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Community Bank System Inc
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Welcome to Community Bank System First Quarter 2020 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projection about the industry, markets and economic environment in which the company operates.
Such statements involve risk and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's Annual Report and Form 10-K filed with the Securities and Exchange Commission. Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.
Thank you, Brent. Good morning everyone, and thank you all for joining our first quarter conference call. In addition to Joe and I, I’ve also have Scott Kingsley and Joe Serbun to join us on the call this morning.
This is clearly a different and challenging environment for all of us. Let me start with our COVID response. Early in March, we mobilized the pandemic response team consisting of senior leadership across the company. Our initial focus was and continues to be the health, safety, and wellbeing of our employers -- employees, customers, and communities. We began execution immediately by limiting travel meetings, instituting sick time policies, and enhancing cleaning protocols in all company facilities. Over the following week, we closed branch lobbies, instituted work-from-home, separated our critical operating functions into multiple teams in different facilities, utilized shift work, and instituted social distancing in all office spaces.
We've been operating with this environment for over a month, and although less efficient, our operational cadence is quite stable. We're prepared to continue as we are until such time it is safe for our people to resume normalized operations. At this juncture in New York and Vermont, the governor's stay-at-home orders extend through May 15th, and in Pennsylvania that date is April 30th. We will remain abreast of circumstances and react accordingly in the best interest of our employees, customers, and communities.
Also in March, we announced that Scott Kingsley, our Chief Operating Officer, would be retiring from Community Bank System, effective June 30, 2020. Scott served in that role for a year and a half after having served as Chief Financial Officer since 2004. Scott worked side by side with me for nearly 16 years, and the company will miss his energy, passion, and talent.
At that same time, we further announced that Joe Serbun was appointed to the role of Chief Banking Officer. Joe began his career with Community Bank in 2008 and previously served as Executive Vice President and Chief Credit Officer. Joe will continue to bring exceptional leadership to our company for the benefit of all our stakeholders.
I will make only a few comments on Q1. It was pretty good. Absent the COVID-related allowance build, earnings were very strong. I think a couple of pennies better than last year’s quarter. The total loan book was down much less than seasonally expected, and we had organic growth in commercial. And deposit performance was also good in the quarter. Our non-banking businesses had a quarter. The pre-tax earnings of our wealth management business was up 12%, benefits was up 9%, and insurance was up 2%.
With respect to the acquisition of Steuben Trust Company that we announced in October, it is proceeding, albeit at a somewhat slower pace. We continue to be hopeful that we can close in the second quarter, but have not yet received regulatory approval and there remains uncertainty around the ultimate impact of COVID-19.
Joe will provide a little more color on the quarter, but there are obviously more significant matters to discuss. One of those I wanted to touch on was financial strength. In severe circumstances of economic and financial distress, there is no substitute for earnings, liquidity, capital, asset quality, core deposits, and revenue diversification. When I look at the fundamental financial strength of our company, I'm highly confident we are as well prepared for whatever the future may bring as we possibly can be. Joe?
Thank you, Mark. Good morning everyone. As Mark noted, the earnings results for the first quarter of 2020 were solid in spite of challenges related to the COVID-19 crisis. The company reported $0.76 in fully diluted GAAP earnings per year for the first quarter, excluding $0.01 per share for acquisition related expenses, fully diluted operating earnings per share were $0.77 for the quarter. These results were $0.04 per share lower than the first quarter of 2019 due largely to the COVID-19 crisis and its related impact on the company’s operating.
In particular, the company reported $5.6 million in its provision for credit losses in the first quarter of 2020, reflective of expected credit losses due to rapidly deteriorating economic conditions. This amount exceeded the company's net charge-offs in the quarter by $1.6 million or 9 basis points annualized by $4 million. By comparison, in the first quarter of 2019, the company reported $2.4 million in the provision for loan losses and net charge-offs of $2.6 million or 17 basis points annualized. In addition the company's net interest income was negatively impacted in the quarter due to the significant rapid decrease in short-term interest rates.
During the first quarter of 2020, the company adopted the new CECL accounting standard. This resulted in $1.4 million or 2.7% increase in the allowance for credit losses from $49.9 million prior to adoption to $51.3 million after adoption. Due largely to the expectation of increased credit losses due to the COVID-19 adverse impact on economic and business operating conditions, the company's allowance for credit losses increased an additional $4.4 million or 8.6% at the end of the first quarter to $55.7 million. The total increase in the allowance for credit losses was $5.8 million or 11.5% between December 31, 2019 and March 31, 2020. The allowance for credit losses to total loans outstanding at March 31, 2020 was 0.81%, which represented over 8 times the company's trailing 12 months net charge offs.
As Mark noted, we believe the company's capital reserves, liquidity profile, diversified revenue streams, strong credit record, and experienced management team leaves us well prepared to endure the impacts of the COVID-19 crisis. The company's net tangible equity to the net tangible assets ratio was 10.8% at March 31, 2020. This was up from 10% at the end of 2019 and 9.8% from one year earlier. Similarly, the Tier 1 leverage ratio was 11.1% at the end of the first quarter, which is over 2 times the well-capitalized regulatory standard of 5%.
During the first quarter of 2020, shareholders’ equity increased $121.4 million or 6.5%. This included $19.3 million increase in retained earnings and $93.7 million increase in accumulated other comprehensive income net of tax due primarily to an increase in the value of company’s available-for-sale investments securities. At March -- at December 31, 2019, the company’s Tier 1 risk-based capital ratio, total risk-based capital and common equity Tier 1 capital ratios were 17.2%, 18%, and 16.1% respectively, reflective of the company's lower risk asset base and high levels of regulatory capital.
The company has an abundance of liquidity resources and is well-positioned to fund future balance sheet growth, including its current loan pipeline, potential advances on undrawn lines of credit, and pending paycheck protection program loans. The company's funding base is largely comprised of low cost core deposits. At March 31, 2020, checking and savings accounts represented 68.5% of the company's total deposit base. The company's cash and cash equivalents net of float and reserves totaled $458.9 million at March 31.
