Q1 2020 Earnings Call
our speakers will be referring to
Prepared slides they're going to discussion. You can find the size going to bancorpsouth.com and clicking on our investor relations page where you'll find them on the link to the webcast or you can view them at the exhibit to the page that we filed yesterday afternoon. And now I'll turn it down Robins for his comments on our results. Thank you. Will good morning. Thank you for joining us today to discuss BancorpSouth first quarter 2018 performance. I will Begin by making a few brief comments regarding our pandemic response as well as our first-quarter financial highlights. John will discuss the financial results in more detail and crisp or phone no more color on our customer and Business Development efforts.
After we conclude our prepared comments our executive management team will be happy to answer questions. Let's turn to the slide presentation slide to contains. The legal reminders will has already discussed. I'd like a call in just a few minutes talking about the current pandemic and our response is a company a few highlights of which are included on slide three. These are certainly challenging times in which we live our thoughts and prayers to this morning to those impacted by this horrible virus both from a health standpoint and financially we've had several teammates across our footprint who have contracted the virus and obviously many others who have been impacted weather Thursday through the help of friends or family or through financial hardships as we look at the impact to our company operationally, we've taken many of the same steps as our peers are priority from day one has been to protect the health and well-being of our teammates while also continuing to meet the needs of our customers and communities we serve
I would categorize our response into three broad categories operations front line and our team-mates our business continuity team under the leadership of Jeff. Jagger's has done yeoman's effort and adapting our pandemic planning to this particular situation over 40% of our team mates have the ability to work remotely at least in some capacity. This is allowed us to create more space mission is to spread out our team mates whose job functions require them to be on site beyond that we have physically separated teammates and highly critical areas both in terms of space and work on a schedule such that personal interaction is very limited in an effort to adhere to the government of guidelines and to protect both our customers and teammates. We did convert our branches to drive-thru only with the boss availability as necessary. I believe these actions are consistent with most of the banks across our industry. These are just a few of the many steps our business continuity team has helped us implement.
As to our team mates more specifically our first priority has been to protect their health particularly those who are high risk, according to CDC guidelines. We have provided our team makes the opportunity to take care of themselves and their families during this time and a way that's not damaging to them financially. Additionally. We provided our team mates with an additional three weeks of paid time off that can be used specifically for family and dependent support finally. I'd like to briefly address the customer impact. I think it's important to emphasize that our team is available to to meet any and all needs of our customers Chris. We'll talk more about the government stimulus and the wage a program in a moment, but you are a great example while the paycheck Protection Program was designed and implementing implemented at lightning speed that has certainly been well received by our business office hours are Bankers have been working around the clock since the cares Act passed in Congress to ensure we could support our customers. I'm extremely proud of our team's effort our technology team our marketing team RSP.
Team our loan operations team and almost all of our front-line Bankers have invested countless hours into this program in total. Well over two thousand of our team mates had been actively
involved in supporting the paycheck Protection Program effort
In addition while working 18-hour days to handle this loan demand the team has been working diligently with our current customers to provide loan modifications for qualifying customers who needed assistance. These are just a few very high level highlights of our efforts. I can't begin to cover all the steps that have been taken or you have proper recognition to all of our deserving leaders and teammates during the time. We have a lot of this morning with now discuss the results for the quarter slide for contains our financial highlights for the first quarter given the volatility and earnings associated with the provision which we will discuss more in a moment. We've heard a number of our analysts and investors the desire to monitor pre-tax pre-provision Revenue r p p n r as we work through this cycle accordingly. We've added this non-gaap metric to our disclosures this month outside of the impact of the provision our company continues to perform very well. We generated ppnr for the quarter totaling 91.7 million or 1.74% of average assets.
On an annualized basis this represents an increase from 1.3 1.63% for the first quarter of last year and 1.68% for the fourth quarter. I would not doubt that we adjust for non-operating items in our calculation of this metric which is defined and reconciled in our earnings release.
Reported gaap net income available to Common shareholders for the first quarter of 21.9 million or 21 cents per diluted common share. We had a negative MSR valuation adjustment of 11.1 million months or merger-related expenses totaled 4.5 million for the first quarter accordingly our net interests our net operating income excluding MSR was 34.4 million or 34 cents per diluted common share earnings for the quarter. We're certainly impacted by both the rate environment as well as additional provisioning associated with the economic impact of this pandemic. We close we close the acquisition of Texas first effective January one, we completed the operational integration of this transaction late in the first quarter as well our new teammates from Texas first under Rodney Crowell have done a great job working through this conversion and getting up to speed quickly particularly in light of the operating circumstances.
After the provision specifically while this too early to estimate the ultimate impact of this crisis to our borrowers. We recorded a provision for credit losses of $46 billion for the quarter. Most of that is reflective of the new Cecil adoption-related outlook for covid-19 effect on the economy and our loan portfolio. It should be noted that we came into this cycle with robust Capital Lo n plz and strong liquidity. The quarterly provision was determined primarily by the adjustment of certain economic factors that are considered in our Reserve methodology given the level of uncertainty associated with regulatory guidance. We elected go ahead and adopt Cecil as of January 12020 as previously disclosed our total day one allowance increase was approximately 63023000000 of which was a gross-up of previously purchased credit impaired loans while the remaining forty million was recorded straight to the beginning retained earnings net of tax impact.
mortgage had a
Excellent quarter in the life of the rate environment and refinance activity producing total volume of 477 million for the quarter which contributed to production in servicing revenue of 20.6 million wage. Chris will discuss our mortgage activity in more detail in a moment. But our experience has been that mortgage has been somewhat of a natural Hedge for us in a declining rate environment coming into the quarter. We were in a unique position with many of our peers and that we raised over four hundred and seventy million in capital during the fourth quarter of 2019. We began the quarter looking to execute on our share repurchase plan to deploy a portion of this new Capitol accordingly. We repurchased 3.3 million shares in the first quarter for approximately $87. We temporarily suspended our buyback program in March due to the changing economic environment and intend to wait until we have First Choice visibility into the impact of this crisis before we re purchase additional shares.
