gas. Given the sudden economic downturn and customer relief programs. Our credit metrics outside of oil and gas remained relatively steady. During the quarter potential problem loans increased $73 million to $234 million, driven by a few CRE credits along with some additional Oil and Gas names. Non-accrual loans on $18 million uptick with $5 million coming from oil and gas and the majority of the remaining increase attributed to general C&I and residential mortgages.

Net charge-offs were $17 million, with about half coming from oil and gas and the rest in general C&I. To address the disruption brought on by COVID-19, the company has taken a proactive approach to monitor customers impacted. Loan officers have reached out to their customers to understand their capital and liquidity needs, this outreach has been an essential component of the company's relief programs as we support our customers through this turbulent time. Along with our customer outreach we've undertaken a deep examination of our loan portfolio to identify industries with additional risk exposure. With continued detailed monitoring of the specific industries in addition to the overall portfolio, as we analyze delinquencies and deferrals as leading indicators of credit issues in this evolving environment.

Turning to Slide 11, average deposits were up nearly $190 million from the fourth quarter, the average deposit balance growth was driven by the First Staunton acquisition, which added about $440 million of deposits in mid-February. Our end of period balances increased nearly $1.9 billion, including $1.6 billion of low cost demand and savings deposits that came later in the quarter as our customers built up cash. These inflows resulted in a beneficial mix shift and low-cost deposits made up 58% of our overall deposits at the end of the quarter.

Turning to Slide 12, the inflow deposits is also enabled us to maintain strong liquidity. Our wholesale funding ratio has remained stable demonstrating our continuing ability to fund most of our loans with deposits. While we expect to continue funding loans with deposits, we have $11 billion of wholesale funding available, including $6 billion of capacity at the FHLB in Chicago. These figures do not include the additional liquidity that's available to us through the Fed's PPP lending facility. Our loan to deposit ratio was 95%, well within our historical range, which gives us flexibility to maintain deposit pricing discipline and we expect to maintain this ratio below 100%.

Turning to Slide 13, our net interest income was $203 million, an increase of $3 million from the previous quarter and our net interest margin was 2.84%, up 1 basis point from the fourth quarter. There were several factors that drove the modest increase in NII and NIM. On the asset side one-month LIBOR remain significantly elevated over Fed fund rates, particularly in March positively impacting CRE and commercial and business lending yields. This benefit was offset by a decrease in long-term interest rates resulting in elevated refinancing in the residential mortgage book and the pay-off of higher coupon loans in March. Additionally, this increased prepayment rate drove accelerated recognition of deferred origination costs further reducing our mortgage yield.

On the liability side, our total interest-bearing deposit cost decreased 19 basis points, as we reduced pricing across our full suite of deposit products. Total interest bearing liabilities decreased 17 basis point aided by a beneficial mix shift toward low-cost deposits and reduced wholesale funding costs. These factors were most pronounced in March, resulting in a NIM for 2.89% for that month. Looking ahead, we expect the commercial loan yields will continue to benefit from elevated LIBOR rates in April and at least somewhat into May. We anticipate the LIBOR Fed funds spread will normalize later in 2020 as economic conditions become less uncertain. We also expect our deposit costs to continue to decline in the second quarter as we benefit from CD run off and a full quarter impact from our reduced pricing, but note that our month-to-date April cost of interest bearing deposits is already running at approximately 36 basis points.

Turning to Slide 14, first quarter non-interest income of $98 million was up $5 million from the last quarter and up $7 million year-over-year. Our insurance income was seasonally higher as we receive property and casualty contingency fees in the quarter and our capital markets groups saw our revenue lifts driven by market volatility. We also benefited from $15 million of gross mortgage banking revenue in the first quarter, but that was partially offset by a $9 million MSR impairment, resulting in $6 million of net mortgage banking income. However, most other fee categories were softer in Q1, due to -- due in part to our COVID-19 relief program and lower market levels, impacting assets under management and investment activity. These declines and other fee categories were largely offset by net gains resulted -- realized on the further sell down of prepayment sensitive mortgage-backed securities.