Total borrowing availability at the Federal Reserve Bank was $260.4 million and total borrowing capacity at the Federal Home Loan Bank was $1.83 billion. The available for sale investment security portfolio was valued at $3.14 billion, $1.5 billion of which was available for pledging if needed. In total, these sources of immediate liquidity exceeded $4 billion. We closed the first quarter of 2020 with total assets of $11.81 billion. This was up $398.7 million or 3.5% from the end of the linked fourth quarter of 2019, and up $892.5 million or 8.2% from one year earlier.
The increase in the quarter was largely do a net inflow of deposits as seasonably anticipated; year-over-year increases in total assets was driven by both third quarter 2019 acquisition of Kinderhook and organic growth; average earning assets for the first quarter of 2020 of $10.04 billion, which is consistent with fourth quarter of 2019 but up $664.1 million or 7.1% from one year prior due to both the Kinderhook transaction and organic growth.
Average loan balances in the first quarter of 2020 were up $18.8 million or 0.3% when compared to the linked fourth quarter of 2019, down $603 million or 9.6% when compared to the first quarter of 2019. On a linked quarter basis, the average outstanding balances in business lending, consumer mortgage and consumer indirect portfolios were up slightly or were offset in part by decreases in the consumer direct and home equity portfolios.
The increase in average loans outstanding on an annual quarter basis was driven by the Kinderhook acquisitions, as well as organic loan growth. Ending total loans were down on a linked quarter comparative basis $24.5 million or 0.4% as seasonally anticipated. Exclusive of loans acquired in the Kinderhook transaction, ending total loans outstanding increased to $174.1 million or 2.8% from a year prior.
At March 31, 2020, the carried value of the company's investment securities portfolio was $3.19 billion. This includes net unrealized gains of $155.5 million, up from $33.1 million in net unrealized gains at the end of 2019 and $7.9 million in net unrealized gains a year earlier. The effective duration of the company's investment securities portfolio was 3.6 years at March 31, 2020.
Average total deposits were up $651.5 million or 7.8% from the same quarter last year, but down $45 million or 0.5% on a linked quarter basis. The increase year-over-year was driven by the acquisition of $560.1 million of deposit liabilities in the third quarter due to the Kinderhook transaction. The company's average cost of deposits was 25 basis points in the first quarter of 2020, 1 basis point lower than the linked fourth quarter of 2019.
The company reported total revenues of $148.7 million in the first quarter of 2020, an increase of $6.1 million or 4.3% over the prior year's first quarter. Net interest income increased $3.2 million or 3.7% to $90.1 million due to a $664.1 million] or 7.1% increase in average earnings assets between periods, offset in part by 15 basis point decrease in net interest margin.
Non-interest revenues increased $2.9 million or 5.3% between comparable quarters due to increases in banking and non-banking revenues, offset in part by a small loss on equity securities. Interest income and fees on loans increased $4.9 million or 6.6% over the comparable prior year quarter due to an increase in average total loans outstanding, offset by 17 basis points decrease in average loan yield. As previously reported, the first quarter 2019 average loan yield was favorably impacted by 6 basis points due to $1 million in onetime loan fees.
Interest income on investments decreased $0.5 million or 2.9% between the first quarter of 2019 and the first quarter of 2020. The tax equivalent average yield on investments, including cash equivalents decreased from 2.58% in the first quarter of 2019 to 2.45% in the first quarter of 2020, reflective of lower interest rates. Interest expense was $1.1 million higher than previous year's first quarter, driven by 4 basis points increase in the cost on interest bearing liabilities and $446.1 million or 6.9% increase in average interest bearing liability balances.
Employee benefit services were for the first quarter of 2020 were $25.4 million. This represents a $1.3 million or 5.5% increase over the first quarter 2019 revenues. The improvement in revenues was driven by increases in plant administrative and actuarial recordkeeping fees, as well as increases in employee benefit trust transfer agent fees. The company reported $8.1 million in insurance services revenues during the first quarter of 2020, a $0.2 million or 2.5% increase over the first quarter of 2019 results due primarily to an increase in group medical and property and casualty insurance revenues.
Wealth management revenues for the first quarter of 2020 were $7.1 million or $0.8 million or 12.4% higher than the first quarter of 2019 due to both acquired and organic growth. Banking noninterest revenues increased $0.7 million due primarily to an increase in mortgage banking revenues. During the first quarter of 2020, the company increased its commitment to sell secondary market eligible residential mortgage loans, which drove an increase in mortgage banking revenues from $0.2 million in the first quarter of 2019 to $0.9 million in the first quarter of 2020.
The company recorded $93.7 million in total operating expenses in the first quarter of 2020. This represents a $5 million or 5.7%, increase in operating expenses over the first quarter of 2019. Salaries and employee benefits expense increased $4.9 million between comparable quarters and reflective of the increased payroll costs associated with the third quarter of 2019 Kinderhook acquisition, merit-related pay increases and an increase in employee benefits and including significantly higher medical costs.
Total data processing and communication expenses increased $1 million or 10.8% between comparable annual quarters, driven by higher payment processing and telecommunication costs. Occupancy and equipment expenses increased $0.5 million or 4.4% between the periods due largely to increased costs associated with the Kinderhook acquisition. These increases were partially offset by $0.5 million or 11.2% decrease in intangible asset amortization, as well as $0.7 million or 6.4% decrease in other expenses.
The effective tax rate for the first quarter of 2020 was 18.8%, up from 18.5% in the first quarter of 2019. The company recorded lower amounts of stock based compensation tax benefits in the first quarter of 2020 as compared to the first quarter of 2019. Exclusive of stock-based compensation tax benefits, the company's effective tax rate was 20.9% in the first quarter of 2020.
