Q1 2020 Earnings Call
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Ladies and gentlemen, does the operator cities conference scheduled to begin momentarily.
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[music].
Good morning, and welcome to the Colin for Q1 earnings results call. My name is James and I'll be facilitating the audio portion of todays indirectly broadcast.
All lines have been please UN mute to prevent any background noise.
There was a few onstream sweepstakes know what else the options available in the reason console.
This time I would like to turn to show over to Mr. Baby Mendez, Sir the floor is yours.
Thanks James.
Good morning Conference call will be led by Phil Green, Chairman and CEO, Jerry Salinas Group Executive Vice President and CFO.
Before I turn the call to Phil and Jerry.
I'd like to take them over to address the safe Harbor provisions. Some of the remarks made today will constitute forward looking statements are defined in the private Securities Litigation Reform Act of 1995 as amended we intend such statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995.
Amended.
Please see the last page text in this morning's earnings release for additional information about the risk factors associated with these forward looking statements.
If needed a copy of the release is available on our website or by calling the Investor Relations Department to one zero to 205234.
At this time I'll turn the call over to Phil.
Thanks Amy.
Good morning, everyone and thanks for joining us.
Today, the first quarter results for calling for Austin, Our Chief Financial Officer, Jerry Salinas will also provide additional comments before we open it up to your questions.
In the first quarter, Rostered $47.2 million or 75 cents per share compared with earnings of 114.5 million hard dollar certainly not a share reported in the same quarter last year.
In a very challenging environment, which are bancolombias, you're close more than two thirds of our employees are working remotely. Our team continues to serve our customers very high level that process known for and execute our strategy of pursuing consistent above average organic growth.
In the first quarter, our return on average assets was 0.57% compared to 1.48% in the first quarter last year.
Average deposits in the first quarter were 27.4 billion up from 26.1 billion in the first quarter last year average loans in the first quarter were up 15 well.
To $15 billion and 14.2 billion in the first quarters last year.
Our credit loss expense was a 175.2 million for the first quarter that compared to 8.4 million in the fourth quarter 2019 in 11 million in the first quarter [noise].
29.
In addition to changes related to seasonal.
Our credit loss expense was elevated in the first quarter is a result, coke 19 related business closures and also challenges faced by our energy industry customers due to recent commodity price declines [noise].
Net charge offs for the first quarter were 38.6 million compared with 12.7 in the fourth quarter 2019 at 6.8 million first quarter of last year.
Annualized net charge offs for the first quarter were one point, all 4% of average loans.
Performing assets were 67, and a half million at the end of the first quarter down 38% from 109.5 million at year end. Most of this decline came charge offs related to energy credits, we've been dealing with for some time as they move to the snake towards resolution.
Overall delinquencies for accruing loans at the end.
First quarter were.
Hundred 22.3 million or 80 basis points period end loans those numbers remain within our standards in comparable to what we've experienced in the past several years.
No problem loans, which we define as first grade Chen and higher.
They are 82 million at the end of the first quarter compared to 511 million.
Previous [laughter].
Energy related problem loans were 141.7 million at the end of the first quarter compared to 132.4 million for the previous quarter and 119.3 million in the first quarter last year.
Energy loans in general represented 10.2% of our portfolio at the end of the first quarter.
Well below our peak at more than 16% in 2015 and down from 11.2% in the fourth quarter 29 team.
Clearly we enter the current downturn from a position of strength, we're not confused.
The deterioration of the economy brought on by Cobot, Nineteens pandemic, well have a negative but manageable effect on our portfolio.
We're in the early stages of this downturn, which is unprecedented in our lives.
We don't know the link we don't know the ultimate resolution.
We don't have the impact of massive financial fiscal stimulus brought to bear on problem.
But we do you know it will address these issues consistent with our culture in core values that have guided us through multiple crises over 152 year history.
Well, we don't have all the answer is an outcomes I'd like to share a few data points, we hope will be helpful.
We've identified seven portfolio segments.
Eight including energy.
We feel have higher than usual risks to the current economic dislocations brought on by the pandemic.
Include restaurants hotels aviation.
Payment as fords.
Retail.
Religious organizations and associations and organizations.
The total these portfolio segments represents 1.36 billion at the end of the first quarter.
There were 227 million in deferrals related to this portfolio at quarter end.
The reserve for loan losses against these segments and the ended the quarter was 2.25%.
Looking at energy.
This portfolio totaling 1.57 billion at quarter end and carry loan loss reserve a 6.5%.
Reserve base borrowers represented 82% the quarter in total.
Significantly influence in our energy reserve number was an all price scenario of $9 per barrel for the remainder of 2020.
This assumption was combined with borrowers plans to manage through the current cycle.
Hedge positions cost structures debt levels.
Other secondary sources of repayment.
And other factors.
Similar analysis was perform on non reserve base borrowers.
57% of the production portfolio is hedged in 2020.
And 32% in 2021.
Both at prices in the mid Fiftys.
The average breakeven for the portfolio is 18.6 $6 per barrel.
Our focus on commercial loans continues to be on consistent balanced growth.
