Q1 2020 Earnings Call
Now we'll turn the call over to John Corbett. He and I will deliver Center States prepared remarks after which we will turn it over to Robert Hill to leave the South State team through its comments will then take off Q&A John. Thank you will good morning to all of you and thanks for joining us this morning. Hope you and your family is a remaining healthy and safe.
What is your name?
And after tax earnings, this is after an elevated Cecil provision of $45 million as a result of the pandemic even after the spell check is reserved the company still produced a return on tangible common Equity of about 10% Capital levels remain strong with a tangible common Equity at 9.1% off in response to the pandemic both wheel and Steve had begun stressing our Capital position on a pro-forma basis with South State Bank to confirm our ability to travel through this cycle without impact dividend or common Equity with a much stronger pre-tax earnings than a decade ago and conservatively underwritten credit book with a good borrower equity and surplus capital.
The income continues to be a bright spot as the drop in interest rates provides a Tailwind of both our Capital markets business and Mortgage business. Both of these businesses are operating at record levels of sales rep for Ability the income now represents 1.3% of assets, which is above our 1% goal. The liquidity of the company is also strong with over a billion dollars in cash and fed funds driven by non CD deposit growth of 13% during the quarter.
As for asset-quality CenterState into the quarter in good shape with an MPA ratio of 48 basis points and only five basis points of net charge-offs.
Earnings are always important other more urgent priorities in March and April as we quickly shifted our attention to the health and safety of our teammates and providing Financial to our clients during the mandatory shutdown. We kept our branches open during the shutdown, but we moved quickly to limit them to drive through service only to reduce the exposure of the virus to our branches boys 93% of the remaining non Branch staff have been working from home ever since fortunately. Our teams have experience working from home during Hurricane Season down there also mandatory closures.
Despite the hardships to our clients.
Times of Crisis our when our clients depend on us the most and we can really make a difference in their lives early in the shutdown our relationship managers and branch managers began in organized calling campaign to proactively offer assistance to those that are the most vulnerable.
We offer for ATM withdrawals. We increased our Mobile deposit limits and begin ramping up the process to distribute paycheck protection loans to struggling small business clients. I'd like to suggest that it's time to rethink the term Bankers hours. When I started in this business thirty years ago. I had a preconceived notion like many of a nine-to-five workday in golf at the country club in the afternoon. Nobody predicted that Bankers hours in 2020 would be twenty-four hours a day seven days a week with bankers at their desks after midnight.
That is precisely what occurred.
Two weeks after the PPP forgivable Loan program was launched by the SBA Easter weekend was The Crucible 6,800 loans to the SBA for loan proceeds of a half a billion dollars in just two days Saturday and Easter Sunday to put that in perspective that is three times the volume of loans that we generated a month in our team. Did it over holiday weekend?
Since the program launched CenterState secured in total nearly 7,000 loans for one point 1 billion dollars of cash flow relief for our small business clients. Home Alone was $6 and the smallest was just $1,170 borrowers included everything from doctors to Plumbers to retail stores and two churches schools in all centre-state secured continued paychecks for 130 thousand workers, and I'd like to publicly express my pride and appreciation for their patriotism during a national crisis. They stepped up and they were there for our clients at a time of need.
Finally, I'm happy to announce that the merger between CenterState Bank and South State Bank is proceeding as planned.
And if we have scheduled the shareholder vote for May 21st, we feel confident that the merger will close on schedule in the third quarter and there's also a small chance we could complete the month ahead of schedule our joint South State and Center State executive team began working together as one leadership team before the announcement of January and we continue to meet every Wednesday to integrate the two companies even during this crisis.
Periods like this of Crisis and stress can be times when new teams are fragmented and people are driven apart or they can be opportunities when new teams are Thursday through the trials that they overcome together.
As our newly combined executive team with South State collaborated through the crisis. The Silver Lining is that our personal relationships and our trust in one another have grown stronger. We are eager to move forward to serve our clients and communities and to produce generous returns for our shareholders and to do it together as one high-performing company will see you for more color on the first quarter financials. Thanks. John month was 3.74% down 3 basis points loan yields execration were down nine basis points interest-bearing deposit costs were down. Ten basis points off. Our teams make good progress again in March after the rate cuts.
Fewer day and 2.3 million and lower accretion income versus Q4 driven by our non-interest income businesses.