From a credit risk and lending perspective, the company is taking actions to identify and assess its COVID-19 related credit exposures based on asset class and borrower type. No specific COVID-19 related credit impairments were identified within the company's investment securities portfolio during the first quarter of 2020f. With respect to the company's lending activities, the company implemented a customer payment deferral program to assist both consumers and business browsers that maybe experiencing financial hardship due to COVID-19 related challenges.
Through April 15, 2020, the company granted payment deferral request for up to three months for 3,274 consumer borrowers, 1,018 business borrowers, representing $587.2 million on the company's loan balances. The company anticipated it will continue to receive COVID-19 financial hardship payment deferral requests throughout the second quarter of 2020.
At March 31, 2020, nonperforming loans increased to 0.46% of total loans. This compares to 0.39% of total loans outstanding at the end of the first quarter of 2019 and 0.35% at the end of linked fourth quarter of 2019. The increase in nonperforming loans is largely attributable to a single line of credit that matured on December 31, 2019 with total outstanding balance of $9.9 million.
Total delinquent loans which includes nonperforming loans and loans 30 or more days delinquent to total loans outstanding was 1.11% at the end of the first quarter of 2020. This compares to 0.88% at the end of the first quarter of 2019, and 0.94% at the end of the linked quarter fourth quarter of 2019. The delinquency status for loans on payment deferment due to COVID-19 financial hardship will reported at March 31, 2020 based on the delinquency status at March 20, 2020.
The Steuben acquisition is scheduled to close later this quarter. However, due to COVID-19 crisis and pending regulatory approval, the ultimate closing date may need to be adjusted. As a reminder, Steuben Trust is a 14 branch franchise operating in six county region of Western Europe with total assets of approximately $560 million. Community Bank currently serves four of the counties within Steuben’s current footprint and the other two are continuous to our markets. The company expects this acquisition to be approximately $0.08 to $0.09 per share accretive to its first full year of GAAP earnings and $0.09 to $0.10 per share accretive to cash earnings excluding one-time transaction costs.
Operationally, we will continue to adapt to the changing market conditions. In immediate near-term, the company will remain focused on assuring the timely intermediation of deposit response, assisting borrowers that experienced financial hardship with payment relief, closing and funding PPP and other laws and maintaining service standards in our financial services businesses.
Based on the current market conditions, we believe certain aspects of the company's operations will be more adversely affected in the second quarter of 2020 than they were in the first quarter of 2020. Following auto sales have slowed considerably, which has reduced the demand for new consumer mortgage and consumer installment loan. Although, business lending activity increased in April due largely to PPP program, the effective yield on the PPP loans is significantly lower than the company's first quarter average earning asset yields, which may negatively impact the company's net interest margin in future periods.
Deposit and other banking fees, including part related interchange revenues, are expected to decrease due to declining levels of commerce. Higher levels of unemployment will affect our borrower’s ability to service debt, which may increase the level of expected loan losses, eventually resulting in company reporting significant provision for credit losses in future periods.
The company's wealth revenues will likely decrease in the second quarter, consistent with a decrease in investment asset values. Insurance services may be negatively impacted by lower sales activities. And although, the company's employee benefit service business is largely driven by participant headcount levels as employee benefit’s trust operations will likely be negatively impacted by a decrease in underlying planned valuations. The company's dividend capacity remained strong. Its full year 2019 dividend payout ratio was 47.5%. Accordingly, the company expects to continue to pay a quarterly dividend consistent with past practice.
Undoubtedly the COVID-19 crisis has changed the near-term outlook for society in general, as well as expectations around economic conditions. First and foremost, we remain hopeful that the effective treatment is on the near-term horizon when the vaccine becomes widely available later in 2020. Like the disease the specific acuity of this crisis has on our employees and their families, our customers, communities and shareholders is highly uncertain. With that said, we intend to support of stakeholders in a thoughtful, disciplined and passionate manner and believe the company is well prepared to endure its impacts.
Thank you. Now, I will turn it back on the Mark.
Thank you, Joe. Before we open it up for questions, as I said in the opening, I have Scott Kingsley to joining us to say a few final words to the group that he have the opportunity to work so closely with over the past 16 years. Scott?
Thank you, Mark. To our investors and analysts, I want to take this opportunity to say thank you for your continued confidence and support of the company and myself over the past 16 years. Your engagement and effective challenge have been critical in our strategic decision making and supportive of our continuous improvement objectives. As I prepare for my retirement from the company, I am both humbled by and proud of our what our team has been able to accomplish, and pleased to have been a small part of that. I'm also supremely confident in our team's ability to continue to provide a differentiated level of customer community service and superior shareholder returns. Again, thank you.
Thank you, Scott. And thank you for 16 years of tremendous service at Community Bank System. And on behalf of our entire organization, we wish you and your family and very best for the future.
Thank you, Mark.
With that Brent, I would now ask you to turn line over for questions.
We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Joe Fenech with Hovde Group. Please go ahead.
We’ve seen some other companies report just [indiscernible] provisions here in the first quarter to build reserves. Some of them cited unemployment data and projections they used I guess from as late as April 12th. I know you guys generally are very conservative on credit, so I wouldn't necessarily expect the same reserve build. But just curious what metrics do you use specifically to determine the reserve build from the first quarter? And given your comment in the release about -- and on the call here about the increase in payment deferral request you expect in the second quarter, whether that means the big reserve build might be pushed out a quarter or two for you all, or if you feel like you mostly accounted for that with this 1Q provision allocation?
As you know, we adopted the CECL model in the first quarter. And the model is kind of comprised of really three significant components; the quantitative components, the noneconomic qualitative adjustments, and the economic qualitative adjustments. And in the economic qualitative adjustments, we used forecasts provided by Moody's. And we used those forecasts, I think the update we used was through March 27. So, effectively that was the latest and greatest information we have from Moody's. And so, we used that in our CECL model. I guess the best way to describe the economic forecast is kind of the Nike Swoosh kind of shape in the sense of a significant drop-off in the second quarter with some recovery in the later quarters. And so, that component of the model largely drove the adjustment in the first quarter.
