Webster Financial Corp (WBS) 2020 Q1 法說會逐字稿

Good morning. Welcome to Webster Financial Corporation's First Quarter 2020 Earnings Call. I will now introduce Webster's Director of Investor Relations, Terry Mangan. Please go ahead.

Thank you, Rob. Welcome to Webster. This conference is being recorded. Also, this presentation includes forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations and business and financial performance. Webster has based these forward-looking statements on current expectations and projections about future events. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning risks, uncertainties, assumptions and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the first quarter of 2020.

I'll now introduce Webster's President and CEO, John Ciulla.

Thanks, Terry. Good morning, everyone. Thank you for joining Webster's first quarter earnings call. We have a modified call this morning as a result of the COVID-19 pandemic. CFO, Glenn MacInnes and I will review business and financial performance for the quarter. I will also provide some additional information on the line of business performance and COVID-19-related activities across the bank. After Glenn and I complete our prepared remarks, I will review our credit profile, including: one, our exposure to industries most directly impacted by the pandemic; two, a comparison of our current portfolio with the portfolio we had heading into the 2008 financial crisis; and three, a portfolio-by-portfolio review of key credit metrics and industry exposures. Our Chief Credit Officer, Jason Soto, will join me during this portion of the presentation. After the credit discussion, HSA Bank President, Chad Wilkins, and Jason will both join me and Glenn in responding to your questions.

First, I want to acknowledge the fact that we are living in uncertain, challenging and unprecedented times. I hope that all of you and your loved ones are healthy and safe, and I want to let those whose health has been impacted by the crisis know that the Webster Bank family has you in our thoughts.

The way our bankers have taken care of each other, our customers and communities over the last 2 months is truly amazing. I usually end my remarks with thanks to our bankers, but today, I'm going to start by thanking each and every Webster banker for their remarkable contributions during this challenging time. I'm so proud of the entire Webster team.

Webster Bank and the entire banking industry has rallied to be part of the solution to this health crisis and the resulting economic fallout. I also want to publicly acknowledge the bold, swift and timely actions of legislators, bank regulators, the treasury and state and local officials. Each have collectively and individually reached out to banks, listened to what's happening on the ground and rolled out creative and impactful programs to help those individuals and businesses in need.

When you turn to Slide 2, you can see Webster at its very best. Consistent with the way our values-based organization has operated since our founding during the Great Depression in 1935, we immediately took action at the outset of the pandemic to support our employees, customers and the communities we serve. The safety of our employees was and is our #1 priority. We swiftly moved 80% of our workforce to remote or at-home work, thereby creating a safer, socially distanced work set up in our buildings for those who need to be on-site to execute essential operations.

We modified branch activities and hours to ensure the safety of our employees and customers while being available to meet our customers' needs. This included moving to drive through and ATM service with bank lobbies open by appointment only. We established a no-interest loan program for our employees whose families have been financially impacted by the pandemic. We have paid all of our employees at 100% of pay, including those who are home because of illness, quarantine, higher health risk or to take care of loved ones or kids home because of school closures. We've increased the daily pay of those bankers on the front line and have added PTO time to those workers as a future benefit. We have not reduced our workforce by a single FTE during the crisis, and we've augmented and expanded our employee assistance programs to support our employees during the pandemic.

For our customers, just as we led the banking industry with our foreclosure avoidance program during the Great Recession, we immediately placed a moratorium on residential mortgage foreclosures relating to Webster-owned mortgages. We waived fees on early CD withdrawals, we increased availability and amount of funds for withdrawal by our customers, and we've worked with our customers adversely impacted by COVID-19 through the modification of loans, the deferral of loan payments and through participation in the SBA Paycheck Protection Program and the Fed's Main Street Lending Program.

Here are some data points related to activities we've undertaken, both as principal and what we have done through government programs. As of April 16, we have modified over 2,000 units, representing $476 million of residential mortgages and home equities. That's approximately 6.5% of total home equity and mortgage balances; roughly 750 borrowers or $300 million of Small Business loans, representing approximately 17% of our Small Business portfolio outstandings; and over 300 borrowers and close to $1.6 billion of commercial loans or roughly 13% of the funded Commercial loan portfolio.

With respect to the Paycheck Protection Program, we started accepting applications on day 1. And despite technology and process challenges experienced by all banks, we were able to help many business clients in need. When the SBA stopped accepting applications last Thursday, we had more than 2,000 SBA-approved loans, representing approximately $650 million, most of which should be funded over the next week. We have continued to process applications internally, and we'll begin submitting those applications for approval when the SBA has additional funding and opens up the process, which it looks now like it will be later this week. With respect to the Fed's Main Street Lending Program, we have worked with our industry organizations and directly with the Fed to be prepared to utilize these loan programs to help our larger commercial customers through the crisis.

And for our communities, we've increased the amount of our 2020 philanthropy budget and repositioned dollars to support those most impacted by the COVID-19 pandemic. We have made more than $375,000 in donations thus far to Feeding America, the American Red Cross and United Ways across our footprint to provide urgent basic needs.

I'll now turn to our financial highlights on Slide 3. Webster's first quarter results continue to demonstrate our ongoing commitment to strong execution on strategic priorities through any and all operating environments. Pre-provision net revenue of $125 million was up modestly from Q4, driven by a slight increase in total revenue and a slight decline in expenses. Earnings per share were $0.39 in the quarter compared to $0.96 in Q4 of 2019 and $1.06 in the prior year's first quarter. The declines resulted primarily from an increased provision resulting from the adoption of CECL, a weakening forward economic outlook and the impact of a significantly lower interest rate environment.

Glenn and I will walk you through the assumptions underlying our CECL process and ultimate provision number. Our CECL process is strong, consistent with the requirements and controls of the accounting process. In this quarter, that process included the appropriate amount of conservatism and thoughtful judgment to reflect the uncertainty of the environment and the behaviors in our portfolio with respect to onset of the pandemic.

Tangible book value per common share increased 8% from prior year. Our first quarter return on common equity was 4.75%, and return on tangible common equity was 5.95%, with each reflecting the $68 million reserve build in the quarter. The combination of a slight increase in total revenue and a slight decrease in expenses led to improvement in the efficiency ratio, which was 58% in Q1. March 31 reported credit metrics remain strong, while our forward forecast of economic conditions deteriorated significantly with the onset of the pandemic.

Slide 4 presents loan and deposit trends. Loan growth was strong as total loans grew 11% and commercial loans grew almost 16% from a year ago or by more than $1.8 billion. Strong organic growth in CRE was augmented by approximately $450 million in revolver drawdowns in the commercial portfolio in March, and we saw a reduction in prepayment activity. Deposits grew 7.7% year-over-year, driven by the inflow of HSA deposits and public funds. And transactional on HSA deposits now represent 60% of total deposits, up from 57% a year ago. Also of note, footings at HSA Bank increased 9% from a year ago for growth of $679 million during the year.

Turning to Slide 5. I will spend a few minutes speaking to each of our 3 lines of business. In Commercial Banking, loans were up nearly 7% linked quarter and 15.5% from a year ago, which includes the aforementioned $450 million in net revolver draws. CRE drove the year-over-year growth while sponsor and specialty loan balances, which saw the lion share of the revolver draws, drove the linked-quarter increase. Prepayments were lower in the quarter, partially attributable to lower economic and transaction activity in the second half of the second half of the quarter due to the emergence of the pandemic.

Deposits were up smartly some 15% linked quarter and 20% from a year ago, largely driven by the depositing of revolver draws into DDA. Normalizing for revolver usage, deposits were up approximately 5% in Commercial Banking in the quarter. Loan and deposit volumes in the quarter drove a 3% year-over-year increase in net interest income in Commercial Banking despite rate pressure. Expenses were up 4.3% year-over-year, driven by investment in people and technology. Commercial Banking PPNR was relatively flat year-over-year.

While we are appropriately cautious with new underwriting activities, I can tell you that we closed meaningful high-quality new business in the quarter in segments that are not experiencing a material adverse impact from the pandemic, segments such as software and technology infrastructure. In fact, in early April, we closed our largest agented deal on a best-efforts basis, a $350 million technology infrastructure deal where we held just over 10% of the risk after close.

Turning to Slide 6. In HSA Bank, we are continuing to make great progress. We concluded another successful first quarter as we opened 338,000 new accounts for a total of 734,000 new accounts opened over the last 12 months. In addition, we added over 1,000 new employers in the quarter. There was no material impact in the quarter related to the previously reported movement of accounts tied to the decision by 2 wholesale partners, custodial partners, to in-source account administration. Ending accounts were up 6.4% to 3.1 million, while deposits increased 8.5% to $6.7 billion. The 2019 year-end Devenir report indicated an overall HSA market that slowed marginally as the market growth rate of accounts was flat and the deposit growth rate declined by 3 percentage points during the year.