Including both core component to it if I was lending relationships that are 10 million in size as well as larger relationships, while maintaining our quality standards.
Regarding new loan commitments book.
The balance between these relationships went from 53% larger 47% core at the end of 29 team to 57% larger and 43% core so far in 2020 the movement towards larger loans year to date was mostly due to.
Two large public finance transactions.
New relationships, we're off to a strong start in the first part of the quarter, but were negatively affected in February and March Kogas, 19, pandemic, resulting in a decline of 16%.
Paired with the first quarter over the last year.
The dollar amount of new loan commitments booked during the first quarter rose by 6% compared to the prior year.
We continue to look at many deals going into first quarter, we booked 13% more loan commitments from opportunities.
Paired with the same quarter last year.
In CRM, we saw the market become more liberal in terms of structure.
Our percentage of deals loss to structure increased from 76%. This time last year to 91% and the first quarter this year.
Our weighted current active loan pipeline in the first quarter was down about 30% compared with the ended the fourth quarter new to the effects of the pandemic.
On the consumer banking side, we continue to see solid growth in deposits and loans.
Overall, net new consumer customer growth.
The first quarter was 3.3% up from 2.9% a year ago.
Same store sales as measured by account openings were down by 1.1% beauty and the first quarter.
In the first quarter, 33% of our account openings came from the online channel, which includes our Frost Bank mobile App.
Online account openings were 31% higher compared to the first quarter 2019.
The consumer loan portfolio averaged 1.7 billion in the first quarter, increasing by 2.6% compared to the first quarter last year.
Overall frost bankers have risen to the unique challenges presented by the pandemic and its resulting shutdowns with a mix of keeping our standards and sticking to our strategies along with a truly remarkable remarkable amount of flexibility and adaptability.
We opened the 11th of our 25 planned new financial centers in Houston region in the first quarter and we have two more openings scheduled for may.
Even if lobbies remain close through the new branches schedule openings, one of the new locations as a motorbike and we'll begin serving customers on day one.
We continue to our talented experienced bankers as part of our Houston expansion, we've already filled more than 170, approximately 200 position is expected.
I will talk more in a minute about our efforts around the paycheck protection program, but I wanted to know that during the first round of funding. This important small business program for US was number one in the Houston market in terms of the number DPP loans It got approved.
And Harris County, we've helped nearly 2000 businesses get loans for $616 million that shows our strong commitment of Houston market and reinforces our strategy of bringing our value proposition to more customers there.
Late in the first quarter, we began offering programs to assist our customers similar to the disaster loans and other relief efforts that we implemented after hurricane Harvey.
And for Austin announced that it would dominate $2 million nonprofit agencies assisting with endemic relief.
In the areas, where we have operations.
Just before the quarter ended Congress passed a cares act, which included provisions for $349 billion in small business loans through the paycheck protection program or TPP.
We knew that frost small business customers would benefit greatly from PPP loans. So even as we closed our hobbies and set up our employees to work probably to protect them and our customers we mobilized for the PPP application process.
Even though the SPD a final license application with only hours to spare we were ready to begin processing on day one.
And then demand was tremendous.
We received more than 9000 applications and just first four days.
Comparison, we process about 9000 commercial loans than is typical year, but we dug in an across bankers adopted and adapted when technologies in the developed systems on the go.
And through lots of hard work in many long hours, we wrestle TPP or the graph.
The initial funding was set up the last two months, but it was exhausted in less than two weeks before that happened Frost recede 14000, PPP applications for a total of $3.3 billion and because of the dedication and commitment and effort of thousands across bankers.
More than 10500 of our small business customers more than three quarters of those applying received SP a funding in the first route for $3 billion or 90% of the amount requested.
Based on our side, we projected we'd be fortunately to receive approval on about 900 million. Instead, we were able to secure more than three times that amount.
At $3 billion represents continued paychex for workers, who employers have been affected by the pandemic.
Through this process, our small business customers on a true value of having a relationship across every quarter when we share our financial information and talk about the great work across bankers do and executing our strategies, while taking care of customers. This time I can say that I've never been prouder of the work our people do on behalf of our cut.
Okay.
I hope our shareholders at that same since fried knowing their companies truly source of strength for our customers in our communities and also a force for good in their lives.
So it makes me optimistic that will get passed to many challenges that remain our credit teams have reached out to borrowers in our industries that are most affected by the pandemic. We continue to work very closely with both commercial and consumer customers.
We're keeping a close eye on the recent anomalies in all prices impact that is having on the economy.
Following our best practices in public health guidelines to formulate plans to return to our offices and read.
In our model.
Our commitment to customer service was confirmed this month on Frost received the highest ranking and customer satisfaction in Texas and JD powers, you asked retail banking satisfaction study for the 11 consecutive year.
We sometimes take these achievements for granted or consider them routine.
The events for the past few months should stand as a reminder, that there is nothing routine about frost and its culture.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Thank you Bill today Im going to skip our usual comments about the Texas economy, given the level of economic uncertainty in the short term there wouldn't be much value in macro comments at this time I will point out that hit it has been reported that businesses in Texas received more PDP.