With respect to the second quarter, we'll re-evaluate the model, which will include also the economic qualitative factor adjustments, but also we're going to be evaluating sort of observed data with respect to delinquency and migration of risk ratings and those types of factors. So, it is possible that in the second quarter, there will be additional reserve build based on the factors we're observing in addition to changes in the economic outlook.
And then with respect to the decline in oil prices, you all in the 2015-2016 cycle, Mark, Scott I guess, I remember having some tangential exposure to lower oil prices. There wound up being really no discernible impact to you as far as I can tell. So maybe just update us on what you consider your exposure to be to these record low oil prices.
Yes, I think we have Joe, pretty limited, at this juncture, exposure, mostly to fracking industry -- but in Northeast Pennsylvania, but I'll let Joe Serbun comment further on that.
Yes Joe, our exposure, Mark said, not only to the fracking, but we had some pipeline contractors who are in the portfolio. Our overall exposure is probably somewhere in the $40 million range, and we monitor it quarterly. It's a lot smaller, much significantly smaller than it was back in '16 and '17. And the clients in the portfolio by and large are very strong and very liquid. And right now, being essential, so they are out working which is good. But we don't have any concerns at the moment with respect to that portfolio.
And then on the outlook for M&A, you all were already an acquirer of choice in the market. I'd have to think the resiliency of the stock here through this makes you even more of an acquirer of choice. If one of your preferred targets, Mark, came to you during this period, would you feel confident enough to move forward and announce something during this time or is there just too much uncertainty at this point?
I haven't really given much thought to that hypothetical question. My initial answer would be that we would take a look at it. I think if you look at the financial strength of the company as I have suggested Joe talked about in little more detail, I think we're pretty well positioned for whatever the future is going to bring here in terms of economic distress and ultimately potential credit losses. So clearly, I think the valuation delta gives us potentially that opportunity.
With that said, I would think most who are thinking about being sellers are not going to be thinking about it for some time. So, I think we're not going to see a whole lot of activity, but I think certainly if we have the opportunity to have a dialog with a high value partner right now, we certainly would entertain that.
And on the Steuben kind of the pending deal that you have, it just sounds like, I mean, correct me if I'm wrong. It just sounds like more of a processing issue may be given everything the regulators and others have on their plate right now?
Yes, it’s just everything is moving slow as you know, Joe. We, our – us, Steuben folks, our core process -- and everybody is working remotely, and that creates some challenges when we're trying to work through those. The regulators are working remotely, so everything's just moving slower. When we announced the transaction, I think we’ve said we expected to close in the second quarter. And as of right now, we still are planning to do that. But clearly, the future direction of COVID and the environment will dictate that potential.
And then last one for me. Mark, your fee businesses and the contribution there give you diversity of the earnings stream that not many of your peers have, but the closure of the businesses really didn't occur until the middle of last month of the quarter, right in March. Can you walk us through your initial thoughts on how you expect your various fee businesses to fare with what's going on?
Sure, I think I'll start with the obvious, the wealth management business. I think that business will probably be down. We estimate somewhere in the 15% range in revenues in the second quarter. The earnings probably won't be down quite that much because there will be some offsets in terms of commissions and the like, but you're probably talking of double-digit decline in the wealth business. I think the investments business and insurance business will be slightly less impacted and we would expect a single-digit reduction in revenues and earnings in those businesses for the second quarter, Joe.
Our next question comes from Alex Twerdahl with Piper Sandler. Please go ahead.
First off, Scott, congratulations on a great career and good luck with your retirement, and you're certainly going to be missed.
Thank you, Alex.
I wanted to start with the PPP program, and just in terms of the fees that are expected from the $350-ish million dollars of loans. Are those going to be pretty much reflected in the second quarter, or are those going to be capitalized over the life of the loan? How should we think about sort of how those balances are actually going to impact the balance sheet?
We intend to hold those for investment and therefore recognize the fee over the life of the loan. And at this point, the second round of the installment, this additional funding we will continue to evaluate our strategy around that, but at the current time we're planning and hoping those for investment.
And would we, is there a way to sort of guesstimate with that? And as they’re going to close the fee income presumably or if the margin and should we assume these are all kind of the 5% loans, or is there a way to kind of clarify that a little bit more?
No, it will come through margin is how we will account for it. With respect to the weighted-average fee, we're not there yet relative to making that determination. But I think there was 1%, 3% and 5% level, so it's somewhere in between those amounts. But we don't have that pinned down just yet. We will shortly though.
And then in terms of the margin, is there a way you can kind of help us get a little bit better sense for the moving parts in the margin? Obviously, you got some moving parts anyway seasonally in the second quarter, but just given the PPP program, expected durations of those loans, et cetera, plus other things in the balance sheet. How should we be thinking about the margin from here in the second quarter?
With respect to the loan portfolio, if I can start there. We had a decrease in the primary kind of late in the first quarter. The full impact of that increase has not been recognized if you will in the first quarter. So we'll feel a little bit more impact on the loan yield side, just from the decrease in the short-term interest rates. As you mentioned also the PPP loans will go on at a lower effective yield. So the overall loan yields are expected to decrease.
We threw a slide in the investor deck, which sort of shows the history of short-term interest rates as compared to our loan yields. And we've effectively maintained loan yields above 4% through kind of the last 10 years or so, that will be a little bit more challenging with the PPE loans depending on the volume. So we expect loan yields to drift down a bit in the second quarter. We have made some changes on the funding side relative to our cost structure. If you recall going back to late 2015, our total cost of deposits was in that 10 basis points or 11 basis points range, we're sitting at 25 basis points now. I would now expect us to get back 10 basis points or 11 basis points certainly in the short term, because we've added the Kinderhook balances as well. And there’s just a little bit higher cost structure relative to our cost of deposits.
