Community Financial System, Inc.

Welcome to the Community Bank System first quarter 2020 earnings conference call. Please note that this presentation contains forward-looking statements within the provisions of the private security litigation reform act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and form 10-K filed with the Securities and Exchange Commission. Today's call presenters are Mark Kaczynski, President and Chief Executive Officer, and Joseph Tsitaras, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.

Thank you, Grant. Good morning, everyone, and thank you all for joining our first quarter conference call. In addition to Joe and I, I've also asked Scott Kingsley and Joe Surbin to join us on the call this morning. This is clearly a different and challenging environment for all of us. Let me start with our COVID response. Early in March, we mobilized a pandemic response team consisting of senior leadership across the company. Our initial focus was and continues to be the health, safety, and well-being of our employers, employees, customers, and communities. We began execution immediately by limiting formal meetings, instituting sick time policies, and enhancing cleaning protocols in all company facilities. Over the following week, we closed branch lobbies, instituted work from home, separated our critical operating functions into multiple teams in different facilities, utilized shift work, and instituted social distancing in all office spaces. We've been operating with this environment for over a month, and although less efficient, our operational cadence is quite stable. We're prepared to continue as we are until such time as it's safe for our people to resume normalized operations. At this juncture, in New York and Vermont, the governor's stay-at-home orders extend through May 15th. In Pennsylvania, that date is April 30th. We will remain abreast of circumstances and react accordingly in the best interest of our employees, customers, and communities. Also in March, we announced that Scott Kingsley, our chief operating officer, would be retiring from the community bank system effective June 30, 2020. Scott served in that role for a year and a half after having served as Chief Financial Officer since 2004. Scott worked side by side with me for nearly 16 years, and the company will miss his energy, passion, and talent. At that same time, we further announced that Joe Servin was appointed to the role of Chief Banking Officer. Joe began his career with Community Bank in 2008 and previously served as Executive Vice President and Chief Credit Officer. Joe will continue to bring exceptional leadership to our company for the benefit of all of our stakeholders. I will make only a few comments on Q1. It was pretty good. Absence of COVID-related allowance bills, earnings were very strong. I think a couple pennies better than last year's quarter. The total loan book was down much less than seasonally expected, and we had organic growth in commercial. And deposit performance was also good in the quarter. Our non-banking businesses had a great quarter. The pre-tax earnings of our wealth management business was up 12%. Benefits was up 9%, and insurance was up 2%. With respect to the acquisition of Steuben Trust Company that we announced in October, it is proceeding, albeit at a somewhat slower pace. We continue to be hopeful that we can close in the second quarter, but have not yet received regulatory approval and there remains uncertainty around the ultimate impact of COVID-19. Joe will provide a little more color on the quarter, but there are obviously more significant matters to discuss. One of those I wanted to touch on was financial strength. In severe circumstances of economic and financial distress, there is no substitute for earnings, liquidity, capital, asset quality, core deposits, and revenue diversification. When I look at the fundamental financial strength of our company, I'm highly confident we are as well prepared for whatever the future may bring as we possibly can be.

Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the earnings results for the first quarter of 2020 were solid in spite of challenges related to the COVID-19 crisis. The company recorded 76 cents in fully diluted gap earnings per share for the first quarter, excluding a penny per share for acquisition-related expenses, fully diluted operating earnings per share for 77 cents for the quarter. These results were four cents per share lower than the first quarter of 2019 due largely to the COVID-19 crisis and its related impacts on the company's operations. In particular, the company recorded $5.6 million in its provision for credit losses in the first quarter of 2020, reflective of expected credit losses due to rapidly deteriorating economic conditions. This amount exceeded the company's net charge-offs in the quarter of $1.6 million for nine basis points annualized by $4 million. By comparison, in the first quarter of 2019, the company recorded $2.4 million in the provision for loan losses and net charge-offs of $2.6 million, or 17 basis points annualized. In addition, the company's net interest income was negatively impacted in the quarter due to the significant rapid decrease in short-term interest rates. During the first quarter of 2020, the company adopted the new CISCO accounting standard. This resulted in a $1.4 million or 2.7% increase in the allowance for credit losses from $49.9 million prior to adoption to $51.3 million after adoption. Due largely to the expectation of increased credit losses due to the COVID-19 adverse impact on economic and business operating conditions, the company's allowance for credit losses increased an additional $4.4 million or 8.6% at the end of the first quarter to $55.7 million. The total increase in the allowance for credit losses was $5.8 million, or 11.5%, between December 31st, 2019 and March 31st, 2020. The allowance for credit losses to total loans outstanding on March 31st, 2020 was 0.81%, which represented over eight times the company's trailing 12 months net charge-offs. As Mark noted, we believe the company's capital reserves, liquidity profile, diversified revenue streams, strong credit record, and experienced management team leave us well prepared to endure the impacts of the COVID-19 crisis. The company's net tangible equity to net tangible assets ratio was 10.8% at March 31, 2020. This was up from 10% at the end of 2019 and 9.8% from one year earlier. Similarly, the Tier 1 leverage ratio was 11.1% at the end of the first quarter, which is over two times the well-capitalized regulatory standard of 5%. During the first quarter of 2020, shareholders' equity increased to $121.4 billion, or 6.5%. This includes a $19.3 million increase in retained earnings and a $93.7 million increase in accumulated other comprehensive income net of tax, primarily to an increase in the value of companies available for sale of investment securities. At December 31, 2019, the company's Tier 1 risk-based capital ratio, total risk-based capital, and common equity Tier 1 capital ratios were 17.2%, 18%, and 16.1% respectively, reflective of the company's lower-risk asset base and high levels of regulatory capital. The company has an abundance of liquidity resources and is well-positioned to fund future balance sheet growth, including its current loan pipeline, potential advances on undrawn lines of credit, and pending Paycheck Protection Program loans. The company's funding base is largely comprised of low-cost support deposits. At March 31, 2020, checking and savings accounts represented 68.5% of the company's total deposit base. The company's cash and cash equivalents net afloat in reserves totaled $458.9 million at March 31. Total borrowing availability at the Federal Reserve bank was $260.4 million and the total borrowing capacity of the federal home loan bank was $1.83 billion. The available for sale investment security portfolio was valued at $3.14 billion, $1.5 billion of which was available for pledging if needed. In total, these sources of immediate liquidity exceeded $4 billion. We closed the first quarter of 2020 with total assets of $11.81 billion. This was up $398.7 million, or 3.5% from the end of the late fourth quarter of 2019, and up $892.5 million, or 8.2% from one year earlier. The increase in the quarter was largely due to a net inflow of deposits as seasonally anticipated. Year-over-year increases in total assets was driven by both third quarter 2019 acquisition of Kinderhook and organic growth, Average earning assets for the first quarter of 2020 of $10.04 billion was consistent with the fourth quarter of 2019, but up $664.1 million to 7.1% from one year prior due to bulk indicator of transaction and organic growth. Average loan balances in the first quarter of 2020 were up $18.8 million to 0.3% when compared to the late fourth quarter of 2019 earnings. up $603 million, or 9.6%, when compared to the first quarter of 2019. On a late quarter basis, the average outstanding balances in business lending, consumer mortgage, and consumer indirect portfolios were up slightly, but were offset in part by decreases in the consumer direct and home equity portfolios. The increase in average loans outstanding on an annual quarter basis was driven by the Kitterhook acquisition, as well as organic loan growth. Ending total loans were down on a late quarter, Quarter comparative basis, $24.5 million or 0.4% as seasonally anticipated. Exclusive of loans acquired in the Kinderhook transaction ending total loans outstanding increased to $174.1 million or 2.8% from a year prior. At March 31st, 2020, the carry value of the company's investment securities portfolio was 3.4%. This includes net unrealized gains of $155.5 million up from $33.1 million in net unrealized gains at the end of 2019 and $7.9 million in net unrealized gains a year earlier. The effective duration of the company's investment securities portfolio was 3.6 years at March 31, 2020. Average total deposits were up $651.5 million, or 7.8% from the same quarter last year, but down $45 million, or 0.5% on the linked quarter basis. The increase year-over-year was driven by the acquisition of $568.1 million of deposit liabilities in the third quarter due to the Kinderhook transaction. The company's average cost of deposits was 25 basis points in the first quarter of 2020, one basis point lower than the linked fourth quarter of 2019. The company recorded total revenues of $148.7 million in the first quarter of 2020, an increase of $6.1 million, or 4.3%, over the prior year's first quarter. Net interest income increased $3.2 million, or 3.7%, to $90.1 million due to a $666.4 million, or 7%. 0.1% increase in average earnings assets between the periods offset in part by a 15 basis point decrease in net interest margin. Non-interest revenues increased $2.9 million or 5.3% between comparable quarters due to increases in banking and non-banking revenues offset in part by a small loss on equity securities. Interest income and fees on loans increased $4.9 million, or 6.6%, over the comparable prior year quarter due to an increase in average total loan downspanning offset by a 17 basis point decrease in average loan yield. As previously reported, the first quarter 2019 average loan yield was favorably impacted by six basis points due to $1 million in one-time loan fees. Interest income on investments decreased to $0.5 million, or 2.9% between the first quarter of 2019 and the first quarter of 2020. Tax equivalent average yield on investments, including cash equivalents, decreased from 2.58% in the first quarter of 2019 to 2.45% in the first quarter of 2020, reflective of lower interest rates. Interest expense was $1.1 billion higher than previous year's first quarter, driven by a four-basis point increase in the cost of interest-bearing liabilities and a $446.1 billion or 6.9% increase in average interest-bearing liability balances. Employee benefit services revenues for the first quarter of 2020 were $25.4 million. This represents a $1.3 million or 5.5% increase over the first quarter of 2019 revenues. The improvement in revenues was driven by increases in plan administration actuarial record keeping fees as well as increases in employee benefit trust transfer agent fees. The company reported $8.1 million in insurance services revenues during the first quarter of 2020. A $0.2 million or 2.5% increase over the first quarter of 2019 results primarily to an increase in group medical and property and casualty insurance revenues. Wealth management revenues for the first quarter of 2020 were $7.1 million or $0.8 million or 12.4% higher than the first quarter of 2019 due to both acquired and organic growth. Banking non-interest revenues increased $0.7 million due primarily to an increase in mortgage banking revenues. During the first quarter of 2020, the company increased its commitment to sell secondary market eligible residential mortgage loans which drove an increase in mortgage banking revenues from $0.2 million in the first quarter of 2019 to $0.9 million in the first quarter of 2020. The company reported $93.7 million in total operating expenses in the first quarter of 2020. This represents a $5 million or 5.7% increase in operating expenses over the first quarter of 2019. Salaries and employee benefits expense increased $4.9 million between comparable quarters, reflective of the increased payroll costs associated with the third quarter 2019 Kinderhook acquisition, merit-related pay increases, and an increase in employee benefits, including significantly higher medical costs. Total data processing and communication expenses increased $1 million, or 10.8%, between comparable annual quarters, driven by higher payment processing and telecommunication costs. High-capacity equipment expenses increased $0.5 million, or 4.4%, between the periods due largely to increased costs associated with the kindergarten acquisition. These increases were partially offset by a $0.5 million, or 11.2% decrease in intangible asset amortization, as well as a $0.7 million, or 6.4% decrease in other expenses. The effective tax rate for the first quarter of 2020 was 18.8%, up from 18.5% in the first quarter of 2019. The company recorded lower amounts of stock-based compensation tax benefits in the first quarter of 2020 as compared to the first quarter of 2019. Exclusive of stock-based compensation tax benefits, the company's effective tax rate was 20.9% in the first quarter of 2020. From a credit risk and lending perspective, the company has taken actions to identify and assess its COVID-19 related credit exposures based on asset class and borrower type. No specific COVID-19 related credit impairments were identified within the company's investment securities portfolio during the first quarter of 2020. With respect to the company's lending activities, the company implemented customer payment deferral programs to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges. Through April 15, 2020, the company granted payment deferral requests for up to three months for 3,274 consumer borrowers, 1,018 business borrowers, representing $587.2 million of the company's loan balances. The company anticipates that it will continue to receive COVID-19 financial hardship payment deferral requests throughout the second quarter of 2020. At March 31st, 2020, non-performing loans increased to 0.46% of total loans. This compares to 0.39% of total loans outstanding at the end of the first quarter of 2019 and 0.35% at the end of the length fourth quarter of 2019. The increase in non-performing loans is largely attributable to a single line of credit that matured on December 31st, 2019 with total outstanding balance of $9.99 million. Total delinquent loans, which includes non-performing loans and loans 30 or more days delinquent to total outstanding was 1.11% at the end of the first quarter of 2020. This compares to 0.88% at the end of the first quarter of 2019 and 0.94% at the end of the fourth quarter of 2019. The delinquency status for loans on payment deferment due to COVID-19 financial hardship will report at March 31st, 2020, based on the delinquency status at March 20th, 2020. The SCUVENT acquisition is scheduled to close later this quarter, however, due to the COVID-19 crisis and pending regulatory approval, the ultimate closing date may need to be adjusted. As a reminder, SCUVENT Trust is a 14-branch franchise operating in the six-county region of Western New York with total assets of approximately $560 million. Community Bank currently serves four of the counties within Stu Ben's current footprint, and the other two are contiguous to our markets. The company expects this acquisition to be approximately $0.08 to $0.09 per share of credit to its first full year of gap earnings, and $0.09 to $0.10 per share of credit to cash earnings, excluding one-time transaction costs. Operationally, we will continue to adapt to the changing market conditions. In the immediate near term, the company will remain focused on ensuring the timely intermediation of deposit response, assisting borrowers that experience financial hardship with payment relief, closing and funding PPP and other loans, and maintaining service standards in our financial services businesses. Based on the current market conditions, we believe certain aspects of the company's operations will be more adversely impacted in the second quarter of 2020 than they were in the first quarter of 2020. Home and auto sales have slowed considerably, which has reduced the demand for new consumer mortgage and consumer installment loans. Although business lending activity increased in April due largely to the PPP program, the effective yield on the PPP loans is significantly lower than the company's first quarter average earning asset yields, which may negatively impact the company's net interest margin in future periods. Deposit and other banking fees, including part-related interchange revenues, are expected to be decreased due to declining levels of commerce. Higher levels of unemployment will affect our borrowers' ability to service debt, which may increase the level of expected loan losses, potentially resulting in the company requiring significant provision for credit loss in future periods. The company's wealth management revenues will likely decrease in the second quarter, consistent with a decrease in investment asset values. Insurance services may be negatively impacted by lower sales activities. And although the company's employee benefit service business is largely driven by participant headcount levels, its employee benefits trust operations will likely be negatively affected by a decrease in underlying plan valuations. The company's dividend capacity remains strong. Its full year 2019 dividend payout ratio is 47.5%. Accordingly, the company expects to continue to pay quarterly dividends consistent with past practices. Undoubtedly, the COVID-19 crisis has changed the near-term outlook for society in general, as well as expectations around economic conditions. First and foremost, we remain hopeful that the effective treatment is on the near-term horizon and the vaccine becomes widely available later in 2020. Like the specific acuity this crisis has on our employees and their families, our customers, communities, and shareholders is highly uncertain. With that said, we intend to support our stakeholders in a thoughtful, disciplined, and compassionate manner. We believe the company is well prepared to endure its impacts. Thank you. Now I will turn it back over to Mark. Thank you, Joe. Before we open it up for questions, as I said in the opening, I asked Scott Kingsley to join us to say a few final words to the group that he had the opportunity to work so closely with over the past 16 years. Scott? Thank you, Mark. To our investors and analysts, I want to take this opportunity to say thank you for your continued confidence and support of the company and myself over the past 16 years. Your engagement and effective challenge have been critical in our strategic decision-making and supportive of our continuous improvement objectives. As I prepare for my retirement from the company, I am both humbled by and proud of what our team has been able to accomplish and pleased to have been a small part of that. I'm also supremely confident in our team's ability to continue to provide a differentiated level of customer community service and superior shareholder returns. Again, thank you. Thank you, Scott. Thank you for 16 years of tremendous service to the community bank system. And on behalf of our entire organization, we wish you and your family the very best for the future. Thank you, Mark. With that grant, I would now ask you to turn the line over for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Joe finish with over the group. Please go ahead. Morning, everyone.