Our correspondent business which is capital markets and fixed income had twenty-seven point eight million in Revenue.
revenue of $11
Turning to credit and Cecil we had non p c d net charge-offs at one point 1 million or four basis points annualized with total net charge-offs of 1.4 million or five basis points wage non-accrual loans entered at 79.4 million with the new accounting treatment of PCD loans bringing ending in PA is to access to 48 basis points absent the accounting change the bulb ratios were in line with the previous four quarters are initial Cecil Reserve $115 or Ninety Six basis points plus an additional $6 for unfunded commitments additionally at quarter-end and light of the impact of the coronavirus on economic forecasts. We made a q1 provision for credit losses of 44.9 million plus an additional one main expense to age to reserve unfunded commitments for total expense of 45.9 million in spite of us only recognizing one point four million in that charge off during the quarter and essentially having very little loan growth dead.
158.7 or 1.32% this represents a 37.7% increase over the day one Cecil off allowance including the reserve unfunded commitments which resides on the liability side of the balance sheet. This would be a 138 basis points. We also have on the ballot sheet of remaining not discount of 81.2 million for purchase loans as it's disclosed on page six of the earnings release turning tonight interest expenses are efficiency ratio is 54.9% adjusted relative to queue for 19 our compensation expenses up 4.1 million dollars, including 2.9 Million and higher health insurance as we have a self-insured plan. So q1 expense estimates are often higher and 1 million and higher expense in q1 versus Q4 nineteen due to the annual resetting of the FICA cap off.
Also included in our other nie line is the one man expense to increase Cecil Reserve unfunded commitments and are FDIC assessment expense was up 1.1 million versus Q. In terms of our tax rate. We recognize the 2.3 million dollar benefit from the ability under the cares act to carry back in to Prior years with a higher tax rate should also had some Equity, payout in the first quarter and recognized one point four million in excess tax benefits from that.
During the capital formation. We reported in ROTC e of 9.9% in spite of the $46 provision for credit losses and unfunded commitments in the quarter. And while we did not cheat to add some liquidity and had 13% on CD deposit growth and 17% DDA growth. Our loan growth was only 1% Saloon growth did not consume capital in q1 bulb Walmart is for the industry will feel pressure this zero rate environment, which will impact our profitability. Of course, we're pleased we were able to earn an almost 10% ROTC and a quarter with this kind of credit club and earned over $90 in pretax pre-provision income and the quarter this equates to a pre pre r o a of 2.09%
PE ratio north of 9% on the heels of Cecil adoption and a higher q1 Cecil provision expense. So a strong Capital position good core deposit growth strong pre pre performance and healthy addition to our Lounge during the quarter with a respectable ROTC of almost 10% after all of that on I'll turn it over to Robert.
Good morning is a pleasure to be with you today and hope that you your co-workers and your families are well. Our first quarter was strong with record revenues solid loan and deposit growth and a strengthened balance sheet with added liquidity and increased provisioning for loan losses are pre-provision earnings were record levels. We felt that preparation for both economic environment have had bus was very important. We therefore bolster. Loss Provisions by approximately thirty-six billion dollars. John Pollock will provide more color on our financial results just a minute and I will start by sharing the way our bank is leading and managing through this.
Our bank is reflection of the people businesses and communities we serve when they are going through tough times is our job to be part of the solution. This has been the foundation of our culture since the bank was stored on the heels of the Great Depression and it continues to this day our Bankers have served and sacrificed in the last few weeks to support our customers like never before beginning in late February. Our crisis response team was activated in response to covid-19. This team has guided us successfully through a number of natural disasters. And while this crisis is different from the experience gained from past disasters is invaluable. I would like to talk about these past few weeks and what we're doing to prepare for more challenging future month throughout this. We remain committed to making decisions based upon a long-term View and we see this as a time for relationships can be forged for decades to come our focus is dead.
Two main areas our team and our customers. Let me start with our team in addition to the ongoing efforts of running the company. Our team has been working around the clock to assist customers with all the while. We're still working to merge our two great companies in the third quarter of this year. I'm very proud of our team and enormously grateful for how they've handled this crisis throughout the company wage stories of sacrifice are incredibly inspiring the South State team has responded to the call as strong as we've been in the past. We've never been stronger as a team than we are today with 80% of our employees working from home and certain branches support teams continue to work at their respective locations with almost all of our branches open and providing Thursday through service. We've been fortunate to have just a few employees impacted by covid-19 as it relates to our customers while we are not on the health-care front lines. We are among the e
Calling First Responders. We're a company.
Who's deposit and one relationships are made up of hundreds of thousands of individuals and businesses.
This crisis Knows No Boundaries, and it's impacting small and medium-sized businesses and their employees across our footprint providing customer access to our bankers and our branches has been our top priority.
