Good day, and welcome to the F.N.B. Corporation First Quarter 2020 Quarterly Earnings Call. All participants will be in a listen-only mode. After today's presentation, there'll be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Matt Lazzaro. Please go ahead.

Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B Corporation and the report it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings release, related presentation materials and in our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until April 30th and the webcast link will be posted to the About Us, Investor Relations & Shareholder Services section of our corporate website. I'll now turn the call over to Vince Delie, Chairman, President and CEO.

Good morning and welcome to our earnings call. On today's call, I'd like to address three key topics. First, I'll begin by providing an update on how we are navigating our business through the COVID-19 pandemic while supporting our employees, customers, communities, and shareholders. Secondly, I'd like to briefly comment on a few points about our first quarter financial performance. And finally, I'd like to revisit several key strategic initiatives and programs. Our company's existing pandemic preparedness plan and ongoing pandemic exercises enabled F.N.B. to stay at the front of this escalating crisis. Dating back to 2018, our management team went through a pandemic simulation and collaborated with our business continuity team to develop a formal pandemic response plan. During this process, sustainability was thoroughly evaluated and ultimately formed the foundation of the comprehensive plan currently in place. Additionally, our ongoing commitment to invest in our digital channels and technology played a critical role in our ability to provide convenient banking options for our customers who were not able to leave their homes. Our investments in technology also enabled us to build and establish an automated process to handle nearly 15,000 business applications for the SBA Paycheck Protection Program in just one week's time. Our efforts resulted in approving and processing 75% of those applications in the first round of funding representing $2.1 billion in loans. We anticipate processing the remaining applications during the second round of funding. As I mentioned, when Phase one of F.N.B.’s technology initiative called clicks-to-bricks began. We had previously introduced online appointment setting and we are able to quickly make specialized COVID-19 contents and offerings available in our solution centers. We tapped into the strength of our established communication channels for both customers and employees, keeping both audiences informed of any updates. Our employees’ response to this crisis has been exceptional. Their professionalism, compassion, positive, and resilient attitudes have been a bright light in helping each other, our customers, and our communities while navigating these unprecedented times. Protecting the health, safety, and financial wellbeing of our employees remains critical as we find ways to address any impacts to their health or the health of their families. For example, F.N.B. provided our team with up to 15 days paid leave and also expanded our existing paid caregiver leave program. Additionally, to assist with any possible financial hardships resulting from the coronavirus, F.N.B. provided a special assistance payment to essential employees working on the frontline and in our operations areas who ensure that our customers continue to receive vital financial services. We also leveraged our IT infrastructure by making accommodations to give employees the ability to work remotely where appropriate. To-date we have approximately 2,200 colleagues working remotely, which represents about half of our workforce and largely non-retail positions. This capability also speaks to our investment in technology and IT infrastructure. As we focus on our communities, the F.N.B. foundation committed to provide $1 million in relief in response to COVID-19, benefiting food banks and providing essential medical supplies. Many of our employees began reaching out to our clients and our communities to provide support that our Pittsburgh headquarters F.N.B.’s vendor management team has been using our vetting process to assist Allegheny County and quickly researching new vendors, offering medical supplies and services to combat COVID-19. With respect to our retail branches, we have focused on drive-up services, enclosed our lobbies reverting to appointment-only practices which are supported by the appointment setting capability within our clicks-to-bricks platform. As you can imagine, the monumental commitment of our leadership team and employees to operate in this challenging environment required a sustained 24/7 effort. I'd like to commend our employees for the actions they've taken to execute and abide by our safety measures while continuing operations. With these key priorities and actions in place, let me pivot and comment briefly on our first quarter performance. Given all this happened in a noisy quarter, our underlying core performance remained solid. Our philosophy is to maintain our approach to risk management through varying economic cycles and serve as the primary capital provider to our clients. While F.N.B like many banks will be subject to a difficult economic environment, this philosophy and the actions we have taken to strengthen our balance sheet and reduce risk should position F.N.B. well as we move through the current crisis. Looking at the quarter’s results, GAAP EPS at $0.14 included $0.15 of bottom-line impact from significant items primarily related to COVID-19 and the adoption and implementation of CECL and the corresponding reserve build under these macroeconomic conditions. The top line results were solid as revenue increased to more than $300 million driven by strong loan and deposit growth and positive results across our fee-based businesses. Average commercial loans grew $225 million, or 6%, as we saw activity pick up in late March, particularly in C&I, with growth of 17%. I'll note there was limited impact to average balances from anticipated liquidity draws. Compared to the first quarter of 2019, average deposits increased 5% with growth in non-interest bearing deposits of 7% leading to an improved funding mix. The net interest margin expanded to 3.14% supported by strong loan growth, a seven basis point improvement in total cost of funds and higher accretion levels compared to the prior quarter. The fundamental trends in non-interest income were strong with capital markets revenues of $11 million setting another record in the first quarter. Insurance and mortgage banking income also had strong underlying performance. Due to the significant shift in the interest rate environment, our non-interest income includes $7.7 million of impairment on mortgage servicing rights, excluding changes in MSR valuation, mortgage banking income totaled $6.7 million up more than 50% from the first quarter of 2019 with significant pipelines moving forward. On a core basis, expenses remain stable compared to the fourth quarter and disciplined expense management will continue to be a top priority as we move beyond this crisis. Vince and Gary will provide more detail on the implementation of CECL and additional details on the financials and their remarks. With that, I'll turn the call over to Gary.