One important point to note is that HSA Bank's funded account growth rate was 9.2% in 2019 compared to the industry rate of 5.6%. In the first quarter, our funded account growth rate was 6.8% year-over-year, both reflective of our consistently low percentage of unfunded accounts when compared to industry data.

We had a good start to the year from a sales perspective as we signed several large employers in the quarter. We also announced a major partnership with Jellyvision that will further enable our customers to make informed and smart health care choices. We also launched partnerships with Blue Cross Blue Shield of Michigan and Principal Financial Group. These partnerships are all uniquely capable of delivering strong growth, especially within the jumbo employer market.

In addition, as you may have seen, yesterday, we announced that we signed an agreement to acquire State Farm Bank's portfolio of seasoned HSA accounts, representing approximately $140 million in deposits. We expect to close that transaction in the second or third quarter.

In response to the pandemic and consistent with all of Webster, we were able to quickly transition 96% of our HSA staff to work from home in less than 3 weeks, maintaining 24/7 customer support and continuing to meet service and quality metrics. In addition, we are working closely to support our customers through the pandemic at a time when our services may be particularly critical, including capabilities we have deployed directly or via partnerships, such as eHealth; HSA-, FSAstore; GoodRx, Blink Health, Medical Cost Advocate and Health Care Bluebook. We feel that the current legislative and political landscape remains favorable for the HSA industry and the chances of a near-term Medicare for all national health care solution are even more remote than they were a year ago. Our relationship with WEX, our technology partner, and Cigna, our largest HSA partner, have never been stronger.

I'm on Page 7. In Community Banking, we've done a tremendous job keeping our employees and customers safe while continuing to provide the standard of customer service our clients expect. Total Community Bank loans grew by 5% year-over-year, with Business Banking loans leading the way at 9%. Deposits grew by 3%, again, led by Business Banking. Noninterest income was up 9% as a result of higher mortgage and investment services revenue. Many more customers have transitioned to self-service channels as digitally active households crossed 50% in the quarter for the first time, and we see that trend continuing given the pandemic.

As you can imagine, our Community Banking team, along with the resources from across the bank, are working diligently in executing on the PPP loan program, which will help so many of our customers. We've been focusing on customer outreach and support. And I can't say enough about the way our community bankers, including all of those in our banking centers, have delivered for our customers and communities during the first quarter and over the last several weeks.

Before I turn over to Glenn, I'd like to make a couple of comments related to capital management. First, we are completely focused on internal execution. And other than opportunistic HSA transactions, bank M&A remains a low priority. We have a strong capital position, enabling us to support our customers and assist in the financial recovery in the country. As we announced this morning, our Board has approved a quarterly dividend of $0.40 per share. Also, after a modest repurchase of approximately 2 million shares in early Q1 before the onset of the pandemic, we do not anticipate repurchasing additional shares until this pandemic is behind us.

I'll now turn it over to Glenn for the financial review.

Thanks, John. I'll begin with our average balance sheet on Slide 8. Average loans grew $516 million or 2.6% linked quarter. Growth was led primarily by the commercial business. A linked-quarter increase of $329 million in Commercial Real Estate was the result of strong originations and a reduction in payoffs. On a year-over-year basis, our commercial real estate loans grew more than $1 billion. Commercial loans now represent 66% of total loans compared to 63% in prior year. Consumer loan performance was driven by a $96 million increase in residential mortgages with some offset in home equity.

On the deposit side, our low-cost transactional and HSA deposits have increased more than $1.2 billion from last year and now represents 60% of total deposits with a combined cost of 13 basis points. The Q1 seasonal inflow of HSA and government deposits funded loan growth as well as a $200 million reduction in short-term borrowings.

With regard to capital, the modest average linked-quarter reduction in common equity is reflective of a day 1 CECL adjustment of $58 million and approximately $77 million as a result of share repurchases in the quarter. Likewise, modest reductions in the common equity Tier 1 and tangible common equity ratios are also reflective of CECL, share repurchases and asset growth. We have elected to phase in the CECL impact on regulatory capital, which favorably impacts our ratios by 20 to 25 basis points. Even excluding the phase-in in capital treatment, our capital ratios would remain very strong and well in excess of regulatory well-capitalized levels.

Slide 9 summarizes our Q1 income statement and drivers of quarterly earnings. Net interest income was flat to prior quarter as the $6 million benefit from loan growth was offset by the effect of a lower rate environment. This is reflective in our net interest margin, which was lower by 4 basis points versus Q4, 16 basis points due to lower loan yield, which was partially offset by 9 basis points from lower deposit costs and 3 basis points from lower borrowing costs. Versus prior year, net interest income declined $11 million. $31 million of the decline was due to lower market rates, with a partial offset of $20 million from earning asset growth.

Net interest income increased $2.5 million linked quarter and $4.8 million from prior year. HSA fee income increased $3.4 million as a result of account growth and the seasonal increase in interchange. In addition, our mark-to-market on hedging activity increased $2.6 million, which was offset by a decline in syndication and client swap revenue. The increase in noninterest income from prior year reflects the mark-to-market on hedging activity as well as higher mortgage banking revenue.

Reported noninterest expense of $179 million declined modestly linked quarter and grew less than 2% from prior year. Pre-provision net revenue of $125 million increased $3 million from Q4 and decreased $9 million from prior year. Provision for credit losses for the quarter was $76 million, which I will explain in more detail shortly.

The efficiency ratio improved to 58% from 58.5% in Q4, reflecting a modest increase in revenue and a slight decrease in noninterest expense. And our effective tax rate was 22.6% compared to 22.3% in Q4.

Turning to Slide 10. I will review our results of our CECL adoption and the first quarter allowance. As we look at the walk, the day 1 CECL adoption was $58 million, a 28% increase in the allowance, resulting in a starting coverage ratio of 1.33%. During the quarter, we had $7.8 million in net charge-offs. We recorded a $12 million provision as a result of loan growth of $855 million during the quarter. Loan growth primarily came from the commercial categories and included $450 million in line draws in March, slower prepayment activity and loans funded from our strong fourth quarter pipeline. The remaining Q1 provision was $64 million, bringing our allowance to $335 million or a coverage of 1.6%. The provision is reflective of our economic outlook, including GDP, unemployment and housing prices and a qualitative assessment of our loan portfolio and how it will perform through the pandemic. This was accomplished by reviewing higher-risk sectors, loans participating in modification programs and potential risk rating migration based on a granular bottoms-up credit review. At the time we closed the books in early April, our outlook included a second quarter GDP decline of nearly 20%, with unemployment peaking just under 10% and a recovery beginning in the second half of 2020.

As we move into the second quarter, we will refine our assessment in 3 critical areas: first would be an update of our outlook on macroeconomic variables; second, an updated review of higher-risk sectors and our loan modification programs; and third, the assessment of the impact of government stimulus programs on our portfolio. Initial April economic forecast are projected to be more severe as the second quarter GDP decline could exceed 30%, with unemployment peaking near 15%. All of these areas are still developing, making it difficult to project how the pandemic will impact the provision in the second quarter and over the remainder of the year. That being said, our provision in the second quarter will be driven more heavily by the expected duration and severity of the pandemic.

Slide 11 highlights our key asset quality metrics at March 31, prior to the effects of the current environment. Nonperforming loans in the upper left increased $12 million from Q4. C&I represented $9 million of the increase. Net charge-offs in the upper right increased slightly from Q4 and totaled $7.8 million in the quarter. Commercial classified loans in the lower left represented 287 basis points of total commercial loans. This compares to a 20-quarter average of 317 basis points. The allowance for credit losses increased to $335 million, resulting in a coverage ratio of 1.6%.

Slide 12 highlights our key liquidity metrics. Our diverse deposit gathering sources continue to provide us with a strong competitive advantage. More than $1.1 billion of core deposit growth in Q1 has maintained our favorable loan-to-deposit ratio of 85%. We are predominantly core deposit funded, with brokerage CDs representing less than 0.5% of total deposits at March 31. In addition, our sources of secured borrowing capacity remain intact, totaling over $9 billion at March 31.

Slide 13 highlights our key capital metrics. Our regulatory capital ratios exceed well-capitalized levels by substantial amounts. The common equity Tier 1 ratio of 11% exceeds well capitalized by $1 billion, while the excess for the Tier 1 risk-based capital ratio is $809 million.