John will discuss Capital more in a moment needless to say raising low-cost Capital late last year has turned out to be a very good decision for us. We are obviously pleased with our Capital levels and, our ability to whether this economic downturn as of March 31st, each of our regulatory Capital metrics have buffers in excess of three hundred basis points above the regulatory well-capitalized thresholds. I'll now turn to John and allow him to discuss our financial results in more detail gone. Thanks, Dan. Good morning all if you'll turn to slide five, you'll see our summer income statement off during the summer income statement net income available to Common shareholders was 21.9 million or 21 cents per diluted common share for the quarter as Dan mentioned earlier. We did had two significant non-operating items in our first quarter results. We had a negative pre-tax MSR valuation adjustment of 11.1 million and pre-tax. Yep.
Play the expanse of 4.5 million accordingly. We recorded net operating income excluding MSR available to Common shareholders of 34.4 million for the quarter or thirty-three cents per diluted common share compared to 67.8 million or $0.65 per diluted common share for the fourth quarter of 19 and 55.9 million or $0.56 per diluted common share for the first quarter of 2019. I would like to remind you about the merger with Texas first that damage and earlier doesn't affect the comparability of the financial information shown on this slide as well as the subsequent slides that we will discuss in addition the summit and Texas Star mergers, which close late in the third quarter of nineteen in packed comparisons of the first quarters of not 2019 and 2020 this slideshow also shows the pre-tax pre-provision. Yep.
Revenue metrics damn mentioned earlier both in terms of dollars, and as a percentage of assets, you can see from the comparisons provided that we fared well relative to both first and fourth quarters of 2019 our net interest interest Revenue declined 1.9% compared to the fourth quarter of 2019 and increased 9.8% compared to the first quarter of 2019. I believe it goes without saying that the net interest margin has been and should continue to be under pressure as a result of the ongoing issue and emack & related Fed rate actions are reported net interest. Margin for the first quarter was 3.54% while our net interest margin excluding incredible deal with 3.48% comprable metrics for the 1st fourth quarter of 2019 were 3.76% and 3.61% Respectively. We reported a phone number.
an interest margin of 3.8
6% for the first quarter of 2019 while our core margin was 3.74% The accretion component of our Gap margin was adversely impact impact of the changes in the rules associated with the accounting for loans under Cecil as we look at the quarter-over-quarter change in our core. Margin. The shift in earning asset mix is responsible for approximately 10 basis points of the 13 basis point total decline as we mentioned in our fourth quarter called given the mid-november capital raised only about half of the margin impact was realized in the fourth quarter results. Also, we had a shift and asset mix attributable to the deposit growth and the quarter finally the FED actions contribute to all three basis points of that compression while closing of the first Texas first transaction had a very nominal impact. I'll take just a minute to talk about our liquidity position weather in Beijing.
Form of the SBA paycheck Protection Program loans request for loan deferrals or mortgage for appearances. The bank has more than sufficient resources of liquidity home address. Our customers needs during this pandemic event in addition to 1.7 billion and unplayed securities as well as on balance sheet cash and cash equivalents exceeding two hundred and fifty million at March Thirty One. We do have substantial off balance sheet liquidity including secured funding lines of 6.7 billion with the federal Home Loan Bank Thousand nine hundred fifty million with the Federal Reserve the bank also maintains unsecured fed fund lines with other Banks totaling about a billion these off-balance-sheet liquidity sources team and played Securities provide a approximately ten billion in additional funding sources. Should we need it in addition both the fhlb and a Fed have provided additional funding on Thursday?
Charities to assist with extenders programs suffice it to say liquidity is not a concern for us at this point in the cycle before we move tonight interest Revenue expense. We you can place to see the impact of the provision that Dan mentioned earlier on earnings. We had a provision of 46 million for the quarter compared to Nova quarter provision for the fourth quarter of 2019 wage provision of $500,000 for the first quarter of nineteen Dan has already mentioned the impact of the pandemic on a provision and Chris will touch on credit quality in more detail in a moment. If you turn to slide 6, you'll see a detail that are on interest revenue streams total non-interest revenues was 76.5 Million for the quarter compared with twenty four point seven million for the fourth quarter of 2019 and 64.2 million for the first quarter of 2019 mortgage revenue is the largest driver of violent dog.
Till T. And these totals across Court.
As Dan mentioned the rate environment resulted in elevated refi activity providing a significant increase in our mortgage production and servicing Revenue in the quarter total production servicing revenue of 20.5 million was somewhat offset by the non-cash MSR valuation charge of 11.1 million. Chris will discuss mortgage as well as insurance and money management in more detail in a moment the final item. I would like to mention briefly is other non-interest Revenue during the fourth first quarter. We sold a book of business with in our insurance agency to one of our producers which generated a book game of just over four million. This game was recognized in other in non-interest revenues during the first quarter. Chris will also suck on this further in a moment, but it will have an impact on future commission Revenue about two and half million annually.