Morning, Joe.

Hey, guys, we've seen we've seen some other companies before just disputes provisions here in the first quarter. To build reserves, you know, some of them cited unemployment data and projections they use, I guess, from as late as April 12. I know you guys generally are very conservative on credit. So I wouldn't necessarily expect the same reserve bill, but just curious what metrics you use specifically to determine the reserve bill from the first quarter, and given your comment in the release about, and on the call here, about the increase in payment deferral requests you expect in the second quarter, whether that means the big reserve bill might be pushed out a quarter or two for you all, or if you feel like you mostly accounted for that with this one Q provision allocation.

Yeah, I'll take that one, Joe. We, as you know, we adopted the CECL model in the first quarter. And the model is kind of comprised of really three significant components. The quantitative components, the non-economic qualitative adjustments, and the economic qualitative adjustments. And in the economic qualitative adjustments, we used forecasts provided by by Moody's and we use those forecasts. I think the update we used was through March 27 so effectively that was the latest and greatest information we have from Moody's and so we use that in our CECL model. I guess the best way to describe the economic forecast is kind of a Nike swoosh kind of shape in the sense that a significant drop off in the in the second quarter with some recovery in later quarters. And so that component of the model largely drove the adjustment in the first quarter. With respect to the second quarter, we'll reevaluate the model, which will include also the economic qualitative factor adjustments, but also we're going to be evaluating sort of observe data with respect to delinquency and migration of risk ratings and those types of factors. So it is possible that in the second quarter there will be additional reserve bills based on the factors we're observing in addition to changes in the economic outlook.

Okay. That's helpful. And then with respect to the decline in oil prices, you know, you all in the 2015-2016 cycle, Mark, Scott, I remember having some tangential exposure to lower oil prices. There wound up being really no discernible impact to you as far as I can tell. So maybe just update us on what you consider your exposure to be to these record low oil prices.

Yeah, I think we have, Joe, pretty limited at this juncture exposure, mostly to the fracking industry, but in northeast Pennsylvania. But I'll let Joe Servin comment further on that.

Yeah, Joe, our exposure, Mark said, not only to fracking, but we had some pipeline contractors in the portfolio. Our overall exposure is probably somewhere in the $40 million range. And we monitor it quarterly. It's a lot smaller, significantly smaller than it was back in 16 and 17. And the clients in the portfolio, by and large, are very strong, very liquid. And right now they're being essential, so they're out working, which is good. But we don't have any concerns at the moment with respect to that portfolio.

