Earnings Call Transcript - DCOM Q1 2020

Operator, Operator

Good morning and welcome to the Dime Community Bancshares First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kenneth Mahon, President and CEO. Please go ahead.

Kenneth Mahon, President and CEO

Thank you, operator, and thank you, everyone, for joining us this morning. Good morning. On the call with me today are our Chief Banking Officer, Stu Lubow; CFO, Avi Reddy; and our Chief Accounting Officer, Leslie Veluswamy. In my prepared remarks, I'll make some enterprise-wide comments about the current pandemic and then pick up some of the broad things that underlie the earnings release this quarter. This is my 40th year with Dime and my fourth year as CEO. Throughout most of my career, I was aligned with a monoline multifamily structure. Multi-families were a much-maligned asset class in the years leading up to my induction as CEO, especially regarding concentrations. So in order to diversify our assets and our revenue streams, in 2017, we began to transition toward the commercial bank model. The positive impact of that transformation is now taking hold and is most apparent in this quarter's earnings release. However, I do find some irony in the fact that in times of crisis like this, we once again fall back on the stability of the New York City multifamily asset class for comfort. Dime is no longer dependent on multifamily housing as it was four years ago, but it still represents almost two-thirds of our loan portfolio. Multifamily loans have served Dime exceptionally well in times of economic crisis. New York City multi-families were by far the best-performing credits during the financial crisis that began in 2008. Year after year, Dime had one of the lowest loss rates in the nation based on the performance of New York City multi-families. In fact, for the six years between 2007 and 2013, our cumulative net charge-offs were only 130 basis points of loan balances at the start of the crisis, which was approximately five times lower than the overall bank index. Given the low LTV nature of our multifamily portfolio, which was 52% at March 31, 2020, we anticipate our stellar track record to continue even though conditions are now much different. Due to the city's limited geography, multifamily apartment buildings are the primary form of housing. A large percentage of our borrowers have remained robust through intergenerational family ownership across various economic cycles. And these owners will know how to manage through this crisis. We view this as a liquidity event for building owners, having nothing to do with vacancy levels or credit deterioration. It's important to remember that prior to the lockdown, economic conditions in New York were outstanding. Going into lockdown, vacancy levels were near all-time lows. As we saw after 9/11 when real estate values tumbled but then took off at the start of 2002, we don't want to try to read the market but rather focus on the facts. The only material abandonment of New York City multifamily housing that I can recall occurred in the 1970s during the city's financial crisis. That was during and after the John Lindsey era. To believe that the current housing situation ends badly, you'd have to assume that New York City jobs and the economy will not recover. It was a time when housing support was mainly dependent on the financial sector in New York. Today, we've had significant investment in what's known as the TAMI sector: technology, advertising, media, and information companies. As mentioned in our press release, the best thing we can do for our loyal borrowers right now is to help them get through their liquidity crunch. Our owners were current on their payments before the government locked down economic activity, and they will manage their properties back to health during and post-lockdown. So for now, we see our focus for the benefit of both landlords and tenants is to provide support. As of April 21, we had approved forbearance requests on $559 million of loans across all of our portfolios, which represents 11% of the total loan portfolio. The weighted average LTV on loans granted for forbearance was 55%. You can see more detail in the press release. In our press release, we've also outlined certain affected areas in our commercial loan portfolio that we are monitoring very proactively, mainly hotels of $173 million and restaurant loans of $27 million. I've asked Stu Lubow, our Chief Banking Officer, to join us on the call today to help answer any questions on any of your loan inquiries in a more granular fashion. In summary, given the low LTV nature of our multifamily loan portfolio and the long-term demand for housing stock in New York City, we remain optimistic that our credit performance will again outperform the peer group averages. Right now, in terms of the mix of our portfolio, we have a solid blend of safety and yield; slightly less than two-thirds are brokerage-driven multifamily loans and one-third are multifamily relationship loans that came with the business banking build-out. The earnings and balance sheet advantages of the relationship loans continue to drive our improvement in asset yields, deposit costs, and non-spread revenue, as you will see when I discuss this quarter's earnings release in detail. We also believe that we have built a balance sheet with significant capital strength, and we are entering this uncertain economic period with an extremely