We have expanded our Outreach both in person and digitally and have experienced a significant increase in our digital delivery channels early on WE mobilized task forces in both consumer and Commercial areas to develop responses to customer needs we have found that in times of Crisis communication is even more important job one was to proactively offer our customers and understand how they are positioned to weather the storm much of the efforts today have been focused on providing principal and interest referrals to Consumer and Commercial customers home typing loans for small businesses through the PPP program. We took a proactive approach with 90-day payment rolls for areas. Most impacted. We process took an interest approves of our price 24% of our notes and 20% of total principal balances.
These are pearls were not made because of inability to pay but it has to have a more constructive dialogue with our customers into work together to manage through this environment off and regarding the program. Our team has worked around the four weeks to support existing customers and welcome new customers to our bank today. We have assisted almost 6,000 small businesses through the program for total approximately nine hundred million dollars. The average loan size is about $150,000. We have a great opportunity to assist those in need off. This other programs are developed We Stand ready to deliver them to our customers.
Don't sleep. In very good Financial Health. Our operating principles have always been found this profitability and growth, speaks to Capital strength core deposit funding T and A granular and high-quality loan portfolio. This crisis is certainly different than others. We have faced in many ways. We have been making decisions in preparation for this price is for dead. Only want to thank both the center State and South Bay teams while we continue to operate and serve our customers separately during this time. We're becoming stronger as one team this month since we're experiencing today makes the opportunity. We have together even more compelling and confirms that this is the right partnership for our banks and for the opportunities ahead. I will now turn over to John Pollock to discuss first-quarter Financial results to detail.
Thank you. Robert have been very active care of the needs of our earnings this quarter or impacted by sizable provision of loan losses under the new implemented Cecil standard due to a very different economic forecast than what we first imagined at the start of the year off as compared to three point six million dollars last quarter with much of the attention returned to asset-quality. We've added some slots this quarter to help give you some insight into the various segments of our loan portfolio and Jonathan kivett our chief credit officer will speak to many of these during the Q&A session We Begin this economic downturn with what we believe is a very solid balance sheet with strong levels of liquidity and capital beginning with slide number 16 birth.
Income total 24.1 million dollars or 71 cents per share.
Excluding merger expenses adjusted net 27.6 million or 82 cents per share without the impact of a much higher provision for future losses. Our performance was very strong with growth and total revenues as net interest income and non-interest income improved one point six million dollars and seven point eight million dollars respectively one slide number 17, you can see our net interest margin increase for basis points link order to 3.68% as a yield on earning a wage was unchanged and our cost of funds declined for basis points.
total interest earning assets Advanced a little with average loan growth of over a hundred forty million dollars as seen on slide number 18
during mid-march with uncertainty surrounding covid-19 increasing we added to our liquidity position with newborns Towing five hundred million dollars. We anticipate much of our one demand during the second quarter will be under the SBA paycheck Protection Program with a current pipeline of nine hundred million dollars turning to slide Number 96. You can see our accretion income total 10.9 million dollars of 3 and 1/2 million dollars as the result of the adoption of Cecil and the change from pool Accounting in the East pole accounting any discount remaining on acquired loans will be a created in as these loans paid out renew or mature then on slide number 20, you can see the $52,000 discount that remains on this two billion dollar acquired portfolio turning to slide number 21 non-interest income increased by 7.8 million this quarter dead.
Mortgage Banking income 10.9 million higher this amount. Secondary Market income was 4.8 million higher in our mortgage servicing related income was higher wage six point 1 million. The mortgage servicing rights income was unusually high as the Hedge gain significantly outpaced the decline in the fair value of the asset. This is off of the 10-year treasury yield declining much more significantly than the overall mortgage rates During the period lower mortgage rates, of course, significantly increased the application activity in our team has done a fantastic job processing this additional volume.
Money wealth management income was $500,000 higher this quarter and our Capital markets group had a strong quarter of back-to-back swap activity during this declining rate is based on slide. You can see the net changes in all non interest expense categories, excluding merger-related expenses adjusted non-interest wage increased four million dollars about two million of which resulted in higher FICA taxes in the New Year. The other expense category was also higher 2.4 million dollars as it related to higher amortization expense of passive loss Investments, which has a positive impact on the income tax expense.
Shows our efficiency slide number 23 shows our efficiency ratio increased slightly to 62.1% from 61.6% last month to 59.7% from 60.7% primarily due to a nine point three million increase in total revenues.
Tangible Book value $1.12 to the adoption of Cecil impacts of the month 19 our economy are in the rearview mirror. We do not anticipate any share purchase reactivity at this time. I will now turn the call over to John Corbett CEO CenterState Bank, as a reminder. We are conducting this call remotely and I ask that you please direct your question to the appropriate individual you would like to respond. This concludes our prepared remarks and I would like to ask the operator to open the Chrome questions.
