Dime Community Bancshares, Inc. (DCOM) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Dime Community Bancshares First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. 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.

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 done with a monoline multifamily script. Multi-families were a much maligned asset class in the years leading up to my induction as CEO, especially with regard to 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 taking hold now 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 is dependent on multifamily housing as it was four years ago, but it still represents almost 2/3 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 in the primary form of housing. A large percentage of our borrowers have remained refund 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 in every regard, 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 mind 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 doing and after the [John Lindsey Adera]. In order to believe that the current housing situation ends badly, you'd have to believe that New York City jobs and economy will not recover.It was a time when housing sporting were 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 active and lockdown. So for now, we see our attack for the benefit of both landlords and tenants is to be supported.As of April 21, we had approved forbearance request 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 banks was 55%. You 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 questions 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 multi-family 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'll see when I'll be discussing 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 can't 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 of 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, it 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. SBA should get a lot of kudos for the work that they've done, I mean, for an organization that not used to originating this level of loan base so, really, our experience has been very good with them.The pandemic has made it clear to everyone just how important small businesses are to ensure full employment and to 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 short span of time, Dime has now one of the most productive SBA operations in the New York area. And 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 bankwide priority. Many of our staff worked around the clock and over weekend to ensure we kept credit flowing to businesses.As of April 21, we registered $163 million of loans with SBA. Total fee income from processing these PP loans is expected to be around $5 million. Of the applications we registered with the FDA, 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 to them in a time of need.As you'll see from our results this quarter, we're on a path of creating structurally higher net interest margin, plus other improved profitability metrics. Our pre-tax pre-provision for the first quarter was -- 2020 was $18.7 million, representing a 20% year-over-year growth.As I've 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 well course deposits raise -- that we raise increases the franchise value of the company.Second metric is increasing low-cost business deposits. Total commercial bank deposits from our business banking division, plus our legacy multi-family division increased by almost 24% from approximately $109 million on a year-over-year basis. Commercial deposits now comprise 13.4% of total deposits as 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 NIM and has contributed to six consecutive quarters of core NIM expansion.Our fourth targeted metric is the lowering of the commercial real estate concentration ratio. We've now reduced that ratio to 50% -- to 589% at March 31, 2020. And as many of you may remember, Dime was well over 900% only a few years ago. Lastly, non-spread revenue, we grew annual non-spread revenue, excluding security gains and losses and a onetime BOLI claim by approximately 65% on a year-over-year basis.In summary, we continue to make quantifiable progress on 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 deguiding 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 course of deposit perspective. Now our course of deposits is lower than many of those senior competitors, with the decline in cost of deposits witnessed in the first quarter of 2020, and we expect to be at the meeting once we -- 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.

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 December 31, 2020. The deform 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 as it relates to the economic variables at the end of March, which continued into April and actually still remains to this day. We believe that prudent to wait until there was 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 that is premature given the uncertainty in the forecast assumptions. As the year progresses, we believe there'll be more consensus on the economic 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 after which 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 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 NIM 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 and 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 it 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 Cristo Commercial 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 up year-over-year, 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 as it relates to 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 of 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 Instructions]. Our first question today from David Bishop with D.A. Davidson.

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

Yes, I mean that's an accounting question we're working through at this point. We're going to do with 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.

Okay, great. So -- and then I guess just looking more toward overall NIM outlook. I know that things will be likely choppy over the next couple of quarters as we have an increase in average earning assets from the PPP loans coming on and then a reversal likely in, I think, 3Q, so I guess taking kind of isolating the Fed rate movements over the last few months. How do you see the kind of cost of deposits reacting? Do you think we have that built in or do we have some further RIM to move over the next quarter?

Sure. I'll take that in steps. So I think on the PPP program, there's around $150 million to $160 million that we've -- that we're going to be funding. And if you assume that you put on that particular program at 1% and a 50 basis point spread that by itself, if it stays in the margin if it's in the full quarters were on our balance sheet of $6 billion, that's probably five basis points negative on the NIM. But again, as you said, that's a short-term impact. In terms of the cost of deposits, there is further room over there. As I mentioned, on the CD side, there's a significant amount of CDs coming up, and we continue to reduce deposit costs.So there's definitely more room over there, at least for the next quarter or so, we would say. We continue to look at our money marketplace. We have the opportunity to raise municipal deposits now. So on a marginal basis; we're able to raise municipal deposits in the 50 basis points to 60 basis points at this point, which is lower than our overall cost of funds. So it actually helps us reduce a lot of the other deposit categories that we have.In terms of the floating rate aspect of the balance sheet on the C&I side, there's around a $150 million of loans that still -- that's floating without flows. So to the extent LIBOR goes down, uptime goes down even further, there's some opportunity for that going down. But I'd say, by and large, the loan yields, obviously, they changed in the month of March. So you're going to see a bit of a decline in the next quarter, but the deposit cost decline should offset that. So we should see a little bit of margin -- core margin expansion in the quarter ahead as well. It's tough to predict how much.