The unprecedented environment makes it difficult to provide formal guidance at this time. What I can tell you is we expect average earning assets to grow in the range of 4% over Q1, driven primarily by loan growth. We expect net interest income to be flat to Q1 as a result of loan growth, Paycheck Protection Program volume and lower deposit and borrowing costs, to be somewhat offset by lower asset yields as average market rates have come down since Q1. Noninterest income will likely be flat to modestly down given the mark we recognized in Q1. And noninterest expense will likely be flat to Q1's level. Our share count will be about 1.3 million shares lower on average due to buybacks completed in Q1.

With that, I'll turn things back over to John for a review of our credit profile.

Thanks, Glenn. Now many of you know that I'm deeply involved in our credit execution as I grew up in commercial lending and credit and served as Webster's Chief Credit Risk Officer during the financial crisis. As I said many times, I'm proud of the credit risk framework that we have built over the last dozen years with respect to risk selection, underwriting, portfolio management and credit reporting. The nearly $21 billion loan portfolio we have today has been thoughtfully and purposefully built. While I never predict credit performance, the ultimate outcome of which will be determined by the depth and duration of this crisis, I can say that we have been true to our underwriting guidelines, and I'm very proud of our line of business and credit professionals who always put risk management first.

As I mentioned earlier, Jason Soto, our Chief Credit Officer, who joined us 5 years ago from GE Capital, is with us today on the phone and I will be -- and he will be available for Q&A. We'll now walk through the credit slides that we posted this morning with the earnings deck, and we'll respond to any credit questions during the general Q&A.

Starting on Slide 14, you'll see an outline for this discussion. As I mentioned, Jason and I will comment on our exposure to those segments most directly impacted by the COVID-19 pandemic. I'll then provide what I hope to be a clear and concise comparison of our current loan and securities portfolios with our 2007 pre-Great Recession portfolios. And then I'll briefly walk through each of our loan portfolios, allowing Jason to provide some context with key metrics, so hopefully, you'll get a sense -- have a clear granular view of the $21 billion we have in loans. I'll highlight on each slide without reading every detail, but I will provide you with what I believe to be the key takeaways.

Slide 15. You've seen this disclosure from other banks as they have reported. This attempts to capture our loan outstandings in each of the most impacted sectors, including ratings categories, modification and line draw activity through 3/31, which Jason will update in a moment. I want to make clear, we wanted to be transparent with this disclosure, but this doesn't represent all of the loans that we think are at risk. Many of these loans are not at risk. These are simply the categories that the industry has been reporting that are obviously most impacted in the first order by the pandemic. In fact, 94% of these loans are pass rated, and you'll see here that there's been limited modification and revolver draw activities, so I want to provide a little context there.

The key takeaway on this slide is that our direct exposure to these segments is modest on both an absolute and relative basis. 94%, as I said, are in pass-rated categories, most representing 1% or maybe 2% of our total loan portfolio. We are fortunate as our strategies have over the long term been focused on less-cyclical industries with recurring cash flows. So on a relative basis, we've not really pushed hard on sectors like energy, transportation, discretionary retail as focuses.

The other point I want to make before letting Jason provide some context is that you'll see retail in -- as broadly defined, represents 5% of our loan portfolio. In this category, more than 50% of those loans are in high-quality investor CRE, and those are mostly in nondiscretionary pharmacy or grocery anchored. And for those of you who've heard me talk about Bill Wrang over 25 years, with his retail exposure, he's always looking for nondiscretionary.

I'll also tell you that an additional 20% of that retail exposure is fully followed in our ABL group, where credits are borrowing-base secured and often have cash dominion. And I've been working with Warren Mino in that group for the entire 15 years I've been here, and they have an unbelievable track record in managing even struggling large retail exposure. So we've got a lot of confidence within that pocket of retail.

Jason, maybe I'll turn it over to you to make a couple of comments there.

Great. Thank you, John, and good morning, everyone. To provide an update on the information on the slide, as of late last week, the overall pace of modification request has slowed the last couple of weeks. Modifications are up to $692 million versus the $517 million. Revolver draws in these sectors are up modestly to 130 versus 122.

That said, as John mentioned earlier, commercial modifications in total have been roughly $1.85 billion as of late last week. So we're clearly seeing modification activity beyond just these sectors.

Reality is that many of the companies being impacted may have a portion of their revenue tied to these sectors or otherwise feeling the ripple effect of the current environment. It's a bit hard to capture all that with a straight top-down approach by sector, and so for that reason, we're using a more granular bottoms-up approach to identify the exposure to borrowers that we believe may be more impacted in the current environment. By exposure, we've reviewed over 80% of the accounts in the portfolio and have reached out to the majority of those where we have direct relationships. We created a common framework to rate the potential level of impact to the borrowers. We roll that up weekly and have a call to review updates.

Based on this, I believe we have a good handle on the exposure to borrowers that may need some accommodation in the near term. I will also say that 90% of the borrowers that have requested modifications are pass rated and many have low loan-to-values, junior capital, owner and sponsor support and liquidity. So assuming we start to see a resumption of economic activity throughout 2020, we're optimistic that the majority of these borrowers will recover and we will certainly do our part to support them in a prudent way.

Thanks, Jason. Turning to Page 16, these next 3 slides demonstrate the purposeful, strategic shifts in our portfolio since the Great Recession. This is the execution that I talked about earlier. The reason I think these 3 slides are so important is that I've seen so many people use credit performance by asset class during the Great Recession as a proxy for loss prediction during the next credit downturn like the one we are entering into right now. Again, I'll never promise or predict ultimate credit outcomes, but I can tell you that our portfolio today is vastly different than what we had in 2007. Not only are the portfolio dynamics different, but the way we underwrite, manage and report on risk is light years ahead of where we were in 2007 when we had only a few years earlier transitioned to be an OCC-regulated commercial bank.

The key takeaway on this slide, comparing consumer and business banking loan portfolios and performance, is that the overwhelming majority of losses here come from broker-originated, non-centrally underwritten, out-of-market mortgage and home equity loans and from a small portfolio of business banking unsecured loans. We no longer originate out-of-market mortgages and home equity loans with few exceptions. We centrally underwrite everything internally, even correspondent in-market loans. And we have been very disciplined on underwriting guidelines over the last 10 years. Moreover, we have virtually no unsecured business banking loans, and we do not originate that product.

On Page 17, it shows the same analysis for our Commercial Banking portfolios. We had outsized losses in the discrete residential development portfolio and a discretionary aviation portfolio and equipment finance. Consistent with my earlier comments, we have focused, since the Great Recession, on less cyclical verticals and businesses. And you can see here that our exposure in those 2 areas is minimal as a result.

Another key point on this slide is the fact that sponsor and specialty and leveraged loans within our C&I business in general performed at the same level or better than our other portfolios in the Commercial Bank, a point I've made several times over earnings calls when asked about the nature of our leveraged loans. While our sponsor and leveraged loan portfolios are larger today on an absolute basis, I'll remind you that they represent roughly the same percentage of C&I loans as they represented in 2007, and they represent roughly the same percentage of Tier 1 capital plus reserves that they represented in 2007.

On Page 18, this is a critical slide. You've heard me talk about the geography of our capital losses during the Great Recession. Here, you can see that the single biggest category of losses or write-downs for us during the financial crisis was not in the loan portfolios, but in trust preferred securities in our investment portfolio. Today, only 18% of our $8.5 billion securities portfolio is credit-sensitive compared to 44% in 2007. And the nature of those credit-sensitive instruments today is higher rated and higher quality. Again, this was a purposeful strategy shift from lessons learned during the Great Recession.

So the natural question after these 3 slides is, so you've eliminated those activities that drove the highest losses, but are there other portfolios hidden in your overall loan portfolio that could blow up and have losses. And again, I can't tell you that there's not going to be a specific segment or industry that will not have credit losses depending on the depth and duration. But I can tell you, our ability to monitor our portfolio, the surveillance we have, the ability to look at correlated risk across portfolios, the quality of our risk management team is light years ahead of what it was before. And I can tell you that we've pivoted over time in the last 12 years on things like contractors or traditional advertising-based media so that we're able to make decisions quickly to reduce emphasis in certain portfolios over time, and we've done that. So my confidence that there aren't hidden pockets of risk is much higher than it would have been during the Great Recession. And I hope that those 3 slides provide some perspective on how thoughtful we've been about building our portfolio and the fact that we did take to heart lessons learned during the last downturn.

On Slide 19, you'll see just an overview of the portfolio. And the truth is, it's a straightforward midsized bank typical portfolio with obviously a sponsor book in there where we have industry expertise. You can see a high-level breakdown here of the $21 billion, and in the carats on the right, you'll see where those exposures reside. So for consumer finance, the $7.2 billion portfolio, $7 billion of that are prime in-market, residential mortgage and home equity loans and then a small pocket of consumer finance, which includes LendingClub. I will speak to each of these on the following slides.