And businesses in any other state and we're proud to have been a leading participant in that program as Phil mentioned in his remarks, making approximately 3 billion loans over a remarkably short period of time, we're now involved with the second tranche of that program and we continue to assist our customers during this challenging time.
Now I'll turn to our financial performance in the first quarter looking at our net interest margin. Our net interest margin percentage for the first quarter was 3.56% down six basis points from the 3.62% reported last quarter. The decreased primarily resulted from lower loan yield lower yields on loans and balances at the fed.
As well as an increase in the proportion of balances at the fed as a percentage of earning assets, partially offset by lower funding costs. The taxable equivalent loan yield for the first quarter was 4.65% down 23 basis points from the fourth quarter impacted by the lower rate environment with the March fed rate cuts.
And decreases in LIBOR during the quarter.
Looking at our investment portfolio. The total investment portfolio averaged 13 billion during the first quarter down about 678 million from the fourth quarter average at $13.6 billion.
The taxable equivalent yield on the investment portfolio was 3.46% in the first quarter up nine basis points from the fourth quarter.
Our municipal portfolio averaged about 8.5 billion during the first quarter up about 109 million from the fourth quarter.
The municipal portfolio had a taxable equivalent yield for the first quarter of 4.07% down one basis point from the previous quarter and at the end of the first quarter of about two thirds of that municipal portfolio CSF insured.
As we mentioned last quarter during the fourth quarter, we purchased 500 million in 30 year Treasury securities, yielding 2.27% to 2.27% as a hedge against falling interest rates.
During the first quarter given the volatility in the yield curve, we decided to monetize the gain associated with those treasury and sold then resulting in a pre tax gain approximately 107 million.
The duration of the investment portfolio at the end of the first quarter was 4.6 years down from 5.4 years last quarter and with impacted by the sale of those 30 year treasuries.
Our current plan does not include any material investment security purchases for the remainder of the year.
Looking at our funding sources the cost of total deposits for the first quarter was 24 basis points down five basis points from the fourth quarter. The cost of combined fed funds purchasing repurchase agreements, which consists primarily of customer repos decreased 26 basis points, 2.95% for the first quarter from.
1.21% in the previous quarter.
Those balances averaged about 1.26 billion during the first quarter down about 158 million from the previous quarter.
During the first quarter, we did redeem our 150 million in preferred stock, resulting in the recognition of 5.5 million in debt issuance costs, which reduced net income available to common shareholders for the first quarter and results in the elimination of that $2 million quarterly dividend going forward.
Looking at our credit loss expense the components of our total credit loss expense consisted primarily of 110 million.
For the energy portfolio 34.8 million for the commercial real estate portfolio and 22 million for the Cnine portfolio, Our energy reserve coverage at the end of the first quarter was 6.58%.
Moving onto noninterest expense total non interest expense for the quarter increased approximately 22.4 million or 11.1% compared to the first quarter last year, excluding the impact of the Houston expansion in the operating costs associated with our headquarters move in downtown San Antonio non interest expense growth.
Would've been approximately 7.6%.
We are with joining our previous earning guidance earnings guidance and will not be providing any EPS guidance for full year 2020 at this time, given the uncertainty surrounding the economic impact of the pandemic, including the potential impact to future expected credit loss expense.
I will say that given the fed rate cuts in March and the continuing decline in LIBOR rates. We do expect our net interest income and net interest margin percentage to decrease from their first quarter level, we will see a positive from the impact of the PDP.
Given the short term nature of those alone we expect that benefit to be relatively short term as the fees associated with those alone will be around into interest income over the life of those loans.
During our call last quarter, we do provide guidance around projected expense growth for 2020 over 2019.
During these uncertain times, we continue to focus on managing expenses, including looking for ways to operate more efficiently.
As a result, we currently expect a non interest expense in 2020 will grow at about 8.5% over 2019, that's about a 2% lower than our previous guidance with that I'll now turn the call back over to fill question.
Thank you Gerry.
Okay, we'll open it up for questions now.
Thats right. So as a reminder to ask a question you will need the press star one on the color Tom again that is Taiwan.
Listen keypad.
Your question press the pound.
Please standby wild compile the Q any roster.
Your first question comes from July.
Brady Gailey.
Doubling your line is open.
Hey, Thank you good morning, guys, Hey, Greg Good morning.
You look at period end loan balances you had some strong growth in the first quarter.
Can you expand on.
What what drove that and how you're looking about loan growth for the rest of the year exclusion Pete.
Yeah, Let me see I mean again, it's period or you don't know cured in are you looking at average numbers.
I was talking about period.
Which grew during the.
Percent.
Yes, Brady, we did from a linked quarter basis, we did have a pretty significant growth we grew 4%.
Period, and so about 16% annualize a big portion of that growth. If you annualize it was related to our see an eye portfolio that was up almost 6.7% just actual growth and if you annualize that almost 27% and we did see some increases in commercial lines that were drawn on.
Peter and especially during that time period, leading up to March period end, we have seen some of that began to subside as the pace of those draws and I'd say that was the bulk of the increase there we actually had a decrease in energy between December end up and March they were down 84 million. We also.