Okay. Thank you, Joe. And then on the outlook for M&A, you know, you all were already an acquirer of choice in the market. I'd have to think the resiliency of the stock here through this makes you even more of an acquirer of choice. If one of your preferred targets, Mark, came to you during this period, would you feel confident enough to move forward and announce something during this time, or is there just too much uncertainty at this point?

Okay. I haven't really given much thought to that hypothetical question. My initial answer would be that we would take a look at it. I think if you look at the financial strength of the company, as I suggested Joe talk about in a little more detail, I think we're pretty well positioned for whatever the future is going to bring here in terms of economic distress and ultimately potential So, you know, clearly I think the valuation delta you know, gives us, you know, potentially that opportunity. With that said, I would think, you know, most who are thinking about being sellers are not going to be thinking about it for some time. So I think, you know, we're not going to see a whole lot of, you know, activity. But I think, you know, certainly if we have the opportunity to have a dialogue with a high value partner right now, we certainly would entertain that.

Okay, and on the skewbend trend, the pending deal that you have, it just sounds like, I mean, correct me if I'm wrong, it just sounds like more of a processing issue, maybe, given everything the regulators and others have on their plate right now?

Yeah, it's just everything is moving slow, as you know, Joe. You know, we are, us, the student folks, our core process, everybody's working remotely, and that, you know, creates its own challenges. And we're trying to work through those. The regulators are working remotely. So everything's just moving slower. You know, when we announced the transaction, I think we said we expected to close in the second quarter. And as of right now, we still are planning to do that. But, you know, clearly the future direction of, you know, COVID and the environment, you know, will dictate that potential.

Okay, and then last one for me. Mark, your fee businesses and the contribution there give you diversity of your earnings stream that not many of your peers have, but the closure of the businesses really didn't occur until the middle of last month of the quarter, right, in March. Can you walk us through your initial thoughts on how you expect your various fee businesses to fare with what's going on?

Sure. I think the – I'll start with the obvious, the wealth management business. I think – That business will probably be down, we estimate, somewhere in the 15% range in revenues in the second quarter. The earnings probably won't be down quite that much because there will be some offsets in terms of commissions and the like. But you're probably talking a double-digit decline in the wealth business. I think the benefits business and the insurance business will be slightly less impacted, and we would expect a single-digit reduction in revenues and earnings in those businesses for the second quarter, Joe.

Okay, that's it for me. Thanks. And then, Scott, really enjoyed working with you and all the best.

Thank you so much, Joe. Thanks, Joe.

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

Hey, good morning, guys. Morning, Alex. First off, Scott, congratulations on a great career. Good luck with your retirement, and you're certainly going to be missed. Thank you, Alex. Wanted to start with the PPP program and just, you know, in terms of the fees that are expected from the 350-ish million dollars of loans, are those going to be pretty much reflected in the second quarter? Are those going to be capitalized over the life of the loan? And kind of how should we think about sort of how those balances are actually going to impact the balance sheet?

Yeah, it's a good question, Alex. We intend to hold those for investment and therefore recognize the fee over the life of the loan. at this point. You know, as the second round gets funded, there's additional funding. We'll continue to evaluate, you know, our strategy around that, but at the current time, we're planning on holding those for investment.

Okay, so would we... Is there a way to sort of guesstimate with that? And is it going to flow through fee income, presumably, or through the margin? And should we assume these are all kind of the 5% loans, or is there a way to kind of clarify that a little bit more?

No, it will come through the margin is how we will account for it. With respect to the weighted average fee, we're not there yet relative to making that determination, but I think there was a 1, 3, and 5% level, so it's somewhere in between those amounts, but we don't have that pinned down just yet. We will shortly, though.

okay so i mean and then in terms of the margin is there a way you could kind of help us get a little bit better sense for the moving parts in the margin obviously you get some moving parts anyway seasonally in the second quarter uh but just given the ppp program expected durations of those loans etc uh plus other things in the balance sheet you know how how should we be thinking about the margin from here in the in the second quarter yeah so that's a

Very good question, Alex. With respect to the loan portfolio, if I can start there, we had a decrease in the prime rate kind of late in the first quarter. The full impact of that decrease has not been recognized, if you will, in the first quarter, so we'll feel a little bit more impact on the loan yield side just from the decrease in short-term interest rates. As you mentioned also, the PPP loans will go on at a lower effective yield. So the overall loan yields are expected to decrease. We drew a slide in the investor deck which sort of shows the history of short-term interest rates as compared to our loan yields, and we have effectively maintained loan yields above 4% through, you know, kind of the last 10 years or so. That will be a little bit more challenging with, you know, the PPP loans depending on the volume. So I would expect loan yields to drift down a bit in the second quarter. We have made some changes on the funding side relative to our cost structure. If you recall, going back to late 2015, our total cost of deposits was at 10 or 11 basis points. We're sitting at 25 basis points now. I would not expect us to get back to 10 or 11 basis points, certainly in the short term, because we've added the Kinderhook balances as well. There's just a little bit higher cost structure relative to our cost of deposits. I potentially could see, in the second quarter, the cost of deposits drift down a few more basis points in the quarter. The investment securities yield, at least in the short term, I would expect to be maintained at kind of that 240, 245 level. And the cash equivalents that we're carrying on the balance sheet at the end of the quarter, it's likely that they will be invested in the all portfolio. So I would expect those to come down, which ultimately will help our margin outcome. So all of those things considered, I think it's fair to assume a decrease in the margin by five, six, seven basis points in the coming quarter. The only thing I would add, Joe, is in relation to the fees on the PPP loans, is yes, we are going to amortize those, as you suggested, over the potential two-year period. When those things start getting forgiven... we will accelerate the recognition of the associated fee for those loans. So it's going to get messy, I think, to make judgments forward-looking about what the actual reported margin might be. I think looking at the expected fundamental margin related to the loans and deposits is reasonably straightforward, but there's going to be a big variable here as it relates to the acceleration, which we expect to see as these things get forgiven and we accelerate the fees associated with it. So I'd just throw that out there as well for consideration.