Slide seven presents a detailed not interest expense totaled loan interest expense for the first quarter was 168 million compared with a hundred sixty two point four million for June 4th quarter of 19 and 150 million for the first first quarter of 1902 operating expense which which excludes merger-related expense and other one-time items was 163.5 Million for the quarter compared to 156.6 million for the fourth quarter and 149.1 million for the first quarter of 2019 salaries and employee benefits expense is the only item that really warrants additional color. The remainder of the expense categories were very stable quarter-over-quarter a.m. Central Corridor comparability standpoint. I would remind you that in our fourth quarter call we discussed year-end accrual true UPS, totaling approximately four million that provided a one-time better wage.
Beyond that the quarter-over-quarter increase is driven by several seasonal factors in addition to the Texas first merger. First of all, the seasonality and the renewal cycle in our in our book of business drives higher producer commission payouts in the first quarter second, the the FICA limit resets adversely impact our first quarter expense as well on that. I don't believe there any other large variances or other one tile items that warrant further for the color slide eight provides a graphical presentation of our total Capital position wage. Is Dan mentioned and as you can see here our fourth-quarter cabarets really bolstered our total Capital ratio and provided some needed diversity to our Capital stack as a 6:31. Each of our captain metrics is over three hundred basis points above the regulatory prescribed well-capitalized minimums. We've stressed our Capital using prior.
Cycle Loft experience as well as current economic forecasts. We do feel good about our capital capital levels at this point in the cycle that concludes our review of the finance Jules. Chris will now provide some color on our business development activities crisp. Thank you John. Good morning, everyone. You can slide 9 reflects our funding mix as of March 31st, the both the first and fourth quarters of 2019 of the total growth for the quarter 370 million was attributable to the Texas first acquisition by 130 million was achieved organically off. The organic growth was a little bit lighter than our normal seasonal experience with first-quarter growth. We had some public fund balances that were moved out a little earlier than expected in and our historical experience. It's not shown in the slide. You can see that that Trend in the average balance is with rupt seven hundred million in total quarter-over-quarter. We mentioned in our fourth quarter call that we believe we had reached inflection point on deposits coughing.
We saw one basis.
Point decline in the average cost of deposits compared to the fourth quarter. However, this elevated seasonal public fund balances provide a headwind of approximately 3 basis points on our total cost of deposits off while the magnitude remains to be seen we expect deposit cost to continue to Trend down in light of the current rate environment as we look at geographical performance relating to deposits. We have several divisions across our footprint in a standout this quarter the East Central, Mississippi Memphis Metro North East, Mississippi West Tennessee, Missouri, North Central, Alabama and Pine Belt divisions all reported strong deposit growth for the court. I think it's like 10, you'll see our loan portfolio as of March 31st compared to the fourth quarter of 2019 and the first quarter of 2019 as Dan mentioned we closed an integrated took his first transaction which added $185 million to our portfolio.
Otherwise our loan portfolio declined nominally on an organic basis the mix of our loan portfolio is consistent quarter-over-quarter beyond that. I would like to just make a few comments around our efforts to work with our customer. We've not seen the increases in line utilization that many banks in our industry have experienced. I believe this is largely attributable to the make up of our loan portfolio as we've discussed in the past the guards tickets and Islander and our average loan size is less than $150,000 and an effort to work with our customers through this pandemic. We are offering 90-day payment deferrals on loans less than 30 days past due and in compliance with all barring covenants as of the end of last week, we had received a further requests on approximately 3,700 loans and total payment deferral of approximately twelve million.
These customers are taking prudent steps to preserve cash during this time of uncertainty additionally our lenders SBA specialist and credit administrators have been working around the clock helping customers take advantage of the opportunities provided under the cares act and specifically the p p p p 3 is we've started calling it program our relationship managers received approvals for approximately eighty five hundred loans, totaling approximately 1 billion, which we are currently in the process of funding of these applications approximately 40% of the loans worth less than $25,000. We are pleased and proud that we were able to serve such a broad Coalition of diverse businesses across our footprint and we are ready to support existing requests new request if additional funds off are granted. It was really a tale of two quarters and that we woke up one morning with 3% unemployment and a good loan Pipeline and things came to an abrupt stop as businesses and projects were put in a club.
Hold pattern despite the overall organic loan growth pressure during this time to still worth mentioning several divisions producing meaningful loan growth at the beginning beginning of the quarter our Dallas, Texas, Missouri South Arkansas in Northwest Florida divisions all had great quarters from a loan growth perspect.
starting on Slide
11:00 the next several slides provide some additional disclosure on those portfolios. We consider to be higher risk as a result of the pandemic like to reiterate dance comments that it's simply tears too early to estimate the ultimate impact on the economy or our loan portfolio said differently. Our risk is not limited to just these particular portfolios, but they are deemed to be the highest risk at this point in the cycle spots twelve to fourteen provide additional detail in the granularity and diversity within each of these portfolios and across our geography as we've mentioned several times our average loan size. It's just $150,000 which is further evidenced by the statistics. I provided a moment ago from the PPP program as the average loan size under that program has been approximately $120,000 off slide fifteen contains credit quality highlights for the quarter.