Thank you, Vince, and good morning, everyone. We closed out the first quarter of 2020 with our credit portfolio remaining in a satisfactory position in the midst of the current global challenges that have come as a result of COVID-19. The first quarter also marked the adoption of the CECL accounting standard, which is our communicated last quarter brings additional changes to the reporting of credit quality metrics. I will also review the steps we are taking to monitor the book and manage the emerging risks while continuing to meet the credit needs of our borrowers and the communities in which we operate. Let's now review our first quarter results. The level of delinquency at March 31 totaled 1.13%, up 19 basis points over the prior quarter and included a temporary uptick in early stage. A majority of which has already been brought current. NPLs and OREO totaled 64 basis points and nine basis point increase linked quarter. This increase does not reflect credit deterioration but rather changes in non-accrual reporting moving from the former PCI pool accounting to the new CECL standard. Net charge-offs remained low at $5.7 million for the quarter or 10 basis points annualized. Provision expense for the quarter totaled $48 million, of which $38 million relates to a reserve build for adverse macroeconomic conditions tied to COVID-19. The ending reserve stands at 1.44%, up 15 basis points compared to our day one CECL reserve of 1.29% providing NPL coverage of 256% at quarter end. It's worth noting that inclusive of unamortized loan discounts our period ending reserve represents 66% of our 2018 DFAST severely adverse scenario charge-offs. Our teams have been working tirelessly over the last several weeks meeting with borrowers, reviewing credits, tracking performance metrics, and administering government-backed lending programs as part of our response to the COVID-19 crisis. We entered the crisis with our credit portfolio in a position of strength due in large part to our core credit philosophies that I have discussed with you before, including consistent underwriting, proactive management of risk, attentive and aggressive workout, and a balanced asset mix spanning our entire footprint. We have taken many actions over the last several years to maintain a lower risk profile to position our book to withstand various economic cycles and adverse conditions similar to those we are currently experiencing. Over the last four years, we have sold approximately $700 million in loans to proactively de-risk the balance sheet. A large portion of which were higher risk acquired loans that we were able to move off the books at a financial benefit to the company. We've also historically limited our exposure to highly sensitive industries like travel and leisure, food and accommodation, and energy with exposure to these three industries remaining very low, totaling only 3.8% of our loan portfolio. As it relates to relief programs, we were able to quickly mobilize our credit teams to review and approve payment deferral plans for qualified borrowers, which to date, totals approximately 6% of our loan portfolio. As an SBA preferred lender, we have also been working diligently to support our small business borrowers in securing PPP financing that is fully backed by the SBA. The volume and key performance metrics for these relief programs are monitored daily through a specialized set of reports developed in response to COVID-19. Using our holistic credit systems, we have been tracking daily utilization rates, deferral activity, PPP loan volume, and borrower impact assessments, which are broken down further to allow us to monitor our credit portfolio by line of business, loan product, geography, and industry. In addition to expanded analytics, we have also leveraged our existing allowance and DFAST frameworks to conduct scenario analysis and stress testing including select loan portfolios. All of the actions taken will help us manage through the challenging conditions faced by the industry today. Above all, I would like to take a moment to recognize our team of bankers and credit support staff for all of their hard work and dedication to help meet the credit needs of our customers and communities during this challenging time. We'll continue to draw on the leadership and experience of our credit and banking teams to manage through this challenging environment as we have in past cycles. I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.

