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Sterling Bancorp, Inc. (Southfield, MI) (NASDAQ:SBT)
Q1 2020 Earnings Call
Apr 28, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Sterling Bancorp, 1Q 2020 Conference Call and Webcast. [Operator Instructions]. At this time, I'd like to turn the conference over to Jack Kopnisky. Please go ahead, sir.

Jack L. Kopnisky -- President and Chief Executive Officer

Good morning everyone, and welcome to our first quarter 2020 earnings call. Joining me on the call is Luis Massiani, our Chief Financial Officer and Bank President; and Rob Rowe, our Chief Credit Officer.

On our website, you will find the slides we are referencing in our presentation. Before we review the first quarter performance, we want to start by recognizing that these are extremely challenging and difficult times for all of us, especially those on the frontlines of this crisis, and those that have been affected by COVID-19. We have been very focused on aggressively and proactively supporting our colleagues, clients, and communities in these uncertain times. Our priorities have been to ensure our colleagues are safe and secure while providing uninterrupted value-added service to our clients.

Given our well-developed information technology platform, at the onset of the pandemic, we were able to quickly transition roughly two-thirds of our employees to work from home. We have ensured our financial center colleagues are safe and are operating with reduced hours and have maintained 85% of the offices opened. Though, we are adjusting closures as safety dictates and have changed hours and access protocol across the institution.

We have provided additional compensation and adjusted benefits to all employees to support their families and communities during this difficult time. We have proactively reached out to our commercial and consumer clients to support them as they navigate this challenging time. For consumer mortgage clients, we are providing 90-day grace period relief as well as waiving certain fees. For commercial clients, we are working to extend interest and principal payments as needed.

In total, we are providing relief on $1 billion of loan balances or approximately 5% of the loan portfolio. We are providing the support necessary for the SBA's paycheck protection program, and have approximately $650 million in applications and funding working through the process. We intend to participate in the Main Street lending program in conjunction with the Federal Reserve.

We have focused our philanthropic action on communities that are most vulnerable and hardest hit by providing funding to 14 food banks in our markets, and providing technology resources to schools in low and moderate income areas. I'm extremely proud of our colleagues as they have worked exhaustively to support our clients, communities, and each other during this crisis.

Moving to the financials for the quarter, on an adjusted basis, we incurred a net loss available to common shareholders of $3 million, and an adjusted loss per share of $0.02. Our results were most impacted by the elevated Day 2 provision, which was made more severe by the pandemic driven disruption to our economy.

We adopted CECL on January 1st, 2020 and the Day 1 adjustment increased our allowance for credit losses by $91 million. Given an increasingly uncertain outlook for the economy beginning in March, we added $138 million to our provision for credit losses at the end of the quarter, bringing our allowance for credit losses to 1.50% of total loans.

Our base case for CECL utilizes a blend of Moody's scenarios reflecting moderate and severe recessions and anticipates GDP will shrink by an annualized rate of 18% in the second quarter, not returning to prior levels of production until 2022. We believe our allowance reflects the current economic outlook as of today.

We adopted the regulatory relief that provides for two-year delay and subsequent three year phase in for regulatory capital impacts of CECL. The credit exposures we are focusing on, given the disruption of the economy are on page 15. First, we have a commercial real estate exposure primarily to hotels in the Greater New York Metro area, that have national flags, and are supported by long-term liquid operators in the amount of $395 million.

These properties have a loan to value of 54% and strong historic cash flows. We also have a small real estate secured portfolio of restaurants with $48 million outstandings. The hospitality commercial real estate represents 2% of the overall portfolio, and we have been working with these clients to modify a $110 million in balances or 25% of our portfolio.

Secondly, our commercial real estate book has exposure to retail operators in metropolitan New York, in the amount of $1.3 billion. The majority of these properties are anchored by grocery, drug and other essential tenants [Phonetic] and have a weighted average loan to value of 50%. There are no regional malls or lifestyle centers in this portfolio, and these properties have been operating over the past month given the essential nature of the anchors. Retail commercial real estate represents 6.1% of our loan portfolio and has traditionally had strong debt service coverage.

We are working with clients to modify $78 million in balances or 6% of the portfolio. Third, our equipment finance and ABL portfolios have $654 million in outstandings to the transportation industry. The majority of these loans are to national shippers. Of the total balance, we maintain a $122 million to smaller localized specialty transportation businesses such as towing services that have an average outstanding of $83,000.

Transportation exposure represents 2.3% of total loans, and we are working to modify $90 million in balances or 14% of this portfolio. Fourth, our Franchise Finance business is primarily to the larger, quick service, national franchisees that have continued to operate during the pandemic. The loans are secured by real estate and equipment, and we are modifying $77 million in loan outstandings. And finally, we have very low exposure of $64 million to the oil and gas sector through our equipment finance and ABL portfolios.

Turning to our performance for the quarter, on an adjusted pre-tax, pre-provision, net revenue basis, we grew by 3% over the first quarter 2019. Recall, our slower pace of growth over the past year reflects our shift out of commoditized asset classes into targeted relationship oriented portfolios. This transition is essentially complete. From a balance sheet perspective, commercial loan growth for the quarter was strong.

Our commercial loan portfolio grew $412 million over the fourth quarter of 2019, or 8.7% on an annualized basis. The portfolio increased 13.7% from the same period last year. As we adjust our capital allocation, we will only fund loan relationships that yield accretive risk adjusted returns. Credit spreads and yields for new loan originations and commercial finance, asset based lending and certain sectors in commercial real estate are not currently achieving our targeted return hurdles. Given the historically low rate environment, we will be very selective in what opportunities we fund and we trade superior return characteristics for growth.

We estimate net commercial loan growth to be in the $500 million to $1 billion range for the full year. The Main Street Federal Reserve program should enhance the viability of middle market commercial borrowers. The first quarter traditionally has a lower growth rate in core deposits, given the annual run-off in deposits resulting from tax collections and subsequent usage by municipal clients.

Total deposits increased approximately 1% over the linked quarter, and 6% year over year. Since mid-March to the present, we have seen increased deposit flows as clients have moved funds from the market into safe bank havens. We will also continue to expand our funding channels and have been encouraged by the growth in relationship balances, and digital deposits. We estimate deposit balances will match loan growth over the course of the year. Given this historically low Fed funds rate and dramatic downward shift in the yield curve, the net interest margin declined in the quarter.

Loan yields declined by 37 basis points over the linked-quarter due to a decrease in accretion income and as short-term rates declined significantly. Deposit costs declined 8 basis points and interest bearing liabilities declined 9 basis points. Based on the actions we have taken to date, we expect the total cost of funding to decline 10 basis points to 15 basis points in each of the next three quarters to end the year, down to 35 basis points to 45 basis points.