Okay, that's helpful. And then just final for me, I was wondering if you can just kind of run down the hot button loan segments and just kind of quantify your exposure to things like lodging, restaurant, retail, CRE, things like that.

Yeah, so I'll kick it out. So I always start out with retail. Retail trade, represents about 4% of our total exposure. It's about $260 million. Lodging, everyone's interested in that, represents about 3% of our exposure.

Health and social services and social assistance is 2% of our exposure. Construction, 2%. Unfortunately, our dairy farmers, which represents about 1%, are getting hit. Food service, 1%.

Furniture stores, and we pulled those out because we have a couple of larger furniture stores. We pulled those out. That represents 1%. Manufacturers, I think I said, that's a 2%. We pulled out casinos. As you probably know, we do business with a couple of casinos here in upstate New York, so we pulled those out. That's just less than 1%. And I guess transportation would be the last one, which is just less than 1% of our total loan outstanding.

Great. That's extremely helpful. Thank you. That's all my questions for now.

Thanks, Dylan.

Our next question comes from Eric Zwick with Dunning and Scattergood. Please go ahead.

Morning, guys. I could start with maybe a couple of follow-ups on the SBA Triple P program. You noted that you approved just under 1,400 loans. I'm curious how that compares to the number of applications you received. And then secondly, since the program ran out of funding late last week, have you continued to accept additional applications? And do you think if the second round of funding comes through, will you be able to process and fund all of those additional applications?

I'll take that one. So it's been hectic. It's been fast-paced. So yeah, the expectation is that they're going to appropriate additional dollars, hopefully upwards of $2.5 billion. We have continued to process, or let me rephrase, continue to validate the application's dollar request. So we'll continue to do that with the expectation that there's going to be additional funding come the middle of this week. Will we get through all of our applications? That's the goal. We've thrown a lot of people at it. We probably have somewhere around, rough numbers, 1,200 applications that we're working through that did not get processed with the first go-around. So the expectation is we'll work through those. There will be additional funding. and we'll take care of as many clients as we possibly can. It's been a team effort. I can tell you that.

Great. That's helpful. And then just to make sure I understand, kind of switching to the current credit situation, if I look at the 90 days plus delinquent and still accruing bucket, that increased from $5.4 million to $12.6 million. You mentioned that delinquencies are reflected as of March 20th. So am I right? Does that assume that there was kind of a pre-COVID increase in that bucket? And if so, what was the driver?

Yeah, so we have one credit, a lot of credit that has matured. If we're just shy of $10 million, part of a bigger relationship, the total relationship is somewhere around $13, $14 million. We have two loans that are current and a line of credit that has matured, and we're working with the client in an effort to renew or come up with a solution. While it was pre-COVID, so this was not a result of C-19, the business that they're in, retail, certainly is going to be impacted post-C-19, and it's during the retail sector. And like I said, it's a line of credit that's mature that we're trying to work with a client to get a solution and resolution on.

Are you able to talk about a particular industry or retail that they serve?

No, just in the retail sector.

Great. Thanks for taking my questions. Yeah. Thanks, Eric. Thanks, Eric.

Our next question comes from Russell Gunther with VA Davidson. Please go ahead. Hey, good morning, guys.

Good morning, Russell. Good morning, Russell. I just wanted to follow up on the exposures that you provided. I appreciate the color there. I just want to make sure it's fair to have the right characterization. So this is an attempt to sort of ring sense or quantify your exposures that are most at risk in the near term from COVID-19. So just to confirm that, please. And then is there any material shift either way with Subban or any of their exposure that would be worth calling out as well?

So your commentary was correct. It's sectors that we deem to be most impacted by C-19 as a percentage of total load outstanding. And we'll continue to evaluate that as we... As we play this out, one might, as an example, one might fall on, be added, one might be dropped. With respect to the Subend portfolio, you know, they have some exposure to to certain industries similar to ours that we've designated as high risk. They've got a little bit of lodging. They've got a little bit of ag. They have a little bit of healthcare. I don't see any of it in that it's not that big of a portfolio. I don't see any of it that would be sufficient enough to move the needle in any one of these categories on a holistic basis.

Okay, great.

And then are there any portfolio characteristics that you could share, whether it's a weighted average LTV or debt service covering ratio to just help contextualize this a bit more?

That's a little bit of a challenge, right? So our portfolios are rather seasoned, and as a result, the values, particularly the appraised values, are dated and they were determined during different economic times. So I don't think it's necessarily fair to throw out an LTV that would have any meaning. What I would share with you is some of the guidelines or metrics that we underwrite against. As an example, our loan-to-values target is anywhere between 70% and 75%. It's having to go beyond that shore But our target is to come in at a 70 to 75% appraised value. And we typically underwrite with a 10 over 20 amortization. And we typically come in with debt coverage somewhere between 1.1X to 1.2X. Those are kind of the things that we underwrite to and try to adhere to. Do we have some, as I said, do we have some that might go beyond the supervisory limit of 85% to be due for points? It's not a very big bucket at all. So I hesitate to throw an LPV out there. I hesitate to throw a debt coverage out there because I don't think that they're necessarily meaningful at this point in time given what's going on in the economy. But just have a sense of the way we underwrite. 75% are less, 10-year term, 20-year RAM. We like personal guarantees so we get recourse. Other kind of things that might have more value to.

No, it's very helpful.

I appreciate the reminder of those targets. And then I guess just stepping back, kind of a bigger picture and attempt to quantify what the, you know, potential loss rates for COVID-19 could be. And is it a useful exercise to think about a DFAS severe or, you know, materially adverse scenario? Is that something you have contemplated, performed internally from a stress testing perspective? Just curious as to your thoughts there. Yeah, well, Russell, we're not at the size limits for DFAS, so we had started the DFAS process back in 16 and 17. Ultimately, there was a change in the regulation that excluded us from the DFAS process. With that said, I'll call it the collective intelligence we gained through the DFAS process we used to run an internal capital stress test model, and we do that on an annual basis. We just completed one in December, and it includes a scenario which is severely adverse, which takes our charge-off levels in a very sort of pessimistic outlook and, you know, applies a factor, a multiple factor to those charge-off levels, along with other assumptions relative to a severely adverse scenario. And so we pushed the limits relative to that stress test, and in all instances we were able to maintain regulatory capital levels well above the required regulatory capital standards and even our own internal capital standards, which are higher than the regulatory standards. Got it. No, I think that's... That's very clear relative to the position of strength that you guys are operating in today.