Moving to Slide 15, non-interest expense of $192 million was down $11 million from the fourth quarter. This decrease was primarily due to lower personnel costs, as we have reduced expected incentive compensation, had less hiring in response to the current environment and are seeing the benefits of the restructuring done in the fourth quarter. Business development and advertising costs were $2 million lower during the quarter, due to less business travel and the planned reduction of advertising spend. Technology costs also decreased $2 million from the reduction of third-party consultants, which took place at the end of last year.

Turning to Slide 16, we look at our customer activity as you'd expect branch traffic is down since the pandemic began with April branch transactions about 17% lower than in January. We also saw 32% drop in ATM transactions for the same time period. As our customers increasingly chose to stay home. However, with the significant investments we've made in digital technology over the last several years, our customers were able to shift their activity from our branches to online and mobile. We signed 86% uptick in mobile sessions, since January, and an increase in the use of our Open application, which allows customers to open accounts online or from their mobile devices. Call center, volume has also increased 32%, as we move communications with our customers into non-branch channels.

As shown on Slide 17, our regulatory capital levels remain strong and we have sufficient capital to support further loan growth, if our customers continue to seek liquidity. CET1 was 9.36% at the end of the first quarter and we anticipate it will build through the remainder of 2020. We repurchased $71 million of common stock in the quarter, but suspended our repurchase program on March 13th. We expect our repurchase program to remain suspended for the remainder of the year.

On Slide 18, we discuss our outlook. Given the extraordinary economic uncertainty our previous quantitative guidance should no longer be relied upon. However, we'd like to provide more general expectations for the remainder of the year. While we have ample liquidity and funding sources, we expect to be able to fund loan growth with deposit growth and expect our loan to deposit ratio will remain under 100%. Given the lack of attractive investments for our portfolio we're now targeting and investments to total assets ratio of 15%. We expect our mortgage banking business to continue to do well, but it will likely be offset by lower service charges as we provide relief to our customers.

We'll also face headwinds in wealth management, due to lower market valuations. We often speak about costs as being one factor that we control, we will continue our disciplined approach and expect our expense run rate for the rest of the year to be in line with that of the first quarter. As mentioned, we suspended our stock repurchase program on March 13, and expect that will remain a suspended for the remainder of the year as we build capital.

With that, I'd be happy to take your questions.

[Operator]

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Casey Haire from Jefferies. Please proceed with your question.

[Casey Haire, Jefferies]

Sorry, about that. Yes, thanks guys. So I guess, focusing first on the energy reserves to 17%, it sounds like you guys do present. Do you expect to prolong depressed pricing here or can you just give us a little bit more color there? Can we expect more reserve build or do you feel like you have adequate reserves at 17%?

[Philip Flynn, President, CEO & Director]

Pat, you want to take that question?

[Patrick Ahern, Chief Credit Officer]

Sure. So I think in general, time will tell what we end up doing as the year goes on. We feel like radically reserved right now. However, with the kind of unprecedented environment we're doing with oil and gas, we're going to follow this closely as we get into the second quarter. Right now our oil and gas portfolio has been reduced almost 40% from a year ago and as we've mentioned, it now represents about less than 2% of the total portfolio. The portfolio as it sits today is about 60:40, oil to gas and we feel good about the fact that about 70% of the portfolio is hedged. For 2020 and almost 50% hedged or 2021. We are just kind of starting into the spring redetermination season right now. We've got about a third of our loans have been -- they've got results on that redetermination, so we're seeing some reductions in borrowing base by almost 20% to 25%. And our average loan commitments have been reduced by about 20%, so...

[Casey Haire, Jefferies]

Okay, very good. And on the forbearance front, I think you mentioned or deferral $733 million. Apologies if I missed this in the script, but is that still trending up or is that stabilized just getting some color on the pace there?

[Philip Flynn, President, CEO & Director]

There is more to come clearly, those are the deferrals that we've already granted, there is some more to come. They're not going -- go at the same pace, I wouldn't think that we saw over this past four weeks or so.

[Casey Haire, Jefferies]

Okay, great. And just couple of follow-ups on the NIM, the LIBOR disconnect with Fed funds. It sounds like you guys expect that to sort of normalize, I guess a little bit towards the end of this quarter. Just what is sort of baked into your guide, just for the quarter, guys, so we can just track that?

[Patrick Ahern, Chief Credit Officer]

Yes. So, clearly it was elevated in March, it's step down that delta, it was north of 80 basis points, step down to 60 basis points and we have a stepping down. The long-term average is closer to an eight, we're not actually going to get to an eight necessarily much before the end of the year, but we certainly would see it getting down into that much narrower range, as we move to the end of the third quarter.