This should allow us to stabilize the margin throughout the year as our focus is to match asset yield declines with funding cost decreases. In addition to deposit repricing, we expect to reduce our cost of wholesale funds by 25 basis points per quarter through the balance of the year and we have $170 million in senior debt -- in senior notes maturing in June that we pre-funded with our sub debt issuance in December.

Core fee income for the quarter was strong, increasing 19% over the linked quarter, driven primarily by loan fees and commissions, including operating lease income of $4 million acquired in our portfolio purchase that closed in the fourth quarter. Expense levels were essentially flat to the prior quarter. Our efficiency level continues to be among the best of peer banks. It is most essential to provide added support to our colleagues and clients during this difficult time, which may result in a temporary increase in costs. However, we will continue to focus on controlling expenses, where we can and making investments to ensure superior efficiency in the long term.

Net charge-offs declined $7 million or 13 basis points of loans. Delinquency levels were similar to this quarter one year ago, but nonperforming loans increased by $82 million driven by credits in commercial real estate, ABL and equipment finance. We were more aggressive in moving credits to substantial substandard and NPLs given the environment and potential risks in the future.

We have provided significant detail on our CRE, ADC, and ABL and equipment finance portfolios on pages 16 and 17, which represents the majority of our Criticized loans. We are comfortable with these portfolios given diverse industry exposure, strong levels of collateralization, and individually underwritten borrower relationships.

Capital and liquidity relationships -- capital and liquidity ratios remained strong. Tangible common equity to tangible assets was 8.74% and Tier 1 leverage ratios were 9.41% at the holding company and 10% at the bank. We have targeted a minimum of TCE to TA range at 8% to 8.74%, and Tier 1 leverage at the holding company of 9.25%. Even with this meaningful increase in the allowance for loan losses, capital levels were similar to last quarter and will build throughout the year.

During the quarter, we repurchased 4.9 million shares, although we have decided to temporarily suspend our share repurchase until the long-term impact of the pandemic is known. Our liquidity levels are extremely strong with core low-cost deposit funding, untapped FHLB borrowings, Federal Reserve liquidity measures, bank lines of credit, and wholesale funding of nearly $9 billion. In addition, we have minimal exposure to unsecured committed lines of credit.

To summarize the quarter and provide our thinking for the balance of 2020 for what we know today, I want to make the following points. We are strong, diversified, and profitable. On a pre-tax, pre-provision basis for the quarter, return on assets was 170 basis points, and return on tangible equity was 20%. We have a diverse mix of credit portfolios to ensure that we are not highly concentrated in any one area, and that we have multiple options to allocate capital based on market dynamics. We have robust levels of capital, a diverse mix of liquidity sources, and substantial earnings which will continue in this cycle.

We have historically generated net capital through earnings of approximately $350 million after dividends with strong returns and we have accreted significant tangible book value over the past nine years. We will adjust our models amid the challenges facing us with thoughtful, proactive strategic actions to ensure a continued level of high performance. We expect to grow tangible book value in 2020 by high single digits.

Our leadership team has been through many cycles over the past 30 years and we will successfully navigate through this one. It's one of the reasons why we decided to go to 150 basis points on the allowance because we -- our view is that, given the challenges in the market, we would prefer to provide a significant buffer up front to deal with the pandemic as time goes on.

Finally, I want to recognize our amazing colleagues and clients. Our colleagues have adjusted to this challenge very quickly and find ways to support each other, add value, and provide great service to our clients. Our clients have been terrific partners in working through the unknowns in our economy. This is the time when you need us most and we will deliver for them. Our relationship-based team model has enabled us to comprehensively be a hands-on advisor and confidant. I am very confident that we will collectively find a way to defeat this challenge we are all fighting, and create an economy that thrives and prospers in the future.

Now, let's open up the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. We can now take our first question, it comes from Casey Haire of Jefferies. Your line is open. Please go ahead.

Casey Haire -- Jefferies -- Analyst

Yeah, thanks, good morning guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Good morning.

Casey Haire -- Jefferies -- Analyst

Maybe just to start off on the credit migration, it sounded like you guys were a little bit more aggressive given the environment. It was a decent amount though. Could you just provide a little color on what you were seeing in asset-based lending, equipment finance and the construction portfolio? And then secondarily was this -- were these from acquired portfolios?

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. So let me start off and then I'll turn it over to Rob on this one. Given what we see in the future, we were very aggressive about moving credits through this cycle. So whether it's a substandard or NPLs, probably half of what we moved through the cycle, we wouldn't have moved in a normal time, but we decided to be aggressive on this -- in this process. The other thing I would tell you is, all of the credits that we -- on the NPL side were increased, end up being secured credits. We have very good collateral on all of them. The loss given default cushion of just the ones we moved in is extremely low. We don't believe we are going to lose much of anything on these if they go through to a default scenario. So with that, I'll turn it over to Rob to maybe add some more color to this.

Robert Rowe -- Chief Credit Officer

In terms of most of the NPA increase, they were not from the acquired portfolio. There was a little bit of that. It was transportation-related. And then in terms of more commentary, the construction and we did highlight it as ADC, but it really is -- it a deal that has already been constructed. It's in lease-up now. The lease-up was slower than expected, although reasonable. Now with COVID though, that is going to change the dynamics in that particular deal, which was a $30 million deal. And so that's why we moved that into non-performing. The bulk of them are really diffused in terms of industry, so we don't want anybody nor ourselves to extrapolate from anything in particular. [Indecipherable] about it.

Casey Haire -- Jefferies -- Analyst

Okay, great. And just switching over to the loan growth guide and NIM guide. So it sounds like there is not that much on the loan growth side that's hitting your hurdles. So, what -- I guess what kind of categories are hitting your risk-return hurdles and then where are new money yields on those categories versus the 4.47% in the fourth quarter and the first quarter here as well and then versus the origination yield of 3.82%?

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Yeah. So it's about. So, Casey it's -- on the new origination front yields, high threes to low fours is what we're trying to target, and we think that there are opportunities like that out there across the entirety of our portfolios. But you have to be selective in identifying those. So it's not that we're necessarily earmarking one loan portfolio over another, to -- for growth. It's just that we're going to be selectively growing across the board all the portfolios whenever we find opportunities from a credit spread perspective, in particular, are over 250 basis points to 275 basis points or better than that.

So we don't want to fall into the trap of absolute yields. We are very mindful and essentially continue to maintain a discipline around origination yields and particularly related to credit spreads and when the credit spreads make sense regardless of the asset class. And in many respects, a little bit agnostic [Phonetic] to the industry as well. We will continue to execute on that.

The reason for essentially lowering that guide is the fact that yes, we anticipate that, in order to get the right types of deals and that selectivity that we're talking about, we have to step off the accelerator that are a little bit there. We need to focus on, again just places where we're going to find full relationships that are going to be overall more profitable over time. There is also a component that Jack alluded to of a -- substantial amount of our borrowing, of our client borrowing clients are going to be eligible for various programs, Main Street being one of them, so it's uncertain and unclear to say exactly how those programs are going to continue to work and in particular, how Main Street is going to work.