I guess I was just trying to get your thoughts around, you know, what the potential loss content would be and how you're thinking about it from an order of magnitude perspective.

Yes. Mark, that's a really good question. We've actually spent a fair bit of time talking about that. I mean, the real challenge is, you know, the focus initially was on, you know, some of the commentary and the inbound question, well, what's your locking portfolio? And, you know, this, this, The potential loss scenario has expanded way beyond logic. I mean, it's a little of everything. If you look at, you know, Joan talked about some of those kind of what we would consider higher, you know, risk potentially credits in the business lending portfolio of $3 billion. We also have a $2.5 billion mortgage. residential mortgage portfolio, how's that going to be impacted when unemployment could potentially go to 20%? How about the auto lending portfolio that's a billion dollars, what happens to that when unemployment is 20%? So I think the challenge around this is really just that there's so much uncertainty going forward as to what those what that loss content is gonna be. I think that if we had any reason to think it's gonna be a lot higher than where we've kind of provided in our reserve, you look at our reserves, what, $55 million, We would have provided more. I think we're prepared to do that when there's any level of kind of forward clarity or indication. Right now it's just such a coin flip as to what the ultimate loss content is going to be on really any portfolio. It's not just commercial. So it's been a real challenge, kind of an interesting exercise to go through. If you look back to the 08-09 crisis, our losses didn't even blimp. I don't even think they were, they weren't even a standard deviation beyond what they historically had been. I think it could be a little different this time, just because it's a different problem. It's going to be more widespread. It's not necessarily just regional. So I would expect that there's potential for somewhat greater losses than there was relative to the credit crisis in 08, 09. But I think trying to determine an order of magnitude on that at this juncture just really It's really too soon and hopefully we'll have a little bit better clarity as the second quarter unfolds and at least the phase in of the return to normalization commences and we get to see a little bit more evidence of what the future might hold and we'll have a better understanding then to make better informed judgments.

I really appreciate your comments there, guys, and what a very challenging and fluid situation. So thank you for taking my questions, and, Scott, congratulations and best of luck.

Thanks so much. Thanks, Russell. Thanks.

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

Thanks. Good morning, everyone.

Good morning, Colin. Good morning.

Mark, thanks for that color on the unknowns. Obviously, we appreciate your position, and this is not easy, but if I could just dig in a little bit and make sure I understand kind of the movement within the reserve that occurred this quarter. So, Joe, I think you said 1.4 million of the increase in the reserve from the fourth quarter was related to CECL, and I thought that you all had said that that increase would maybe be closer to 5 million in the past. Is that correct? And I'm just wondering, you know, maybe what you ended up seeing, especially given what was going on, I would have thought that that would have been, you know, the seasonal component would have been certainly higher than maybe what you would have thought at the end of fourth quarter.

Yeah. Colin, we have given kind of a range of estimates in some of our previous discussions, and we had Initially, you know, kind of in the third quarter, come out with a little bit of a higher expectation. And as the fourth quarter went, you know, obviously before COVID, we had kind of lowered our expectations as we refined our model and came out with an estimate that would potentially be in the range that was very similar to our incurred loss model. Ultimately, when we You know, refined our estimate and came up with a final determination for, you know, the post-adoption number. It was at $1.4 million higher than the 1231 number. So effectively, you know, we're running an incurred loss model, came up with $49.9 million, running a CISO model, which is a completely different model. if you will, and came up with $51.3 million. So the net increase was $1.4 million due to the conversion. And then with respect to, you know, as the COVID crisis unfolded in front of us, you know, we had to, A, test our model right out of the gate. And we did that, and we largely relied on the economic qualitative factor adjustments in our model to kind of give the forward-looking expectations. You know, the observed data relative to delinquency and risk rating changes really wasn't there at the end of the quarter. It simply hadn't, you know, developed yet. We do expect, however, to see some developments on that. you know, delinquency and risk ratings in the second quarter that will potentially create the need for additional reserves.

Okay. Okay, that's helpful. And then just to sort of frame maybe again what you sort of do know, so the deferrals that came in this quarter, I think it was like $587 million in total, did you – Have – are you setting aside or is your intention to set aside a reserve allocation for those deferrals with the expectation that maybe they could be, you know, challenged credits post-COVID? Or how are you thinking about kind of the reserve on that 587 and then also to – I know in that slide deck you guys put out, like, you know, that $1.5 billion of potential exposure – you know, just, and I know it's hard, as you said, Mark, like trying to gauge what the lost content is is really a challenge, but just curious as to maybe what you think the reserve adds to those two types of, you know, exposures could be, roughly, or how you're thinking about it.

Colin, I mean, that's a very fair question, and we've had similar dialogues internally about, you know, do we have a just reserve for some of the deferred payments and specific concentration risks over and above what our model would allow us to. And at this point, we deemed it a little bit too speculative because, quite frankly, we don't know the outcome. We still don't know the outcome relative to how quickly life will resume. But we're aware that we're going to need to evaluate that in the second quarter. And with respect to the deferred payments, if we wind up with a second round of deferrals for a lot of these customers, we're going to have to evaluate those for the overall risk associated with that second round of deferrals. But we did not make a separate adjustment in the first quarter for the deferrals. And keep in mind, we also provided that deferral number through April 15th. you know, the facts were a little bit different on March 31st.

Right, okay, that's a good point. Okay, okay. Okay, that's helpful. And then just on the, oh, let me just pick on the loan book. You had indicated here, again, where you guys listed the exposure, like the remaining availability within each of those segments, I guess, if they drew down their line. Was there any accelerated line draws that happened in the quarter or you've seen happen post-quarter end within some of these credits?

Right.

So, interestingly enough, there's actually been very little movement going back almost nine quarters now. you could look at utilization of the lines over that nine quarters and the high point was 54, 53, 54%. The low point was 47, 48%. And we're sitting right now at about 49% utilization. That's over the last nine quarters. So there really hasn't been much, there hasn't been any run on the lines. That said, we had one client who had a sizable line of credit who, who, elected to draw down on it, a highly liquid firm that quite frankly didn't need to draw on it, but did nonetheless. That would be the only outlier that took place. Otherwise, it's been very consistent over, like I said, over the last nine quarters.