[Casey Haire, Jefferies]

Okay, and just last one on the deposit costs at 57 in March. How much more -- how much more room do you have going forward from that level?

[Philip Flynn, President, CEO & Director]

So, we mentioned it fell into the 30s in April, and it will probably likely fall further slightly given CD rollovers and other repricing dynamics that we'll contribute to that. So probably be again less than it will be in the '30s in the second quarter and falling and likely less than that in the third quarter unless environment shifts.

[Patrick Ahern, Chief Credit Officer]

We slashed our deposit pricing at the same time that the Fed took their last big whack at rates and so you'll see the full impact of that as we go through the quarter. But even as early as we are today in the second quarter, we've dropped another 20 basis points overall.

[Casey Haire, Jefferies]

Got you. Okay, thanks very much.

[Operator]

And our next question comes from Scott Siefers from Piper Sandler. Please proceed with your question.

[Scott Siefers, Piper Sandler & Co.]

Good afternoon, guys. Thanks for taking the questions.

[Philip Flynn, President, CEO & Director]

Good afternoon, Scott.

[Scott Siefers, Piper Sandler & Co.]

Hey, I guess first question I wanted to ask was on the reserve to sort of stress losses. I think Phil, you said 54%, which is obviously a pretty healthy number. I guess, if I back into what the reserve is relative to the last time you guys said publicly disclosed stress tests, it would have been closer to 55%. I mean, also very healthy, but just curious if you guys can maybe walk through what has changed in either the portfolio complexion, loss assumptions, what have you that would allow that reserve to, kind of, look better these days?

[Philip Flynn, President, CEO & Director]

Sure, Scott. So I think you can do the math and infer, yes, that our total stress losses in the severely adverse scenario from our last public disclosure to our last internal run did come down several $100 million. The drivers of that as Pat mentioned a little bit and part where the more than $400 million reduction in the oil and gas book. And then the general mix of our portfolio, which has become more overall mortgage-centric, which has a lower loss content in our models in general, and the continued low levels of risky asset classes in the severe scenarios, such as single-family construction lending or foe-sale housing construction lending and condo-related activity.

Now our models, we're obviously geared and tied to the realized the outcomes of the prior results. So what will be the outcomes -- next time can shift, but based on the models that we've had those numbers as we continue to mix the portfolio away from those higher risk classes and to steadier loan categories have moved. The total expect loss -- potential loss down, and obviously, we moved the reserve up.

[Scott Siefers, Piper Sandler & Co.]

Okay, perfect. That's good color and I appreciate that. And then just wanted to ask one question just on capital, so common equity Tier 1 is still very solid and then I guess what's a little unique about the way this cycle seems to be panning out is, whereas TCE ratio was like the all-important ratio last time around. Presumably, this time it's got to have much less weight, given that you would get penalized on the TCE for PPP loans, but those are kind of invisible from the standpoint of regulatory ratios. I guess in your guys, how does the TCE factor into your thinking in the way you, sort of, manage thing this time around?

[Philip Flynn, President, CEO & Director]

Well, we've always said that we wanted to keep it at about seven or above. And as you recall, as we're building toward CECL implementation, it had run up. So we expected CECL. We had first time and come in what we didn't expect is to have a $1.5 loans flow on to the balance sheet at the end of March. So that took it down to the $6.9 that you see. But, you know, if you exclude the PPP loans that will be sitting here, although they're completely funded by the Fed it should creep up from here. With PPP, if you leave that in, of course, it will be lower. Because we'll end up with -- we've got, I mean we have funded 900 as we sit here today. We have about another 100 in the queue, give or take, and we've opened up our inquiry page already in anticipation of Congress and the President signing the extension. So I don't know where it will end up. It will be higher than where it is.

[Scott Siefers, Piper Sandler & Co.]

Yes. Okay, perfect. Thank you guys very much.

[Operator]

And our next question is from Terry McEvoy from Stephens. Please proceed with your question.

[Terence McEvoy, Stephens Inc.]

Thanks, good afternoon. First off, I was wondering -- just wondering are you seeing, I mean, experiencing higher modification activity and drawdown activity among those commercial portfolios that you highlighted in the presentation today?