The first bullet contains information regarding our adoption of Cecil some of which then covered earlier our day one increased to the allowance was 63 million forty million of which was recorded to retain birth net of the tax impact and twenty-three million was the result of recharacterize I be characterizing PCI loans into the new PCD treatment and grossing up the credit Mark. We're exposed to provision of 46 million for the court. Finally. We had net charge-offs for thirteen point seven million for the quarter primarily from charging down previously marks from those former PC Island on March Thirty 12020 allowance for credit losses, total 218.2 million or 1.53% of net loans and leases. We are pleased with the level of coverage at this point in the south.
As you can see in the second bullet point our net charge-offs for the quarter were driven exclusively by acquired loans. And if we discussed with many of you when we've been out on the road, the accounting under Cecil will have a significant impact on charge optometrics given the accounting under the PCD rules as compared to the old PCI methodology. The fact that the credit discount is grossed up in our allowance results in higher levels of charging fundamentally. There were have been no economic change. We've attempted to provide good disclosures in our press release around all our credit quality metrics from an acquired purses Legacy perspective. Finally Assad impact of the acquired loans are other credit quality metrics or stable quarter-over-quarter. We've tried to be as transparent as possible with additional disclosure around current activity and portfolios that could be impacted by the pandemic and we'll continue to play play or allowance methodology and credit monitoring functions as the economic impacts become more visible and measure
So that sixteen provides a graphical waterfall presentation of the changes in our Lounge, which I discussed on the previous slide. You can see the impact of Cecil adoption the Texas first merger the net charge-off first quarter provision in the road forward of our allowance for credit losses again, though the adoption of Cecil combined with our first quarter provisioning our allowance coverage increased from .85.
Let net loans and leases at the year-end to 1.53% at March Thirty 12020 anything on the mortgage and insurance the tables and slide Seventeen provide a five quarter. Look at our results for each product offer our mortgage banking operations produced origination volume for the quarter tonne in 477 million. Our mortgage team has worked long and hard hours to help our customers take advantage of historically low rate environment particularly the dip that occurred in mid-march home purchase money volume was $285 million or 60% of the total volume for the quarter. Even the timing of the rate declines. We expect refinances to be larger percentage of volume in the second quarter deliveries in the quarter were 409 million compared to $419 in the fourth quarter of 2019 and 239 million in the first quarter of 2019 production and servicing Revenue, which excludes the MSR adjustment total 20.6 million for the quarter compared to 6.9 million for both the first and fourth quarter wage.
2019 our margin was 4.37% for the quarter representing an increase from 1.03% for the fourth quarter of 2019 the velocity of the pipeline increase near the edge of the quarter created an anomaly in the mechanics of the margin calculating for the quarter the pipeline increased from 290 billion at the end of the year to five hundred and seventy million at March 3128. The five hundred seventy million pipeline of March Thirty One consists of approximately 70% and 30% purchased money, but that said spreads widened in the corner as a result of capacity. It's from a processing standpoint. Finally as Dan mentioned earlier the MSR valuation adjustments during the quarter was a -11.1 million.
Living to Insurance total commission revenue for the quarter was 29.6 Million compared to twenty seven point six million for the fourth quarter of 2019 and 30.2 million for the first quarter of 29th. As we mentioned each quarter. We typically Benchmark to the same quarter in the prior year given the seasonality of our renewal cycles. First quarter is always one of the better 2/4 per insurance has resulted a percentage of our renewals that occur at the beginning of the year the slight decline compared to our first quarter of last year. The result of a couple of factors are contingency commission estimates for the quarter were about a million less than a quarter last year and additionally as John mentioned we sold a book of business to one of our producers which generated approximately 2.5 million annually in Revenue. We were pleased with our ability to hold Revenue in a tight Ranger left in the cycle. Where wild our renewal rates are extremely high compared to Industry averages is difficult to generate new business in this environment and insurance commission. Revenue could certainly be under pressure at this Panthers.
Angry, finally, I'd like to briefly mention wealth management wealth management Revenue held up. Well during the first quarter at 6.6 million, which was flat compared to the fourth quarter of 2019 and up from 5.6 million for the first quarter of last year. But that's it. I revenue is directly correlated to assets under management in the those valuations. Therefore. This is another area where we would could see some downward pressure on Revenue going forward if asset values remain low.
Even with this volatility, we believe these non-interest-bearing business lines continue to be a core strength for our companies. They give us a diverse Revenue stream not totally tied to the lending and credit space now, I'll turn it back over to him for his concluding remarks. Thank you Chris this pandemic and its impact on the economy is certainly not the start for 2020 that we had hoped for or envisioned. But I believe our industry and our company in a much better position than we were entering the last financial crisis and looking at us specifically. We have much better risk management processes and functions across the board in particular is Chris mentioned we've made significant strides in our credit underwriting and monitoring processes as well. As a diversification of our loan portfolio is John discussed. We are pleased with our regulatory Capital metrics as well as our funding mix and liquidity metrics off our Capital metrics indicate. We are positioned to be able to whether all of the stress scenarios.
We have analyzed whether there is still however, there is still obviously a lot of uncertainty around the ultimate impact of this pandemic with that operator we have now be happy to answer questions.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question, please press * then two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question Queue at this time. You'll pause momentarily to assemble the roster.
The first question today comes from Kevin Fitzsimmons of d a Davidson, please go ahead.
Hey, good morning. Everyone Hey Kevin, how are you?