Thanks, Gary, and good morning, everyone. Today, I'll cover our results for the first quarter and provide an update on the current environment. As noted on Slide 9, first quarter GAAP EPS totaled $0.14 which includes $0.15 of significant items. The TCE ratio ended March at 7.36%, reflecting 16 basis points of CECL adoption impact and another 15 basis points for the $48 million of after-tax items. These significant items are listed in the reconciliation tables with the biggest piece being the COVID-19 related reserve build of $38 million during the first quarter. We used a pandemic driven recessionary scenario in evaluating the macroeconomic projections. Let's start with the review of the balance sheet on Slide 14. Linked-quarter average loan growth totaled $278 million or 5% annualized attributable to commercial growth of 6% and consumer growth of 2%. The average commercial growth includes less than one percentage point annualized for COVID-19 related increases in commercial line utilization that occurred in the month of March. Continuing on the balance sheet slide, on a linked-quarter basis, average deposits were relatively flat, as normal seasonal outflows impacted average balances. On a year-over-year basis, average deposits were up $1.2 billion or 5.2%. From an overall liquidity standpoint, we are comfortable with our current position, including the benefit of opportunistically accessing the debt capital markets to raise $300 million in holding company liquidity at very attractive spreads on February 20. We also executed a portion of our previously announced share repurchase program, buying back 2.4 million shares prior to March 12, representing 0.7% of our total shares outstanding. Turning to the income statement. On Slide 15, net interest income totaled $233 million, up $6.2 million or 2.7% from last quarter. The net interest margin expanded seven basis points to 3.14% driven by solid average loan growth, lower cost of funds and higher discount accretion levels now that we are in a CECL environment. During the first quarter, the higher discount accretion offset the pressure on variable rate loan yields given the significant decline in the short end of the curve. On the funding side, the total cost of funds decreased seven basis points to 1.01% from 1.08%, reflecting lower borrowing costs as well as a shift in funding mix and a 10 basis point reduction in the cost of interest-bearing deposits. Slide 16 and 17 provide details for non-interest income and expense. There continues to be strong performance in capital markets, mortgage banking, insurance and trust as well as for operating non-interest income as a whole. As Vince noted earlier, we are consistently receiving positive contributions from our fee-based businesses which diversifies our revenue base and helps to mitigate the impact of a volatile interest rate environment. Looking at the first quarter, non-interest income totaled $68.5 million, a 7.4% decrease from last quarter due mainly to the impact from the $7.7 million MSR impairment given the decline in interest rates. Excluding the impairment, non-interest income increased $2.2 million or 3% with capital markets posting a record of $11.1 million increasing 29% from the fourth quarter driven by strong origination volume. Turning to slide 17. Non-interest expense on a run rate basis remains stable compared to fourth quarter levels. This excludes $2 million of expenses associated with COVID-19, $8.3 million of branch consolidation costs and $5.6 million of expense related to changes in retirement provisions for new grants under our long-term incentive program that do not affect the total cost of the grants but do affect expense recognition timing. Bank shares and franchise taxes increased $1.7 million, reflecting the recognition of a $1.2 million state tax credit in the prior quarter and higher year-end 2019 bank capital levels. While other increases and decreases essentially offset each other. The efficiency ratio equaled 59% compared to 56%, as the other unusual or outsized items increased the current quarter's efficiency ratio by over three percentage points. Regarding guidance, the outlook we shared in January is no longer relevant given the impacts of the COVID-19 pandemic on the overall economy and the uncertainty around the length of time it takes to recover. However, in the spirit of transparency into our short-term forecasts, we are providing our current directional outlook for the second quarter of 2020 on Slide 18 based on what we know today, which is subject to change given the very fluid situation we are all managing through. We expect second quarter net interest income to decline mid single digits from first quarter levels as the net interest margin reflects a full quarter’s impact of the current interest rate levels. We expect average loan balances to be up mid-to-high single digits reflecting higher March 31 spot balances and $2.1 billion of PPP loans from the initial phase of the program that are expected to fund during the quarter. The second phase of the program would be additive to these figures. As we strive to accommodate all of our customers that want to participate. We expect expenses to be flat from the core level of $178 million this quarter. We expect our core fee trends to continue from solid levels in the first quarter with service charges expected to decline due to COVID-19 impacts on certain products and services. We expect the effective tax rate to be around 20%. With that, I will turn the call back to Vince.