We will now open the line for questions. If you'd like to ask a question, please press * then 1 on your touchtone phone. If you were using the speaker phone, please pick up your handset before pressing the key to a draw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
Today's first question comes from Steven Skelton with Piper Sandler, please. Go ahead.
Hey, good morning. Everyone. I guess my first question would be for the team. So I guess 21st for South Dade. I noticed, you know, a hundred percent of the lodging oil under deferral. I'm wondering with that portfolio as well as maybe all the Deferred loans in particular how much of that was you guys reaching out to customers versus inbound calls requesting the phone number and then why you think there haven't been more deferrals as a percentage basis for the consumer kind of Ready book. I've seen kind of various things from different companies this quarter but like a pretty large percentage at like 89% on the commercial side.
Leaving this is Robert. I'll start and then we've got Jonathan Kevin our chief credit officer. I'll I'll turn it over to him. But you know, I think you can take multiple strategies on these on the falls the window when we need certain segments were going to get hit. We were we were talking those customers instantly and these are like taking taking the hotel bulb. For example, the these aren't National Hotel operators. These are local operators who mostly raised local Equity with local investors and have really good liquidity and off the value so we know these people very well, so we engaged with them and what the needs based approach. It was really we know that the next ninety days are going to be tougher off for the hotel industry mustipher for 90 days during that time. Let's engage let's get information. Let's make sure we understand you and liquidity position what you take to break even and and off.
We come up for air in the next ninety days. So that was the philosophy behind it. So it was I'd say really all.
Active on our part to to help those customers kind of bridge the gap to get to the other side Jonathan. I turn it over to you for any additional color.
No, I think that's right Robert the commercial the numbers the commercial at 90% or almost exclusively based on outbound calling just being proactive particularly in those Industries hotels retail and restaurant Industries. I think on the consumer book. I think the reason those numbers are a little bit lower is is that that is more reactive. We just haven't been as proactive in call in and making those outbound calls.
Okay, and maybe I don't know will if you might be able to comment on kind of the similar ideology in terms of the deferrals and and thoughts on consumer deferrals moving forward. It's probably Thursday or Dan. Yeah. Okay. This is John, you know, if you don't know Dan Van has been the chief credit officer here at CenterState for about a decade prior to that Dan was the head of special assets for RBC for Florida. And then even before that we were both Richard and will back at the Alabama National. So dancing with us in a combined team for for a long long time. Then you want to you want to address that yes, very similar to talk to Robert and John has been indicated very proactive on the commercial side and more reactive on the consumer side and expect dead.
That that the consumer side will be continue to be somewhat stable and and weeded. Okay, so then you don't expect to see any increases wage on the consumer side ready mortgage, I guess Auto. I mean do you think that could continue to escalate throughout the quarter throughout the coming from we've seen a noticeable kind of life and and drop off of the deferral request, uh, those that have been impacted with been impacted already and we have very little exposure on consumer or Auto or any of the smaller dollar consumer type type of loans.
Okay, great very helpful. And then maybe I don't know if this is real or or John but curious if you could give us any kind of visibility and I know this is hard into it to where you think the combined into basically shake out at this point. I mean, it's a lot of moving Parts obviously heading in the next quarter with rate, but just kind of get some kind of directional thought sometime where they combine them together and how we feel about that Steven. This is John. I'm Steve Young answer that. I hate Steven, you know both speak for South State here, but from the center of perspective. Yeah. We were pretty pleased with how the men shook out this quarter. The corner was only down 3 basis points. I mean, I think that really reflects off, you know, we couldn't we can't help what's going on on the opposite side, but there is a real discipline from both banks around our core phone number.
As well as you know who can control we can control so there's been a lot of effort to reduce rates on the deposit side.
So, you know to give a prediction from here is is difficult as we know because the the the environment will uncertain but I I guess from a if we look backward wage. I think we were really pleased at CenterState on on how the core margin I think we were at 374 and maybe John Pollock you ever talked to South States margin, um, I am in the past but you know, obviously the future, you know margins going to be a little bit more challenging but I do think the balance sheets are a little bit bigger which will help offset some of that wage job you have any comments?
Sure, I appreciate the question Steven. I'd say a couple things I think first as as we've talked a lot about over the past six months is we knew going in the first quarter of this year the impact of Cecil on our margin, you know, as we as we've talked about the discount now, it's coming through faster. I think a slide that shut up. Look at Stephen really it's in both decks as you don't page twenty of both right decks. We show you the discount. So that discount that we each have, you know, fifty-two million for us about 81 million percenter stay that accretions going to keep coming through and it's going to come through probably faster. So that clearly is having a a positive impact on the margin now as we all know that there's clearly going to be pressure with the way rates have come down, but let's talk about the funding side of 2nd.