I potentially could see in the second quarter the cost of deposit drift down a few more basis points in the quarter. The investment securities yield at least in the short term I would expect it to be maintained at kind of 240-245 level. And the cash equivalents that we're carrying on the balance sheet at the end of the quarter slightly that they're invested in the all portfolio, so I’d expect those to come down, which ultimately will help our margin outcome. So all of those things considered, I think it's fair to assume a decrease in the margin by 5 basis points, 6 basis points, 7 basis points in the coming quarter.
The only thing I would add Joe is as it relates to fees on the PPP loans is yes we are going to amortize those as you suggested over the potential two year period. With those things start getting forgiven we will accelerate the recognition of the associated fees to those loans. So it could I guess mess, I think to make judgments forward-looking about what the actual reported market might be. I think looking at the expected fundamental margin related to the loans and deposits is reasonably straightforward. But there is going to be a big variable here as it relates to the acceleration, which we expect to see as these things get forgiven we reaccelerate the fees associated with them. So I’d just throw that out there as well for consideration.
And then just final for me, I was wondering if you can just kind of run down the hot button loan segments and just kind of quantify your exposure to things like lodging, restaurant, retail, CRE things like that?
So I'll start with retail. Retail trade represents about 4% of our total exposure it’s about $260 million. Lodging and interest in that represents about 3% of our exposure. Health and social services and social assistance is 2% of our exposure, construction 2%. Unfortunately our dairy farmers, which represents about 1% during hit. Food service 1%, furniture stores and we pulled those up, because we have a couple of larger furniture stores and we pulled those out, they represent 1%. Manufacturing I think I said we have the 2%. We pulled out casinos, as you probably know we do business with a couple of casinos here in State of New York, so we pull those out and it’s just less than 1%. And I guess transportation would be the last one, which is just less than 1%, of our total loan outstandings.
Our next question comes from Erik Zwick with Boenning and Scattergood.
I guess start with maybe a couple of follow ups on that FDA PPP program. You noted that you approved just under 1,400 loans. I'm curious how that compares to the number of applications you received? And then secondly, since the program ran out of funding late last week, have you continued to accept additional applications? And do you think if the second round of funding comes through, will you be able to process and fund all of those additional applications?
So, it's been hectic, it's been fast paced. So yes, the expectation is that they're going to appropriate additional dollars, hopefully upwards of $2.5 million. We have continued to process -- continue to validate the applications dollar requests. So we'll continue to do that with the expectation that there's going to be additional funding to come in the middle of this week. When we get through all of our applications that's the goal and we’ve thrown a lot of people at it. We probably have somewhere of round rough numbers 1,200 applications that we're working that did not get processed with the first go round. So the expectation is we'll work through those. There'll be additional funding, and we'll take care of as many clients as we possibly can. It's been an team efforts, I can tell you that.
And then just to make sure I understand kind of switching to the current credit situation. If I look at that 90 days plus delinquent and still occurring bucket that increased from 5.4 million to 12.6 million. And you mentioned that delinquencies are reflected as of March 20th. So am I right, does that assume that there was kind of a pre COVID increase in that bucket? And if so, what was the driver?
Yes. So we have one credit, line of credit that is mature just shy of $10 million part of a bigger relationship, total relationship somewhere it’s been around $13 million, $14 million. We have two loans that are current and line of credit that is mature, and we're working with the client in an effort to renewable come up with a solution. Well, it was pre COVID so this was not a result of C-19. The business is the way retail certainly is going to be impacted post C-19, and it's -- they're in the retail sector. And like I said, it's a line of credit that's mature that we're trying to work with the client to get a solution and resolution on.
And are you able to talk about that particular industry or retail that they serve?
No, just in the retail sector.
Our next question comes from Russell Gunther from D. A. Davidson. Please go ahead.
I just wanted to follow up on the exposures that you provided. I appreciate the color there. I just want to make sure if it's fair to have the right characterization. So, this is an attempt to sort of ring fence or quantify your exposures that are most at risk in the near-term from COVID-19. So, just to confirm that please. And then is there any real material shift either way with Steuben or any of their exposure that would be worth calling out as well?
So sectors that we deem that would be mostly impacted by C-19 as a percentage of total loan outstandings and we'll continue to evaluate that as we play this out. One might, as an example, one might go on be added one might be dropped. With respect to the Steuben portfolio, they have some exposure to certain industries similar to ours that we've done and at the time we estimated that will go hold and that will add a little bit of healthcare. I don't see any of it and it's not that big of a portfolio. I don’t see any that would be sufficient enough to move their needle in any one of these categories on holistic basis.
And then are there any portfolio characteristics that you could share, whether it's a weighted-average LTV or debt service covering ratio just to contextualize this a bit more?
That’s a little bit of a challenge. So, our portfolios are rather seasoned and as a result, the values, particularly the price values are dated in and they were determined given economic time. So, I don’t think it’s necessarily fair to throw an LTV would have any meaning. But what I would share with you is some of the guidelines or metrics that we underwrite against. As an example, our loan to values target is anywhere between 70% and 75% and that mean that we can go beyond that sure, but our target is to coming into 70% and 75% of the value. And we typically underwrite with 10 or 20 amortization, and we typically come in with debt coverage somewhere between 1.1x to 1.2x. those are kind of the things that we underwrite to and try to hit to.
Do we have? So I said that we have some that might go beyond the supervisory limit of 85%, we do report it, it’s not a very good bucket at all. So I had to take the control of LTV out there, I had to take control of debt coverage out there, because I don’t think that they are necessarily meaningful at this point in time, given what’s going on in the economy but just have a sense of the way we underwrite 75% or less, 10 year term, 20 year ramp. We like personal guarantee so we get recourse, those are kind of the things that might add more value to.
And then I guess just stepping back kind of bigger picture and attempt to quantify what the potential loss rates for C-19 could be. And is it a useful exercise to think about a DFAST severe or materially adverse scenario. Is that something you have contemplated, performed internally from a stress test testing perspective, just curious as to your thoughts there?