Our Commercial Real Estate is comprised of -- a majority of it in our Commercial Banking investor CRE book, run by Bill Wrang for over 21 years here, who's had great asset performance even during the Great Recession. It also encapsulates our Business Banking, investor CRE and owner-occupied CRE, and it also includes owner-occupied middle market, commercial real estate loans as well as some technology infrastructure, data center-like real estate-secured businesses.

The C&I is typical C&I in middle market, in sponsor and specialty. It includes our enterprise leverage loans, asset-based lending and equipment finance. And then you'll see the investment securities where we make the point again on the breakdown between noncredit and credit-sensitive instruments. And on Page 36 in the supplemental information, please don't turn to it now, you'll see a detailed breakdown of the investment securities portfolio, which I will not cover here.

On Page 20, residential mortgage. The key takeaway on this slide is that our $5 billion mortgage portfolio is a high-quality, prime in-market centrally underwritten portfolio with high FICO scores and modest LTVs, both at origination and when updated for today. Credit performance, not surprisingly, has been outstanding. And I told you that we've only had a modest level of modification and payment deferral requests to date on this portfolio.

On Page 21, home equities, pretty much the same story as mortgages: in market, prime, strong FICO and LTV metrics at origination and even slightly improved when updated today. We manage this book effectively through end of draw on much of the portfolio, and we have not seen, interestingly, any defensive drawdown activities on the unfunded portion of these home equity loans thus far into the crisis. I also want to highlight one carat there that close to 50%, 5-0, of this portfolio is in a first lien position.

On Slide 22, personal lending, a very small $220 million. 80% of it represents LendingClub. And as you know, it's about $176.2 million and has been coming down since a peak of about $230 million, $240 million. We stopped purchasing lower tranches in 2017, purchasing just As and Bs and recently just As. And we are no longer purchasing LendingClub. If you look at it, the FICO scores are strong and have been improving, and we have not seen credit performance in this small portfolio deteriorate yet. We'll obviously watch it closely. We've got good geographic diversity in the portfolio. And over the time we've been involved with LendingClub, we have seen performance in the portfolio that meets or exceeds expectations.

On Page 23, in Commercial Real Estate, our total CRE portfolio, we've had meaningful and targeted growth over the last few years as we are good at it, and we've been underweight compared to peers and when compared to regulatory concentration hurdles. Majority of this business is in our investor CRE line within the Commercial Bank, led by the same management team for many years and through cycles. I'll provide more detail on that $3.8 billion, representing the 62% you see in the top chart there on the next page. The overall portfolio is well diversified with limited exposure in more volatile sectors and very little hotel exposure, very little discretionary retail exposure. We've had less office exposure as well than we did 10 years ago.

So on the next page, let's do a deep dive on our largest exposures and our largest part of the portfolio. Focusing on investor CRE, we've had a targeted strategy of growing multifamily and industrial, selectively financing office projects in strong markets. As I mentioned I think 6 times on this call already, and I apologize, Bill Wrang with us for more than 20 years, who came out of Aetna, manages this portfolio. It's more of an institutional quality real estate portfolio. It performed exceptionally well during the last downturn. It tends to be lower yielding but more resilient during a tough credit time. We partner with experienced sponsors on equity partners and provide well-structured solutions with sufficient cushion to withstand volatility.

If you look here at the origination metrics, they've been very steady over the last few years despite competing in a highly competitive lending environment, and that discipline tends to serve us well. It's also translated into very strong updated portfolio statistics, which are the bottom chart there. So we're not talking about 80% loan-to-value real estate loans. We're talking about a portfolio of 60% loan-to-value real estate loans with an average debt service coverage ratio of nearly 2x. Overall, and not surprisingly, asset quality is really strong in this portfolio. And we've been reaching out to our customers aggressively, and we will be managing through whatever the crisis brings us, but we feel really good about this portfolio.

On Page 25, you'll see the C&I portfolio balanced and diversified. This includes our sponsor and leveraged portfolios, which are primarily industry-focused, collaterally focused businesses in ABL and equipment finance, core in-foot businesses in Middle Market and Business Banking. Most meaningful concentrations are in broad, diversified categories, such as services and communications, a good portion of which is software, technology and infrastructure originated in our sponsor business. And we've maintained lower exposure in construction and retail as well as finance companies, which we feel could represent correlated risk with our broader portfolio, so we have deemphasized over time those segments.

On Page 26, we'll talk about sponsor and specialty and leveraged on these last 2 pages, and I'll ask Jason to provide a little more color and context. One of the important things that we always talk about and I'm not sure is fully understood is that our sponsor and specialty business is $3.3 billion or something. Only 1/3 of that is leveraged loans. We're reporting here leveraged loans, which are leveraged at origination based on regulatory definitions, generally 3 by 4 senior to total leverage. So a full 2/3 of our sponsor and specialty portfolio is acquisition and industry-specific financing that does not qualify as leveraged loans.

Most of our leveraged loans are in this book, over 80%. We've been lending to sponsor-backed and leveraged companies since 2004 when Chris Motl and I arrived at the bank. And as you saw earlier in the presentation, the performance has been strong and in line with overall C&I even through a cycle.

We've meaningfully shifted this book over time to make sure that we're lending to noncyclical end markets that have recurring, protectable, predictable streams of cash flow. You'll see that software, tech and infrastructure has grown from about 1/3 of the portfolio to almost 50%. Again, that's because of the nature of the transactions and the underlying companies, and these companies seem to be less susceptible to this particular crisis as well.

Health care is another defined vertical where we seek to support routine medical services that will benefit from demographic trends. And at the same time, we've shifted away from some segments that are less predictable and less protectable from a cash flow perspective.

And the last slide I'll cover before I let Jason provide a little context on sponsor and specialty is Slide 27. And this is something that I talked about a little over a year ago on an earnings call when we talked about leveraged lending. This page shows comparative metrics between what we're originating in sponsor and specialty and the broader leveraged loan capital markets. On average, we have 1 turn to 1.5 turns less leverage on the deals we do versus the market. That's less risk. We've maintained discipline on covenants with only 7% of our book being covenant light, where the general market is almost 84% covenant light. The leverage deals we have, those that are leveraged loans, are still 0.5 turn to 1 turn inside the broader leverage market, and non leverages are almost 2 turns inside the market.

When we look at the borrower's ability to service debt, we have a very strong profile with 85% to 90% having fixed charge coverage ratios of greater than 1.5x. And on average for both leveraged and nonleveraged deals in sponsor, our loan-to-value, that's the loan to the enterprise value, is between 35% and 40% on average. In most cases, with significant cash equity or junior debt beneath us. And the sponsors that we have worked with through financial crises with relationships over a long time have deep financial and management resources to help us through a downturn. We saw that during the 2008 crisis.

Jason, can you put maybe a finer point on some of those or fill in something I might have missed?

Yes. Look, John, I think you hit all the key points. I guess the only thing I would say is we've really increased the percentage of direct deals that we've done over the last 4, 5 years from about 1/2 to about 2/3, which we think is important.

And I guess the last thing I'd probably add, and I think it just speaks to the credit culture here at the bank, is our strategy in sponsor and leveraged has not only been deliberate, but it also has been very collaborative between the lines of business and credit. We've been particularly disciplined in moving away from the areas that you mentioned, like traditional media and restaurants as well as smaller, cyclical credits where we've had some historical losses.

And we've also been very clear about our underwriting parameters as we've grown. And for example, in tech and infrastructure, which is the largest segment, when we talk about financing, recurring revenue business models, 90% of the exposure in that book has over 70% recurring revenue. There's only one deal that has less than 50% of recurring revenue in that book, which again, represents almost half of the sponsor book.

If deals come in outside those parameters, our commercial leaders generally just pass. And again, it's not to say that those deals will be bulletproof, right? It really depends on the end markets those customers serve and the competitive dynamics. But our thesis is that the services and software being provided are making customers more efficient and smarter about their businesses. So we expect that once installed, the revenue will be sticky.

Thanks, Jason. I appreciate it. Before we go to Q&A, I'd like to acknowledge the departures of Jim Smith, our Chairman, and John Crawford, our former Lead Director from Webster's Board of Directors following our virtual Annual Meeting of Shareholders, which will occur this Thursday. The insights, direction and dedication that Jim and John have given to Webster over so many years have helped to make this organization what it is today and will continue to influence us into the future. They are both personal mentors to me, and I'm proud to call them friends. I appreciate everyone's patience, going a little bit longer in the comments this morning, and I hope they were helpful.