Thanks, Vince. I'd like to touch on several initiatives that stand out as we move forward. In January, we launched our new interactive website designed with enhanced functionality that creates a one-stop shopping and interactive digital experience. Online appointment setting, a streamlined account opening process and deploying interactive teller machines throughout our footprint are just a few of the functionalities that our clicks-to-bricks digital strategy affords us, combined with our network of nearly 40 ITMs and 550 ATMs and our robust award-winning mobile application. We are well positioned to continue to provide service to our customers through multiple channels and meet their needs during this time of social distancing and economic challenges. We've invested heavily in our mobile and online platform, which is critical during a time of limited operations in the physical channels. Mobile deposits are up more than 40% in the last two weeks of March compared to the year-ago period and pre-COVID-19 first quarter levels. F.N.B will continue to build out our digital capabilities as previously planned. Protecting our customers and communities from economic disruption, F.N.B. was one of the first banks to develop a structured deferral program and announced several measures to support customers who may be enduring financial hardships and are directly impacted by COVID-19. Furthermore, we instituted an outreach program and activated an outbound calling initiative to contact thousands of customers across all business units during the crisis ensuring their needs were being met. We also continue to participate in the previously mentioned Paycheck Protection Program and evaluate other COVID-19 related Federal government relief programs to determine their suitability for our customers and communities. Regarding our outlook, liquidity, and overall capital position, we consistently run stress tests for a variety of economic situations including severely adverse scenarios that have economic conditions like current conditions. Under these scenarios, our capital ratios remain above the threshold and we are able to maintain appropriate liquidity levels, demonstrating our ability to continue to support all of our constituencies under stressful financial conditions. As we gain more clarity on this evolving health pandemic and the resulting challenging economic environment, we will continue to update you on key business drivers and expectations. In closing, I'd like to express how proud I am of our team's efforts during this very difficult time to identify new and creative ways to connect with those in need. This is an unprecedented time for our nation and our industry. Our mission has always been to improve the quality of life in the communities we serve. Now more than ever, we must work together to support those impacted by this public health crisis. As such, I want to again say thank you to our employees and all those serving on the frontline in our communities who are making a difference as we navigate through this together.

We will now begin the question-and-answer session. Our first question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

Good morning, guys.

Good morning, Jared.

Good morning, Jared.

First on the margin, walk us through some of the moving parts as you look out into the second quarter. I would think that with the strong growth in PPP that that would offset some of the pressure in the second quarter. I guess maybe on the PPP, are you accounting for those fees or do you anticipate to account for those fees through NII? And then what is the blended fee rate on the $2.1 billion that you have there?