So you can kind of see on in terms of our cost of funds kind of for the quarters gotten down the the 59 basis points. Well, if you look at March now just kind of carve out marches down to fifty-three. So we're seeing you know, really on the funding side a lot of relief there. We're getting tons of funding. In fact, our deposits are up over a billion dollars since the end of the month and then obviously we got the these p p p ones that are come through we both got a big slug of that. So, you know trying to model that Stephen the fees are going to run through the margin of 70% of those loans probably get forgiven in the next few months and then you'll kind of have a tail off of that. So a lot of definitely a lot of moving pieces around that but gotta have good funding in this environment and we continue to see good opportunities. I think is both teams mentioned. We played some offense on the TPP side to get new customers.
Okay, great. And maybe just one last one for me curious if you could comment on expectations around service charge revenues, obviously, that's a pretty big chunk of revenue for you guys and just curious about how do you think that could play out with you know, maybe fees being forgiven or less activity on the cards and other things of that nature.
This is John Pollock. I'll I guess I'll start with that I'd say.
Let's just think about the PPT. These for a minute is
We're going.
That'd be after expenses north of twenty million dollars. Now that doesn't this, you know, these these contracts are written in pencil, right? So the rules continue to change so always going to be put up a loan loss reserve and there's even I'm not 100% sure but twenty plus million and fees clearly pays, you know, a lot of bills that we've all been experiencing a no centers like to comment on their number clearly that's going to help in terms of the trying to pay for all that.
Yeah, I guess I'm more like the deposit account fees and just like directionally at that. We should see a big drop off their. Well, they'll be tougher. I mean clearly the consumers out less off. The bottom line is the unemployment rate is going to drive a lot of these things what the charge offs are with the fee income is the consumers clearly. I'm getting a lot more cash right now. They've gotten a few stimulus checks, but I think you're seeing with all people. They're kind of being you know a little bit more stingy with their cash and kind of holding on to that. But yeah, it should have that impact I would think on the feast even
Okay, great. Thanks for the call. Again. I appreciate it.
All of our question today comes from KBW, please. Go ahead.
Thanks. Good morning. I wanted to see and maybe we can I guess I'll direct you maybe two to John first and then till we'll just to talk about the economic assumptions that went into your calculation for the provision in the end you're and you're reserved build this quarter, and then how you think about how may be some economic assumptions have changed since quarter end. Just kind of help us get a sense as to how you're thinking about. You know, what kind of level of future Reserve bills that we may see. Thanks God.
Well, this is John. I'll start Catherine.
Yeah, we we when we have developed our Cecil model, you know, we use Moody's Analytics kind of for the for the economic forecasts. So obviously Moody's is put out three different forecasts one on the 10th the 20th and then the 27th of March and then we can really get the final until April 2nd. So we're kind of using the Moody's Baseline covid-19, you know, it's got clearly a recession in the first part of the year, you know unemployment going up to 9% I'm the second quarter near kind of peak to trough GDP above -6 per cent. Hopefully a partial bounce back in the third quarter. And then I think the key number in that forecast is wind is full employment. Come back.
And in that forecast, it's 2023. So you kind of have that it kind of helps you accumulate the data, you know, I say Catherine so you got that piece. I think how we're thinking about it clearly addictive in. The future is is a complete guess in this environment. Nobody really knows today. I think unemployment's clearly the key was the key last time how how unemployment goes down how fast these are going to go and how the faults are going to go. You know, we've obviously had an instant shock of supply and demand and then you know, finally a lot of people like to use letters what we clearly don't think it's a v I hope it's not an L. It feels like it's more of a, you know, kind of a wider it might be a w and what I mean by W is stimulus comes in we kind of see an uptick and then we see a downtick as we kind of rationalize some of these businesses. So that's how we kind of think about it. I think in the second quarter dead.
clearly I guess I'm going to get
Remore forecasts are movies this course. I'm sure they're all be a little different but I think our view is we would continue to see some pressure in the in the second quarter, but still a bit of time to play out so that I'll kind of toss it over to Will.
Yeah, thanks John. Yeah, Catherine our models are not exactly the same but they share a lot of the same components. We also use the the Moody's Baseline code forecast. And as John said that has been changing on a very rapid basis and then within that you know, the factors that are probably most correlated with loan defaults and provision expense would be unemployment. Number one housing price index. So you already price index home more bacon see right things like that and all that go what John said what I think a lot of other Banks has said which is that, you know at March Thirty One am based on the information available. Everybody felt that their provision was appropriate and their allowances appropriate if we get the same type of changes, you know dead weekly that we've gotten before it's likely that we get on the June 30th. You'll see the industry ourselves included continue to build reserves because it doesn't look like the economic forecast at this point or get along.