strong capital base. The strength of our capital base cannot be emphasized enough. Our tangible equity ratio grew by 80 points on a linked-quarter basis and is currently 9.4%. Our consolidated Tier one risk-based capital ratio is in excess of 12%. And our consolidated total risk-based capital ratio, which is in excess of 15%, ranks among the highest in our peer groups. Of note, management began preparations for bolstering our capital base back in December of 2019, which led to the successful issuance of $75 million of preferred stock in February of 2020. It looks like the pressure move today was simply the continuation of our focus on building a safe and sound institution for the long term. Next, I would like to talk about Dime's involvement in the SBA's Paycheck Protection Program, more commonly referred to as PPP. The SBA should get a lot of kudos for the work that they've done. For an organization that is not used to originating this level of loan base, our experience has been very positive with them. The pandemic has made it clear to everyone just how important small businesses are to ensure full employment and support a well-functioning economy. Over the past several years, we have taken numerous steps, including hiring personnel and adding new processes and systems that put us in a superb position to help our business customers. In a short span of time, Dime has now one of the most productive SBA operations in the New York area. Prior to the PPP rollout, we ranked among the top 10 SBA lenders by dollars of origination in the New York District. We're deeply committed to being a source of capital to businesses in our footprint. This initiative has been a bank-wide priority. Many of our staff worked around the clock and over weekends to ensure we kept credit flowing to businesses. As of April 21, we registered $163 million of loans with the SBA. Total fee income from processing these PPP loans is expected to be around $5 million. Of the applications we registered with the SBA, 32% were existing Dime clients and 68% were new clients. Successfully onboarding these new clients after PPP will accelerate the growth of our business deposits, with many of these new clients remembering that they were first introduced to Dime as a source of help during a time of need. As you will see from our results this quarter, we're on a path of creating structurally higher net interest margins, plus other improved profitability metrics. Our pre-tax pre-provision for the first quarter of 2020 was $18.7 million, representing a 20% year-over-year growth. As I have mentioned in the past, Dime's strategic plan is built upon improving five fundamental metrics: one, growing our total checking account balances; two, increasing low-cost business deposits; three, growing relationship-based commercial loans; four, reducing our CRE concentration ratio; and five, growing sources of and the contribution of non-spread revenue. Now a quick update on each of those, starting first with the growth in our checking account balances. On a year-over-year basis, average noninterest-bearing and interest-bearing checking accounts increased by 22% to $626 million. Every dollar of low-cost deposits that we raise increases the franchise value of the company. Second metric: increasing low-cost business deposits. Total commercial bank deposits from our business banking division, plus our legacy multifamily division, increased by almost 24% on a year-over-year basis from approximately $109 million. Commercial deposits now comprise 13.4% of total deposits compared to approximately 10.4% of total deposits a year ago. Our next financial objective is growing relationship-based commercial loans. The business banking division currently stands at approximately $1.4 billion. This business continues to be significantly accretive to our overall net interest margin and has contributed to six consecutive quarters of core NIM expansion. Our fourth targeted metric is the reduction of the commercial real estate concentration ratio. We've now reduced that ratio to 589% at March 31, 2020. As many of you may remember, Dime was well over 900% only a few years ago. Lastly, in non-spread revenue, we've grown annual non-spread revenue, excluding security gains and losses and a one-time BOLI claim by approximately 65% on a year-over-year basis. In summary, we continue to make quantifiable progress on our overall strategic objectives. Most satisfying to me, and the purpose of our business model transformation is the significant progress that's come on the deposit side of the balance sheet. Deposits to loans for the business banking division are running at 27% of the loan portfolio, compared to approximately 5% for the legacy multifamily business. We are making tangible progress on improving the quality of our deposit base, which was perhaps the guiding tenant of our business model transformation. Looking at the fourth quarter of 2016, just prior to the build-out of the commercial bank division, Dime was almost the highest of our peers from a cost of deposit perspective. Now our cost of deposits is lower than many of those senior competitors, with the decline in the cost of deposits witnessed in the first quarter of 2020, and we expect to be at the meeting once everyone finishes reporting. At this point, I'd like to turn the conference call over to our Chief Financial Officer, Avi Reddy, who will provide some additional color on our first quarter results.