But we do envision that some portion of originations that we would have had over the course of the year, are going to be offset by some of these programs as we continue to move forward. So there's going to be more details on that, we think shortly, and we will be able to get our heads around a little bit more of how those are going to impact the pipeline of business.

On the NIM front, we are -- there's the positive and the negatives. You obviously saw pretty substantial earning asset yield compression in the first quarter that's driven by the $6.5 billion to $7 billion of floating-rate loans that we have. Those loans are largely concentrated in four business lines, which are traditional C&I, asset-based lending, warehouse lending, and then about $1.5 billion to $2 billion of loan swap transactions that we have that are in our commercial real estate and multifamily portfolios.

That $6.5 billion was -- so, it felt a lot of pain in the first quarter, there is going to be some additional earning asset pressures as LIBOR continues to converge downward toward debt funds, as we've started to see that in the early part of the second quarter. With that said, that being the negative, the positive being that we've also -- this has also given us the opportunity to reprice pretty meaningfully across the board everything that we do on a funding liability side.

So we provided in the slide deck there what we consider to be a pretty good guide of how we see that cost of funds evolving, because when you think about the difference between the weighted average cost of deposits and the weighted average cost of funding liabilities for the first quarter relative to where deposits and funding liabilities exited the quarter on a spot basis at 3/31, you're getting about a 17 basis points to 20 basis points pickup in funding cost reduction.

You're going to continue to see that over the second quarter because you have three things that will continue to happen. First and foremost, our CD book is going to continue to reprice down. We have another $1 billion of just over $1 billion of CDs that reprices in the second quarter. The difference between the weighted average yield or the weighted average cost from those CDs and where they are going to reprice today is about 100 basis points to 125 basis points depending on the term of the CD.

Second is that FHLB advances of -- we have about $500 million of FHLB advances that mature in the second quarter. There is another $1 billion that mature in the second half of this year. The funding pick up on FHLB across the board, if you essentially take the rate curves today relative to the weighted average cost of the FHLB cost is about 150 basis points on average.

And the third component is that we have been very aggressive in starting to cut down particularly in the month of March, we started to cut down pretty meaningfully all consumer and commercial deposit client rates as well. We are not done with that yet, and you're going to continue to see that happening over the course of the second quarter and over the second half of the year.

So our weighted average cost of funds of total funding liabilities, which was 98 basis points in the first quarter on a weighted average basis. We exited the quarter at 81 basis points and we think that, that -- and we're targeting that, that 81 basis points from here to the end of the year is going to get down to closer to 35 basis points to 40 basis points.

So there is a meaningful repricing of about 40 basis points to 45 basis points that will happen on our $26 billion of funding liabilities. And that is what we think is going to create some pretty good NIM stability as we move through the rest of the year.

Casey Haire -- Jefferies -- Analyst

Great, thanks, Luis. Just one more, the TCE ratio, down to 8%, 8.75%. It doesn't sound like there's a lot of balance sheet growth coming. So I don't -- it doesn't seem like there's a lot of erosion from this 8.74% level. Why sort of lower that a little bit? Is it just about to the PPP participation?

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Yeah. It's not really a lower, if you go back to probably the last two years of earnings calls, we have been essentially guiding to -- we're comfortable at running the Company at that 8% to 8.75% TCE ratio, based on where we stand today from a reserving, so with the $326 million of allowances, the rest of the capital ratios that we have, when you combine allowance plus tangible capital, we have plenty of capital relative to what we have established or the hurdles that we can run the Company at.

So if anything, this isn't just about pointing to the fact that the tangible common or the TCE ratio decreases. It's actually the fact that we think that we still are in a pretty kind of robust excess capital position relative to where we would be comfortable running the Company, because we had to get there from a growth perspective, when we decided to turn back the share buybacks as the environment becomes clearer. We continue to have excess capital, where we would be comfortable running the Company at a little ratio than where we are today.

[Speech Overlap]. So it's not about decreasing the ratio per se, because of losses.

Robert Rowe -- Chief Credit Officer

Yeah. I'm just going to emphasize the same point because we have a lot of the write-ups that misinterpret. We're not intending to move it to 8% to 8.75%, we're just saying that, that is the minimum level that we're comfortable with. If anything, capital will build in our forecast through the year. So we want to create capital flexibility as time goes on.

Casey Haire -- Jefferies -- Analyst

Yeah. Sounded that way, I just wanted to clarify. Thank you.

Jack L. Kopnisky -- President and Chief Executive Officer

Thank you.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Thanks, Casey.

Operator

Thank you. We can now move along to our next question. It comes from Alex Twerdahl of Piper Sandler. Your line is open. Please go ahead.

Alexander Twerdahl -- Piper Sandler -- Analyst

Good morning, guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Good morning, Alex. They didn't butcher your name too badly, right?

Alexander Twerdahl -- Piper Sandler -- Analyst

Twerdahl?

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah.

Alexander Twerdahl -- Piper Sandler -- Analyst

I'm only talking about 25 minutes of dial-in. So I'm happy to be here. It seems to me that you guys, going back to the reserve here, it seems to me that you guys took about a severe scenario as you could justify trying to put as much weight as you could on that scenario, and then trying to front-load as much of the pain as possible that potentially could result from this whole crisis. So is that a fair characterization of the way you guys thought about the reserving here?

Jack L. Kopnisky -- President and Chief Executive Officer

That is a fair characterization. The one caveat being that there -- as everybody has said, and we think so as well, there is still uncertainty out there, right. So we have always taken the approach that we think it's better to kind of hit these things head-on and get them behind you as quickly as you possibly can. That's why we didn't take advantage of determining that things were COVID related to essentially not migrate credit and so forth through the classification rate.

At the end of the day, we are very confident in the composition of the book of business and we have always been very cognizant of the fact that when you go into environments like this, you are going to have some additional charge-off content. We have been pretty -- we know which ones are the portfolios that are going to have some of that loss content, those are portfolios that have now been in our view for the most part, very fully reserved.

And we are -- not to say that we're not going to have incremental reserving requirements going forward, because this will depend on what happens from a macro environment and how those forecasts -- continued forecast assumptions change. But we have based our forecast and we based our modeling off of mid-April data, which I do think is slightly different to what others have done that we're -- again, just from a timing perspective, there was a use of a forecast scenario that were just earlier on.

So we do envision it and we do think and believe that we have essentially gotten ahead of it a little bit more, just because we use more up-to-date information where again we were a little bit more draconian in the assumptions that we were making from all things to macro.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

The other reason why we're comfortable with what we've done on that basis, if you step back, and this is one of the points I have not done a good enough job getting across. One, we are a secured lender. So we have two big portfolios. One is a commercial real estate portfolio. That's about a 48% loan to value in total, and was a debt service coverage of 1.68% and we have a C&I portfolio that is 97% secured within margin.