Sure. I can make a few comments, Jared. So just kind of walking through the outlook for the net interest income going forward. As we've talked about in the past, the changes in one month LIBOR and prime have a significant impact on our net interest income and margin. If you look at where average LIBOR was for the last couple quarters and projection for this quarter, it was 1.84% in the fourth quarter, 1.68% in the first quarter and projected to be around 0.70% on average for the second quarter. We have $8.5 billion in LIBOR-based loans and another $2.9 billion in prime-based. So the projected move down obviously impacts those loan portfolios. Now offsetting the impact, we continue to reduce the rates on our interest-bearing deposit costs as we've talked about. We're projecting another 33 basis point reduction in the second quarter from first quarter levels and then we will have benefits as you mentioned from the PPP program as we fund this quarter. The 2.1 billion, you'll have, our average fee rate we're estimating is around 3% is how that would kind of calculate out when you go through the tiering. The spread is 65 basis points. So kind of an all-in margin is around two, two and a quarter for those loans. The way we're going to account for it, is you put them on the loan system, kind of loan by loan. So it's created in over two year period. And then once the loans are forgiven and paid off, you would bring in the remainder of the fees into interest income at that point in time. And then lastly, the last piece I would comment on too is just the accretion that we had this quarter running through and kind of a CECL environment versus the pre-CECL environment. So it was about $17 million this quarter, is up about $7 million from the fourth quarter. So that contributed to the first quarter. I don't expect it to be quite at that level in the second quarter, but I don’t know because it’s a function of prepayments and with under the CECL accounting, there are a lot more variables that get factored into that with pre-payments being a big contributor. So I still expect it to be a meaningful contributor in the second quarter, just not quite at that as high as that $17 million. If you looked at the last third and fourth quarter of last year, we were running 10 basis points to 12 basis points from accretion it’s probably a reasonable run rate subject to change based on what happens with prepayments during the quarter.

Hey, Jared. A couple of other points on the PPP program. Of the 15,000 applications that we brought in, we have kind of originated an average loan size of about $180,000. So we're on the lower end of the spectrum in terms of the size. We have more small businesses coming through that pipeline. We still have 25% that are still out there. That totals about $650 million that we processed and are ready to be processed in round two once the funds are available. And we would expect some additional fundings on top of that. Just in the spirit of transparency. We've also funded about 90% of the $2.1 billion already. So they're closed on the books.

On the loan growth this quarter did I hear you right? Did he say that there was only 1% of the growth was from increased line utilization or was that line utilization went up 1%?

No, it was 1% on average, right. So the line utilization occurred later in March that we would have had. So on average, the 1% of that 5% growth that I mentioned, the average balance growth.

Hey Jared, I can add to Vince’s comments there. Our usage was running around 42%, a little over 42% prior to the COVID impact. It peaked at just under 47%, as you know, businesses built some cash positions. We're already back down to 43.8%. So it's really getting close to back to a normalized level at this point.

But we really don't have a significant amount of large corporate exposure that essentially was funded up either to put liquidity on their balance sheet or to back up commercial paper offerings. We don't have a tremendous amount of that in our portfolio. So the liquidity draws were much lower than what others would have reported.

Okay, great. Thanks. And then just finally for me. The – sorry, under deferrals, you said that's 6% of total loans are in deferral. Are you seeing any concentration in either category of loan or geography?

Yes, right now, we're at about 5%. We expect with the pipeline to be at about 6% or just a touch over 6% based on the pipeline that we have. In terms of those deferrals, we're seeing those in the industries that you would expect, restaurant, travel, tourism. Those books are very small from our perspective as we've strategically, really not had a focus on lending into that space as we've talked in the past. So, it's really concentrated kind of there.

And if you look at the dispersion of deferrals, it's all – it’s pretty similar across the loan types in terms of percentage of the size of the portfolio, right? Gary? I mean it's ranging around 2.5% – 2% to 2.9% is pretty much where it is. So it's pretty consistent that we're not seeing a spike in one particular area.

Okay. All right. Thanks for the color. That’s helpful.

Yes. Thanks, Jared.

Our next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning.

Good morning, Frank.

Good morning.