Russell, we're not the size limits for DFAST. So we had started the DFAST process back in '16 and '17 ultimately to change in regulation that excluded us from the DFAST process. With that said, I'll call it the collective intelligence we gained through the DFAST process we used to run an internal capital stress test model and we do that on an annual basis. We just completed one in December and we include this scenario which is severely adverse, which takes our charge off levels on a sort of pessimistic outlook and apply the factor, multiple factor to those charge off levels along with other assumptions relative to a severely adverse scenario. And so we pushed the limits relative to that stress test and in all instances, we were able to maintain regulatory capital levels well above the required regulatory capital standards and even our all internal capital standards, which are higher than the regulatory standards.
I think that's very clear relative to the position of strength that you guys are operating in today. I guess I was just trying to get your thoughts around what the potential loss content would be, and how you're thinking about them in order of magnitude perspective?
We actually spend a sort of time talking about that. I mean the real challenge is the focus initially was on some of the commentary I mean inbound question, what's your lodging portfolio. And the potential loss scenario has expanded way beyond lodging. I mean this is below of everything. I mean if you look at and Joe talked about some of those kind of what we would consider higher risk potentially the credits in the business lending portfolio of $3 billion.
We also have $2.5 billion mortgage yield, residential mortgage portfolio. How is that going to be impacted when unemployment could potentially go in 20%? How about the auto lending portfolio, that's $1 billion. What happens to that when unemployment is 20%? So I think the challenge around this is really just that there is so much uncertainty going forward as to what that loss content is going to.
I think that if we have the reason to think it's going to be a lot higher than where we've kind of provided in our reserve, and you look at our reserve is, what $55 million. We would have provided more. I think we're prepared to do that when there is any level of kind of forward clarity or indication. Right now, it's just such a coin flip as to what the ultimate loss content is going to be on really any portfolio. It's not just commercial. So it’s a real challenge kind of interesting exercise to go through.
If you look back to the '08-'09 crisis our loss has been even blip, I don't even think they weren’t even standard deviation beyond what they historically have been. I think it could be a little different this time just because theirs is a different, this is different problem. It's going to be more widespread, it’s not necessarily just regional. So I would expect that there is potential for somewhat greater losses than there was relative to the credit crisis in '08 and '09. But I think trying to determine an order of magnitude on that at this juncture is just really, it's really too soon.
And hopefully, we'll have a little bit better clarity as the second quarter unfolds and at least the phase in of the return to normalization commences and we get to see a little bit more evidence of what the future might hold and we'll have a better understanding then to make better informed judgments.
I really appreciate your comments there guys in what's a very challenging and fluid situation. So, thank you for taking my questions. And Scott congratulation and best of luck.
Our next question comes from Collyn Gilbert with KBW. Please go ahead.
Mark, thanks for that color on the unknowns. Obviously, we appreciate your position and this is not easy. But if I could just dig in a little bit, making sure I understand kind of the movement within the reserve that occurred this quarter. So Joe, I think you said 1.4 million of the increase in the reserve from the fourth quarter was related to CECL. And I thought that you all had said that that increase is maybe be closer to 5 million in the past. Is that correct? And then just wondering maybe what you ended up seeing, especially given what was going on I would've thought that that would've been, the CECL component would have been certainly higher than maybe what you would've thought at the end of fourth quarter?
Collyn, we have given kind of a range of estimates in some of our previous discussions and we had initially, kind of in the third quarter come out with a little bit of a higher expectation. And as the fourth quarter, obviously before COVID and we had kind of lowered our expectations as we refined our model, we came out with an estimate that would potentially be in the range is very similar to our incurred loss model. Ultimately, when we refined our estimate and came up with a final determination or the post adoption number, it was at $1.4 million higher than the 12/31 number. So effectively we're running an incurred loss model came up with $49.9 million running a CECL model, which is a completely different model if you will and came up with $51.3 million. So the net increase was $1.4 million due to the conversion.
And then with respect to, as the COVID crisis unfolded in front of us, we had to, A, test our model right out of the gate and we did that and we largely relied on the economic qualitative factor adjustments in our model to kind of give the forward looking expectations. The observed data relative to delinquency and risk rating changes really wasn't there at the end of the quarter. It's simply hasn't developed yet. We do expect, however, to see some developments on delinquency and risk ratings in the second quarter that will potentially create the need for additional reserves.
And then just sort of explain maybe again what you sort of do note, so the deferral that came in this quarter, I think it was like 587 million in total. Did you have, are you setting aside or is your intention to set aside a reserve allocation for those deferrals with the expectation that maybe they could be challenged credits post COVID? Or how are you thinking about kind of the reserve on that 587 million and then also in that slide deck you guys put out like that $1.5 billion of potential exposure. And I know it's hard as you said, Mark, trying to gauge what the loss content is, is this really a challenge. But just curious as to maybe what you think the reserve at each of those two types of exposures could be roughly, or how you're thinking about it?
Collyn, that's a very fair question and we've had similar dialogs internally about do we have adjust the reserve for some of the deferred payments and specific concentration risks over and above what our model would allow us to. And at this point, we deemed at a little bit too speculative, because quite frankly we don't know the outcome. We still don't know the outcome relative to how quickly life will resume. But we're aware that we’re going to need to evaluate that in the second quarter.
And with respect to the deferred payments, if we wind up with a second round of deferrals for a lot of these customers, we're going to have to evaluate those for the overall risk associated with that second round of deferrals. But we do not make a separate adjustment in the first quarter for the deferrals. And keep in mind, we also provided that deferral number through April 15th. The facts were little bit different on March 31st.
And then just on the -- let me just stick on the loan book. So, you’d indicated here, again where you guys listed the exposure that there may be availability within each of those segments, I guess as they drew down your line. Was there any accelerated line draws that happened in the quarter or you've seen happen post quarter end within some of these credits?