So we don't have things like many committed unsecured lines of credit. So we had a de minimus amount of draws on lines of credit, because all of our lines of credit, the majority of our lines of credits are secured and they are based on the assets that secure them as to the advance rates. We don't have very much leveraged lending. We have some degree of three times and four times leverage deals, but we have a very small amount. And frankly, we have virtually no snicks, so the shared national credit. So we tend to be a bread and butter, although diverse, bread and butter, secured less leverage type of portfolio.

With that said, as I mentioned in the comments, all of us around the table have been around this -- challenges like this in the past, not exactly this one, but similar economic shocks to the system. And our experience says, take them as much medicine as you can upfront and hopefully it gets better going forward than you estimated.

But in case it doesn't then, you have to deal with that. So we tried to use experience and history to look at this thing and as Luis said, the benefit we have by announcing earnings now is, we've been able to see how the models work through this. So the numbers we're using are very up to date and very direct. So, thank you.

Alexander Twerdahl -- Piper Sandler -- Analyst

Great. And then just as I think about the 1.50% [Phonetic] reserves today and then just knowing that so many of your portfolios were acquired and marked on acquisition. Is there a way to kind of characterize the reserve and so to say if you would include those loan marks on there that instead of being a 1.50% [Phonetic], it would go to X?

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah, about another 30 basis points, so we get closer to about 1.75% to 1.80% [Phonetic].

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay, very helpful. And then just as you think about loan growth going forward and you cut the guidance justifiably for 2020, and I sort of -- as I think about that, it stacks up versus the expense targets, expense targets hadn't really changed. However, I know that a good chunk of the expenses were supposed to be branch rationalizations, etc., kind of wheeling into business development on the loan growth side, and if we might have less business development on the loan growth side, shouldn't the expenses come down a little bit more than what's in the guidance?

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. The way we've looked at that Alex, and frankly because it's the right moral and ethical thing to do, we decided to create full employment this quarter. So we would normally cut costs in personnel. I'm not going to cut people in this quarter in the middle of a pandemic. When we get through this quarter, hopefully the economy turns around, and we will adjust our expense models into the third quarter and the fourth quarter along the way.

So it's one of the things that I think you have like a little bit of a moral imperative to take care of your folks during this period of time, but your assumption about expense reductions and by the nature of what's happening in the economies, there are going to be businesses that we need to put more people again, some businesses that we have to take less people from.

So that's how we see it. So [Technical Issues] will improve through the year. We're just -- we're doing in our view the right thing in this particular year-to-date and then in this particular quarter. So that's how we view this.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

I think, if anything, not that [Indecipherable] there's any positive that will come out of the current situation that we're all going through, but one of the positives has been, if anything, we're actually more bullish longer-term on how many financial centers and how many kind of locations you actually need to continue to operate and provide services to the same level and value-add that we have been providing the clients through this.

So we've actually been very encouraged by the fact that we've seen a substantial amount of migration from folks that traditionally use the financial centers to going under our online systems and using our online banking tools. We've seen a substantial -- we have seen, you know, it's becoming clearer as to where the opportunities are, and continuing to rationalize the entirety of financial center footprint.

So as Jack alluded to, we've made a decision that it's not that we're putting it on -- it's not that we're not going to continue to rationalize expenses, but we're putting that on hold for a short period of time as we continue to work through this. Longer-term, if anything, we're going to actually be substantially more bullish than what we have been up until this point in continuing to reduce the number of locations and continuing to shift how we essentially staff all our businesses, and particularly our consumer banks, to make it substantially more efficient than what it has been.

And this has proven to us that we can actually be even more aggressive than what we've been up to this point. So long-term, it's actually a great opportunity.

Alexander Twerdahl -- Piper Sandler -- Analyst

Thank you for taking my questions.

Jack L. Kopnisky -- President and Chief Executive Officer

Got it.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We can now move along to our next question, it's from Steven Duong of RBC Capital Markets. Your line is open. Please go ahead.

Steven Duong -- RBC Capital Markets -- Analyst

Hey, good morning guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Good morning, Steven.

Steven Duong -- RBC Capital Markets -- Analyst

Good morning. Have you guys run internal stress tests recently, and if so, do you mind giving us what your loss rates were on those?

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. So the detail on loss rates we're not going to provide, Steven, but we have run a stress test. We've run severe recession scenarios and not necessarily OCC or DFAST driven scenarios, because we don't think that those necessarily kind of really apply in this instance. But we have run stress scenarios that have severe recessionary environments, even more, severe than what we are modeling out. And we are very confident and comfortable that we continue to maintain substantial buffers throughout the well-capitalized thresholds across the board.

So one of the positive things about being, having the types of PPNR profitability that we have and not being a big dividend payer is the fact that we have a substantial amount of internally generated capital that if you shut off or decrease the trajectory of balance sheet growth, we get to a place where we accrete tangible capital ratio very, very quickly.

So even under severe recessionary scenarios that we're running, we are very confident that we can continue to run at levels that are well above well-capitalized thresholds and well above our internal capital requirements as well.

Steven Duong -- RBC Capital Markets -- Analyst

Great. And just curious like in these stress scenarios when you're looking at your PPNR, generally is there a sense of how much of the decline, peak to trough your PPNR goes to? And is that primarily from just purely from a rate shock or is it affected by delinquencies as well?

Jack L. Kopnisky -- President and Chief Executive Officer

It's a combination of both. It's mostly rate shock and it's mostly -- [Technical Issues] sorry, we put the phone line on mute there for a second, so we are, it's primarily from rate shocks and as you can imagine, if you continue to have a prolonged environment where the rate curve like the one that we're in right now where we really have no steepness to it, that's where the biggest amount of pressure comes from. And that would be the biggest part of the kind of severe stress scenario that we continue to model. To the extent that we don't get any steepness to the curve, you are going to be in a place where over some period of time, we continue to feel some margin pressure.

And if you extend that out, for a period of two or three kind of like a two or three-year window, you do get a place for PPNR decreases by about 15% to 20%.

Steven Duong -- RBC Capital Markets -- Analyst

15% to 20%, is that right?

Jack L. Kopnisky -- President and Chief Executive Officer

Correct.

Steven Duong -- RBC Capital Markets -- Analyst

Okay.

Jack L. Kopnisky -- President and Chief Executive Officer

Now that's [Speech Overlap]. So to be clear, that's not what we envision is going to happen. So to be clear on that. But that is when you essentially think about what are the pressure points that we have in our business model in a severe recession scenario or in severe stress scenario is the fact that we do generate about 85% to 90% of our revenue of a spread lending in an environment which we continue to have a kind of lower forever type of rate dynamic with five year and 10-year treasury that continue to be at somewhere between 45 basis points to 65 basis points.