Had some nice gains in the public finance area with some large deals.
Mm one related to import and the.
And the state.
A very large though the when was related to.
So medical center large medical center HPC. So both of those things we're also products.
All right.
When you look.
PPP.
Yes, threebillion at around one.
How much do you expect to do and round, two and where is that.
Comment I think most banks are saying, it's around 3% would that be a fair estimate for broad.
It is our key is is running about that I think it ended up maybe being a tad lower in the first route but a thanks you were seeing a little bit smaller balance in the second and.
So I think it will make it solidly in the 3% as far as volumes couple of things are happening. One is we are.
Making sure that we get through.
We can the applications that were not process and first round. So our backlog there was.
Somewhere between three to 4000 applications I can't remember the exact number right now and.
So we are working on those as well as we've looked at the second round applications, which show we may be at the point of processing those now.
As of late last night, we may have started that we're seeing a little bit lower volume.
About.
We've received about 2000 applications are as I recall this event.
End of yesterday.
Loan balances as I said being a little bit on the smaller side.
So still good activity, but but not as the huge rush that was there at the beginning because I think a lot of.
Larger customers.
More sophisticated common customers add more visibility just in terms of era.
Awareness of the program so.
We saw a large rush and then the beginning.
As far as well, we're booking that that's going into a interest income.
Okay. That's helpful. Then finally from me you mentioned, 57%.
The energy production is hedged.
This year, 32% next year.
Okay.
Reserved or.
The total production or those are the percentages of your energy customers that just have some level.
Yeah. That's those are customers that have some level of hedging.
Okay, great. Thanks, guys.
Thank you break.
Your next question comes from the line of Ken Zerbe Morgan Stanley. Your line is open.
Great. Thanks, good morning.
Good morning.
Hey, a multipart question a little bit.
Can you just talk a little bit more about the increase in net charge offs in the quarter, but also layer in.
How much that related to energy and certainly whether how much of the energy reserve builds related to specific reserves.
Versus just sort of normal see silver reserves, if that makes sense.
Well first of all the charge offs for the quarter were heavily related to energy. There was so recall $38 million related to two credit sewer nonperforming and.
And Weve described those has been moving through the snake really for a couple of years now our or even longer.
There were written down to values, which at the time, we're we're based upon.
Deals that were on the table in one case.
And.
Bankruptcy in another which there is good it offers related to.
Honestly as we've seen the coke in 19.
And then make impact and the reduction in and volumes.
And demand usage worldwide.
I think those those fat user certainly and risk. So that's really what that relates to broaden both of those two credits now that I think a combined amount of $28 million.
And.
So will we are we're close to get done out of the snake, but they didn't quite move through in time for that panned out.
Just to clarify there the our total was 38.6 million for the quarter and 33.8 million of that with energy related as Phil mentioned, thanks for your 33.
Good afternoon 38.
30 total.
And then in terms of specific energy reserve build versus.
More general Cecil.
Yeah, We book any specific energy reserves that's correct.
Jerry speak to the seasonal aspect of it which will include some overlays qubec firms. So what we did was our TV ended up using the Moody's baseline forecast that was adjusted around the middle of March that took a west, Texas intermediate down to $35 flat.
For three years in that scenario I think it's called yet seta scenario.
Then what happened was that.
Moody's continue to reduce that given what what's going on in the in the global.
Pardon me, if you will between Russia, and Saudi Arabia, and so we were in a pandemic started coming in and so we decided that what we would do as we would use really more overlay and adjust our.
Update the.
Usage of eight different Moody's model, if you will so our energy.
Reserves that we created were primarily related to overlays rather than specific reserves and we can kind of talk a little bit of if you'd like about the the work that was done there but.
That's how off that's what increased the reserves was not so much specific as much as more macro sort of overlay type.
Yes tests that were not and as they update their models to be more reflective of the situation with energy in the and the pandemic, we see maybe a reduction of our relations exactly that would be our expectation and just to give you a little bit of insight and all this in our 10-Q and we'll file. This here this morning, but the stress testing it was down on that in energy.
Portfolio.
And at $9 per barrel during 2020.
And then.
We did create a sort of I.
I guess they call it an energy.
Oversight Council that became there was created in.
Towards the end of March in day review, the credit portfolio of all our major energy credits and so that group was was very involved with what was done and so they took the decision to go ahead again run those stress test assuming $9 in 2020, and then increasing to 36 in 21 $40 into.
22, and 45 thereafter.
And that work that was done was quite created the overlay I think the overlaying the energy portfolio.
Was in few include the Q factors in the overlays was like 88 million and as Phil said the expectation for US is that during the next quarter. If you well wait and see some models are we re Ron we would expect that we would use more update.
Model inputs and our expectation currently is that a big portion of that overlay would be moved into model more model type results, but we'll have to see what the model. So thats kind of what happened during this first quarter.
Makes sense and then just one follow up I think you said you brought your energy as a percentage of total loans from 11.2 down to 10.2% told lunch.
Just kind of how did you bring it down so much in the quarter and where do you envision this going over the next few quarters.