Our next question comes from Mark Fitzgibbon with Piper Sandler.

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?

Yes. When part of the request for forbearance is for them to give us a granular picture of the tenants that are paying what the level is. I mean, you see a lot of -- I would say hub is around the 50% range, Avi will agree with that. I think that's kind of where -- what we're seeing on a as...

Yes. I think, generally speaking, on a lot of our modification requests are on smaller multi-family 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.

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

In terms of -- from the end of March through yesterday, we're seeing those numbers fairly stable. And we're seeing requests down over that period as well. Obviously, the first on slide or flurry of those came in the first 10 days of the month. So we haven't really seen a big change in terms of percentage nonpayment in terms of tenancy.

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

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 in December 31st when the payments stopped. So we had put it on nonaccrual and begun the process of selling a no because there was just so much value. The properties up on the upper east side. And even within this market, we were easily able to sell the node. And as Avi mentioned earlier, we're going to -- that deal is going to consummate by the end of the month.

Mark, the other thing with that property is just because of some of the disruption, we weren't able to sell it by 31st March. In the normal course of events, it won't have shown up as an NPA. It's not delayed because people were not able to go and close the transaction or get the stuff in order, so.

And Avi, as it relates to CECL, do you have a sense -- and I know you're still working through a lot of the numbers, but have a sense what the impact of CECL would have been if you had adopted it?

When we put out a number, Mark, at the end of -- in our 10-K at the start of the year, it was a range of negative 2% to plus 2% back then. I mean, CECL, obviously, it's 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.

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

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

Well, in the past, when we've gotten that question about where do you see multi-families as a percentage of portfolio when we get through this process? We used to answer about 40% or so. Now it's a little bit above 60%. I think moving it down to 40% from where we sit today, is going to take a little bit longer because a lot of those borrowers will just want to sit tight. The rates are really in a good range for them. So they're not going to gain anything by moving and get it going to a lower rate at this point. There's been a lot of discipline around multi pricing for a bunch of people.So as Avi said earlier, we're not going -- we don't expect to see as many prepayments coming out of this as we would. That's the only thing that would slow it down because it's just our inability to convert the core forward, but there's still opportunity. I mean, there's always some -- even in times like this, there's always some turnover of properties. Just more slowly going forward.

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. 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. And so what we're looking at is being able to take existing customers that have good credit, good low LTVs, good debt service coverage and convert those to a floating rate asset. And we are inserting floors on those so that there's limited downside risk in terms of interest rate risks to us. We get the fee upfront and 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.

Got it. Thank you for that color 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?

No. We have -- we're obviously in the midst of the second round. I mean, at this point, I've just gotten hot off the press on update. We were prepared. We had applications in place. So we've approved nearly 700 applications at this point. The dollars are much smaller this time around. But the fees will be still fairly significant because obviously, on a smaller transaction, we're getting five and three point in terms of processing fees. So I still think they'll be fairly substantial in terms of the number in round two. Obviously, we're still in the midst.

Got it. And then just to circle back on the fees. In terms of the swap fees, I mean, are you still seeing those strong going into the second quarter here? Or is there -- it's going to be pretty volatile, but just given the outlook of activity for the year, is there a thought to where that level could kind of normalize going forward?

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

Got it. And then I appreciate the color you guys gave around the NIM and the dynamics there and that all in core NIM, 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, the NIM was going to go up during 2020. And it sounds like that's still the expectation. But given all the moving parts, just broadly, do you think -- up, I guess, more than what you were originally expecting at 12/31 or less at this point?