That would cause a little bit of pain as we continue to move through in an environment like that. That's not what we're modeling, but that would be the -- would be true, a real stress scenario for us.

Steven Duong -- RBC Capital Markets -- Analyst

Right. And I guess so, is that 15% to 20%, a decent amount that's from a rate shock and we've kind of like gone through a rate shock.

Jack L. Kopnisky -- President and Chief Executive Officer

That's right.

Steven Duong -- RBC Capital Markets -- Analyst

So that's kind of baked in already, is that fair to say?

Jack L. Kopnisky -- President and Chief Executive Officer

It's baked in. So it's definitely baked in on the floating-rate loans. No doubt. Now, you also, the one part that's not baked in, that is and that's why I said, it's over a two-year or three-year window is a fact that, new origination yields for example in the first quarter were just under 385 basis points, right? So we today, as the book of business, the existing book of business rolls off, there would be some continued margin compression from the perspective of that same type of asset class, not having -- it might have a bigger credit spread, but it doesn't have necessarily a higher absolute yield than where we were before.

So there is always shifts on that too Steven, so it's not easy. Though it assumes static portfolio, it doesn't assume that we really move balance sheet compositions on both the asset and liability side. So it is a difficult question to answer. But that there is no doubt that, that type of environment would continue to cause some pressure from a NIM compression perspective, but there are various levers that we could pull that would essentially alleviate some of that longer-term that are not factored into that 15% to 20% that I mentioned to you long-term.

Steven Duong -- RBC Capital Markets -- Analyst

All right. Great. Appreciate it. That's it from me and just good luck with everything. Thanks, guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Great.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We can now move along to our next question. It's from Matthew Breese of Stephens, Inc. Please go ahead.

Matt Breese -- Stephens, Inc. -- Analyst

Hey, good morning guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Good morning, Matt.

Matt Breese -- Stephens, Inc. -- Analyst

Going back to the substandard loan migration. Can you just talk about the process for identifying loans that were or were not impacted by COVID-19 here, I mean even the construction loan that Rob mentioned, it sounded like you may -- you could have interpreted that as COVID impacted. Why didn't you decide to use some of the latitudes you've been given to put that loan into forbearance -- into the forbearance bucket versus NPL?

And the reason I ask is, is I think the interpretation of the deterioration isn't necessarily aggressive versus non-aggressive, as you put it, but that has occurred pre-crisis, pre-COVID.

Jack L. Kopnisky -- President and Chief Executive Officer

That's correct. I agree with what you are saying from pre versus post. With that said, Matt, this is -- we are -- whatever we're going through a modification process or a forbearance process, we are not just taking the pre versus post and saying and drawing a fine line of saying that that's the defining factor as to why something becomes a migrated credit or not. We are looking at every one of these things individually. We're essentially getting updated financial information for our -- for commercial real estate and multifamily deals.

We're getting everything updated with rent rolls and tax returns and everything that you need to be able to make a decision. For commercial type credits we're essentially looking at models and updated projections and understanding what are the true underlying dynamics of the business. Just because we're not taking the approach of saying, just because the business was current prior to pre-COVID, it means that this is a forbearance loan that doesn't migrate through [Phonetic] credit as well.

We're looking at the long-term impact of COVID on that business in the long-term, what we consider to be the long-term viability of that business. The reason for migrating those credits and putting them into the buckets that we did as the fact that those are not credits that we have determined that we're going to run through and we're going to manage as if they were a workout credit and we're essentially going to focus on executing our collateral position and getting our money back as quickly as we possibly can.

Don't want to sound cold-hearted and that we're not working with borrowers, because we obviously are. But that doesn't mean that we're essentially just giving product launch to our commercial banking teams and our credit folks essentially to work with everybody. We're making individual decisions and whenever it makes sense to provide forbearance, we will. And we will work with borrowers to help them through this and provide some relief.

But at the same time when we identify situations that need to essentially continue to run their course from a credit perspective, we will absolutely do that. And that's what we've decided to do with those three credits. We could have -- it was four credit sorry, we could have taken the position where those credits were essentially saying, don't migrate in this quarter, we decided not.

Matt Breese -- Stephens, Inc. -- Analyst

Understood. Okay. You're one of the few banks to use the April economic forecast in your provisioning. As you went through the quarter and Moody's provided updates, how much of a difference in the outcome in the provision was there from using the late March data to the mid-April data.

Jack L. Kopnisky -- President and Chief Executive Officer

It increased by about 35% -- about 35%. And one of the challenging factors that we went through and all banks that use Moody's went through this and the fact that for a period of time, Moody's was essentially producing a new forecast scenario every day, all right. So we started running models in mid-March with some impact where you had started to see already that macro assumptions were changing and therefore there were some change in the Day 2 day reserves already. Those started -- the Moody's models kept on getting more so over the course of the end of March and then into April. And we finally decided to put a kind of a line in the sand, and kind of a stake in the ground on April 11th, and say that's the scenario that we're going with.

And subsequent to that, Moody just came out with some additional scenarios where you continue to see some deterioration, but it's much more the level and grade of decay in the forecast assumptions that actually has subsided somewhat relative to the scenario that we use. So we purposefully decided to wait as long as we could to essentially get the most updated information. We ran multiple scenarios. We ran the scenarios that included the pre-draconian impacts of COVID. And we'll continue to manage them as we go over the course of the year.

Matt Breese -- Stephens, Inc. -- Analyst

Understood. Okay. And then just one more on the reserve. As I look at the breakdown on page 7 of the different buckets, one thing that stood out to me was that your traditional C&I bucket is about a 129% reserve versus CRE, which is 172%. I would think it would be the opposite. Could you just help me better understand why the C&I portfolio was at a lower reserve level than your commercial real estate?

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

So look at the historical loss content that we've had in C&I, if you take out medallions which are embedded in that traditional C&I bucket, we have essentially had zero losses in traditional C&I. That is bread and butter, commercial banking, the input from commercial banking that all of our relationship managers and commercial bankers do. Those are long-tenured relationships with the bank, where we have had a history of, we have very, very strong cash flow dynamics for underlying borrowers there, and that is not a portfolio that even under severe stress doesn't get through this.

And so, a little bit of what Jack was talking about before, we don't have in C&I a whole lot of unsecured exposures. So all of that is driven for the most part off a borrowing base. The substantial chunk of that borrowing base being based on advance rates off of accounts receivable. So the nature of that C&I book is maybe not -- is unsecured cash will be funding, which is the reason as to where the loss content has been. Again if you set aside some specific verticals like medallions, the lost comp in that book had been very, very strong throughout. And that's reflected in the long term model.

On the CRE side, you have, listen, that is one of the portfolios where you would have essentially seen the numbers that we were running in mid-March. That's one of the portfolios where the -- the increase of 35% that I alluded to as forecast assumptions changed, that's one of the portfolios that was most severely impacted by that.