Avinash Reddy, CFO

Thank you, Ken, and good morning, everybody. EPS was $0.24 this quarter compared to $0.19 for the linked quarter. Included in this quarter's results was an $8 million reserve build. The $8 million provision for the first quarter of 2020 was entirely associated with an increase in the general loan losses reserve due to the adjustment of qualitative factors tied to the bank's existing incurred loss framework to account for the effects of the COVID-19 pandemic and related economic disruption. Dime elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to COVID-19 is on or December 31, 2020. The deferment will provide time to better assess the impact of the COVID-19 pandemic on expected lifetime credit losses. As all of you are well aware by now, there was significant forecast uncertainty regarding the economic variables at the end of March, which continued into April and actually still remains to this day. We believe that it is prudent to wait until there is more certainty in the economic forecast before implementing CECL. We continue to run and validate different models, but we will not be providing a CECL estimate at the current time as we believe it is premature given the uncertainty in the forecast assumptions. As the year progresses, we believe there will be more consensus on the economic outlook, and we hope to use more realistic consensus scenarios to provide you with better estimates. As Ken alluded to earlier, in the fourth quarter of 2019, we made the proactive decision to diversify our capital stack by introducing preferred stock into the mix. Given its perpetual nature, we view the replacement of common equity with preferred equity as a prudent capital management practice that would enable us to reduce the overall cost of capital while maintaining the quality of our capital base with a perpetual instrument. To that end, we raised $75 million of preferred stock at a very attractive rate of 5.5% in early February. It was practically one of the last capital raises before capital markets conditions changed dramatically. Given our preplanned intention to replace common equity with preferred equity, we repurchased $21 million worth of shares at a weighted average price of $16.22 in the first quarter of 2020. Our strategic plan is based on remixing our loan portfolio and not growing the asset base. So, by definition, we will generate excess capital. We will, of course, be very prudent with share repurchases in the times ahead. Pro forma for all the capital actions, we ended the first quarter with a tangible equity ratio of 9.4%, which is a meaningful increase from the 8.6% at year-end 2019. Pre-tax pre-provision earnings for the first quarter of 2020 was $18.7 million, representing a 27% linked quarter growth and 20% year-over-year growth. We continue to demonstrate that we don't have to grow the balance sheet to grow our core earnings per share power. The core net interest margin increased by 12 basis points on a linked-quarter basis to 2.59%. As Ken mentioned, driving a structurally higher NIM is one of the key tenets of our business model transformation, and we are pleased with this quarter's results. The increase in core NIM was driven by a 14 basis point decline in our cost of deposits; we continue to hold our loan yields fairly steady. The quarter-end weighted average rate on our total loan portfolio decreased by only four basis points on a linked-quarter basis. The weighted average rate on the $1.4 billion business banking portfolio was 4.62% at the end of the first quarter and was accompanied by $386 million of self-funding deposits at a weighted average rate of 49 basis points. This leads to an implied business banking portfolio NIM of approximately 3.75%, which is far above the NIM on our overall balance sheet today. Over the remainder of 2020, we have approximately $970 million of CDs at a weighted average rate of 1.90% that are maturing. Repricing these CDs at lower rates provides us an opportunity to continue reducing our cost of deposits. Our charter conversion from a community bank has enabled us to accept municipal deposits, and in a short span of time, we have built the municipal deposit portfolio to $78 million at quarter end. This has reduced our loan-to-deposit ratio to 122% at the end of the first quarter. In terms of access to liquidity, we have significant unused collateral at the FHLB, which totaled $1.5 billion at the end of the first quarter of 2020. Our efficiency ratio was 57.5%, and the expense to assets ratio of 1.68% remained relatively well-controlled compared to other commercial banks. A critical part of the business banking build-out is the addition of non-spread income. In 2019, we saw promising early signs of increasing large spread revenue, and this trend continued in the first quarter as we recognized $1.2 million of customer-related loan-level swap income. This was up year-over-year, and fee income grew by approximately 65%. We were a participant in the PPP and expect to book approximately $5 million of fees from that program in the quarters ahead. Non-performing assets and loans 90 days or more past due increased by $7 million in the quarter. The increase was entirely attributable to a single real estate relationship with a very low LTV. We have a contract in place for the sale of the property. This is expected to close at the end of the month of April, and we expect zero loss content with this particular loan. As you well know by now, we don't provide quantitative NIM guidance. We won't be providing any specific guidance regarding balance sheet growth targets; it is a bit early to do so given the unfolding economic conditions. That said, we remain committed to remixing our balance sheet gradually over time with good solid credits that are accompanied by higher levels of deposits. At this point, we don't expect material balance sheet growth for 2020. On a related note, we may see more of our real estate borrowers waiting until their reset period before refinancing or taking the option to reprice their loans rather than prepaying early. While this could lead to a decline in prepayment fee income from the $2 million figure we have seen over the last couple of quarters, it will mean we retain solid credits at low LTVs for loan growth with a coupon rate that's fairly attractive in the current low-rate environment. We're projecting non-interest expenses for 2020 to be approximately $99 million. And finally, with respect to the effective tax rate for the remainder of 2020, we expect it to be approximately 22%. With that, we can turn the call over for questions.