Good. I'm doing good, Dan. Hope you are as well. I appreciate all the additional disclosure very helpful specifically on the PPP program or the P3 program. I like that better. Can you walk us through in general terms? Just the I would assume it's just going to be a lot of noise in second-quarter from that. So from a very top level I would think there's some dilute of impact to the margin in a vacuum just from from loans that are basically earning 1% or carried it 1% You're going to have the balance has carried an average loans, but that's basically going away for the most part third-quarter. I'm sure there's expenses associated with this program and then origination fees are they dead? How should we think of those are those going to flow through the margin or flow through the non-interest revenues line if you could just
Give us a sense on that. Thanks. Yeah. Sure Kevin. I think that's those are good questions. And and again we've never we've never made a billion dollars in loans in a week before. So it was I thought it was an interesting interesting time and it looks like they're going to turn on some more money. So our team is geared up for for round two. So your specific questions had to do with the fees so off there are fees associated with these loans at the days. We will book those in and that will come in as interest income amortized over the life of the loan if the loan pays off early on a loan is Forgiven as you suggested in the third quarter, then we would have a windfall at that point for whatever amount of the loan is Forgiven. There's been discussion recently on how much of the loans are going to be forgiven. How much of the loans businesses are going to just carry as low cost capital and use the proceeds for different reasons. So this point I don't know that we have a lot of clarity in if all of it will be forgiven or something less dead.
Of it, but you're exactly right on your second quarter impact the 1% carry plus the fee coming into interest income is still going to cause some reduction in our interest. Margin. It will be deluded to margin in the second quarter. And then assuming we have big pay Downs or big forgiveness in the third quarter. It would be hugely accretive to margin in the the third quarter. There are certainly expenses involved and caring that so you'll see some elevated expenses in 2 Q. I don't know what those expenses would flow forward into three Q cuz at that point extra cost should have basically gone away, but we will definitely see some additional cost and and to queue for the processing of all of this.
that answer your
Questions. Yeah, that that is great one quick follow-up cuz you alluded to the potential round two of the request. You initially got what kind of percent would you say? You filled and in other words, is there a pipeline of requests you didn't get filled because the program ran out of money that will will start the pipeline going for round two years. So, you know, we were we were actually taking applications on Thursday morning and entering them and getting approvals up until the time that the money ran out. So from a success rate on a first-round we were in the high nineties 97% plus that came through in the first round since then. Our team is already seeing a little over a thousand applications that are sick ready to go and round to you know, we're taking we took three hundred applications plus yesterday. So the applications are still flowing through and and I would have suspect will continue to birth.
So until the money that comes available whenever they decide what they want to do in in DC.
Most of the stuff, you know, remember sole proprietorships were not allowed to apply until the 2nd Friday or a week after it started. Those are going to be the smaller dollars Chris commented, you know, we saw fifty percent of the dollars that we the loans that we produced come in at under $25,000. Our average loan size at $120,000 is half or less of the national average wage do that continues to show the granularity of our overall customer base, which which I continue to believe is a big positive for our company as a whole to have that granularity in our in our loan portfolio existing loan portfolio plus the size of these paycheck Protection Program loans that we put out.
That's perfect. Thanks, Dan. You're welcome. Thank you very much, Kevin.
Next question today comes from Jennifer Demba of SunTrust, please go ahead.
Thank you. Good morning. Good morning. How are you? Jenny? I'm good. How are you? Good. Can you talk about what code deferral rates you've seen em on might be the more invulnerable loan buckets in your portfolio. You know, whether it be Health Care restaurant or whatever. It is off until I think we're seeing deferral request across the portfolio in in total, you know, it's interesting many of the folks that were the first ones calling needing deferrals with maybe in the groups that we would wonder, you know, well, we don't think they're going to need a deferral but I think people were just afraid I think they're still fear out there. You know, Chris gave the numbers we've got about twenty eight million dollars in payment deferrals sitting out there right now which you know represents somewhere less than 9% of the number of loans that are in our portfolio think we break it down at all by long tight. And do we Chris know we don't have
That granular look at it.
Just add some color to it. I think Dan's right, you know the some of the first request that came through or from the medical community. They felt that pretty quick especially in the elective surgery the orthopedic Baptist space what we've seen them do is you know there weathering the storm by you know, protecting cash with the loan payments. We've seen them, you know, reducing salaries, you know, making furloughs taking advantage of the PPP program and other things to get through this, you know, the visibility we see on those folks now is they're positioned well to get through, you know, the ninety days or a hundred twenty days, whatever that looks like and then you know in the clearly the hospitality industry that was you know to the high high percentage of those requested deferrals. Once again, what we're seeing them take action is dead, you know, they're consolidating down to lower staff. So operating on one floor, you know, some of our operators that might have multiple hotels in one area or consolidating into one hotel and kind of a pot approach. Yep.
We've done with branches to some extent so really, you know, the communication flow back and forth between those folks has been good. I think you know they to dance Point everyone was taking advantage of the deferral process a lot of that. You know, I think frankly The Regulators worked with as quickly to so The Regulators came out early and said it was, you know, gave us some TDR cover and I think that gave the same Banks ability to work with their customers quick and efficiently suggested that we were. Yeah, I think again, I think our team has been engaged with our customer base quite quite well and you know, I think at this point, I think I was hoping that we can get some recovery and get back to work and do the things that everybody's talking about Chris specifically on the medical the the bigger medical clinics and the bigger hospitals. Thursday are going to get some government relief also not near enough to offset the losses and the revenue to them but the medical business will will allegedly I Believe come back faster than some of them.