So in the loss history that we have had in commercial real estate, has been very strong throughout all of the legacy provident bank as well as all of the banks that we have merged with and acquired over time, have always been very good commercial real estate lenders. The history and track record of CRE performance has been very, very good. That is a portfolio that under more -- under changing macro assumptions that is a portfolio that saw a vast majority of that shift or increase to 35% as the macroeconomic assumptions indicated in the various modeling scenarios that we put forward.

Matt Breese -- Stephens, Inc. -- Analyst

Very good. Last one from me, just on the accounts receivable business, can you just talk about what you're seeing in terms of aging of the receivables? Is there any deterioration there? And I know you have a look at the books every couple of weeks, are you seeing folks starting to stretch a little bit and not pay on time?

Jack L. Kopnisky -- President and Chief Executive Officer

So I'll answer the first and I'll turn it over to Rob. I think that you're -- so those that we have not seen major -- we've not seen migration and deterioration trends from an aging perspective. What we have seen and we are going to see over the course of the second quarter and into the third quarter is that the balances are going to decrease pretty substantially.

So both from an end of period perspective as well as an average balance perspective, if you look at our payroll finance and our factoring businesses today, there has been a decrease of about 15% to 20% in the balances of -- or volume of receivables that are being factored. Not surprisingly, when the economy has shut down and there isn't kind of the turnover of new goods and services being produced, you're going to have less invoices to provide financing on.

So you're starting to see a volume decrease that's been pretty substantial. We haven't yet seen a significant aging of the delinquencies and you'll see that we actually have had up until this point, no modification requests in factoring our payroll financials until this point, because we have been able to continue to collect on accounts receivable. Rob?

Robert Rowe -- Chief Credit Officer

Yeah. There are a few accounts in the factoring business that -- that as you would imagine, we are watching very, very closely and we are working with our clients where we are risk-sharing with them more than we would have done in the past on specific retailer needs. Our total exposure on the factoring side that we're watching exceedingly closely is around $5 million of exposure, but nonetheless, it is exposure.

Matt Breese -- Stephens, Inc. -- Analyst

Understood. Great. That's all I had. Thanks, guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Thanks, Matt.

Operator

Thank you. [Operator Instructions]. We can now move along to our next question, it comes from Collyn Gilbert of KBW. Your line is open. Please go ahead.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks, good morning guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Good morning, Collyn.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Luis, if I could just start on the reserve and CECL adoption, Moody's adoption. So did you, in your Moody's input, did you use then their April baseline outlook, is that right?

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Yes.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Okay. And then, so just within that, right. So I know that their April baseline was weaker than what their March baseline was, but they did have other more severe scenarios in your outlook within that. But just again, I recognize -- April 11, but I guess where I'm going with this is the economics. What we see in 2Q, I think it's going to reflect the even greater deterioration and even what perhaps are April baseline set or the qualitative and quantitative parts of that. I mean, is it reasonable to think that your reserves could even increase even more in 2Q, than what you guys posted in the first quarter?

Jack L. Kopnisky -- President and Chief Executive Officer

What's reasonable for one person might not be reasonable for another. So that's an impossible question for me to answer as what's reasonable, but is there something else [Speech Overlap]

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Well let me -- Sorry, I was just going to say, just based on your -- the way you guys have looked at it relative to where [Speech Overlap] you're going to look at it.

Jack L. Kopnisky -- President and Chief Executive Officer

So that's a better way to phrase the question. So I agree with you there. So, how we're thinking about it. So in addition to the quarter [Phonetic] -- remember that CECL has two components to it, it has a quantitative aspect and it has a qualitative aspect. So the models, the Moody's models and we're using it for CECL, it gives you a quantitative approach to estimating loss factors.

On top of that, we put some pretty significant qualitative factors on specific portfolios where we find the -- what we see today there is going to be a potential risk for incremental loss content. So the numbers that we're coming up with there are not reflective of what the model say is the loss content that -- it's not what the Moody's models are saying the loss content is. That allowance is higher than what Moody's is telling us.

And the reason that it's higher is because of exactly what you're suggesting which is, there is greater uncertainty out there. Could there be incremental reserves? Yeah, absolutely. There is a lot of uncertainty as to how this is going to play out. With that said, the loss -- and the portfolios that we have earmarked as potential kind of the places where we're seeing kind of the issues, right which is in the small balance equipment finance on the asset-based lending front. We've taken Moody's plus a substantial qualitative factor approach to get to the loss rates that we have, or to get to the loss coverage and the allowance coverage ratios that we have in those portfolios.

So we've tried to get ahead of that. We like very much, for example, as I pointed to the small business and we put this out in a couple of slides. The net carrying balance of the small business portfolio today, in fact, our performing and non-performing transaction is just over 70% of par value. So we've gotten ahead of a lot of this. Not to say that there won't be more reserves. But we are taking a pretty conservative view from a quantitative and qualitative perspective to get to the numbers that we've got to on the reserve.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Okay. And then I know you sort of alluded to this, but I don't know if you could just breakdown where in terms of the dollar of deferrals, the $1.1 billion of modifications that you made versus the increase in classified and then the PPP program, how much is their overlap there that you're seeing with some modification requests that were also in your criticized [Speech Overlap].

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. Modification requests that were in the criticized. So let me answer a little bit differently. So as you would imagine, 50% of the portfolios in commercial real estate was multifamily. So the larger percentage of the $1 billion of the mods that we have, that we have done up until this point reside in the commercial real estate/multifamily portfolio. So that's the first one.

The second one is -- or the second one behind it is on the C&I side, our franchise finance business is reported inside of C&I and that franchise finance business which is largely quick-service restaurants has also, we have been pretty vocal in saying this for quite some time, which is, those are all concepts that are going to make their way through this. And they are going to get back to more solid footing. But there is going to be a substantial amount of that portfolio that is going to have to be modified to provide some working capital really through this.

So the two components of the portfolio that have -- let's say 50% of the loan modification, a little bit over 50%, so about 60% of loan modifications today are commercial real estate multifamily and then the franchise finance business. On the construction side, which was one of the -- you know, in our ADC book with one of the criticized classified migrations we've had, we did not have -- we've had no loan modifications there.

And then on the public finance warehouse lending factoring and payroll financing, we've had no modifications either. The rest of the portfolios are pretty evenly split between equipment finance and on the asset-based lending side. They are pretty evenly split from the perspective of modification request that has not yet been -- not necessarily have been approved, but what had been requested at this point.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Okay. That's helpful, thanks. And just on the construction site, can you just remind us what percent of your construction book is in the sort of the housing tax credit business?

Jack L. Kopnisky -- President and Chief Executive Officer

30%.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

30%?