Just curious on, if you can give any more detail, Gary around stress testing? If we sort of think about the baseline outlook, how loss expectations stack up to the last cycle to 2008, 2009 at the legacy bank. I guess every, excluding Florida is coming back then?

Yes, Frank, what I would say to you that we have been very proactive and strategically have de-risked the balance sheet over the last number of years like I mentioned earlier, and we're coming off some very solid charge off levels over the last 18 months. Naturally, the world has changed. We expect that consistency in the underwriting that we talk about with you all the time on the front end to play a meaningful role as we go forward here. In terms of charge-offs, all banks are going to experience credit deterioration as is typical in any downturn. And this one is rather severe at this point. In our last stress test, we remained well capitalized and expect to be able to fully execute our business plan from a charge off standpoint under those adverse scenarios. And to the extent that the forecasted economic conditions under the CECL methodology are worse than COVID-19 conditions are at this point that we used at March 27th date. So we're using some very current COVID information around our modeling. We would expect any potential reserve build to occur from normal levels based on movements from this point in time. So from a loss perspective, we're not going to forecast the losses as we go forward. But we do expect the portfolio to perform as well as possible through the cycle that we're dealing with right now based on the consistency that we've talked about in the underwriting.

And if you go to page 13 in the deck, Frank, there's a comparison on F.N.B.’s performance, our net charge offs over average loans back historically. Gary, maybe you could comment on that. I mean it does exclude Regency and the Florida portfolio that we divested.

Yes. So, back in the 2009 and 2010, great recession that we all experienced a number of years ago. On page 13, you see F.N.B.’s performance through that cycle. This is basically the core bank. At that point in time, it did exclude – it does exclude Florida and Regency as those portfolios are now no longer a part of the company's balance sheet. That consistent underwriting that we had in place back then remains today. And we do expect that that will allow us to perform better than the industry as a whole as this cycle moves through itself.

Okay. And then, just back to the margin and NII guide for 2Q Vince, I'm sorry, does that include any accretion in NII expectations? Or I don't know, have you left yourself enough, wide enough range there, I'm just curious?

No, it would include, my comment earlier about kind of 10 basis points to 12 basis points. If you look at the third and fourth quarter kind of run rates, which were pre-CECL. I would expect that to be kind of more normal run rate next quarter, right. Again, it's a function of prepayments, though. Repayments end up being high again. We would have more. So I think that's kind – it's kind of a reasonable number I would say Frank. And I truly won't know until you kind of quarter plays itself out. But there's definitely that kind of 10 to 12 in there for the second quarter. That's baked into our number. And then also I should clarify too, that we mentioned the $2.1 billion in the PPP activity, that's on the books for two months of the quarter. So you don't have to 2.1, you have 2/3 of that just from a modeling standpoint. And that's included in the number two into the target.

Okay. But I guess what wouldn't be included is if they are only on the books for two months. Well, I guess it's late in the course. So you don't have anything from the 3% being accelerated, because some of the stuff is going to be forgiven, nothing like that as in 2Q?

No. No. It's just – what it would include is normal accretion within that two-year timeframe. It's going to probably that forgiveness process probably going to get you through June 30. There's going to be…

I would expect it would get you beyond June 30, Frank. So you'll probably look at the third quarter event there starting with the forgiveness items to go through.

Just to circle back on the PPP income recognition. So I just want to better understand why would, I guess, be pushed out to 3Q? Because just from an accrual accounting perspective you did most of the activity here early in the second quarter and then there's the eight-week period, which gets us to sort of the beginning, the beginning weeks of June. And so I would think that you would have a sense for at least around one, what's been utilized by June and so what forgiven? And just so why wouldn’t you accrue for that in 2Q as opposed to 3Q?

Well, there's a process. They still have to put out the guidelines on the forgiveness as to how that process is going to work Brody. So you're really not going to know with certainty that every single loan will get that forgiveness. They are all 100% guaranteed. So from a risk standpoint you're covered there. But from a kind of loan accounting standpoint you can't really bring in the un-amortized or un-accreted fee until the loan is forgiven and paid off. So, since you don't know with certainty that all 100% of those are going to be forgiven when they go through the still to be defined SBA process, that's why. And we'll accrete some of it in, but the full amount really doesn't come in until the loan is truly paid off and then you would bring it in.