I think we had a little bit of anomaly in the end the previous quarter and going from 10 point.
A basic 10% total 11, I think it just came down to more normalized level based upon activity I don't think there's anyone.
One thing we have been working to reduce the exposure of the energy portfolio and we'll continue to do so.
We're going to get it below the the 10% level I'd like to see it moved more towards the mid single digits overtime, but that takes time to do because you've got credit agreements in place that.
Now you've got to you've got to move through and we're not a charge and the timing on all that we're still going to be in the business. As we said we want to be there with the.
With the best customers and as we.
Periods like this we thought to prune the hedge and we want to continue to do that so we're working hard to continue to run to rationalize our exposure down to more in line with some of the other significant components as a whole loan portfolio and of course as Phil mentioned earlier, we did have almost $34 million in charge offs. Yes, we did that are going to affect that percentage.
Sure.
Understood. Thank you very much.
Yes.
Your next question comes from the line ask deep breath test from Compass point. Your line is open.
Hey, good morning, guys.
Morning, Hey on the energy book I definitely appreciate all the color you gave there and in sorry, if I Miss this but was just wondering if you could give some background.
How far along you are in the Redetermination process on what you're seeing in terms of how much lines are declining for customers and what utilization is at this point.
Okay. We are about I'd say about a third through the redetermination process that happens at this time of year.
What we've been seeing thus far is about 13% reduction in valuations.
So the actual lines to customers have only come in 13%.
That's a reduction in.
The.
The valuations.
No that we've we've been working to reduce that.
Over and above the Redetermination process, you know as Jerry mentioned, the energy Kelsall that we've put in place where we're talking with customers, making sure we understand what their operating plans are what their expense reductions our.
Cash flow et cetera, we've been pretty successful even before maturities of getting some line reduction so I don't want to say it all relates to the redeterminations, but because it it has been just working with customers as well as far as.
We could look I guess, what commitment levels and see what the differences there, but I'm, having a hand right now what the reduction is in that we can look what we're going to call and then and then how does that inform the reserve for the quarter do you sort of extrapolate.
Results from that one third onto that the two thirds remaining that you're still working on and then you set the reserve that way or are we going to see that incremental reserve flow into Twoq you for the additional two thirds you're working on now.
Well remember some of what we did in this first stage of seasonal and the overlay, which really based on a stress test ahead based on $9 oil for the year and I think though really at that point would they use but they use the the reserve levels at that before the re determination. Okay got it and then for the two energy credits you talk.
By charging off what was the severity on those.
In Hawaii.
What do you mean severity in terms of the book value, which you had the Mark what was the percentage a charge that you ultimately talk.
Resolve those.
You know those I'd say, it's pretty big on those.
Can I can cut somewhere around here the original amount but.
Third charged down you know I would say, it's at least three quarters on those those are.
Hey, there's some other credits I think may still may have said that are making their way through the snake area. They were put in play they've had some pretty significant charge offs, yeah right away. So.
So I would you say as a rule of thumb say use three quarters, it's not our finest hour for sure okay.
And just backing up to the total loan book level could you just give a deferral amount again on the higher risk bucket that you mentioned that combined.
1.36 billion I think it was you mentioned and then what was the total deferral percentage for the entire alone.
At this point.
Okay well the.
The deferral store the.
The higher risk bucket, so not including energy would have been.
And this was as of then let's say April 20, Threerd $227 million Okay.
Billion 361 outstanding and if you look at the deferrals for the entire company.
Sure about $1 billion, three but I agree with about 8% of our loans.
Okay, and maybe just one last one on the NIM.
Into Q I know is when you'll get that full quarter impact of the rate cuts you talked about.
The trend there being down was just wondering if you could.
You know sort of bracket that in terms of rough range or estimate in terms of magnitude of what you're expecting for twoq that'd be great.
Thank you only color I can give there really is.
I don't think any of us really completely understand how the PDP loans will affect any just margin how quickly they will be repay some of our conversations internally we talk about potentially.
75% of a may be getting paid within say the first 10 week, but that's really just trying to figure out how all this will work I mean, if we had some challenges obviously.
With.
Some of the in putting into the system. There is no secret Dare I know theres a lot of credit associated with that so don't fully understand yet how all that's going to play out as we move forward, but that would be a big assuming that it worked out that way, obviously you'd have a significant.
Hit there from a positive standpoint.
Yeah, Matt.
Any any way to just estimate backing that out as you're absolutely right. I mean, that's going to be some noise in twoq and maybe even threeq you to depending on when these things are.
Our forgiven or whatever happens with those but maybe just backing that impact out any sense just from a magnitude per se I would tell you that down if you back them out and again.
I think that our net interest margin we were at 356, I think that full year, we'll still be north of three is what our current projection. It but you are going and see some drag, especially between the first in the second after that it's still level down a little bit, but you're going to see some significant reductions in them.
Nam again, we have not making any investment assumption of course, there's nothing really to buy right. Now we're really trying to make sure that we keep our liquidity on the tide, we can and we have not borrowed from the federal reserve under there.