Jack L. Kopnisky -- President and Chief Executive Officer

30%. Yeah, 30% in the affordable housing where we own -- in those projects, we essentially are our own take out because we essentially end up investing in the low income housing tax credit programs longer term. So running the risk that we're running there is that for whatever reason the developer of the project doesn't perform, and all that happens is the developer gets taken out and somebody else comes in to finish the projects and the perspective of converting that construction loan into a different type of -- into the equity investment, there really isn't much risk. And so we keep very close tabs on how those developers are performing.

But that's not a -- we're not concerned with in any way, shape or form of that percent -- or that component of the book. The vast majority of the rest of the book is just multifamily construction, which is in footprint or in the New York, New Jersey, Connecticut area with very strong LTVs and it represents less than 2% of the portfolio. So we're monitoring closely, but we're not construction, aside from that one transaction that we have taken a conservative view on, that we have migrated into NPL status, we're not concerned about the construction book at all.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Okay, great. And then just on the NIM. How -- well, let me start by saying, I feel like the core NIM outlook is pretty optimistic. And I hear what you're saying on the funding side, obviously, you have control over that. But then I guess just thinking on the asset side, right, I mean the LIBOR drop is going to be felt more harshly in the second quarter than it was in the first quarter. What kind of gives you confidence in that core NIM guide? And then part two of that question is also, how do you see I mean, I guess, the assumption is that these classified substandard loans are really actually not going to get into any kind of like non-accrual status that will end up impacting the NIM as well, I'm guessing, or just if you could kind of speak to that core NIM guide.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Yeah. So we're going to see -- well, you're going to continue to see some credit migration -- so credit migration that you're going to continue to see near-term, so call it second quarter and third quarter is going to be largely driven by the small balance equipment finance portfolio.

So that component of $120 million bucks of loans, that will continue to migrate through because those are businesses a little bit of what we're talking about in when Matt Breese asked the question of how we are individually looking at these credits when we essentially decide to make it forbearance or remodification. Those are credits, but again, it's not to say that we're not going to work with borrowers or provide relief, because we are. But those are credits or the viability of the business and sustainability of that business long term is going to be in substantially greater doubt than in pretty much every other portfolio that we are working on right now.

So we should not see the vast majority of the payments you are going to see from the migration of credits that will then go into non-accrual that would impact our yields, which was pretty significant in March. That has for the most part happened already because all of those credits, the four credit that we're talking about, which continue to be performing today, actually have already impacted our -- we've already reversed, we put them on non-accrual and reversed out an interest income in the quarter, which had a little bit of an impact on what earning asset yields were in the month of March.

Why are we confident? I think there is two reasons. I think the first and foremost, we are still in the very early stages and early innings of repricing the entirety of the funding stack, as we talked about. So that is, you have not seen the impact of that on our financials yet. The difference between the weighted average cost of funds for the quarter relative to where we exited the quarter is the biggest difference that we've ever had since we've been here and it's the biggest difference by a lot.

Usually the difference between weighted average and spot is somewhere between 5 basis points to 10 basis points, we're double that, 17 basis points to 20 basis points in this quarter. And we have the pricing strategies in place to get ahead of this and continue to move those cost of funds across the board substantially lower as we move into the second quarter.

The second component of that is that on the earning asset side we have $6.8 billion of floating-rate loans. The vast majority of those floating-rate loans did not hit, had not breached loan floor provisions in the first quarter, just because of where the starting point was relative to where asset yields ended up for the quarter.

We don't have loan floors on every one of those. We don't have -- well, I'll call it meaningful loan floors on the $6.8 billion worth of loans, but we do have a substantial chunk that as we continue to move down and LIBOR continues to reprice will start hitting some of those loans floors. And that's going to represent approximately a third of that $6.8 billion. So even though there is a bigger drop in LIBOR in the second quarter, you do start to offset that longer-term from the perspective of starting to breach some of those loan floors, where we don't get the impact of -- you know, the full impact of the LIBOR continuing to move down.

So the way that we're thinking about it is, if you essentially take a similar type of drop in earning asset yields in the second quarter relative to what you saw between the first quarter and the fourth quarter, which was about 20 basis points on earning assets and this is including accretion income on loans, it should be pretty stable this quarter relative to the first quarter.

So if you simply take earning asset yields that are 20 basis points lower in the second quarter than they were in the first, and you're already starting from 20 basis points lower on the cost of funds, and you're continuing to move that cost of funds lower, you get to a place where again there is always going to be some uncertainty on that. Because what happens with rates, we unfortunately don't have the magic crystal ball. But the starting point for where funds, where cost of funds and earning asset yields are is in a much better place in the second quarter than it was in the first.

And we're pretty confident that we will continue to manage those types of earning asset yield dynamics, we can offset that with the cost of funds reduction longer-term.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Okay. That's helpful. Thank you. And then just lastly on the movement in the securities book. Can you just sort of explain kind of your strategy there? I know some of it was called away from you, but just for the tranche that you guys sold and just how you're seeing to positioning the security book going forward?

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Yeah, well, that's one of the things that's also going to help the NIM going forward. We've been, I think for the past three or four calls, we've been talking about and alluding to, to continuing to move the balance of securities down as a percentage of total earning assets. The strategy behind the $400 million of largely NBS that we sold in the first quarter is the fact that those were securities that where we had some substantial long-term premium amortization risk, that we wanted to get rid of.

So yields or securities that we had on the books that were yielding 2.5% to 2.7%, when you start accelerating, if we would have essentially waited and just had those securities continue to run off over time and prepay, they will not have yielded 2.5% to 2.7% because we would have had a substantial amount of premium amortization that would have been accelerated.

So, we're going to continue to manage that percentage of the securities book down. We would be comfortable running at somewhere between 12.5% to 15% of securities, the total earning assets. We were at 17% this quarter, we will get to 15% by the end of the year. So we're going to do that through a combination of some incremental kind of, reducing of specific components of the portfolio, and we're also going to do it because there is going to be some earning asset and loan growth that anything can happen over the course of the year, but we will hit that 15% target by the end of the year.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, great. I will leave it there. Thanks, guys.

Jack L. Kopnisky -- President and Chief Executive Officer

Thank you.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We can take one final question, it comes from Steve Moss of B. Riley FBR. Your line is open. Please go ahead.

Steven Moss -- B. Riley FBR -- Analyst

Good morning. I just want to follow up on the securities book here. Wondering, you have a healthy level of munis and corporate securities. Just wondering what your appetite is for keeping the current mix versus a potential restructuring and moving to something more conservative?