[Philip Flynn, President, CEO & Director]

Sure. So the REITs have drawn their backup lines. As you know, I'm just trying to get to that page that as it's Page 8. So, yes, so the REITs have drawn and kind of just general C&I not necessarily called out on Page 8, Terry. It has drawn some and of course, we had a run-up in mortgage warehouse, but that's to be expected.

[Chris Niles, EVP & CFO]

So, Terry, I guess I would add, and I follow, I was looking at Page 6, so to Phil's comments just now you can see the general commercial loans was where the draw and the mortgage warehouse and the REIT, that was all at the end of the quarter. And since then, which is what we've tried to highlight on the right hand side of Page 6, we really haven't seen incremental activity. So the drawdown and liquidity driven activity we saw in the last three weeks of March really abated when we move past April 1st and we really haven't seen any further of that activity here in the second quarter.

[Terence McEvoy, Stephens Inc.]

And then just as my follow-up question, do you have any sense for the average fee on your PPP loans, it looks like your, kind of, average size is skewed a little bit larger than others, which could impact that or would impact that fee?

[Philip Flynn, President, CEO & Director]

Yes. I think we're figuring it's -- to be 3% plus. We've got a lot of smaller stuff in the queue. Like a lot of banks, I mean, we process the loans on our first come first serve basis, but a lot of larger companies with professional finance staffs were ready to go upfront. So it tended to skew larger at the beginning and as we wounded down, leading up to the money running out the loans tend to get much smaller and what's left in our queue and what's coming in now tends to be smaller as well. So it will probably be like 3-ish, 3-plus.

[Terence McEvoy, Stephens Inc.]

Okay. That make total sense. Great, thank you.

[Operator]

And our next question is from Jon Arfstrom from RBC Capital Markets. Please proceed with your question.

[Jon Arfstrom, RBC Capital Markets]

Thanks. Good afternoon, guys.

[Philip Flynn, President, CEO & Director]

Hi, Jon.

[Jon Arfstrom, RBC Capital Markets]

Back on Slide 6. Just following up on Terry's question, it's probably a good sign that you haven't seen more line draws in April, but curious how long you expect some of those draws to hang around? Can we see those come back down? Any thoughts on that?

[Philip Flynn, President, CEO & Director]

Yes. We generally feel that a lot of these draws were just companies wanting to ensure their liquidity in the face of the turmoil. So things haven't calmed down yet, they've calmed down some all of the Fed actions have certainly helped a lot in the capital markets. So it's very hard to predict what's going to happen. But my guess would be that as this quarter rolls along and if things continue to stabilize, you'll probably see some of this money come back just, because people won't necessarily feel like they've got to be sitting on a ton of cash, but again, it's a little hard to predict. The fact that we didn't continue to get draws past quarter end to any great degree. Feels like there was a little bit of window dressing going on for some of the folks, who drew these funds.

[Jon Arfstrom, RBC Capital Markets]

On Slide 9, it's a good slide. I haven't seen CECL shown like this by category. So I think, I understand the moment of everything, but the two negative numbers, I'm assuming one is the likes of loan and the other is prepayment driven, but can you just, kind of, address those two, so we understand that?

[Philip Flynn, President, CEO & Director]

You're correct in both cases. So, and the Day 1 CECL adoption, the negative in the commercial and business lending, excluding oil and gas is adjusting for the fact that we have -- tend to have considerably shorter loan terms a lot of 364 day type facilities etcetera, and therefore our Day 1 adoption was a reduction and the allocation of reserve to those given the term based nature of CECL. And similarly, but for different reasons as we move through the quarter and refinance rates fell and therefore prepayment rate -- expected prepayment rates increased the average life of the expected mortgages at the end of the quarter wasn't is expected to be shorter than it was at the beginning. So that resulted in a net release in the mortgage line, which is why you had a net negative reserve build.

[Jon Arfstrom, RBC Capital Markets]

Good, that helps. And then next one is, this is trying to get this out of you, Chris will be like trying to get the packers draft pick early tonight. But second quarter loan loss provision, what are you watching, kind of, what are the nuances for Associated? What are the things that might be a little different about how you will look at and think through the level necessary in terms of your second quarter provision?