With that, Rob, I'm happy to open it up for questions.

(Operator Instructions) Our first question comes from the line of Steven Alexopoulos with JPMorgan.

To start on the reserve. So given, Glenn, you called out some of the assumptions in the 1Q reserve, and the economic outlook appears to be a bit worse than that. Just based on how you guys are seeing how CECL is now working, should we see a COVID-19 impact in the reserve in 2Q similar to what we saw in 1Q, given the change in model assumptions look like they're coming?

No. I mean, we don't see that. I talked in my comments about -- first, let me back up and just say our CECL is an estimate of multiple scenarios and modeled losses as a result of that. And then we did a bottoms-up granular build, as I indicated. So I think our reserves and our provision in second quarter will depend less on like a 2Q shock and more on the expected duration and severity of the economy over the next 1 or 2 years, right? And so we -- additionally, we have to assess the impact of the stimulus programs and our own loan modification programs. And then we'll evaluate that over the next couple of weeks. But I don't see it as anywhere near where we were in Q1.

Steve, let me give you context, too. I know it's so hard for you, and obviously, it's hard for all of us because what we're doing is with the knowledge that we have as we're going through the process, we're giving -- we use a third party, obviously, with respect to data, like many of our peers do. And then we look at that and we look at the applicability to our portfolio with what we're seeing, the results of our bottoms-up approach to looking at all the commercial credits, reaching out to our borrowers. And it all filters in, and what we try and determine at that time with the best forward outlook we have on the economy and the best information we have on portfolio performance is our models assess the life of -- life losses, lifetime losses, life of loan losses in the portfolio. And so what I think will happen in Q2 is the banks will continue to revise based on what the forward outlook is. And I think Glenn made a really good point.

I also think that we'll have better indications of how much the fiscal stimulus and other programs have helped to help maybe mitigate or offset some of that. And at the end of the day, depending on the depth and severity of the future economic forecast at that point in time, that will impact and influence the magnitude of either additional provisions or no additional provisions or somehow we miraculously start to reverse course, the release of provisions over time. But I think it's really based on what the macroeconomic forecast will be as we approach the end of the second quarter.

John, in terms of the specific exposures, I appreciate all the color you're giving on credit. But if we look at the most impacted sectors on Slide 15, which is really helpful, but there's a lot to impact on that slide. Can you walk us through which of those do you see as the most risk specific to Webster? And maybe which do you see being less riskful -- risky, just specific to you guys?

Yes. And I'll let Jason, obviously, because he's got a good perspective on it for us. And I think restaurants are obviously probably at risk. I look at that portfolio. We do have some broader -- those aren't on-the-corner store restaurants. For the most part, they're broader, sponsor bank-backed restaurants with high brand names so we believe there's a good chance of survival. But they'll be impacted. We have very little oil and gas, very little travel and leisure from a hotel perspective.

So for me, I think about restaurants, I think about what exposure we might have to nondiscretionary retail, although I said that, that's relatively small. So I would think that those are probably the most directly impacted. Jason, I don't know if you want to provide some color.

Yes, sure. Happy to. Yes, I'd echo the comment on restaurants, right? Luckily, we have a relatively small exposure, and it's a portfolio that we've actually been working down over the last couple of years. I would also say that our average hold size in that portfolio is substantively less than other parts of -- most of that exposure is in the sponsor portfolio, and we haven't, to date, taken material losses so far. We've got borrowers who are -- have multiple locations, diversified geographically. But that's certainly a part of the portfolio that I would be concerned about.

We've already talked about retail. A lot of that is collateralized. I guess a few of the other sectors that I'm focused on is things like advertising base, which again, we don't have a ton of companies that put on, host or support conferences and large gatherings, right, and business services to those. And also, we're seeing a lot of pressure at the moment in some of the routine health care services like dentists, optometrists, physical therapy, things like that, but you assume that most of that will recover. So there are definitely some pockets that we're looking at. You could even focus a little bit on perhaps smaller -- or will consumer behavior change after this. So those are the things that I start to think about and the areas that I'd focus on.

Okay. That's helpful. And maybe if I could squeeze one in for Chad. If we look at footing and account growth in HSA, it seems to slow year-over-year for you and the industry. Is this a new normal for the HSA business?

Chad, are you on directly?

Yes. Thanks, Steve. I would say it's not a new normal. I think that we're going through, one, we've seen some, as I've talked in multiples over the last several quarters, we've seen slowness related to some of the tailwinds subsiding in the industry. I do think that in a recession, there's an opportunity for HSAs or high deductible plans to grow more significantly because they tend to do well in economic downturns as employers are looking to reduce medical costs and so on.

I think there's a potential impact, ongoing impact as we look throughout the year with regard to the current pandemic as, one, employers look to go out to bid benefits plans, and/or you've seen some furloughs of folks impacting plans. So we're paying close attention to that. We haven't seen any impact yet in the first quarter other than perhaps some slowdown in some of the RFP volume in the end of the quarter.

Next question is from the line of Collyn Gilbert with KBW.

So obviously, it's a million-dollar question on how you guys are thinking about the reserve and how you build that going forward. But just trying to put that into some sort of context. So if we look at what you added or if you added to the loan growth this quarter, it looks like it was like a 1.35% reserve. Can you just maybe help us sort of understand why that reserve came in the way it did? You're sitting at 1.60%. Where it could go? Just kind of -- just framing that a little bit for us.

Sure. So Colin, yes. So the most of the growth that we had in the quarter, as I said in my prepared comments, was on the commercial side. So we're up by $855 million. So depending on what portfolio grows and the risk profile of the portfolio, that will drive the reserves for the quarter. So that's why it's a little lower than the total reserves.

Yes, Collyn. No, I was just going to say, it's really hard to give any more context, except to say I think we chose, as Glenn told you, the actual underlying economic performance variables on unemployment and GDP and house prices that he used. We then did a qualitative review, as Jason spoke to, really bottoms up. And I think we really know our portfolio very well, looked at potential risk rating migration over time, the level of modification activity. And what we tried to do was, on the day that we put our pencils down, we tried to -- using our models and using our Q factors, come up with life-of-loan losses across a $21 billion loan portfolio and across a securities portfolio of $8.5 billion. And so I think when you think about what all the other banks are doing, some of them put their pencils down earlier. We tried to take a conservative approach at our current economic forecast, also looking at some of the potential behavioral elements in our portfolio. And so we feel really good that we meet the requirements of CECL. And obviously, what happens with this, the good part about it is, as we move forward, based on actual risk mitigation in the portfolio and based on a forward look of the economy, the view will change and the models will change. And it's really hard to do an apples-to-apples comparison.

What I can tell you is we feel really good about our portfolio, as I walked through. Our CECL is not an indication that we're trying to get ahead of some issue we don't see. We literally feel like right now, that's the appropriate number, given all the information we have.

Okay. Okay. That's helpful. And then I guess this is a hard question to answer, but just anecdotally, and you guys have so much detail. The slides you offered were fantastic. Thank you for that. But the question obviously is the duration of this -- of the COVID experience. Do you have a sense of what the majority of your customers, like how long they can sort of withstand and stay, say, operating and stay afloat and modify? And I mean, is this something that they can carry through the next quarter or 2? Or if this goes -- just trying to get a sense of where their heads are on how they're thinking about the duration of this.

Yes. And I'll let Jason comment here as well. I mean, obviously, that's a tough question. But the sense -- I think the sense is, if you look at -- I mean Jason made a very important point. We showed 3/31 modifications and line draws. We then also -- on the documents, we then told you verbally what it was as of April 16. And we made a comment that the activity had slowed, which is interesting, right? So the number of modification requests and the number of defensive line draws slowed over time. That's actually a positive sign. We're working with a lot of our borrowers. Regulators have given banks greater flexibility in terms of being able to make payment deferrals and modifications over time. And I do think that given the parameters and banks' capital position -- and this just isn't for Webster, I'm giving you kind of a general view, that we have the opportunity to modify 3 months. We can do another 3- or 6-month modification at the end of that period. There's a lot of liquidity coming into the market. There's a lot of programs, like the Main Street Lending Program, hasn't even hit yet, which will give some larger borrowers opportunity for additional capital if they can't get it from their banks. The PPP program is being refunded. The checks are coming out to individuals and families. So I think there is a sense that if we actually start, what is it, opening up America again, within a reasonable period of time, that all of those bridges, with the banks' support and with good operating management by our borrowers, that we can get through this.

So that's anecdotal, right? You're asking an anecdotal question. I'm giving you an anecdotal answer that says, we haven't seen a lot of our borrowers say, "If I don't get out of this in the next 2 months, I'm done," right? It's -- everybody's working together and there's a feeling that banks can be supportive, sponsors can be supportive of their companies, the government's providing financial support. So that's just my view. Jason, I don't know if you have anything else to add.