Their liquidity programming. So yes, there is going to be to obviously some pressure on that on the NIM and especially with LIBOR going down as much as it has here recently.
As it was kind of nice added at higher levels, but it's moving up pretty quickly now yeah. Okay. All right. Thanks, guys. Appreciate it thank you.
Your next question comes from the line of Jennifer Demba of Suntrust. Your line is open.
Thank you good morning.
Good morning.
You mentioned.
Youre 1.6 billion.
And then more vulnerable category right.
Of those categories, what are the larger exposures with them and within that 1.3 billion.
Well, let me just give you bought the.
Segment them for you.
Well.
If you look at a category for.
Religion.
Public finance.
Outstanding should be ended the quarter were approximately 336 million.
Restaurants total their outstanding 275 million.
I would tell us 239 million.
Aviation hundred 96 million.
If you look at the public finance area looking at associations and organizations was 115 million.
Entertainment and sports Rose 114 million.
And retail businesses.
The investor real estate, but the retail businesses were about $86 million.
So that's the.
Breakdown in those categories.
Oh.
Rds, though does.
Or.
We have some.
But not a lot of them.
Fully msps.
Now, let's say it's no.
Remember in writing.
$50 million range so.
Are you talking about on PPP loans, Jennifer you talking about.
Traditional espeed right no regular regular speed I think you know if you give me a minute I'm not able to pull that.
Could have seen that some where it's not it's not a big factor.
Okay.
Okay.
Let me ask.
Cells are mainly limited service.
Hi.
Property.
Yes, so similar to our hotel exposure.
Is.
Okay.
Committed I gave you outstandings committed.
It was three is 314 million, we've got 28 projects, we've got eight of them in construction.
In the construction ones will be finished sometime this year.
Thanks to be seen when they're going to open them.
We've got.
Average loan to value on that those properties is 64%. So our owners are experience. It got a lot of equity in the project projects.
Good operators, a lot of Hilton and Marriott flags.
They are.
No gateway cities.
Nothing related to.
Cruise ships or theme parks or those kinds of things.
For the projects, they've actually close to $38 million commitments, it's actually close them from operation just going dark autumn because they've seen.
They've seen obviously levels good data such low levels. So.
Actually we feel really good about the portfolio I think we're going to have some some risk grade Reid.
Rate increases in our in our parlance, which means increasing risk, but really don't feel at this point, we see any loss in that portfolio.
Good sponsors many of which have good liquidity.
Once the restaurant that look like.
Yeah, the restaurants, our commitments there.
Good Good story I gave you outstandings before we analyze mainly all commitments about $340 million commitments.
119 million of them have up.
Yes for deferrals this point.
You know two thirds of that portfolio.
Committed dollars are.
Associated with with multiple format restaurants multiple sites like.
No franchisees.
Well.
Obviously office locations I think the exposure there Jennifer yeah, probably relates to the small restaurant.
That's up maybe isn't is used to dealing takeout format.
I'd say, maybe borrowers have less than $100000, where you don't have a lot of value with the collateral associated with it it's not a big number it's like $6.4 million for small restaurants that are loan so less than 100000, obviously, they add up a bit.
Right now that's where we received exposure you know the hard thing about all this is that the numbers that were working with.
Really.
Are you know from.
Third quarter year end, we don't have audit reports for a lot of the Oh.
A lot of the company's and even if you did I mean, the numbers look good for everything so what we're doing as we're just having to analyze where we are and use our experiences.
Estimate where these things going to show up so when I tell you know and the restaurants, we think it's under a $100000 and portfolio of 6.4 million Thats true. That's our best guess, if where we'll see it but the fact is we just know right now we're still waiting to see the impacts.
Thanks, so much.
Well.
Your next question comes from the line up John Armstrong of RBC capital markets. Your line is open.
Thanks, Good morning.
John Good morning.
I had a different topic, but I just wanted to follow up one on jennifers questions.
Looks like you had some downgrades are in terms of problem loans outside of energy.
Just curious about that and maybe can you touch on maybe broadness in frequency of your loan grading process.
Yeah, you know I think that we saw new problem loans.
Some of the larger ones public finance related.
No.
Organizations that.
Or maybe in the arch or the education area, which we saw some.
Some downgrades everything to be fine, but we saw that.
I'd say energy is the main area, where we did see the.
Did see the.
Increases and.
We call problem loans, which are first grade tenant higher.
As far as the grain process I mean, our officers responsible to have the grades.
And make sure they are accurate we really.
Want to avoid any double downgrades, we measure that as we as we were measure individual.
Relationship manager performance, so they're responsible for keeping keeping up with it and I didn't really notice anything that gave me much pause in the non energy.
Migration to the downgrades that we saw thanks.
May have somewhere around here.
Yes.
Jerry do you have the non energy.
And.
Chris Graves huge numbers.
I have to look forward to give you a little bit.
So John excuse me, we're going to pull that up there.
We can come back to that.
Just on.
PPP.
Curious why why do you think you were able to secure returns what you expect.
And also wondering if you take a stab at.
How much.
That three plus EUR 3 billion is maybe people that are new to frost customers that are needed frost.