[Philip Flynn, President, CEO & Director]

Yes, it is going to be hard to get that and I'm on the packers port, so I do know the draft I could tell you, if you really want it.

[Jon Arfstrom, RBC Capital Markets]

[Indiscernible].

[Philip Flynn, President, CEO & Director]

No, we need a new punter. Yes, obviously, we're going to be looking at, well let me think about that. So a lot like -- let's think about hotels, you know, almost all that's been deferred now. So that's probably not going to drive much in the second quarter a lot of our oil and gas buildup, we use the probable troubled debt restructuring concept, which I don't think a lot of banks have used as much, which was embedded in CECL. So if we go through continued redetermination periods and we see continued market deterioration in collateral positions you could end up with some more probable TDRs and see some build there. What else we'll be watching, obviously delinquencies and such that we haven't deferred for one reason or another.

[Patrick Ahern, Chief Credit Officer]

And a change in the overall macro environment, right. So our view at the end of the quarter for CECL has a certain macroeconomic outlook and in our internal discussions, it had a fairly high and robust level of recessionary outcomes 20%-plus type or 20% GDP type drops etcetera. And it's plausible that 2.5 months from now that environment will either be perhaps different and more positive or possibly worse as we work our way there. Now, I would -- I'll remain optimistic and say, I'm hoping that things get better for the country and for all of us in which case, I think there is room that the economic outlook is a positive. In addition to the realized outcomes in our portfolio, either in oil and gas or hospitality or otherwise.

[Philip Flynn, President, CEO & Director]

And last thing I would say is, it's certainly is more likely than not that there'll be reserve build in the second quarter, just given the environment here in the second quarter. The continued unemployment claims that we saw this morning etcetera. But fortunately, PPNR looks pretty strong at the moment, so I think we've got plenty of ammunition for that.

[Jon Arfstrom, RBC Capital Markets]

Okay. Yes, thanks for the help. I appreciate it.

[Operator]

And our next question is from Michael Young with SunTrust Robinson Humphrey. Please proceed with your question.

[Michael Young, SunTrust Robinson Humphrey]

Hey, thanks for taking the question. Good evening. Wanted to first ask just on, kind of, balance sheet management and growth from here. How you're thinking about that? Are you, sort of, hesitant to go out and make new loans to new customers at this point, and really focused more internally? And how would you look at maybe mortgage in this environment, putting that on balance sheet versus selling?

[Philip Flynn, President, CEO & Director]

Yes. So the first part of your question, Michael. We are absolutely here to support our customers' needs and we are well positioned to do that, we'll continue to do it. The second piece we are generally in a position where we're going to move the flow of mortgages and that's what we're doing now, off to Fannie or whomever. So we're not putting a lot of mortgages on our balance sheet on purpose. That's not necessarily, because of the run-up and loan outstanding, it's -- a lot of it has to do with you're really not encouraged through the CECL methodology to build up a lot of mortgages on your own book. So we'll be in the mode generally speaking of originating and selling those mortgages and retaining service, which is pretty much been our standard model.

[Michael Young, SunTrust Robinson Humphrey]

Okay. So with higher prepayment speeds, maybe on the existing book on the -- on -- would you expect, I guess those two -- those balances to decline and/or would you look to replace those to maintain, I guess, the overall waiting?

[Philip Flynn, President, CEO & Director]

No. I would guess that our mix, I mean, our mix already shifted quite dramatically at the end of the first quarter. So I think you could expect the mix of our loan book to be less mortgage, more C&I, more CRE as the year progresses. So we're not going to do anything extraordinary to maintain those mortgage balances, because they're being offset by other -- by growth in other categories. And actually strategically we had talked about this before that we felt like our mortgage book was creeping up to us too high of a level against our overall loan book and as things have turned out that's changed rather more rapidly than we thought it would, and it will probably continue to evolve at a much slower pace throughout the year.

[Michael Young, SunTrust Robinson Humphrey]

Thanks. And one last one maybe just on loan to values, I think that's something that a lot of other banks have brought up relative to their CRE book, and I guess trying to give confidence to investors that they don't see a lot of loss content there. Do you have any of that level of disclosure maybe by sector or anything like that?

[Philip Flynn, President, CEO & Director]

Sure. I think, the number that you'd be most interested in if you go back to Slide 8, where you see our exposure to retailers, which is our largest sector of interest. The loan to values in the term book for retailers and most of it is term is 57%.