Yes, they're matching the fee up with the loan on a per loan basis, and then kind of baking it into the yield, I guess, so it will show up.

Right, okay got it. That's helpful.

Yes, we don't want to be capitalized into the loan, too. Right. Right. No, no, we don't.

Okay. And you mentioned the – the current reserve would be 66% of the 2018 DFAST, the severe loss scenario. So that that severe loss sort of fits to about $520 million just doing the math. Is that a one year loss scenario, or is that spread out over multiple years in that stress test?

So that's over nine quarters.

The way you do the stress test. So that's cumulative losses over a nine-quarter period.

So it sounds like just based on that and just given what the PPNR run rate is, that you wouldn't even need to dip into the reserve because PPNR would more than cover the losses. Is that fair to say?

I see what you're saying. Yes, well it depends on how…

How it plays out.

Yes. Like your PPNR levels are more than adequate at that level over that time to cover those losses, if you provision for it every quarter where you wouldn't necessarily need to dip into the reserve.

Yes, understand, very unlikely as you know, those numbers—

Got you. Okay, that's helpful.

Well, I appreciate it. Thank you, Brody.

Thank you.

The next question comes from Russell Gunther of D.A. Davidson. Please go ahead.

Hey, good morning guys. Just a couple of follow-ups.

Good morning Russell.

Good morning Gary. So for you, I appreciate all of the granularity, just wanted to circle back on the COVID-19 sensitive exposures you called out, restaurant, hotels, energy, anything you could share from an underwriting perspective as to where LTVs and debt service coverage stands? And then the follow-up would be you mentioned internal stress tests that you are performing. Just curious as to type of loss rates you would be assuming within those three at-risk buckets as well.

Yes, in terms of the industries from an LTV standpoint, generally speaking, you're going to see a 70%, low 70% range around LTVs around those spaces. And that's going to run fairly consistent across our portfolio. What was the second piece of the question Russell?

Just any detail you could share, Gary, in terms of the internal stress testing that you mentioned in your comments and assumed loss rates within some of the more at-risk portfolios.

Okay, Vince is going to cover that.

Yes, I would just say Russell, I mean that we wanted to put that 66% out there. So, just to restate what was in Gary's note. So if you include the unamortized loan discounts, our period end reserve at March 31, 66% of the severely adverse charge offs over nine quarters from the last stress test that we did. Just to put it in perspective that it's a significant reserve against those charge offs. And we haven't really disclosed all the different pieces of the different loss rates. But what I can tell you is we hit it very hard in that severely adverse scenario and have every time we've done it.

I appreciate it guys. Thank you for taking my questions.

Thank you, Russell.

Thank you.

Our next question comes from Collyn Gilbert with KBW. Please go ahead.

Thanks. Good morning everyone.

Good morning.

Good morning, Collyn.

Good morning, Collyn.

Just to stick to the credit discussion for a second, so if we kind of assume Gary you mentioned kind of 6% of – you are seeing in terms of deferrals right now, I guess that's like $1.4 billion. Do you know how much of those deferrals would be included in that? I guess roughly $3.5 billion of sort of COVID sensitive loans that you classify in Slide 11?

Yes, in terms of the deferred loans in the retail IRE book it's a total of $470 million, the food and accommodation is about $75 million and let me find the lodging. The lodging is about $175 million. And retail right at about $145 million.

Okay. And then the rest is just I'm guessing just smaller granular numbers.

That’s correct Collyn.

Okay. All right, that's helpful. And then, just wanted to clarify just on the NIM, just to make sure I've got these numbers right. So the actual accretion dollar amount that you guys saw this quarter was what, if we compare that to like the $9.6 million you guys saw in fourth quarter?

Yes, it was $17 million, $17.1 million.