So interestingly enough, it’s actually been very little movement going back almost nine quarters now. You could look at utilization of the lines over the nine quarters and the high point was 53%, 54% and the low point was 47% to 48%. And we’re sitting right now at about 49% utilization that's over the last nine quarters. So, there really hasn't been much, kind of any one on the line. That said, we had one client who have sizable line of credit who elected to draw down on it, a highly liquid firm that quite frankly didn’t need to draw on it but did nonetheless. That would be the only outlier that took place. Although, it’s been very consistent with like I said over the last nine quarters.
And then just on the expense side. So I know going into this, I think the guidance that you guys had offered last quarter was that it would be like, I think you said $93 million to %94 million or so a quarter in CapEx. Is there anything COVID related that's going to materially change kind of your expense outlook from that baseline?
So there will be additional expenses related to COVID. Just for example, some of the cleaning activities and alike are increasing. The other side of that is there's less business travel and those types of expenses. So, I think the net, net relative to COVID expense not really kind of effect too much the trajectory of our operating expenses.
And then, Joe just detail on, it looks like other OpEx dropped a fair bit this quarter. Was there anything in there that was unusual that caused that, and maybe just the outlook for that line going forward?
I would say nothing unusual in the quarter. Collyn, I can get back to you on that specifically. But there was nothing that jumped out at me as unusual in the quarter. We just had -- we’ve had some, a couple of quarters where we had some other expenses that we were kind of not anticipating and we booked them in the quarter, and this is a more, call it, normalized quarter for us.
And then just one final question on the PPP program. What percent of the applicants that you're seeing are, and approvals are current on CBU customers versus non-customers?
All of them…
All of them are your customers. Okay. Are you getting requests for non-customers, or…
We've had a few, limited.
Okay, got it. Okay, that's all I had. I'll leave it there. Thanks guys. And Scott, all the best to you on your retirement and hopefully, you'll be able to get out there and travel and enjoy post COVID world.
Our next question comes from Matthew Breese of Piper Jeffrey. Please go ahead.
Just curious on the $587 million of loans that were granted deferral. What was the asset class breakdown of those loans? And was there any overlap between this bucket and the PPP bucket?
So couple of things, so first of all the deferrals and PPP, I guess not surprising. Percentage of deferrals and percentage of PPP, the majority of those came from New York State. And the percentage of PPP dollars is about two thirds by the way of both deferrals and PPP as they came out in New York State. And the same thing with the percentage of PPP dollars, as well as the percentage of deferrals also came about two thirds of them came out in New York versus Pennsylvania. Retail, trade, lodging, manufacturing, construction and healthcare, represented about 75% of the PPP activity.
On the deferral side, Joe may have mentioned this earlier. On the deferral side, much of what we did early on on the consumer or the mortgage and HELOC, much of what we were doing were 30-day deferrals, both P&I. And as a result of people pay attention to the evening news came to realize pretty quickly what they’re going to be open in 30-days and so that that has again looking for some more in future some more deferral days, which we have and we’ll continue to ramp up to 90 days in total.
In the commercial world early on, we were actually having some success in getting just principal deferrals only and they were making interest payment. Again, as they watched evening news, they came back at us and asked us to do both principle and interest, which we also accommodated. And I would say and you probably all know this, but this was it. In concert with our regulators, they’re well aware of the approach that we took with respect to maybe a deferral for sure the PPP, but the deferrals and the duration that we were running. And the fact that we didn't need to address risk rating, the fact that we didn't need to worry about TDRs or debt restructures.
And then maybe just one other measurement. As we think about the number of consumer and business deferrals, the 3,200 and the thousand business customers. What percentage of both of those your buckets in terms of total consumer really consumer accounts and total business accounts did those makeup?
Could you clarify the question a bit, please?
As we think about the number of consumers that were granted deferrals, the 32 -- the 3,274 and the business deferrals, the 1,018. What percentage of total consumer accounts did that make up and what percentage of total business accounts did that make up?
We have 40,000 installment loans. I couldn't tell you the number of home, resi mortgage accounts we have. But we have 40,000 installment loans. We probably have a similar number and our commercial loans in two small business and from account perspective, we might have upwards of 6,000 small business customers and I don't have the specifics regarding the portfolio.
But it just seems to me, if you could kind of get an answer and it’s not sort of directionally to that question just by, I mean I think the 3.8% so you got there percentage of portfolio outstanding. So we've granted deferrals to 4% of the outstanding balance of our consumer mortgage portfolio. And it’sprobably about the same in terms of number of customers. I would say it's probably the same for installments, 2.7%. So we granted deferrals of probably about 3% of our installment customers.
And we're mentioning that you kind of come across there, Matt, the consumer installment and then the 2,080 loans on an average balance basis, that’s $1,600 loan in terms of granularity, jump up to consumer home equity, you're just around $100,000 and that's up. So to Mark's point, I think that's going to be the same number of customers and outstanding on the consumer side, because our average mortgage portfolio is about $100,000 mortgage and our average outstanding auto loan and indirect auto loan is under 20 grand.
So I think we're maybe a little bit surprised that the consumer requests for the deferral were greater, just because of the acceleration of unemployment. So I think hopefully we take that potentially you could say in our markets, but that could also accelerate dramatically, that could double, or triple or more over the course of the next 60 to 90 days as well. But I think we expect that it would be a little bit more of a race for deferrals on the consumer side than what we experienced.
And then my last one, one point of conversation I've had is whether or not in this environment of bank is better to be, have a more rural footprint or more metropolitan footprint. And I wanted to get your thoughts on whether or not you feel like the rural footprint you operate in is to your advantage in this environment or disadvantage?
Well, I think it's certainly better productive business model for us for a long time. I would say if you look at the disease itself and where the greatest areas of impact are, not just from a health perspective but potentially also likely from an economic perspective, it’s probably the more urban markets. And I would say from where we sit right now and what we know, we're probably somewhat -- it's more advantageous for right now to be in non-metropolitan markets. And so my sense is that we are going to open up faster, which should ultimately mean less economic impact in those markets and that may work to our advantage possibly here going forward.