Yes. No, look, I think you hit all the right points in terms of the stimulus, unemployment benefits, PPP. As evidence of that perhaps is we've actually seen some borrowers withdraw modification requests once the PPP sort of went into effect. And so we're seeing some evidence of that support. And then what I could do is I could break down, if you think about the type of modifications that we've been doing by line of business, I would say, generally 3 to 6 months, right? So on the consumer side, it's been almost all 3 months. So we obviously have some ability to further extend if the impact of the virus goes on further.

On our Small Business, Business Banking, about 1/3 has been up to 3 months and 2/3 has been up to 6 months. On the commercial side, it's been up to 3 to 6 months, and 2/3 of that is payment-related balances, more covenants and borrowing base. So I kind of look at this right now between the stimulus programs and the modifications that we've been granting, 3 to 6 months, plus the benefit of those programs, feels like a lot of our borrowers can withstand that timing of impact.

Our next question is from the line of David Chiaverini with Wedbush Securities.

I wanted to ask about the leverage loans. You mentioned about how sponsors have been willing to step up and support their companies. If we look back to the financial crisis, how much -- do you have a sense of how much new capital was actually contributed by sponsors to support their companies, to support the challenges they face back then?

I don't have a number, David, and I would be doing you a disservice if I guessed one. But what I can tell you, and if you remember in that call a year ago, I talked about that our credit performance in our sponsor and specialty business was actually better than many of our secured lending portfolios. It was one of the best performers in terms of actual loss. It had risk rating migration in it. But what I can tell you just, again, anecdotally and from experience, is that if a sponsor has significant cash equity in a platform company, unless there is some sort of paradigm shift that makes that company completely not valuable. If 70% of the capital structure is their equity and we're lending at 30%, 40% of the capital structure, they're not just going to turn over the keys if they think that this is a temporary crisis. So again, I think it comes back to depth and duration. And we have evidence that during the financial crisis, if we're backing good sponsors who are buying good companies time with banks are providing covenant relief and additional liquidity and the sponsors providing capital support, those businesses tend to make it through. And again, that's anecdotal. Can't make any promises, but that's what we've seen and we saw during the financial crisis.

Yes. John, if you don't mind, I could jump in a little bit as well. I would say that as you all know, the level of dry powder that's out there sitting in private equity funds, right, to support existing investments has never been higher. And so -- and you couple that with the fact that the multiples for LBOs have gone up. And so the percentage of equity that's in these capital structures disproportionate increase versus the amount of debt that has gone on. So I think there's going to be a lot of incentive to support borrowers that have good business models that are experiencing sort of a deep short-term impact. And we were actually already seeing that with some of the modification requests that we've gotten where sponsors have been willing to put in some equity, provide us with a little bit of a make well to get access more liquidity and things like that.

And you just touched on it a little bit, for one of my follow-ups. Are you getting anything in return for providing loan modifications to these leveraged borrowers, either in the form of consent fees or additional equity contribution from the sponsors to provide those modifications?

Yes. I -- we are getting some additional equity. We are getting, in some cases, that make well, right? Let us access the revolver for a couple of million dollars more and we'll give you a guarantee. We're taking the opportunity to add in LIBOR floors on a good substantial portion that are coming in, which is obviously helpful in a different way. So we're not -- I don't think we're focusing so much on big fees, right? Our goal is to help out borrowers at this point get through this time, but also improve our position where we can.

That's right. I remind you that -- I mean, these are really strong relationships over time. So both parties work to get to the best outcome. So good answer, Jason. And the answer is, yes, we're close to these folks and we work with them, not at cross purposes.

And then shifting gears to the State Farm HSA acquisition. When -- out of curiosity, when did State Farm put it up for sale? Was this kind of a recent thing? Or has this been in the works for a while? And was this a competitive bidding process?

So it was a couple of months that we've been talking to them. As far as competitive, I think it landed more on our ability and our capabilities from an acquisition standpoint, less on price. It wasn't an auction or anything like that. And we've struck a very good partnership with them, which we're looking forward to working with them going forward.

And your appetite for additional HSA acquisitions?

Sure.

Yes, remains strong. Yes.

Yes.

The next question is from the line of Jared Shaw with Wells Fargo.

This is Timur Braziler filling in for Jared. First, looking at the level of PPP lending, it was a little bit smaller than what we've seen out of some of your peers. Was this a choice at Webster or was this something structural that limited the level of production? And as we look at future SBA programs coming onboard, what level of participation should we expect from Webster?

That's a good question. No, certainly, we wanted to help every small business borrower and customer of Webster that we could. We got through, let's say, approximately 30% applications approved, 30% funding, plus or minus a few percentage points on both sides of that. We fully expect to jump those numbers significantly higher over the next few days as we've got internal approvals. So I would say, no, the answer is, we -- at Yeoman's efforts, we repositioned almost 300 people in the organization to go through it. Obviously, there were technical issues at points with the etrans system. We've worked on trying to make our automated process a little bit more efficient. So I'd say we're kind of right in that national average, although you're right to point out that we trailed some. And we're going to work our butt off to make sure that when the funds come up, open up again, that we close that gap a little bit.

Okay. And then can you disclose what the kind of weighted average fee was for the PPP loans that you did book?

So I think we're probably in the range between 2% and 3%, Timur. And we're funding that basically at the PPP LF at 35 basis points. So it's -- it helps us.

And then just last one for me. I'm not sure if you can disclose this or not, but the current reserving for the LendingClub loans and for the restaurant portfolio?

No. We're not going to disclose by segment. Although, again, I'll just make a qualitative determination that, that didn't drive reserving disproportionately to anything else, and it's less than 1% of the portfolio and it does not have a disproportionate impact based on our loss modeling.

Our next question is from the line of Laurie Hunsicker with Compass Point.

Just wondered if we could go back to Slide 15, which by the way, your detail is great. I really appreciate that. If we can just start by looking at the total, the total of $2.8 billion that you have here, how much of that is real estate on this slide you see now, approximately? I mean, obviously, you gave us the detail around the retail being 58% CRE, so that puts a bit $600 million. Just didn't know if you had -- how much is actually real estate.

Right. Jason, probably does not have that off the top of the head, but I would actually want -- I ask you first, Jason, and then otherwise, I can give a relatively rough estimate.

Yes. The main components in there that are retail and -- is hotels and motels, right? So it does not include some of the multifamily and office properties that I mentioned before. It's also going to be in retail, as we talked about, 58%, I think, is the number, is CRE-collateralized retail. And we talked about some of the characteristics of that, right? So call that $600 million or so, call the hotel is at $125 million. There may be a little bit scattered in the restaurants, in our small business. But that's probably the sum total of the real estate, a little less than $1 billion is my guess.

And on construction and related?

That's mostly equipment finance, right? So that will be trucking, right a good portion...

(inaudible)

Right. Trucking-type exposure. That's probably $200 million, $300 million of it.

Okay. That's helpful. And then in your travel and leisure category, what primarily is that?

Yes. So that's everything from fitness facilities to conference providers or companies that support conferences in the arcades, rock climbing, those types of -- golf clubs, YMCAs. It's a variety of different types of leisure activities, for the most part. A little less in travel unless we do have 1 or 2 borrowers that support travel events, right, they put on travel shows. And so that's probably the lion's share that goes in there.

Okay. Helpful. And then roughly of your $1.5 billion or so of the leveraged lending, how much of that actually shows up on Slide 15?

On Slide 15, I do have that.

So of your $2.8 billion, I guess, how much -- maybe after, how much of the $2.8 billion is leverage lending?

$236 million.

Okay. That's great. Okay. And then also -- and I appreciate all the details you gave us around modifications. Of your total book, the $3.2 billion or so of SNF, how much of that is modified already?

SNF, excluding leverage, is about 17%.

17%. Okay.

The leverage is lower than that.

Okay. Okay. That's great. And then just last question. Of your $6 billion commercial real estate, how much of that is multifamily? And what's the LTV on that? And if you don't have that, I can follow up with you off the call.

Yes, you can see that on the chart, right? Sorry, go ahead, John.

No, go ahead, Jason.

Yes. You can see that on the chart, that it's roughly 23% of the $6.1 billion. And if you focus on the exposure, the majority of which is in the CRE line of business, the LTV on apartments is 62%.

Our next question is from the line of Casey Haire with Jefferies.