Operator, Operator

Our first question today comes from David Bishop with D.A. Davidson.

Chris Keith, Analyst

Hi guys. This is Chris Keith on for David. How are you? So, I'm just curious about the $5 million in fees. Would that run through the margin? Or will that actually be in noninterest income?

Avinash Reddy, CFO

Yes, I mean, that's an accounting question we're working through at this point. We're going to do what how everybody else does it. I mean, at this point, it's our expectation it would be in fee income, but we'll just have to see how that works over time.

Chris Keith, Analyst

Okay, great. Looking at the overall outlook for net interest margin, I expect the next few quarters to be somewhat unpredictable as we see an increase in average earning assets due to the PPP loans coming in, followed by a likely reversal in the third quarter. Given the recent Fed rate movements, how do you anticipate the cost of deposits will respond? Do you believe we have already accounted for that, or is there more room for changes in the coming quarter?

Avinash Reddy, CFO

Sure, I'll break it down. Regarding the PPP program, we expect to fund around $150 million to $160 million. If we assume that program operates at 1% with a 50 basis point spread, this would lead to about a five basis points negative impact on our net interest margin if it stays on our balance sheet of $6 billion throughout the quarter. However, this is a short-term effect. As for the cost of deposits, we see potential for further reductions. Specifically, we have many certificates of deposit maturing, and we are progressively lowering deposit costs. We also have opportunities to increase municipal deposits, which can be raised at rates between 50 to 60 basis points, helping to decrease other deposit categories. Regarding the floating rate loans in our commercial and industrial sector, we have about $150 million that are still floating. If LIBOR decreases, these rates might decline further. Generally, the loan yields changed significantly in March, leading to an expected decline in the next quarter, but the reduction in deposit costs should balance that out. Therefore, we anticipate some core margin expansion in the upcoming quarter, although it's difficult to predict the exact amount.

Operator, Operator

Our next question comes from Mark Fitzgibbon with Piper Sandler.

Mark Fitzgibbon, Analyst

First question I had for you is, have multi-family and commercial real estate building owners given you any sense of what percentage of their tenants have paid rents during the month of April and what that's likely to look like in May?