Yes, Chris, that's a hard question to answer, but I think the way I would think about it is the margin on the business banking portfolio is around 3.75. It was pretty similar last quarter, too. So as Ken said, as we transition the portfolio a little bit more to that, there's obviously going to be NIM expansion from that. Our cost of deposits continues to go down. We have access to the municipal market as well at this point, which takes away some of the pressure from some of the retail funding that we see. And -- but by and large, it's a fixed rate portfolio that we have. And the purpose of the business model transformation was for NIM expansion. I think the biggest piece here in the near-term is that CDs over the course of the year are close to $1 billion. And right now, the cost on those is around 190, and we're probably retaining, call it, 60% to 70% of that at a rate of, let's say, 120 at this point. So we'd expect the NIM to continue going up. I think, as Ken has mentioned in the past, on a linked-quarter basis, on the next quarter basis, it's tough to predict this stuff. But we're just trying to create a structurally higher NIM over your going forward. Obviously, the PPP, the five basis points hit from that, I would exclude that from the core margin going forward, because that's going to be a one-quarter-type impact. But absent that, we should continue to see the NIM grinding higher here. I mean, that's the whole purpose of the transformation.

[Operator Instructions]. Our next question will come from William Wallace with Raymond James.

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?

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

Okay.

So the dollars are much lower in this round.

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

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

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?

Correct.

Yes. Okay. On the buyback, Avi, you didn't say that it had been suspended. I believe you said that you would monitor markets or something. Can you repeat what you said and then maybe explain specifically what's going on with the buyback? Did you suspend it at any point in March? Is it suspended now? And what are your thoughts on when it would start back up or if --

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 -- at some point in time, 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 9.25% and above and just keep that in mind. I mean, 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.

Okay. Thank you. Okay. I appreciate that. That's helpful. And then on the comments that Stu made about the opportunity to refinance some of these fixed rate multifamily loans using swaps, will that -- does that help generate the prepayment penalty income that you suggested could slow if people decide to wait until the refinance period ends?

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.

Okay. Okay. And then, lastly, on CECL, it's our understanding that those that opt to delay are going to have to restate earnings to include CECL when you adopt it, which would suggest that you would be running CECL concurrently are you -- you're saying that because of the uncertainty of the economic situation, and I believe you said the estimates or inputs are all over the place. I mean, is that to say that when you go back to restate, you can decide what adjustments to input at that point in time rather than running it concurrently today?

Yes. I mean, we're running different models at this point in time. The issue is you're not -- we've closed the books right now with the conditions at hand. So we've not had to report under CECL right now. You can't go back in time and change stuff over time. What I was trying to say is the assumptions are all over the place. And by the end of the year, we'll have better assumptions to provide guidance to the Street in terms of what it would be. But in the near term, we're just walking through some of these models over here.

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

So we -- there's a couple of factors. There's nine different factors that people look at. Ones that we took up were the economic factors. So we moved them to the highest range and the scale -- in the existing scale that we had. And then there's another factor for external factors, and we took that up to one of the highest scales in the range that we have. But there's obviously room to think through these as time goes by. So as I mentioned earlier in the call, we're going to monitor conditions and to the extent it may require adjustments in the quarters ahead, we will, of course, make them. I mean, we think -- look, I mean we put in $8 million in the reserve this quarter. It was a conservative view. The conditions are unfolding right now. So we'll just have to see as time goes along. I think as Ken mentioned, you go back to the last crisis and over a seven-year timeframe, our cumulative losses were 130 basis points, I mean, over six years, right? And right now, 60% of the portfolio is still underwritten according to those standards. So I get there's room all over time. I think once this all settles out six to nine months from now, everybody's reserve will be appropriate and then we'll have to actually see what type of loss content there is. Right now, it's a bit of a theoretical exercise.

That's understood. And then last question. I believe you said the Business Banking almost 375 in the first quarter. It sounded like you were suggesting that's going to be the same in the second quarter, but I would have thought there would have been a lot more floating rate loans in there with Fed at zero and LIBOR down that would be lower?

Well, we -- what I was saying that was in the previous quarter, we were above 375, so this would have been in Q4. So we did have the rate drop back in December and then obviously the drops in March. But at the same time, the cost of deposits was also down for that particular segment, right? So we had a cost of deposits around 80 basis points there. And right now, we've taken it down to around 50. And there's a little bit more room for that going forward as well. So yes. I mean the margin on that business again, the overall point is that it's significantly above the existing margin. And if you put on a margin of 350, 375 on a margin of 250 on the overall bank, it's going to help with the overall margin going forward.

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

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, help to staff -- the members 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.

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