A follow-up on the, Glenn, the average earning asset growth, you're expecting, I think, 4% in the second quarter here. Just the composition of that. I mean the $650 million that you booked quarter-to-date is roughly half that 4% move, and it sounds like you're going to be doing more when the program refunds. So my question is, is this 4% growth, is this going to be entirely PPP? Or is there going to be any core loan growth along with it?

No, I think a lot of our commercial growth came in at period end. So we'll get to pull that into the second quarter. And on the PPP side, it's probably about half of it. So I'd say about 5%, on average, if you look at it, it's probably about $500 million.

Yes. And Casey, if that question also kind of tries to get to what's going on in the core underlying. I made the comment, we closed a big deal in April on a technology infrastructure transaction. I looked at our pipeline, it's clearly lower than it's been. Generally, this is a seasonal low pipeline anyway, but it's slightly lower than last year. As I said, we're going to be more careful. Obviously, you're lending into uncertainty, and so you need to make sure that the underlying fundamentals work. Obviously, I think cutting the other way, you do have a little bit more leverage. And I use that word -- I probably shouldn't use that word. But as a lender, you have a little bit more leverage to make sure that your structure and your pricing work. So I would say, Glenn's right, you'd see -- in fact -- yes, in fact, that we had a lot of fundings at the end of the year, we'll carry -- at the end of the quarter, we'll carry through the next quarter. We've got PPP, potentially some from the Main Street lending program. And then a lower level, but a decent level of organic growth. And then the last thing I will say is we do anticipate -- and I'm always asked about paydowns, I do think just with the general level of uncertainty and lower economic activity, we'll probably see lower paydowns, which will help keep that earning asset number up.

Okay. Great. And just if I piece together the NII and earning asset. It looks like you're implying a NIM down about 10 bps in the second quarter, can you just confirm that? And then if you could, where spot rates for loan yields and deposit costs at 3/31, if you have that, Glenn?

So -- yes, so I think your NIM is probably in the range. And I think if you looked at our outlook on rates going into the second quarter, we're assuming the 10-year is probably around 70 basis points, at 3-month LIBOR, about -- this is -- and this is the full quarter average, about 77 basis points, a 1-month LIBOR about 53. And you've seen that trade up closer to 70, but we think that will come back in. And then Fed fund is obviously around 24. So the market rates continue to go down. And I think -- so I think if you look at our net interest income, you have continued rate pressure, but it's offset by loan volume. So the net result is our net interest income was flat, basically flat quarter-over-quarter. But I think your NIM estimate is probably in the range.

Okay, great. And just last one on the capital management front. I understand that PPP is -- carries a 0 risk weight, but it does hurt the TCE ratio at 7:7 today, where -- is there a floor that where you guys would not want to go even -- you would not want to see that dip below even regardless of what you did with PPP?

I think we have plenty of room there. It would be very low. I mean, it will go below 7 before we have any issue with it.

Our next question is from the line of Matthew Breese with Stephens.

Just on the PPP, wanted to -- just a point of clarification. How are you treating the fees? Are those going to roll through NII or noninterest income? And then what is your average life of loan there?

So we're assuming about 24 months on the average life alone. And yes, it will roll through NII. And to the extent there's any pull forward, obviously, that would pop NIM, right, and then net interest income.

Okay. Okay. And then just looking at some of the more granular aspects of the C&I portfolio, you mentioned that equipment finance is 7% of that book. Can you just walk us through some of the common types of equipment that you'd like to underwrite or stay away from? And if you have it, I would love to hear how much of this equipment, if you know, is active versus idle right now?

Yes. That's a great question. And obviously, we've lowered the amount of disclosure because the portfolio used to be over $1 billion. That's much smaller now. I can tell you that it's generally things like yellow metals, fleets of school buses, tractor beds and other things. Jason, I don't know -- you probably have more of a granular insight into the collateral types. I don't think we have the active and dormant stats right now. But Jason, do you have anything to add there?

Yes. No, I don't have the details on what's idle and what's sort of working at this point. But you hit the major categories. It's primarily trucking, it's auto transport. There's some yellow iron and cranes, a little bit of construction. We've reduced that a fair amount as well as buses, whether it be mostly charter buses. So it's -- but definitely more on the trucking side, which is -- it's interesting, we're seeing modifications there, but then there are certain companies that are just flat out. It just depends on what markets they're serving, right? So -- but yes, that's the primary breakdown.

And I think, Matt, I may have said this, and I'm not sure. I believe that of the 300 commercial banking units of modification, the actual borrowers, that about 100 of those are small ticket equipment finance. So we are seeing some activity there. But as Jason said, it's kind of hit or miss in terms of what's happening there. So small dollar amounts, but higher volume requests for modifications and equipment finance. But we'll try and disclose more next time around.

Okay. And then a similar question on CRE. There's roughly $425 million in health care, there's another $539 million health care loans in the C&I portfolio. Can you just provide a little bit more detail on the types of health care, whether it's hospitals or outpatient, skilled nursing, nursing homes, that type of thing?

Yes, you want me to take it, John?

Yes, go ahead, Jason.

Yes. I -- it's mostly skilled nursing, right, is what we've got, is probably about $300 million. And then we've got what I'll call some senior living facilities, right, that are sort of lumped into the same category, whether it's independent living, assisted living and memory care. I think John mentioned before in his comments, data centers is a big -- is another section of about $250 million. And those are real high-quality assets with 10- to 15-year contracts with really, really high borrowers, AA, AAA borrowers, take-or-pay contracts. And then on the mid-market side, it's more owner-occupied type properties in footprint.

The next from the line of Ken Zerbe with Morgan Stanley.

I guess, going back to the reserve, given your assumptions that we could be fairly much in a V-shaped type recovery, can you just talk about the magnitude of difference? If -- I get that if unemployment goes or GDP falls 18%, goes down to 30%, it's probably not as big as the initial GDP move. But what's the magnitude if you assume instead of a second half recovery is maybe a 2021 recovery? So we actually go through, say, 3 more quarters of very depressed economic activity.

I'm not sure I can quantify that for you, Ken. What I can say is that if the assumptions around recovery end up being more dire as you move forward, we'll probably see some of the management overlay that we put forth this quarter actually flow into the numbers. So we might not need as much qualitative adjustment to the underlying models. But I would say -- Glenn, what's the most recent April -- the difference in terms of what we see in terms of depth?

GDP, it's probably another 12 basis points lower in Q2, but then the recovery is much stronger. I'm not sure -- Ken, just to go back a little bit. I'm not sure we're thinking of a V-shape recovery. We're thinking of a more gradual recovery towards the second half of the year. And that's really what -- our estimate, again, is a mix of multiple scenarios and multiple model losses, and that's really what we're focused on. But it is something, as John indicates, that we're monitoring very closely. And I don't think anyone knows a precise answer right now. But based on everything we've had and making model adjustments and then looking at our portfolio, building it up from a granular basis and seeing how our customers behave over the next 90 to 120 days, this is where we ended up.

Yes. And Ken, I completely understand where you're trying to get to, but it's exactly what Glenn said because we're going to see -- if we see risk rating migration, depending on the impact of all of the stimulus and the government programs and our modifications, over time, we're going to see changes in whether it's a V or a U or an L shape. And so we kind of have to wait to see how that plays out to really figure out because we may have a longer recovery period, but we may see really strong impact of fiscal stimulus and all of those variables go into our modeling and our CECL, and we kind of have to wait until the end of the quarter to see where that is.

Got it. Yes. I guess I was just trying to figure out like whether the -- like I say, it's an L Shape recovery, but less GDP decline, like if that could have, say, multiples of the reserve build that you saw this quarter. Like I'm just trying to size the impact on what matters more to your reserve.

Yes. No, I think in all of the different models we ran, I don't think it's multiples, right? I think multiples is maybe more the depth or another shock or some issue. But in terms of the nature of the recovery, if you think -- I think the depth may be more impactful than the duration in some respects. So I do think that if you look at our -- going out that if we end up going away from a V or U, more towards an L, that it's not multiples in any one particular quarter.

The next question is from the line of Bernard Horn with Polaris Capital.

Just a couple of questions. And by the way, great detail on the slides and all the explanations with respect to credit. Just on the PPP. Did I understand you right that it looks like the margin on that program was about either from 75 to 125 -- 2 to 3 basis points -- 200 to 300 basis points on rate with a 75 basis point funding. And then did you -- what kind of additional fees are you incurring in those -- I mean, earning? And are you dealing with existing customers? And are those providing additional relationship activities that you might develop into other business?

So I think we're probably -- so I think -- Bernie, it's Glenn. We're probably -- we have a coupon of about 1%. And then with the fees, we're probably in the range between 2.5% to 3%. The funding is at about 35 basis points through the PPLF, which is you set up uniquely for this. So that gets you probably maybe a little higher than what your range was.