Kenneth Mahon, President and CEO

Yes. When part of the request for forbearance is for them to provide us with a granular picture of the tenants that are paying their rents and what the level is. I mean, I would say the hub is around the 50% range, and Avi will agree with that. I think that's kind of where we are seeing tenants at this point.

Stuart Lubow, Chief Banking Officer

Yes. I think, generally speaking, on a lot of our modification requests are on smaller multifamily or mixed-use properties. And so what you're seeing typically is the first-floor commercial on the mixed-use is retail and those customers are not paying. And then it's between 30% and 50% on the residential units from what we're seeing at this point.

Mark Fitzgibbon, Analyst

And Stuart, that was for sort of April. I mean, do you think the numbers changed dramatically for May?

Stuart Lubow, Chief Banking Officer

In terms of non-payment from the end of March through yesterday, we're seeing those numbers fairly stable. And we're also seeing requests down over that period as well. Obviously, the first onslaught or flurry of those came in the first ten days of the month. So we haven't really seen a big change in terms of percentage non-payment in terms of tenancy.

Mark Fitzgibbon, Analyst

Okay. And then just curious on that $7.1 million relationship with the low LTV, what was the catalyst for that to go south?

Stuart Lubow, Chief Banking Officer

This is one individual. It's a four-unit co-op that is partially owner-occupied. The individual had his own liquidity issues. This has been going on for a bit of time. And, obviously, it started back on December 31st when payments stopped. So we had placed it on non-accrual and begun the process of selling the note because there was just so much value. The property is located on the upper east side. And even within this market, we were easily able to sell the note. And as Avi mentioned earlier, we expect that deal to be consummated by the end of the month.

Avinash Reddy, CFO

Mark, the other thing with that property is that, due to some of the disruption, we weren't able to sell it by March 31st. In the normal course of events, it wouldn't have shown up as a non-performing asset. It's delayed because people were unable to close the transaction or get the stuff in order.

Mark Fitzgibbon, Analyst

Avi, regarding CECL, do you have an idea of what the impact would have been if you had adopted it?

Avinash Reddy, CFO

When we provided a number, Mark, at the end of our 10-K at the start of the year, it was a range of negative 2% to plus 2% back then. CECL is obviously a life-of-loan concept. So it's probably going to be more than what it is right now. I think beyond that, it's hard to say what it is. I would say, no, we do. We did make adjustments to our qualitative factors this quarter. There is room to make more changes to that as we adjust over time. We're also going to look at these forbearance requests over time and kind of see how they perform and come up with it, but I think at this point, it's pretty hard because the assumptions are just so all over the place.

Operator, Operator

Our next question comes from Chris O'Connell with KBW.

Chris O'Connell, Analyst

Hi. It's Chris filling in for Collyn. So I just wanted to get into the overall business plan going forward and see if that's changed at all, just given the change in the rate environment and the overall credit environment at this point. I mean, is there any thought to keep a little bit more of the multifamily on the balance sheet or slow down some of this transition, given the relative attractiveness in terms of how much of the rate movement has brought the two sides of the balance sheet in the multifamily and the newer business banking yields closer together?

Kenneth Mahon, President and CEO

In the past, when asked about the percentage of multi-families in the portfolio after this process, we would say around 40%. Now, it has risen to just above 60%. Reducing it to 40% from our current position will take longer, as many borrowers are likely to stay put given that the rates are favorable for them. They won't benefit from switching to a lower rate at this time. There has been significant discipline regarding multi-pricing for various parties. As Avi mentioned earlier, we do not anticipate an increase in prepayments, which could slow down the process due to our inability to convert the core forward, but there remains opportunity. Even during such times, there is typically some property turnover, albeit at a slower pace moving forward.

Stuart Lubow, Chief Banking Officer

Yes. And there's still opportunity out there. We're obviously being cautious, and we're staying away from certain sectors in terms of non-multi-family relationships. I just want to mention also on the multi-family relationships that we are seeing some opportunities there relative to refinancing existing customers who are looking at this rate environment as an opportunity and looking at swaps. So what we're looking at is being able to take existing customers that have good credit, low LTVs, and good debt service coverage and convert those to a floating rate asset. We're inserting floors on those so that there's limited downside risk from an interest rate perspective to us. We get the fee upfront and are turning a traditional short-term fixed rate asset into a longer-term floating rate asset. So there is some opportunity there, and we're seeing quite a bit of opportunity going forward in the near term.