And Matt, I'd certainly say that our customers in those non-metropolitan areas have certainly not enjoyed a lot of asset acceleration in terms of valuation change, consistent going into the last crisis. It's not like the cost of housing is moving up 12% a year in most of our markets or 15% a year. So, the underlying asset values are not radically different than what they probably were when we underwritten the loans.
Okay, thank you. Scott, best of luck. It's been a real pleasure working with you over the years and I think we've all benefited from having you as a resource. So thank you and be well.
Our next question comes from William Wallace with Raymond James. Please go ahead.
Scott, I'll echo Matt's comments and just thank you for all the help over the years, and wish you best on your retirement. I want to just back up a little bit to PPP. You mentioned the accruals or fees over the two year life of the loan. Is there any reason why we wouldn't expect that the very large majority of these loans wouldn't be forgiven over the next 60 days?
No, I don't think we have any reason to believe that that’s true at all. And so it’s likely, which is why I just wanted to raise the point that if you're thinking about the margin going forward, there's going to be a potentially material impact on the margin in the second quarter and possibly the third quarter as well. So, I mean we would, hopefully the majority of these borrowers will get forgiven and that means they're spending money for the right thing. So, I would expect there's going to be a fairly sizeable acceleration.
The only thing that I question is the capacity of the SBA to actually process all of those forgiveness requests that is going to be interesting. So, I think there is just much risk there as anything we've seen in this program is just the SBA's capacity to process all those requests, because you can start in what probably seven weeks or that, we've been starting to request the processing of forgiveness. And that's going to be an interesting exercise as to determine in terms of the ability of the SBA to turn those around timely.
I'm sure it won't be without its hiccups, just like the initial launch of the program itself. And trying to kind of maybe get a sense of what a second round might look like for you guys, you mentioned I think 1,200 applications are currently in process that were not closed before this ended. Can you give the dollar amount of those and then maybe give us a sense as to what percentage of the applications that you did process were approved?
So I don't know the specific dollar amount. But if you make the assumption that the average loan size, which is based off of what we did approve was about $70,000. If you do the math, you come up with its remaining for those that we haven't processed. Wally, if you repeat the first part of the question though?
What percentage of the applications that you did process were approved for the program?
We have very few applicants that did not get approve, very few.
And then I'll just ask one last question. We haven’t talked about loan growth for a reason, I assume there's probably not much new loans being put into the pipeline maybe there's a little bit of activity, or maybe I'm completely wrong. I'm wondering if you could help us think about loan activity and then the rate of payoffs versus refies given that the non-bank lending sector is now shut down. So just trying to get a sense as to what the portfolio might look like over the next quarter or two?
So, yes, you're right. The installment portfolio, particularly at the indirect portfolio, the activity is not from those switching halt, but it is very slow as a result of the shutdown of many if not all of the card leadership. So that's slow and it will continue to be for a while and that portfolio runs off at a pretty good cliff every single month, so we won't replace that. The resi mortgage portfolio, the pipeline there hanging in not that far off than where we were this time last year and given the rates, you think it'd be a little bit more active or it’s not at the moment. And the refi business is a little bit more active than the purchase.
And on the commercial side, we're just working through the already committed and in progress fundings of construction loans. There's not a lot of activity coming back into the pipeline at the moment and partly because of -- the economy, partly because of the distraction our people are focusing more on PPPs and deferrals. And that everybody, that’s retail folks as well as the commercial folks. So I would suspect that outside of the growth that we’ll report as a result of the PPP loans, the core portfolios will be a little softer.
And what about what's coming due that normally you would expect might go to another financial institution. Are you guys refinancing that or are you finding that there's liquidity existing on some investor balance sheets already to pay off?
So those that we want to keep we’re fighting to keep and those that we'd love to put off our balance sheet on somebody else is little less successful with doing it at the moment. So, we have no choice but to work with the client and mediate the risk as best as we can. But there’s hasn’t been a lot of that activity quite candidly in the last 30 days. And lines of credit typically don't start to come up for extensions, renewals until June, July, August, so there'll be more activity at that point in time.
Our next question comes from the Collyn Gilbert. Please go ahead.
Just two more quick follow-ups. Do you have a number in terms of loans that have been asked for forbearance post 3/31?
This is through April, so through April 15th which is in the deck that we had sent out. So through April 15th, it was 4,292 loans that were deferred for $587 billion…
Okay. Sorry, I should have seen that. And then just finally, just another question kind of around reserves. If we look back in your loss content historically has been just basically nonexistent, but yet looks like I think your peak reserve kind of post around the crisis was like at one-fourth. I mean those are dynamics that are occurring within the book that would point to you guys being able on this go around to carry a much, much lower reserve than when you peaked at 140?
Collyn, that's a good question. I mean, looking forward with the impacts of COVID, that's really a tough call at this point to determine what the future reserves will hold. I know that I've looked at some reserves relative to our larger brethren, and they do maintain a little higher total reserve but they also have higher loss content. So we're sitting at the 81 basis points right now as a percent of loans. It's hard to determine at this point how the COVID crisis will unfold and whether that moves closer to one, or if it stays in its current levels. So that is a very difficult question to answer at this point in time given the facts that we know today.
Joe, is it possible that some of the purchase loan accounting contribute to that differential?
It's possible, I mean that gets pretty [Indiscernible] but I think there’s a possibility that that has had some impact over time.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Tryniski for any closing remarks.
Great. Thank you, Brent. Lastly, we typically have many employees and directors who’re listening on this call, and I just wanted to take the opportunity to thank every one of them for their understanding and their effort, their engagement and their support. It's been a difficult and demanding time for all of us and we really have risen as a team to our standards as essential. Most important I want to thank you for you caring, caring about our customers, our communities, our shareholders and each other. We are not in the banking business. We're in the people business. And I could not be more proud of the work side-by-side every day the 3,000 colleagues that make Community Bank System the organization that it is. Thank you all again for joining and be healthy, be safe. And we will talk again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.