Good things can how do you think the reopening Trends look in your footprint over the next several weeks and that's a great question. You know, we're in eight states. We've got eight Governors and we've got eight Governors that all think differently and they're all putting out different advice. We're in some markets who have really locked down tight with local mayors that have you known not required more stringent processes than the states are requiring. So, you know, it's a hodgepodge for us from market-to-market. We've been fortunate in that we've only had a couple of locations where we've had some some virus impact our company specifically what we've been able where we've had to take some action to protect our folks a little tighter, but I think when you look at the the restart process off the local the local Governor here in Mississippi is saying that he thinks that in the next couple of weeks, they're going to allow, you know, some things to begin to restart. I think all of us in the banking industry are concerned we want to continue to protect. Yep.
people so I see us not jumping out front and you know wanting to bring everybody back into the
And building and get close to each other again. I think we want to make sure that we stepped into this in a slow normal way. We've actually found out that we can work quite well remotely and we can communicate with each other many of us like me have been in the office most days and a lot of our folks have to come to the office every day, but by allowing the other two thousand plus people that can work remotely to do so has significantly lower the headcount within our facilities and that's protected us and helped and help keep us safe and and not ill.
Thank you, Jenny. Appreciate it.
Again, if you have a question, please press * then 1 the next question today comes from Kathryn Miller, please go ahead.
I got good morning everyone. Hey, good morning. Do you know want to see if you could give us any kind of color on economic assumptions that you used for your forty-five million covid-19 this quarter.
Well, that's a good question. Isn't it? You know we use some of the same providers that that others are using out there. We use a a list of economic forecasters off. I'm not sure that any one of them is any better or worse than than another we use a group called for most which is a worldwide economic forecasting team. We met others of capital economics capital capital analytics Wolters kluwer. So we're watching a multitude of different folks that are out there. I think when you look at the specifics, you know, I'm seeing unemployment climbs just like everybody else. We're seeing GDP Contracting just like everybody else. So I don't know that our numbers are going to be any different per se than anybody else is coming in Thursday, March 31st, and it was now twenty days past the end of the quarter and things continued to to change and adapt. I think today most of the forecasters are saying unemployment is going to be dead.
Worse than they thought on March 31st, so it'll be interesting to see what happens between now and June 30th at the end of this quarter John. You want to add anything to that?
Just that, you know, we we we used the foremost service, but certainly also guided somewhat by Moody's and some other services that are pure banks are using we use the Baseline forecast from foremost that has projections on GDP on unemployment rate of unemployment rate is probably the the most influential influential of those of those stats within our model with our model. Yeah when our model home so we we we have unemployment Rising I think to maybe ten or 12% in the foremost forecast. I think some some services are showing higher shortly after March 31st, but you combine, you know, adopting Cecil and having life life of the loan estimates for the first time.
I was just the insurance.
Last Model and then you combine that with covid-19. It's a perfect storm of it's guess work. I mean it's an estimate but we feel pretty good about about the process. I went through we feel pretty good about our model. So the perfect storm on all the different moving Parts here in this quarter the the adoption of Cecil we talked about it late last year and earlier this year off our our net charge-offs went from zero to almost 40 basis points on an annualized basis, but all of that or the 90% of that is due to this adoption of Cecil where we Mark the lounge Mark loans up and then immediately charge them off so that you know puts a lot of noise in our net charge-off numbers as long as that we originated. We actually had met recoveries in the quarter.
Got it. All right. I got that just maybe the unemployment rate that was helpful that tend to 12% cuz we're seeing some companies that are probably waiting kind of a base scenario that an adverse scenario is that in your forecasts as well or do you just have kind of one case scenario with that tend to 12% unemployment? Oh, no, we run multiple scenarios. We run, you know, okay adverse, you know severely adverse and we're we're that's what we were talking about earlier and one of our comments on you know, as we look at the stresses that we put through our system, you know, the fact that we went out and raised 470 million in capital late in the fourth quarter makes us look pretty good at this point makes us look pretty smart. I don't know that we were at the time but, you know raising two hundred and seventy million late in the fourth quarter was is a real benefit to us at this point in the cycle.
For sure for sure. Okay, that's helpful. And then on enter the exposure, I know you disclose the only have 1% of energy loan, which is great. Cuz there's your other peers in Texas. But how do we think about any kind of indirect businesses or markets that may be impacted still by the the drop in oil and recently sure, you know, I think the the the drop in oil carries like every industry that have you know tentacles that Reach Out And Touch other things in in our footprint we're oil and gas production is a big part of the economy that's going to be mostly in the rural markets in East Texas or the rural markets in Louisiana where there's you know, well heads out there pumping and maybe some drilling rigs. The phone rings are gone. You know, those folks were in many times staying in hotels. Will the hotels aren't having any business. They already aren't having any business the local Ford dealer and the local Chevy dealer isn't going to sell off.
Trucks because of the slowdown in that business, so certainly the second and third-degree impact into that industry can have a longer damaging impact on the economy and and many markets that are like that. I don't know that we have a number for that. I mean again, I would tell you that, you know in some markets where it's heavily oil and gas waited the whole town, you know, everything in the in the dry cleaners are related to Oil and Gas.
And that's helpful. All right. Thank you so much. Thank you Catherine.