Interesting. Okay. That's helpful. And then just on the expense side, So I know going into this, I think, you know, the guidance that you guys had offered last quarter was that pre to then, it would be like, I think you said 93 to 94 million or so a quarter in op-eds. Is there anything COVID related that's going to materially change kind of your expense outlook from that baseline?

So there will be additional expenses related to COVID. Just for example, some of the cleaning activities and the like are increasing. The other side of that is there's less business travel and those types of expenses. So I think the net net relative to COVID expense will not really kind of affect too much the trajectory of our operating expenses.

Okay, that's helpful. And then, Joe, just to detail, it looks like other OpEx dropped a fair bit this quarter. Was there anything in there that was unusual to cause that and maybe the outlook for that line going forward?

I would say nothing unusual in the quarter. Kyle, I can get back to you on that specifically, but there was nothing that jumped out at me as unusual in the quarter.

Okay, okay.

We just had a couple of quarters where we had some, you know, other expenses that we were kind of not anticipating. We booked them in the quarter, and this is a more, I'll call it, normalized quarter for us.

Okay, got it. And then just one final question on the PPP program. What percent of the applicants that we're seeing are and approvals are current CDU customers versus non-customers? All of them. All of them are your customers. Okay. Are you getting requests for non-customers?

We've had a few. Limited. Okay. Got it.

Okay. That's all I had. I'll leave it there. Thanks, guys. And, Scott, all the best to you in your retirement, and hopefully you'll be able to get out there and travel and enjoy your post-COVID world. Thank you so much.

Thanks, Kyle.

Our next question comes from Matthew Breeze of Piper Teffery. Please go ahead.

Good afternoon, everybody.

Morning, Matt.

Just curious, on the 587 million of loans that were granted deferral, what was the asset class breakdown of those loans, and was there any overlap between this bucket and the PPP bucket?

Just give me a moment. So a couple of things. So first of all, the deferrals and PPP, I guess not surprising, percentage of deferrals and percentage of PPP apps, the majority of those came from New York State. And the percentage of PPP dollars, it's about two-thirds, by the way, of both deferrals and PPPs that came out of New York State. And the same thing with the percentage of PPP dollars, as well as the percentage of deferrals, also came about two-thirds of them came out of New York versus Vermont and Pennsylvania. Retail trade. Lodging, manufacturing, construction, and healthcare represented about 75% of the PPP activity. On the deferral side, and Joe may have mentioned this earlier, on the deferral side, much of what we did early on, on the consumer or the mortgage and HELOC, much of what we were doing were 30-day deferrals, both P and I. And as a result of people paying attention to the evening news, came to realize pretty quickly that it wasn't going to be open 30 days, and so they're back at us again looking for some more deferral days, which we have and will continue to grant up to 90 days in total. In the commercial world, early on, we were actually having some success in getting just principal deferrals only, and they were making interest payments. Again, as they watched the evening news, they came back at us and looked at us, asked us to do both principal and interest approach, which we also accommodated. And I would say, and you probably all know this, but this was in concert with our regulators. They were well aware of the approach that we took with respect to for sure the PPP, but the deferrals and the duration that we were running and the fact that we didn't need to address this rating, the fact that we didn't need to worry about TDRs or debt restructures.

Right. And then maybe just one other measurement. As we think about the number of consumer and business deferrals, the 3,200 and then the 1,000 business customers, What percentage of both of those buckets in terms of total consumer accounts and total business accounts did those make up?

Could you clarify the question a bit, please?

I'm sorry, that wasn't – yeah. As we think about the number of consumers that were granted deferrals, the 3,274 – and the business deferrals, the $1,018, what percentage of total consumer accounts did that make up? What percentage of total business accounts did that make up?

We have 40,000 installment loans. I couldn't tell you the number of home resi mortgage accounts we have, but if we got 40,000 installment loans, you probably have a similar number, and commercial loans include small business. And from an account perspective, we might have upwards of 6,000 small business customers. And, you know, I don't have the specifics regarding the portfolio.

But it just seems to me you could kind of get an answer, and it's not sort of directionally today. I think the 3.8% you've got there, the percentage of the portfolio outstanding. So we've granted deferrals to 4% of the outstanding balance of our consumer mortgage portfolio, right? Right. It's probably about the same in terms of number of customers. I would say it's probably the same for installments, 2.7%. So we've granted deferrals to probably about, you know, 3% of our installment customers. Absolutely. And worth mentioning that if you kind of come across there, Matt, the consumer installment, you know, the 2,080 loans, you know, on an average balance basis, that's a $16,000 loan. in terms of granularity jump up to consumer and home equity you're just around a hundred thousand dollars and oh by the way that's us so at the market point i think that's going to be the same number of customers and outstanding on the consumer side because our average mortgage portfolio is about a hundred thousand dollar mortgage and you know our average outstanding auto loan or indirect auto loan is under 20 grand yeah i think we were a little bit i think we were maybe a little bit surprised that the the consumer requests for the pearl were greater just because of the acceleration of unemployment. So I think hopefully we take that potentially a good sign in our markets. But that could also accelerate dramatically. That could double or triple or more over the course of the next 60 to 90 days as well. But I think we expected it would be a little bit more of a race for deferrals on the consumer side than what we experienced. Right, right.

Okay. And then my last one, you know, one point of conversation I've had is whether or not in this environment a bank is better to have a more rural footprint or a more metropolitan footprint. And I wanted to get your thoughts on whether or not you feel like the rural footprint you operate in is to your advantage in this environment or disadvantage.

Well, I think it's certainly been a productive business model for us for a long time. I would say if you look at the disease itself and where the greatest areas of impact are, not just from a health perspective, but potentially also likely from an economic perspective, is probably the more urban markets. So I would say from where we sit right now with what we know, we're probably somewhat, it's more advantageous for right now to be in non-metropolitan markets. And so I sense that they're going to open up faster, which should ultimately mean less economic impact in those markets. And that may... work to our advantage possibly here going forward. And now I can certainly say that our customers in those non-metropolitan areas have certainly not enjoyed a lot of asset acceleration in terms of valuation change, you know, consistent going in before we went into the last crisis. You know, it's not like the cost of housing is moving up 12% a year in most of our markets or 15% a year. So the underlying asset values are not radically different than what they probably were when we were under at the long run.