Any brighter last comment I'll make make is just you know, just remind ourselves as much as you that these are models and built off historical data, you know in many cases different underwriting practices going into them. You know today. It's a geography question because the capital moved from tier-one to tier-2 and our our hope is that it doesn't flash or two and two and two losses, but, you know time will tell and and our ability to manage through the crisis will will will govern that as well.
And that's that's very helpful. Thank you. Have you follow up as just as you're thinking about the merger any updated thoughts and how you're kind of thinking about that are states alone Mark and you know in kind of balancing Reserve bills from this quarter and next quarter before the deal closes versus an updated Mark upon upon closure. Thank you. Yeah Catherine off of that and John made me jump in we've been talking to gather on this, you know, as we just alluded to the economy has changed a lot since we first modeled this deal when we announced it in late January and you know, we will model are booked at close and so because that's the proper way to do it and certainly at times are changing like this you need to wait until till close but but clearly wage and logically given the change and economic forecasts the credit Mark should increase from what we originally modelled. Additionally. It's likely that the percentage of PCD loans would also increase wage.
Mean that the double counting impact of the non PCD loans would decrease, you know CD is likely to be lower today than it was before rate marks likely to be lower today than it would have been dead before stuff. That's all still true and close. Those are some of the directional impacts also remind you, you know, just looking back to our modeling though. We're are combined Cecil reserves the two companies and March 31st were some hundred five million dollars higher than what was in the original merger model, but you know, so we're not yet ready to say what the revised marks will be and we won't really be able to do that until we're home at close but those are directionally I think where where you should be thinking about it John you have any additions I agree with your comments.
Right, very helpful.
Thank you.
Again, if you have a question it started in one to enter the queue our next question comes from Michael Rose in Raymond James, please go ahead.
Hey, good morning, guys. How are you? Good morning.
Hey, just wanted to dig into the restaurant booked a little bit. You know, I know some of the markets in Florida John are obviously diverse, you know, Orlando a little bit more travel and tourism took a little bit more business-oriented. But I guess I was a little bit surprised to only see 35% deferral at this point. So can you give a little color on and I'm sorry if I missed it, but on the the concepts the split between you know, uh, you know, fast-casual and then maybe fast food and um, you know, et cetera just any sort of color there would be great. Thanks. Sure. Nice thing is we're going into this with Jeff about concentration there. I think it's 3% a little bit less than 3% but all last day and address them give you kind of some overview on the restaurant side, You know. Two exposures are darling and three of the top ten or darling. We all have we have good strong parent pours if you look at home.
Top twenty-five credits, uh, seven requested deferrals four of those the guarantors have high seven-figure a higher liquidity and so wage, you know little bit of followers guarantors, you know accepting in deferral when there's probably not a short-term need for that based on that guarantor wage, and we do, you know, uh, excuse prior to the quick-service the Chick-fil-A some of those type of restaurant credits as well.
Okay, that's very helpful. And then maybe just on the retail cre book which is obviously a little bit bigger 23% you know, so, can you just give me a holler there on whether it's you know type the store location geography break down just a little bit more color you guys comfortable on you know, why you feel that that portfolio. Hold up. Thanks God.
Yeah, happy to do that. You know, I think our disciplined underwriting and approach to lending would pay off especially in this sector in our guiding principles and have always been a pretty guarantor liquidity dealing with borrow for a successful and the last downturn you know, relationship-driven our typical center of the neighborhood Diner. It's going to be in dense Market or barriers to entry, you know, give example would be a neighborhood center in Boca Raton get the ocean on one side the Everglades the other it's going to be you know dents and you know work demand for the services will continue for the long-term good example, some of the attendant exposure needs type of centers Dollar General Pizza Hut Allstate Insurance. They're all in the top ten. Um, you know, these are National type tenants.
That are going to have long-term need to these local communities.
Okay, maybe just one final one for me. Just maybe for Steve on the correspondent banking business. Obviously some some good numbers this quarter, you know, just in the very near-term would expect any sort of change and activity levels within the various components of the of the business. Thanks. Thanks, Michael Kia just back up for a second thoughts on the correspondence business and really just on these fee income businesses that John will post talked about the big picture, you know a few years ago. We wanted to make sure we built the bank to have Diversified revenue streams and then great environment and just you know, if you look at this quarter are off that interested in come to revenue was around 73% which means we had 27% worth of non-interest income a year ago wage.