Well first of all our position was that we would deal with cross customers.
So you'd have to be a borrower, but indeed didnt need to be a commercial customer when started out in the reason for that wasn't.
It was all based upon what was the fastest way to get money into the community because if we were dealing with non customers. We would have to go through the.
Federal government regulations on B.S.A.M.L. know your customer and we really didnt have any slack they didn't cut any slack for anyone that I'm aware of from that area and so the fastest way to process. The applications was to do it with people that we'd already known through that process with.
And.
And that's the first thing as it relates to that.
The second thing I'd say issue regarding how we were able to do it as effectively as we did.
It's just.
I must've for its just terrific people lined up and outstanding culture that as it has a culture going above and beyond we had over 500 volunteers people that.
Didn't do anything like this in the regular job and wanted to be a part of the process and.
Inputs applications at night from home everyone's doing stuff all.
But not just application and putting mean.
The outcome.
In addition.
Rate accurate completion rate of the applications it comes in.
The surprise, if it was 60% and so a tremendous amount of work had to go into contacting a customer.
Getting information that might have been missing some cases, we had we had.
Suspicion that they fill that out wrong based upon how the given answers on the questionnaire.
So we spent a lot of time talking to customers and getting those applications ready and soon so being able to get 75% or so of the applications through I think we just amazing because I guarantee it.
We didnt get 75% completed.
No ready input ready applications and so there was tremendous amount of working from home.
Slide eight hours.
Around the clock, we've been doing this seven days a week, we took Easter Sunday off and it's just been grid just grid of our people I.
I really think that Tom.
What I've seen.
And not just us but others.
Other community banks and other other back some everyone's trying to us.
But it's just it's unprecedented its historic and truly really its erode what we've seen.
And.
So I am just didnt amazed at the success, we've we've had.
Okay.
I'll leave it at that thanks, guys.
John just one thing I was going to say way I've got the information for you, but it's really broken down by risk rated by.
Core commercial loan class and so I can go through all the numbers, but we're going to file our Q right after that and it will be on page 17 will be the current.
Year by asset class and by by risk rate. The current year in the next page on page 18.
The December information with the new Cecil disclosures that we just don't have I don't have a comparison just.
One versus the other.
Okay that helps thank you.
Your next question comes from the line of Stephen that Alexopoulos JP Morgan Your line is open.
Hey, good morning, everybody, let's too.
Sorry, just a follow up on energy question, where the problem loan balances at the end of the first quarter. There was 132 million last quarter and then what specific deferrals that you provide to energy companies in the quarter.
Okay problem loans would have been at the end of the first quarter 140.
1.7 million.
And the previous yes, you said they were 132.4 at the end of the previous quarter.
Yes.
Saw a decline in risk grade tens.
Oh, the round numbers about 40, an increase in the.
Risk rate 11.
It looks like about.
That's the 85 or so.
So we had little migration there.
We talk.
Or is that we talked about a credit for the last two quarters that was really dependent upon asset sales in order to make their business plan work and they were fighting the issue that.
Yes.
Discount rates had gone so high with the absence of equity into business.
Private equity moving out of market.
You added that on top of that.
What's going on with this demand destruction Cobrand 19, so you've got.
Just discount rates being but also prices being low so we saw some deterioration that.
Relationships, so that I think that most of that I've. Just described so that's I think the most yet on energy deferrals, we've not seen really a whole lot at all we did a pretty de minimis amount of energy customers faster.
Okay. Okay. That's helpful. And then thank you on the expense outlook being taken down for 2020 is that or how much of that is related to the used an expansion is that being slowed at all I can give some color there.
Yeah, the some related to the Houston expansion is just so we're being careful on the people that were hiring were reducing expenses.
No.
Really in all categories is just trying to be smarter about it you know as we do lose people and when we see.
No, we're losing people from for various reasons and.
We're all that were just asking the question do we need to replace that position I think we're just we're doing a good job there were continuing on with the Houston expansion.
We've been investing in that for the last couple of years.
Good about what's going on with regard to that we were looking at seems like ancient history now given everything is it a PPP Ur cobot 19, but.
I'm really excited about the performance we've had in Houston, If you look at our new household.
Goal and where we are versus it were 146% ahead of our new household go and buy we that's what I look at mostly because of that one it's taken care of it tends to take care of everything else were 260% of our wells the goal for our Houston expansion at this point in time.
Our deposits.
Our 68% upfront goal.
But it's been improving for example, if you look over the last.
Three months were 108% of our goal for deposits and.
That's really because of commercial side the consumer side is actually over the last three months, 240% of our goal and so the commercial side takes longer to develop were you can move a relationship over but it takes a while for that operating.
Business to really end up in your numbers and see Disney move in the tour. So we're about 50% of our goal over the last three months see commercial but I'm not worried about that thats, our wheelhouse and I'm expecting that to to go up and as we mentioned you know the business Journal Houston Business Journal reported.
With that we were the number one.
Pp lender in that market anybody, including very large banks to the community banks.
And I.
I think thats getting around in the marketplace equal or or or learning the value of a relationship. It had one customer mentioned.