The next question today comes from John of Danny, please. Go ahead John guys. How you doing? Good. Actually I was going to ask about taxes and stuff. But you just didn't answer that. So obviously negative prices and stuff yesterday pretty interesting. Just just curious back to the PPP loans. What what is the average fee roughly on that billion dollars. Is it is it a probably around 3% give or take? Yeah. I think that's a good that's a good number John, you know, you know how it works. It's it's off on under $350 and 3% between 350 and 2 million and 1% above 2 million and we have loans in all of those categories, but we're we're waited on the smaller side. So, you know, three three perhaps maybe a little higher than 3% Probably a good number for us.
Okay, and then just one other question on on on mortgage, obviously, if you you know, like you said you back out the MSR impairment you had a strong quarter. You've got a good pipeline as far as going forward. Are you guys seeing any disruptions in the market? I mean there's been a lot of stories out there about obviously just given what's going on in the operating environment and stuff. But are you seeing any major disruptions to your to your mortgage operations know we've not are you talking about the ability to sell mortgages and disruption? What disruptions are you specifically speaking? I guess. Yeah, I guess in general the ability to sell. Yeah, you know, we're we're we're producing fannie-freddie Ginny paper and and we're not doing any private label pools. So, you know, we've not had any issue at all in and selling loans very quickly. And and like you said our pipeline is almost as full today or fuller today than it was coming into the the beginning of the second quarter. So so that team is continuing to hum, you know, and and work remotely and yep.
Lot of paper through the system. So we're proud of our mortgage team.
Okay. Okay. So okay and the Indian maybe just just one other question if I can just just as far as so you you step back on the buyback plan, you know, what else just any thoughts on m&a activity over the remainder of the year just given where we're at right now. Yeah, that's a great question John. I think when we look at that wage certainly, you know folks were talking coming into the quarter. You know, when you look when you look back as Chris said January and February things are rocking along fine. We've got 3% unemployment. The world is round, you know, everybody's talking about you know, what do we do next? How do we keep things moving forward and all of a sudden somebody, you know had a wreck and off we go we're off in the ditch and all the things that we were working on is are no longer getting worked on I do think conversations out there, but I think with where we are today from a credit picture, my guess would be that almost everything is going to be put on the Shelf at least for a few months to try and figure out
You know does the economy bounce?
Something they're going to or does the economy, you know linger in a bad state for a while cuz that will impact m&a activity. We continue to stay close and talk to many of our friends out there down the street, but I don't think anybody's going to do anything at this point.
Okay makes sense. Thanks Dan. Be safe. Thank you.
The next question today comes from John Armstrong of RBC Capital markets, please. Go ahead John. Good morning. Good morning. Good morning couple of months. Just back on mortgage Chris. Can you can you just go over the nuances that the margin on the loan sold? And you know, it seems like you're tempering that a little bit south of us in terms of the outlet maybe talk a little bit about you know, the nuances and then the outlook on that. I'd like to have a 4% margin into perpetuity Chris. Can you arrange that for you know, that won't happen, you know, it's it's an accounting treatment when you have an increasing pipeline like that and the fees that are collected on the pipeline or are calculated against the the the book that closes that month. So that's why I can bounce around. So typically you'll see that in our numbers when you have a really rapid increase in the pipeline that margins going to go up now there has been some upward pressure on margins because of so much volume is dead.
Industry so much the capacity issues people are able to put a little more price in the margin and there's a little bit of that but on average I think are you look at it over time? Like we've always said our office is going to average, you know in that or we've been probably in the high ones something like that over time, but you'll see it bounced around a little bit. Is that how I like four and a quarter but you know, when you look up the pipeline that went wage basically doubled my plan almost doubled from from the end of the year to the end of March and we're hanging in there, you know above 500 million and that's a lot of volume coming through our our system. Yeah. That's what makes sense on the topic of pricing. I know it's it's maybe not the most robust market for new loans, but can you talk a little bit about what you're seeing and what you're asking for money on a new loan commercial on pricing and we're getting three requests today. It's I want to lower my rate. I want to defer my payment or I would like a PPP low-wage.
You know, I think I think what you're seeing you had a you had a huge increase in in in the prime rate, right? So immediately everybody new Cruze decreasing. I'm sorry decreases run. So I'm a little fuzzy brained after the P three activities. But so the first request that came out was you know, I need to get all my loans lowered and I needed busting my floors. So I think we've taken a conservative approach to their we're not we're not refinancing a lot of loans or repricing a lot of times. I think it's our feeling today that you know, a prime loan six months ago is a prime plus one loan today. And that's where our stance is today. We're not seeing a lot of new requests frankly right now. I think most people are in a holding pattern. So it's hard for me to give you any color on what new loan pricing looks like but I would say that we're pricing it today. It's prime plus one plus something that's that's it's in those mid fours if we're we're looking at those. Let's try to think we've seen very few new loan requests at all right last several weeks off.
The ones we've seen have been kind of a unique situation of some type that you know, we've been able to jump in and help somebody with but but very little, you know, big business people are trying to figure out how to get the phone back working. That's right.
Any others think you're going to see until things stabilize from an economic certainty or some kind of certainty perspective is just not going to be a lot of loan activity a price new ones. I think the pressure is going to be on what you do existing credits. How do you how do you how do you work with those customers through this?
That makes sense and then expand space. It's maybe you know, maybe a sensitive topic I guess but you still see some flexibility in respen space wage. Yeah. And so that's a great question when you talk about expenses and you know, we're continuing to look to try and make sure that we're controlling controllable expenses in a tight way, you know, one of the earlier questions was talking about wage is going to cost us, you know, you're going to see some expense creep in this quarter because we're spending money to to produce the 8500 lungs that we've already got on the books and every many thousand walk in and and and round too so, you know, there's going to be some noise on the expense side when we look at just the core operating company though, you know from a our biggest expense line is going to be you know over salaries and I think in in in 2 Q salary costs typically always comes down because we blessed through some of the tax pieces of the puzzle there and I think we'll do that again. So I would expect that we will see some dead.