March of 2019 our net interest income represented 80% of our Revenue. So what what it does is it really Hedges the business is really hedge the downside risks to the rates as a related to correspondent, you know, which is a real is a record quarter. Our interest rate swap business was up from the fourth quarter, which was a record quarter about two point nine million. We also replace the C our fixed-income business increased about a a million seven. So that was about four and half million is your number they're dead, you know in the future as we think about it, you know coming off of record quarter not going to be able to do that every quarter, but you know, we think the fixed-income should continue to be a real positive off. The interest rate is what business will slow down. As you know, new purchases will not be as robust. You will have to leave for the answers, but you know, we bought
You see that business slowing down some but still at a higher elevated pace. So hopefully that helps you.
It's take a guy's thanks for taking my questions or next question, please go ahead I'm good morning. And we really appreciate all the information that both companies provided on the disclosures. I just wanted to ask more about kind of the deferrals and to what extent do we see that translate over time into criticizing classified loans or you know, do you think that will see some catch up on those loan grades by the end of next quarter or will it take longer for that.
Icarus this is John Jonathan. You want to take a stab at that and maybe Dan can follow up?
Yeah, sure. I think initially initially. We're not going to see that change in Gray I think over time and I think that's the question is is how long is it going to take? I would say over the next two quarters. You're going to start to see that catch up. So most most of the bar hours are under a 90-day p&i deferral so that p&i deferral probably the Vintage of that is just call it mid March. So you're talking about you know, mid mid June for the deferral to come to an end. And then we're going to obviously be having ongoing conversations, but I think at the end of that deferral. You're going to have so call it late second-quarter early third-quarter you're going to really start to know and hopefully, you know, hopefully we're a little further through this Panthers. We got a better understanding of how the economy is going to get kicked back into gear and the long-term outlook for some of these businesses is going to be better so and these industries so we'll know a lot better. So I think
cute to indicate
Might be a little early but I'm certainly thinking that Q3 will have a real good gauge on long-term prospects and grades.
Yeah, some of the same timing Jonathan remind everybody from a regulatory perspective The Regulators gave guidance that in the system was kind of a time frame that they were looking at before something would be classified as a TD are the majority of ours are on a 90-day deferral at that end of that 90 days will evaluate if another 90 days is needed at that time. Maybe there's an opportunity to show off with additional collateral additional guarantor support. I would say that a lot of the ones that are getting deferrals to have, you know, solid guarantor support with strong liquidity where we don't think there's going to be significant impact to the risk creating long-term.
And Chris is Robert. I just I just kind of had on to what they they said I think trying to draw a correlation between deferral and loss or problem loan at this stage. Not not really a leak. You can make I think it's a really it's a unique situation. We're handling some Industries in a unique way but I think is Dan said well the guarantor support and liquidity that they have we feel really good about in fact, the the larger ones are the ones that are really well positioned and most of these are have significant Aqueduct significant guarantor strength though. Some of the smaller ones actually could be the ones that struggle so I think that's where it gets back to trying to make a correlation between the two most money markets don't have significant covered. In fact, if not Manhattan, so where you obviously got you've got a significant impact so we feel like dead.
A certain period of time these businesses will begin to reopen and and be able to operate and pay principal and interest on a normal payment without having 80% items see like, you know, they've used to so I think that's why we felt like we needed to a proactive engaged approach with the customer was just a better a better approach and I just think it's way too early to try to draw a correlation between the deferrals and any future problem at that sounds good. I appreciate that background a lot. Thanks.
And our next question today comes from Jennifer done by SunTrust, please go ahead.
Thank you. Good morning.
Question for we'll we'll just does all that's going on right now at the pandemic and the shutdown. Does that change at all the timing on the merger took a savings now? You said the closing should happen on time.
Yeah, Jennifer, you know, I think you'll you're going to hear a theme depending upon how many questions we take today that will state, you know, a couple of things one. We're focused on our own teams, and we're focused on our customers and you'll also hear us say that you know, we think this is a pretty significant opportunity really a generational opportunity for us to seize the moment to strengthen our bond with our customers and with our team members and obviously as John alluded to when he talked about the PPP process, we've had to walk, you know convert an assembly line that's used to churning out a certain number of larger units today per day into one churning out, you know, multiple multiple multiple numbers of smaller units with different forms and whatnot a day and done a great job. So doing doing that. So we've been focused on those things. So we have delayed some of our birth
Integration planning is part of that. You know we're but if you recall from our early announcement, we weren't expecting to achieve much the book the costs saves until sometime mid next year. We do have a conversion date as you as you see in the deck in the early second quarter of next year, we or sometime the second quarter of that is really going to drive a lot of the cost saves so you know while I think we're more focused right now on, you know, taking this opportunity to build bonds with two very important constituents off. You know, we are are still very focused on the benefits that this merger affords Us in in in cost savings to both entities and particularly a time where you know took income may be more challenging for some we are very very glad to have that opportunity to help boost our profitability when we get through conversion.