Right. Okay. Thank you. Scott, best of luck. It's been a real pleasure working with you over the years, and I think we've all benefited from having you as a resource. So thank you, and be well.

Thanks so much. Thanks, Matt.

Our next question comes from William Wallace with Raymond James. Please go ahead.

Thanks.

Scott, I'll echo Matt's comments and just thank you for all the help over the years, and I wish you luck in your retirement. Thanks, Bob. I wanted to just back up a little bit to PPP. You mentioned the accrual of the fees over the two-year life of the loan. Is there any reason why we wouldn't expect that the very large majority of these loans wouldn't be forgiven over the next 60 days? No, I don't think we have any reason to believe that's not true at all. So it's likely, which is why I just wanted to raise the point that if you're thinking about the margin going forward, there's going to be a potentially material impact on the margin in the second quarter and possibly the third quarter as well. So, yeah, hopefully the majority of these borrowers will get forgiven, and that means they're spending money for the right thing. So I would expect there's going to be a fairly sizable acceleration. The only thing that I question is the capacity of the SBA to actually process all of those borrowers those forgiveness requests. That is going to be interesting. So I think there's as much risk there as anything we've seen in this program is just the SBA's capacity to process all those requests because you can start in, what, probably seven weeks or so, there'll be banks starting to request the processing of forgiveness. And that's going to be an interesting exercise just in terms of the, you know, the ability of the FDA to turn those around timely. Yeah, agreed. I'm sure it won't be without a pickup, just like the initial launch of the program itself. In trying to kind of maybe get a sense of what a second round might look like for you guys, you mentioned I think 1,200 applications are currently in process that were not closed before this ended.

Can you give the dollar amount of those and then maybe give us a sense as to what percentage of the applications that you did process were approved?

So I don't know the specific dollar amount, but if you make the assumption that the average loan size, which is based off of what we did approve, was about $70,000, you can do the math and come up with the number that's remaining for those that we haven't processed. Well, could you repeat the first part of the question, though?

What percentage of the applications that you did process were approved for the program?

We had very few applicants that did not get approved, very few.

Okay, thank you. And then I'll just ask one last question. We haven't talked about loan growth for a reason.

I assume there's probably not much new loans being put into the pipeline. Maybe there's a little bit of activity, or maybe I'm completely wrong. I'm wondering if you could help us think about loan activity and then the rate of payoffs versus – given that the non-bank lending sector is now shut down. So just trying to get a sense as to what the portfolio might look like over the next, say, quarter or two.

So the, yeah, you're right. The installment portfolio, the installment portfolio, particularly the indirect portfolio, the activity has not come to a screeching halt, but it is very slow. as a result of the shutdown of not all of the car dealerships. So that's slow and will continue to be for a while, and that portfolio runs off at a pretty good clip every single month, so we won't replace that. The mortgage portfolio, the pipeline there, hanging in. Not that far off from where we were this time last year. And given rates, you'd think it'd be a little bit more active, but it's not at the moment. And the refi business is a little bit more active than the purchase. And on the commercial side, we're just working through the already committed and in progress fundings of construction loans. There's not a lot of activity coming back into the pipeline at the moment, partly because of the economy, partly because of the distraction. Our people are focusing more on PPPs and deferral. But that's everybody. That's the retail folks as well as the commercial folks. So I would suspect that outside of the growth that we'll report as a result of the PPP loans, the core portfolios... will be a little softer.

And what about what's coming due that normally you would expect might go to another financial institution?

Are you guys refinancing that or are you finding that there's liquidity existing on some of your customer balance sheets already to pay off?

Interesting. So those that we want to keep, we're fighting to keep. And And those that we'd love to put off our balance sheet on to somebody else is a little less successful in doing it at the moment. So we have no choice but to work with the client and mediate the risk as best as we can. But there hasn't been a lot of that activity, quite candidly, in the last 30 days. And lines of credits typically don't start to come up for extensions, renewals until June, July, August. So there will be more activity at that point in time.

Okay. Thank you for that.

I'll see you later.

Thanks, Bob.

Our next question comes from Colin Gilbert. Please go ahead.

Okay. the call is getting wrong just do more quick follow-up do you have a number in terms of loans that have been asked for forbearance post 331 this is through April so April through April 15

which is in the debt that we had sent out. So through April 15th, it was 4,292 loans that were deferred for $587 million.

Oh, okay, got it. That was big. Okay. Okay. Sorry. I should have seen that. And then just finally, just back, just another question kind of around reserves. You know, if we look back, I mean, your lost content historically has been just, you know, basically nonexistent, but yet... It looks like I think your peak reserve kind of around the crisis was like at 140. I mean, are there dynamics that are occurring within the book that would point to you guys being able on this go-around to carry a much, much lower reserve than when you peaked at 140?

Colin, that's a good question. You know, looking forward with, you know, the impacts of COVID, that's really a tough call at this point to determine what the, you know, what the future reserves will hold. I know that I've looked at some, you know, reserves relative to our larger brethren, and, you know, they do maintain a little higher total reserve, but they also have higher loss content. So we're sitting at the 81 basis points right now as a percent of the loans. It's hard to determine at this point how the COVID crisis will unfold and whether that moves closer to one or it stays in its current levels. So that is a very difficult question to answer at this point in time given the facts that we know today. Joe, is it possible that some of the purchased loan accounting contribute to that differential. It's possible. I mean, that gets pretty complicated, but I think there's a possibility that that has had some impact over time.

Yeah, for sure, for sure. Okay, I will leave it there. Thanks, you guys, so much for your time.

Thanks, Colin.

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

Great. Thank you, Grant. Lastly, we typically have many employees and directors who listen in on this call, and I just wanted to take the opportunity to thank every one of them for their understanding and their effort, their engagement, and their support. It's been difficult and demanding time for all of us, and we really have risen as a team to our status as essential. Most important, I want to thank you for caring, caring about our customers, our communities, our shareholders, and each other. We are not in the banking business. We're in the people business, and I could not be more proud to work side-by-side every day with 3,000 colleagues that make Community Bank System the organization that it is. Thank you all again for joining, and be healthy, be safe, and we will talk again next quarter. Thank you.

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