Jack L. Kopnisky -- President and Chief Executive Officer

So we like the portfolio where it is, and particularly the municipal book is largely concentrated in state -- kind of state-level general obligation bonds of state that are already kind of reopening and that have a substantial amount of the high credit rate with -- where there is a -- the finances or the state finances are in very good shape and they're going to be able to weather through this. So we're not concerned from the perspective of the composition of the securities book on the muni side. And on the corporate side, the majority of what we have, that is about 50% of our exposures are senior and subordinated debt holdings of other financial institutions that are in very, very strong shape. So we are -- you're not going to see us restructure the book from the perspective of changing the mix of what we have today. We are going to continue to reduce some components where we see, we are more concerned from the perspective of reducing kind of reinvestment risk and reducing premium amortization risk versus, we're not concerned on the credit risk of the portfolio at this point.

Steven Moss -- B. Riley FBR -- Analyst

That's helpful. I appreciate that. And then in terms of the modifications rate, I believe it's $1.1 billion were approved. Just wondering what's the total number of requests that you've seen?

Jack L. Kopnisky -- President and Chief Executive Officer

The total number is about two -- twice that level, and so it's about 10% of the total portfolio and we are working our way through it. As we said before, we're essentially taking individual underwriting decisions on improving modifications for each borrower. And so it's going to take us some time to work our way through it. We do not anticipate that all of those will be approved.

Robert Rowe -- Chief Credit Officer

And understand too, we have a lot of people asking for mods -- they don't need mods.

Steven Moss -- B. Riley FBR -- Analyst

Yeah.

Robert Rowe -- Chief Credit Officer

That's part of the management process. But the 5% number is a good number and we'll work through some others. But as you would imagine, it's kind of like the PPP program. It's a great program and why wouldn't you apply for this thing? It's the same thing as mods. There are people that are truly in need and there are others that have the liquidity and the financial sense to continue to pay in as they had been structured.

Steven Moss -- B. Riley FBR -- Analyst

I appreciate that color. And then in terms of just the ABL portfolio, I apologize if I missed this, but I was wondering just what drove the migration to -- in criticized and classified this quarter? If there's any particular segment or a couple of loans?

Jack L. Kopnisky -- President and Chief Executive Officer

We're sorry, Steve. You cut out a little bit, what was the question?

Steven Moss -- B. Riley FBR -- Analyst

Oh, sorry. So in terms of the ABL portfolio, just wondering what the level of criticized and classified -- the migration in criticized and classified that occurred this quarter? Wondering if it's just a couple of loans or any particular segments? I'm sorry, if I missed it.

Jack L. Kopnisky -- President and Chief Executive Officer

It was two relationships, two loans.

Robert Rowe -- Chief Credit Officer

And they were not in the same industry at all. But industries that we would have, you would say, I guess I mean retail, drug.

Jack L. Kopnisky -- President and Chief Executive Officer

Yes.

Steven Moss -- B. Riley FBR -- Analyst

Okay. Thank you very much, I appreciate that.

Jack L. Kopnisky -- President and Chief Executive Officer

Thank you, Steve.

Operator

Thank you. We have no further questions. At this point, I'll hand the call back to the speakers for any additional or concluding remarks. Thank you.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

So we did have a couple of email questions, [Speech Overlap]

Jack L. Kopnisky -- President and Chief Executive Officer

Oh, sorry, forgot about that [Speech Overlap] Personal loans, PPP.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Yeah, so the first question was what was -- what kind of yield are we are expecting to generate on the PPP loans, are those expected to account for balance sheet?

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah, so just in case. And so everybody hears it, it's yields on PPP loans that are expected to come on the balance sheet. So, first and foremost from a balanced perspective, we anticipate that there's going to be between, not all $650 million of funds that have been requested will be necessarily approved. So for modeling purposes, we are assuming $500 million of that actually hits our balance sheet and we're assuming a 3.5% yield on that book of business, which is consisting of the 1% fee in addition to a combination of the processing fees that we're seeing with respect to how the mix of loans are coming in from an average balance perspective.

So 3.5%, about $500 million of loans and we're assuming that 75% of those loans actually get forgiven over a period of three months to four months post quarter. So by the end of the third quarter, we anticipate that, that $500 million would have fallen to about $125 million to $150 million of balances as some of these loans get -- the majority of these loans get forgiven. So that's the first question on PPP.

The second question?

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

The second question we -- in the outlook, we've temporarily suspended our buyback. What would reinitiate interest in repurchases and what kind of environment we have to be in to start repurchasing our stock?

Jack L. Kopnisky -- President and Chief Executive Officer

Got it. So when we say temporary, we truly do, we do mean temporary. That's one of the reasons that we are provided that guidance regarding our tangible common equity ratios and how we're comfortable running at those types of levels, is that we have a substantial amount of capital above those ratios today and we are going to generate a lot of internally generated capital as we continue to move through the course of this year into next.

From a --we know what needs to happen, we need to essentially get back to an environment where we just understand that forecast in macro assumptions are going to continue to change every other week based on what's the latest and greatest kind of headline news that comes out regarding how we're going to open or not reopen the economy.

When you think about locally, or when do you think about the exposures that we have, we are obviously -- New York Citibank was about 65% to 70% of our loan book within a 20-mile radius of Midtown Manhattan. As soon as we continue to see greater clarity as to how New York State and New York City reopen and how we essentially get back to more normalized times in our local economy and therefore we can essentially factor that in with a more kind of crossing the T's and dotting the I's, where that's going to represent on all things modeling for reserves. We would be in a position to essentially move forward and start turning on the buyback again.

So we envision that, that it is going to happen at some point in the second quarter and third quarter where we're going to get that greater clarity, and we'll be able to establish a clear kind of patterned guideline to being able to -- to get back to buy back shares.

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

And then just to close it off, first and most importantly, our thoughts and prayers are with everybody affected by COVID and frankly we need to support each other in this process. Secondly, from a business standpoint, we think we've been most appropriate in the allowance for credit losses. We've been very up to date in how we've structured this. Third, next is on the credit side, we feel very comfortable we have our arms around the credit. These are secured credits, they're not levered credits. They are things that we can work through. We're comfortable on any of the loss given default type of scenarios we have.

And then lastly we're also comfortable as the year goes on for what we know today on the PPNR progression and NIM stability. So we feel like we have our arms around this and can be effective as we go forward and pull the necessary levers. What you've seen from us over a long period of time is we've reinvented the Company and we, like all companies in times of crisis and change like this, there are opportunities to continue to reinvent the Company. And we will continue to do so. So we appreciate the call and appreciate your support. So thank you very much.

Operator

[Operator Closing Remarks].

Duration: 71 minutes

Call participants:

Jack L. Kopnisky -- President and Chief Executive Officer

Robert Rowe -- Chief Credit Officer

Luis Massiani -- Senior Executive Vice President and Chief Financial Officer

Casey Haire -- Jefferies -- Analyst

Alexander Twerdahl -- Piper Sandler -- Analyst

Steven Duong -- RBC Capital Markets -- Analyst

Matt Breese -- Stephens, Inc. -- Analyst

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Steven Moss -- B. Riley FBR -- Analyst

More SBT analysis

All earnings call transcripts

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