[Michael Young, SunTrust Robinson Humphrey]

Okay. And would that be consistent though with, I guess, other areas will be higher, maybe 70%, 75%. Any color is going to be...

[Philip Flynn, President, CEO & Director]

Well, it's going depend -- yes, it would depend very much on the individual categories, but on this page where we called out, you know, industries, which have been impacted by COVID-19, which are 9% of our total loan book. Almost 3% of that is in the category, I just talked about. Obviously retail REITs are a different animal, because they are all a basket of projects. So the LTV there isn't as germane. Oil and gases, you know, depends on their re-determinations, and then the rest of the exposures get pretty limited in a hurry. So we focused in on what's the LTV on these retail-oriented commercial real estate projects and it turns out, it's pretty reasonable.

[Michael Young, SunTrust Robinson Humphrey]

Okay, thanks.

[Philip Flynn, President, CEO & Director]

Sure.

[Operator]

[Operator Instructions] Our next question is from Chris McGratty from KBW. Please proceed with your question.

[Christopher McGratty, KBW]

Hey, guys.

[Philip Flynn, President, CEO & Director]

Good afternoon, Chris.

[Christopher McGratty, KBW]

Chris or Phil, just looking at Slide 18, the guide on the fee income isolating the mortgage component. Can you provide a little bit more perspective on the magnitude of pressure from some of the actions you're taking to waive fees and also kind of the market impact on your wealth business?

[Chris Niles, EVP & CFO]

Sure, so I mean the issue with wealth asset management -- under management we disclose that number and you can see it on Page 3 wealth AUM came down by more than 15% from quarter -- year-end to the -- end of the first quarter. So that will have a drag on those fees as we move through the year. Now some of those fees are on a lag, so they'll basically take effect here in the second quarter. Based on the downdraft we saw in the first quarter, so it's going to be an impact. With regards to the waivers and fee charges, we partially disclose that on the slide with the dynamics we're doing for our customers and that's already over 400,000. And it will likely become more as we continue to go through the quarter. As I asked earlier, we would expect there to be probably additional request for waivers and such over the course of the quarter, and so that will likely increase.

[Philip Flynn, President, CEO & Director]

Now, there is the potential that a lot of this -- maybe all of it will be offset by the fees we ultimately collect from the PPP program, depending on what those turn out to be. I mean, that they're likely to be somewhere in the range, I'm guessing of $30 million to $40 million fees that of course we hadn't -- they weren't even a figment of our imagination in the start of the year, so that should offset, I'm guessing quite a bit of our concern about wealth, as well as some of the waivers.

[Chris Niles, EVP & CFO]

Yes, and just for clarity for geography those fees will show up in net interest income over the course of the next six months. Likely assuming the loans come off, not in fees. Just for clarity.

[Christopher McGratty, KBW]

Yes. Got it, got it. Maybe one more if I could. So obviously dividends are a big topic in Europe and making it way to the US. Your payout ratio is not glaringly, it's about 60%. Just thoughts on dividend sustainability given this -- given the sharp change in the macro?

[Philip Flynn, President, CEO & Director]

Sure. So I'll give you the Jamie Dimon [ph] answer, which is we fully expect to continue to pay our dividend, we feel comfortable that we should be able to. But if we end up in a severe prolonged recession, almost anything is on the table for almost any company.

[Christopher McGratty, KBW]

Great, thanks.

[Operator]

And we have reached the end of our question-and-answer session. And I will now turn the call back over to Philip Flynn for closing remarks.

[Philip Flynn, President, CEO & Director]

Great. I appreciate you all joining us today. I do want to take a moment, because I know a lot of my colleagues listen to this call to thank them for the extraordinary job, evolving doing during this difficult period. People have gone above and beyond, whether it's processing $2.5 billion, more than twice, what we had this time last year. From home, standing up the PPP program, 300 or 400 people spending enormous hours including all night to get things through the SBA portal; it's been an incredible effort by everybody and I just want to tell everyone how much I appreciate it.

I mean, I just like to finish by saying that Associated remains strong and stands ready to help our customers through these challenges and into the recovery that is certain to follow. So we look forward to talking with you all again in July. If you have any questions in the meantime, give us call. And as always, thank you for your interest in Associated.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.