Okay. Okay, so then on a core NIM basis, is it – I guess that would imply maybe that a core NIM fell about four bps in the first quarter. Is that right core NIM would settle out at like 90?

Yes, if the excluded that, I mean it’s kind of all in there, right as we go forward into CECL environment. So the $17 million, I'm trying to think of – hang on a second. Yes, I guess that's about…

Yes, it was $17 million, $17.1 million. Okay, so then on a core NIM basis, I guess that would imply maybe that a core NIM fell about four bps in the first quarter. Is that right? Core NIM would settle out at like 90? Yes, if we exclude that, I mean it’s kind of all in there, right as we go forward into the CECL environment. So the $17 million, I'm trying to think of – hang on a second. Yes, I guess that's about…

That's about like three – what is it about five to six basis points would be $8.8 million is three basis points of margin. So yes, it's around five basis points or so.

Okay, got it. Okay. And then just lastly on kind of the loan growth discussion in trying to reconcile Gary kind of your comment about the pipeline and you still have some customer activities still flowing through. But yet obviously there's a lot of activity that also has come to kind of a screeching halt. But then just thinking about kind of, I guess capital markets, it sounds like you're – I mean you obviously had a great quarter in capital markets this quarter. And it sounds like the expectation there based on your guidance is that that – those levels should hold into this quarter. So I'm just trying to understand I guess you're seeing there's a visible pipeline there that would cause you to say that or just trying to reconcile maybe the thought that activity would start to slow pretty meaningfully there. So just trying to understand why you still have – go ahead.

Yes, I think you have to look at fee income in total, Collyn, because the mortgage bank is – their pipeline is huge. And they took the big impairment. I don't anticipate – I'm not sure what's going to happen with interest rates.

Right.

I don't want to forecast. But I would expect that their fee income in the next quarter would be significantly higher. And then you have the SBA business outside of the PPP program that had a pretty solid pipeline going into this situation. And then there's a lot of activity. The first two months of March were pretty darn good from an origination perspective for us across the geographies. So I would expect that that capital markets activity would continue into next quarter. I can't predict at what level, but I would expect it to continue because there are a number of companies that would like to fix their debt and there are several deals that we were working through, from a syndication's perspective. So, again there's a lot of uncertainty. We're trying to do the best we can with the forecasting, but we were looking pretty good going into this. We'll see what happens as it all shakes out.

Yes, that's great. Okay that’s all I had thanks guys.

Thank you very much.

Thanks.

Our next question comes from Brody Preston with Stephens Inc. Please go ahead.

Good morning everyone. How are you?

Good morning.

Good morning Brody. Good. How are you?

Yes, good. I just want to circle back on the PPP income recognition. So I just want to better understand why would, I guess, be pushed out to 3Q? Because just from an accrual accounting perspective you did most of the activity here early in the second quarter and then there's the eight-week period, which gets us to sort of the beginning, the beginning weeks of June. And so I would think that you would have a sense for at least around one, what's been utilized by June and so what forgiven? And just so why wouldn’t you accrue for that in 2Q as opposed to 3Q?

Well, there's a process. They still have to put out the guidelines on the forgiveness as to how that process is going to work Brody. So you're really not going to know with certainty that every single loan will get that forgiveness. They are all 100% guaranteed. So from a risk standpoint you're covered there. But from a kind of loan accounting standpoint you can't really bring in the un-amortized or un-accreted fee until the loan is forgiven and paid off. So, since you don't know with certainty that all 100% of those are going to be forgiven when they go through the still to be defined SBA process, that's why. And we'll accrete some of it in, but the full amount really doesn't come in until the loan is truly paid off and then you would bring it in.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, first of all, I would like to thank everybody for the thoughtful questions. I hope you found the information valuable. We tried to provide additional information on the credit portfolio so that everybody could have a better understanding of how we ran our model, or what methodology we were using to run our model, where our exposures could potentially be. I think we're in a pretty good place. And I appreciate everybody's thoughtful analysis and questions. And I just hope that everybody stays safe. And we'll look to see you next time.

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