Pending expenses on most of our lines. We've you know, we're still in the process of you know, finalizing and further integrating the Acquisitions that we close late in in nineteen and and early and and twenty, you know the guys over in Central Texas that came on board we closed that one January one. We converted them on, you know, the first part of March or middle of March right in the middle of the you know, stand down then it planning so, you know that I think will will continue to be able to harvest a little expense saves out of those areas. I think that's going to be offset at least in this quarter by the run-up and expenses around 6 p 3
All right, and then just last one you got the money question and I understand what you're saying in capital. But what would you need to see to start off super purchase program again to restart that?
Yeah, you know, I think we just need some some visibility. You know, I think we need to see you know, we need to see what what really could be happening right now. Everybody's waiting to see any evidence that the economy is going to bounce and I think if we can get some clarity around what's going to happen there, you know, I think again we when you look back we raised 470 million dollars in capital in a quarter. We spent eighty something million of that in this quarter. We had net income in this quarter. So, you know, not eighty million of that actually went away from our Capital base. I think we cannot get to believe that we've got sufficient Capital to weather whatever storm comes through at this point and we would like to be able to take advantage of that the pricing where we're sitting today, but I think the conservative stance and our stance is good. We've got to get some clarity looking forward before we're ready to to to depart with the capital that we're holding. I think it puts us in a position of strength to have the high level of capital that we have today.
Thank you.
The next question today comes from Matt Stevens, please. Go ahead. Well. Hey, thanks. How are you guys? Good a few follow-ups here and the loan portfolio just remind us. How much of that portfolio is is variable and will be repressing lower Libor or prime and I assume two floors down some more into play here. So just to update on the overall level of floors that will that will negate a portion of that variable rate loan portfolio. Sure John, you've got some of those numbers Matt floating rate loans or about 20% of our portfolio. That's about three about three billion about a third of those at March Thirty One. We're at the floor. That's the that's good news. The bad news the 2/3 or were not in the floor so that hopefully will give you a little guidance from a lab or pricing not a big not know mostly dead.
Mostly, okay. That's that's helpful. And then on on on the slide deck you gave us a nice breakdown of the home or risk portfolios, whether it's oil and gas retail hotels and and others that that's that's helpful and you gave us a loan to values by state that those are all the hot spots that I think most investors have took it as being vulnerable asset classes. I'm curious what your views are. Do you agree that those are the more vulnerable asset classes in the portfolio or do you have some other views may be different from then?
Yeah, I think Chris. I'm let you jump in here too. But I think we're we're probably in the same boat with everybody else these clearly come to mind quickly. If if the economy stays down long this is going to lead into the rest of the portfolio, you know, you're this isn't going to be limited to hospitality this could go, you know a lot deeper into the portfolio. If the economy doesn't recover quickly the stimulus money that the federal government is spending is you know is going to have an impact. The question is is is when when do we see that impact and how does that impact blow through to us on the different industry perspective Chris's there's some industry that you think I'm talking about here. I don't I'm not I'm unaware of any know I think Matt when you you know,
When this exploded the first calls, we got from customers or the first folks that were reaching out the sink well up with this list and I think you see that with other banks are saying too. I think the next month generation would be as it flows through the real estate book and and the tenants that are you know the support or pay those those payments. So I mean I use my own personal experience. I got a real estate investment. My tenants are orthodontist a dentist and eye doctor a title company in a real estate company title companies doing okay, the other guys are struggling a little bit. So I think those are the kind of things going to see from the real estate side as they start to deal with, you know have their tenants are able to make payments. Yeah, the the the hospitality the restaurant industry in particular, you know, not only are they stressing to pay us but also stressing to pay the rent and wherever they're wherever they're they're they're occupying the space and then you actually get down to the breakdown of your your restaurant industry. So we're seeing our franchise groups. They're down about 20% so Thursday,
Hanging in there with drive-thru only business.
It's the ones that aren't franchises or have a good drive thru type model or feeling it worse so that you know, you start breaking it down from there.
Okay, that's that's interesting and then switching back back to the rate environment. You mentioned the floors and and the variable rate loans. What about on the deposit side at South you've got some more room to bring down deposit cost any any more how you can give us whether that's kind of the the current spot rate on deposit cost or expectations for for how much to pause a Costco flower. Thanks. Yeah, when you look at deposit cost I think Chris talked about it or John one of them talked about the fact that we've got coming into first quarter. We typically are collecting deposits from some of the public entity. So the the counties the cities the municipalities that we that we thank those deposits are priced higher. So in the in the first quarter, one of you all said that that was about three month basis points on our deposit costs, and we've already seen that go away, you know, we continue to reprice deposits down. So I think we'll see a a nice move down in deposit cost in into
You don't have a number for that, but we're able to manage those deposit costs down.
Okay, that's helpful. Thank you guys very much. Thank you, Matt.
Conclude our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks. All right, thank you all for joining us today. If you need any additional information or any other questions don't hesitate to contact us. We look forward to continuing to communicate with you. And as we work our daily process with our customers and their respective communities, we're going to take care of our teammates and take care of our communities. We're going through this together. Don't forget to wash your hands.
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