Right. So the -- right, the program has about a 1% interest rate and then have sliding fees depending on the size. If you look, we're doing, I think, 80 -- about 80% of our applications have been below $350,000, those carry higher levels of fees. So you kind of put that all together, and it increases the NIM depending on what your average life is.

I mean your spread could be $225 million to $250 million.

And your question on customers versus noncustomers, we have -- we work with both. And we haven't denied. We -- our primary focus is to help our customers. And as you can tell, Bernie, from the stats we gave, unfortunately, when the money ran out, we haven't helped as many customers as I would have liked to help, albeit we did an unbelievable job, Yeoman's effort of people working remotely from -- and bringing people in from other areas and leveraging technology. But we've accepted applications from both primarily. Roughly 90% of the applications we received were from customers.

Yes.

Would that provide you with any opportunity to do more business with them? I mean, I'm just wondering if it allows you to get deeper into the customer.

Yes. I'm going to be honest with you. Philosophically, it's not our primary concern right now. It's to try and be part of this solution. And I'm actually talking with our other bank CEOs on a frequent basis about making sure that this program does what it should be. But certainly, if you're there and you take care of your customers and noncustomers, presumably, that's going to have an added benefit over time. And I think we'll obviously be able to talk about impact to customers and noncustomers as the program works itself through.

Very helpful. On the securities portfolio, was the increase on Slide 6 as a result of market appreciation with major drops in interest rates? Or did you add to the portfolios?

Bernie, you're referencing Slide 6?

36, sorry.

36. Okay. Yes. So we did add to the portfolio. You can see that in our balance sheet period end. I think we're up $283 million quarter-over-quarter.

So you actively purchased additional securities. It wasn't just from the increase. It was rates drop.

Yes. We did. We did. Go ahead. I mean, in part to lengthen -- and they were out of a 6-year duration in part to help or improve our asset sensitivity.

Early in the quarter.

Yes.

Yes. So I guess, that partially answers my next part of the question, which is given that, that portfolio has swung from a total loss to -- I mean, from a loss to a gain, any -- given that interest rates are so low where they are right now, can you comment on whether you might change your outlook on how you hold that securities portfolio?

I think it's too early to -- too early to say, Bernie.

In terms of the (inaudible), we obviously like it from an interest rate risk standpoint. We use it to manage our asset sensitivity and we use it, the AFS portion, for liquidity. So I think we sort of triangulate those 3, and we arrive at where we think we could be. Obviously, these are lower risk-weighted securities, so it doesn't take up a lot of capital either. And so we like where we're positioned right now.

Okay. Last question is on -- could you comment on the CD roll forward and repricing and what you're seeing there?

So I think...

You've seen the CD balances come down. Part of that is in response. I think we've pulled back on a lot of promotional programs in most of our markets. And so I think you see -- what you're seeing is customers sort of pausing and moving into other funds, not locking up their money over a longer term. And so as a result, our CD portfolio has shortened, which again, helps our asset sensitivity.

Great. And any comment on the amount of those CDs that will be repricing over the next 2 or 3 quarters?

Yes. I don't have that in front of me. I can come back to you on that, Bernie.

Our next question is from the line of William Wallace with Raymond James.

On the -- on Slide 15, I'm wondering if you could just talk a little bit about the risk migration of the ratings within the past category as you modify these loans. And if you didn't give it already, how has that modifications number changed since 3/31?

Yes, I'll let Jason do that. We did update, William, the revolver draw on modifications on those pages with -- and Jason will repeat that for you. And there hasn't been -- let me make one general statement then I can give it to Jason. There hasn't been much risk rating migration yet, right, because you're going through this process, and you're really looking at reported numbers, where your customers are and things that are purely temporary and COVID related from a modification perspective don't necessarily warrant a downgrade based on regulatory guidance specific to the pandemic. So we haven't seen much. And I think when all of you get on the calls with all of the banks in the second -- for the second quarter earnings, you're probably going to be able to see a better indication of actual ratings migration. But Jason, do you want to update those modification stats and revolver, address that, for Page 15 as of April 16?

Yes, sure. Up from $517 million to $692 million and revolver draw is only up modestly from $122 million to $130 million. And in terms of the risk rating migration, yes, I think we're sort of taking a -- all right, a wait and see, so to speak. And as we get more information as to how long the pandemic impact will last. But we've made sure, as Glenn went through, that we've captured an appropriate reserve to reflect the modification activity that we've seen and the potential risk rating migration we expect.

Okay. So I mean, I know it's impossible to know exactly at what point you'll start to adjust. But is it 3 months when you start to worry about what the cash flow recoveries for these loans might look like? Or is it 6 months? Or is it too impossible to even [ponder]?

No. No, no. I don't think there's a rule of thumb. So you saw downgrades. We have higher classifieds in the quarter. We're watching every single loan in every single portfolio. So we're just being disciplined to the approach that you downgrade once the ongoing financial metrics trigger into a new grade category, or if you think you're potentially at risk for further downgrade and it goes to watch, special mention or substandard. So we'll do that, and we're still doing that. I'm saying given where we are, we have not yet seen meaningful risk rating migration that you may see depending on the depth and duration of the downturn.

Our next question is from the line of Mark Fitzgibbon with Piper Sandler.

Just 2 quick questions. First, can you give us a sense for what percentage your commercial loan portfolio do you think ultimately will go into forbearance? And then secondly, if you could just, Glenn, clarify your comments on the margin, I missed those, I apologize, the outlook for the margin.

Okay. No, Mark. Actually, it's great to have you on the call, and we've gone a long time on this call. So appreciate you hanging in there. I'll take a crack and then maybe see if Jason wants to put another comment. What's very interesting is, and we talked about this, that if you look at the modifications through April 16, right, we gave that number verbally on the whole portfolio slightly up. And the revolver draws, we've seen a slower trend, right? So it's hard to predict, again, looking at depth and duration as who's going to come to us for more modifications. We don't know whether the PPP program, if, in fact, even if they authorize another $250 billion, if you look at the statistics, probably everybody that qualifies doesn't get funded. So maybe if those people who are eligible and do not receive a loan, maybe they come and ask for modifications, so there could be an uptick after that. But what's fascinating is the amount of defensive draws in the portfolio and the amount of modification requests has sort of kind of slowed down with respect to pace and trending. So it doesn't look like now, at least in what we're seeing, that we're going to see a flurry of additional modifications. I think it will be dependent upon particular challenges by independent -- under independent circumstances by borrower. Jason, I don't know if you think that's accurate, correct me if you want to.

Yes. All I'd say is we've actually seen net revolver reductions through the first half of the month from -- we talked about the $450 million or so that were draws in March and almost $100 million of that has been paid back down. So that's a bit of an encouraging sign. And again, across all the lines of business, we've seen less modification over the last couple of weeks, in the last week in particular. It's hard to peg exactly where we think this might end up. But what I can tell you is we do have that weekly update and bottoms-up approach that we go through updating those numbers exactly. And so we do think we're going to see more than what we've seen so far. It may slow down for now. We may see another wave when some of the initial modification request we granted sort of come back for further discussion once we have more information. But we're on it, and we have a very good feel as to what we think we might see.

And Mark, I don't know if you were on the call at the beginning, but I did give, as of April 16, right, in the mortgage and residential books combined, that's about a $7 billion prime book. About $476 million or 6.5% had requested and been granted modifications as of April 16, that's last week. In small business, 750 borrowers, reflecting $300 million or 17% of our business banking, $1.7 billion business banking portfolio, 17% have been modified. And in commercial, about 300 borrowers, representing $1.6 billion or 13% of the commercial funded loan book had been requested or granted modifications.

And then the question on the margin for Glenn?

Sure. And so Mark, we're assuming the following as far as our average rate forecast for the second quarter, we're thinking a 10-year swap of probably around 70 basis points. A 3-year LIBOR rate, on average, around 77 basis points and a 1-month LIBOR rate, somewhere around 53 basis points. And of course, Fed funds at 25%. And so it's making that sort of assumption. Again, I would say that you can assume that our net interest income will be flat quarter-over-quarter, say at [2 30], [2 31], somewhere around there. There will continue to be margin pressure. And it could be 10 to 12 basis points depending on the mix. So it's hard to tell this early, but I mean, that's about where we think we'll be at this point.

At this time, we've reached the end of our question-and-answer session. Now I'll hand the floor back to management for closing remarks.

Thank you. Well, we very much appreciate you spending so much time with us this morning and giving us an opportunity to walk through our credit portfolio as well. We're focused on being part of the solution here and helping our customers and our communities and keeping our employees safe. And I wish the best to all of you out there on the phone. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.