Chris O'Connell, Analyst

Got it. Thank you for that insight, Stu. So I guess, moving on to the PPP program. I think you guys said you had about $163 million so far. Is that inclusive of the second round? Or do you expect more to come in with the second round?

Stuart Lubow, Chief Banking Officer

No, we are currently in the second round. I've just received an update. We were prepared with applications in place and have approved nearly 700 applications so far. The amounts are smaller this time, but the fees will still be quite significant because we earn five and three points in processing fees on smaller transactions. I still anticipate that the numbers in round two will be considerable. We are still in the process.

Chris O'Connell, Analyst

Got it. Just to revisit the swap fees, are you still experiencing strong numbers as we approach the second quarter? Or do you anticipate some volatility? Considering the overall activity for the year, do you have any insights on how that level might normalize moving forward?

Stuart Lubow, Chief Banking Officer

I think right now, we're still seeing pretty strong levels of swap interest in our pipeline. And it really goes back to the comments I made before, somewhat on the multifamily and the real estate situation. Obviously, we're only dealing in real estate, and so there's more opportunity, given the current rate environment, for our customers to lock in longer-term fixed rates. Hence, and us turning those assets into floating rate assets, so I think there's still a lot of strength in that market today.

Chris O'Connell, Analyst

Got it. And then I appreciate the insights you provided around the NIM and the dynamics there and that all in core NIM is probably up in the second quarter. Just very broadly, I guess, given the dramatic shift in the rate environment, I mean at 12/31, kind of looking at 2020 as a whole, I think expectations were, given the balance sheet dynamics, NIM was going to go up during 2020. And it sounds like that's still the case, but given all the moving parts, just broadly, do you expect that to be more than what you were originally expecting at 12/31 or is it less at this point?

Avinash Reddy, CFO

That's a challenging question, but I would say the margin on the business banking portfolio is about 3.75, which is similar to last quarter. As we shift the portfolio slightly, we expect to see net interest margin expansion. Our cost of deposits is decreasing, and we now have access to the municipal market, which alleviates some of the pressure from retail funding. Overall, our portfolio is predominantly fixed-rate. The aim of the business model transformation was to achieve net interest margin growth. In the short term, around $1 billion in CDs are maturing this year, with a current cost of about 1.90%. We're retaining roughly 60% to 70% of that at a rate of around 1.20%. Therefore, we anticipate a continued increase in net interest margin. As Ken has mentioned previously, predicting quarterly changes can be difficult. However, we are focused on establishing a sustainably higher net interest margin in the long run. I would exclude the impact from PPP, which accounts for about five basis points, from the core margin going forward since it will only affect one quarter. Other than that, we should see the net interest margin gradually increase, which is the primary goal of our transformation.

Operator, Operator

Our next question will come from William Wallace with Raymond James.

William Wallace, Analyst

Thank you. Stu, as a quick follow-up. You said 700 applications on Part two, but you didn't give a dollar amount of those. Would you be willing to share that?

Stuart Lubow, Chief Banking Officer

Yes. At this point, I'd say it's between $70 million and $100 million.

William Wallace, Analyst

Okay. And then the fees on part one, those are all 1%? I think Avi mentioned 1% at some point during the call.

Stuart Lubow, Chief Banking Officer

No, no. The fees on that is a blend, so the $5 million of blend on $160 million. So you can do the math.

William Wallace, Analyst

Yes. Good. And then you would expect the weighted average fee percentage for part two to be higher because the loans are a lot smaller?

Leslie Veluswamy, Chief Accounting Officer

Correct.