Just did the circumstance of now with using you know, the physical branches less and doing it more drive. Thru are by appointment. Does that make you feel like you're you're I know you did don't have a lot of Branch overlaps between the two companies that make you rethink the branch Network longer time. I'd say go ahead. Yeah, this is John and maybe Robert have a thought here as well. You know, my guess is that this pandemic I'm going to change and accelerate the way a lot of things occur. And I think it really will be an acceleration of an adoption of the digital channels that that we've all been working a I don't know that there's anything immediate in our um thought process relative to branches, but I do see an acceleration of the path that we were already on Robert anything to add them.
similar to the John
Comments. I mean, I think Jennifer just too.
Maybe talk about just the deal overall and I just expensive number is I think you know when John I were talking about this over the last couple of years. We kind of both felt that we were at the end of the cycle. Now, we obviously dead, you know what we're going through right now. Nobody could have recognized but but clearly we're in the cycle and one of the things that we had hoped I put in our companies together was that we could whatever economic downturn there was be a deeper or shallow that we would come out the other side stronger. So there's tons of short-term economic impact that we have an opportunity to manage through a long-term change in the whole business model and we're hearing that and not just from you know from ourselves and our bank, but from our customers as well. They're looking at the short-term economic impact of a long-term structural impact for their businesses. So one of our challenges was how do you make this thing? How do you digitize more the bank and and we we have encouraged?
Would you have adoption and over a three or five or seven year. We thought you know, we could really make some good games there. Well, this is going to accelerate it significantly. So just check data points. But March of this year, we did ninety percent more individual posits that we did March of last year Zell was 200% increased and so we're seeing how we can run this company in a very different way and how the adoption of these digital products is going to accelerate. So, I think that all the things we thought would happen would be a down that there would be digital adoption. I just think all those things are going to happen, but just at a much faster paced and and create some opportunities for so long that path
Thank you so much.
And our next question comes from Kevin Fitzsimmons Davidson, please go ahead. Good morning everyone. I just had a quick question. I believe it was John that mentioned earlier about the origination fee coming through whether that's in third-quarter or or some a little later and that pays a lot of bills. And so just just in that line of thinking should should we not be viewing that as necessarily flow into the bottom line that some of that can be used for incremental expenses that you'll hang out whether that be compensating some of your front-line employees, whether it be additional Reserve building like you referred to just just how we should be looking at that links. Yeah, John Park to be clear. So it that 20 little over twenty million pays really for all the the expense with the only caveat as you know, the rules continue to change.
And so would would we have to establish a loan loss Reserve. So I think our view today is 70% of that feel come through the next couple of quarters and then 30 per month would come back over the next year to a year and half is the loans repay. But clearly it's it's net of operating expenses.
Yeah, and and cabinets and Steve the same view we would have as far as how that gets forgiven over time. And we what we know today, you know off the interstate number depending on funding could be in the mid-30s after expenses. So, you know, but that's going to happen as John mentioned over over time. I'm so hard to hard to really predict it.
I'll just add on this will that you know, the you asked about the provision obviously the level of provision expenses uncorrelated with with that it I mean it certainly provides another source of Revenue that could help fund any necessary provision expense, but that those would be you know independent decisions from one another of course.
Got it. Thank you. And then just just one quick follow-up on the loan process. You detailed before how your proactively reaching out to customers a choice of those at Risk Industries, but for for larger credits that come to you guys. Are you you going through some kind of credit driven process in terms of scrutinizing that just trying to get back to what you're going through. Thanks. Maybe you want to start there. We're taking a disciplined approach on you know, analyzing that have an honest Frank discussions with clients making sure that you know, they're using their liquidity first and in some cases before they rely on the bank. So yeah, we're going through a process to to make that determination.
Yeah, same here. We're just kind of relationship banking. We're having a one-on-one conversation with these borrowers and we're working with them to understand their Capital needs their prospects to the industry and which is working with it on a really on a case-by-case basis.
Okay. Thank you.
There are no further questions right now like to turn the call back over to John Corbett.
All right. Thank you again for calling in this morning. This is certainly unique times that we're living through. We are planning on participating virtually with the VA Davidson Conference and the SunTrust Conference in June. So we hope to talk to many of you did have a great day.
This concludes today's conference human out of some extra lines. I have a wonderful day.