William Wallace, Analyst

On the buyback, Avi, you didn't mention that it had been suspended. I believe you said you would monitor the markets. Can you repeat what you said and explain what's happening with the buyback? Did you suspend it at any point in March? Is it currently suspended? And what are your thoughts on when it might resume or if it will?

Avinash Reddy, CFO

Sure, sure. Thanks, William. So the comments were, in the first quarter, we had repurchased around $21 million worth of shares. We had raised $75 million from the preferred stock, as you know. So there was kind of $55 million of excess capital there that we were planning to replace the common equity with preferred equity. We were in the market in the month of April. We've actually purchased $10 million worth of shares in April at a price of $14.81. So it's actually below book value, and we still see some value over there. That said, right now, our tangible equity ratio is 9.4%. And I think we'd like to keep that ratio at 9.25% and above and just keep that in mind. I mean, a 9.25% tangible equity for a bank like us with a low LTV portfolio, we think it's pretty safe. We don't want to rush into anything, and we want to see how these conditions play out over time. But that's kind of our internal bogey that we don't want to dip below 9.25% on the tangible equity ratio. I mean with the PPP program, you may see for one quarter, the balance sheet balloon a little bit. But by and large, I think we'd like to keep that 9.25% tangible equity ratio intact at least.

William Wallace, Analyst

Thank you for that information; it's very helpful. Regarding Stu's comments about the opportunity to refinance some fixed-rate multifamily loans using swaps, will that contribute to generating the prepayment penalty income that you mentioned could decrease if people choose to wait until the refinance period concludes?

Avinash Reddy, CFO

I mean, on certain occasions, yes. I mean, it depends on if the customer wants to take a swap or not. In other occasions, these are just existing customers of ours elsewhere that want to come to us for a swap deal. So it depends on the sophistication of the borrower.

William Wallace, Analyst

Okay. And finally, regarding CECL, we understand that those who choose to delay will need to restate earnings to incorporate CECL upon adoption, implying that you would be running CECL at the same time. Are you indicating that due to the uncertain economic conditions, and since the estimates or inputs vary widely, you will have the opportunity to decide on adjustments when you restate, rather than implementing it concurrently now?

Avinash Reddy, CFO

Yes, we are running various models right now. The issue is that we've closed the books with the current conditions, so we haven't needed to report under CECL yet. You can't go back and alter past data. What I meant to say is that the assumptions are quite varied. By the end of the year, we will have more reliable assumptions to guide the market. For now, we are just reviewing some of these models.

William Wallace, Analyst

How aggressive do you feel like you were with the Q factors with the incurred loss model that you opted to use?

Avinash Reddy, CFO

There are a couple of factors to consider, specifically nine different elements that individuals analyze. We focused on the economic factors and elevated them to the highest range on our scale. Additionally, we raised the external factors to one of the top levels on our range. However, there is still room for further consideration as time progresses. As I mentioned earlier, we will be monitoring the conditions, and if any adjustments are necessary in the upcoming quarters, we will certainly implement them. This quarter, we allocated $8 million to reserves, taking a conservative approach. The situation is still developing, so we will need to see how things unfold over time. Referring back to the last crisis, our cumulative losses over a span of seven years amounted to 130 basis points over six years, and currently, 60% of our portfolio is still underwritten based on those standards. Therefore, there is potential for improvement in the long run. I believe that once everything stabilizes in about six to nine months, reserves will be set appropriately, and we will need to evaluate the actual loss content. For now, it’s somewhat of a theoretical situation.

Operator, Operator

This concludes our question-and-answer session. I would now like to turn the call back over to Kenneth Mahon for any closing remarks.

Kenneth Mahon, President and CEO

Thank you, operator. First, I want to take the opportunity to thank our staff and our IT department for enabling us to carry on the business as usual during the lockdown. It's nice to know the business continuity plan works. But most surprisingly, how quickly you're able to transition to work from home helped staff members learn how to transition back to work from the office again when the time comes. So thank you all for that. And thanks for joining us this morning. Have a good day.

Operator, Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.