That they didn't realize when they.
Decided to open a checking account.
15 years ago, they would be making decision on whether their business would stay in business or not because.
Okay.
We're able to get a PPP them through the company that they had their deposit relationship with so I'm excited about the Houston expansion upset about the performance that we've we've had and it is a.
You know, it's it's a tough market to do that end, but this is a very strategic very long term effort for us that we're showing success and not only success because we news we just need.
Our pro forma goals this would be great, but in my mind, we're exceeding that and I'm I'm extremely happy that I'm looking forward to getting past this pandemic situation and getting back to a more normalized environment really can be able to trade off of our value proposition that marketplace.
And how many branches, but at this point are used in and how many are left.
Hello.
11 remain.
Remaining November we wrote from 25 sort of 14 remaining.
Okay. Thanks, so much of the color.
Hello.
Your next question comes from the line of Matt Olney Stephens. Your line is open.
Hey, good morning, and thanks for taking my question Oh, my questions have been addressed but.
Bill you mentioned the banks intention to reduce the energy exposure over time to the mid single digit level and it sounds like this could take awhile, but can you talk more about the driver that decision was made at the at the board level and does this speak to the risk profile.
The asset classes that isn't as favorable as it once was or to speak more to the volatility of the stock price just trying to understand that the driver at this decision. Thanks.
No. It wasn't weighted board low up it's also talking about this up keep in mind.
Why don't you know.
First started talking about this we were at 16%.
Going to 20.
Probably and so we we stopped the growth we made the decision to move it down we said we wanted to between 10 and 13 I think were.
And obviously moved down to 10.
I have said in previous calls I'd like to see at a single digit handle on that.
And one of the things.
As you referred to.
I'm just.
Came up on the NIM.
Finance side, I'll make a big believer in asset allocation Ivan and.
Okay, just take your business I mean, you can.
Pick the best stock at a at a and industry segment, that's that's not doing well and you're not going to do well, even if you pick the best off and so.
I think our shareholders sign up for less volatility when a company like ours and if you looked at the correlation of our stock price to energy prices.
We had the highest correlation of stock price too.
The price of oil of any of our peers and I just don't think that.
Our shareholder sign up for that kind of volatility on the big shareholder I don't sign up for that kind of off.
With a company like ours. So I think just makes sense that what we need you need be needed to be doing was not just there was a long haul around energy, but just by doing the ground game of the what we've talked about for long time now the.
Core loans those under $10 million, maybe I am also making sure that we're doing what are what our.
Our culture in our and our.
Well, what we said we do around underwriting, making sure that were really being conservative around that.
Around all our portfolios, but including energy portfolio. So we've been moving that way we've been talking over the last year about you know when we had gone down 10, moving it down to.
To the single digit levels, and ISI sort of deferred in previous calls and I think that there. So the next largest portfolio segment for our company is probably around six or 7% terms of its size I don't think there's any reason for the energy portfolio.
So to be any larger than you know the bill.
The next largest segment of our portfolio I just think its a.
Mhm.
It's a common sense view of acquired ought to represent for us and it really puts the onus on us to make sure that we're doing the hard work of.
Of.
Have grown the rest of the business as well as I say will.
Even at that level reduce level it'll be a significant portfolio for us, but with less exposure than we had historically and it's a.
It's important business for the state and that'll be something that you know I think that were good and we'll continue to do but we we have been trying to and we are ready to reduce debt exposure overtime, but as I said, it's not something you can do unilaterally.
It has to be done smartway overtime.
In accordance with the lending agreements that you've got in place and maintaining the great relationships that we have with the weather great number of great customers now that we have today.
So thank you Atlanta perfect. Thank you very much.
Your next question comes from the line.
He is when the Walla Bank of America Securities. Your line is open.
Hi, good morning, good morning, guys.
Questions I mean, most of my questions have been asked and answered just a couple of follow ups.
And then too.
You previously talked about obviously the organic expansion in Houston, many other interest there.
Well I guess in the World, where did have some market dislocations and some M&A opportunities come up can you don't do in terms of good interest level.
And like.
Something like a distressed situation would you think about M&A declined in Wyoming or are you extends our to go back to the organic.
Going pretty funny this crisis.
Hey, Tim Tim I think that.
Still focused on the organic growth.
For all the reasons that we have in the past.
Yes.
Lot of that around brand a lot of that around.
Operational fixed exposure.
I think this the pandemic introduce introduces some.
Other variables as well around credit that type of thing, but I mean.
Good.
At the core it still that strategic decision that.
That we've been able to create a brand that's shown demonstrated its ability to grow organically and we just think it's the best.
Deal for our shareholders, who have led us build a company with a brand like that to be able to prosecuted even though it does.
Take some operational burn and the build out period, but it's it's a winning long term strategy and one that we really like to see the benefits of go to the current shareholders that allowed us to build that Brad as opposed to pay.
Payment for.
Other companies that might dilute that.
It continues to be our focus.
Understood and then just one follow up and don't go quite you get out a lot of.
But on the energy book.
Hey, how do you see that.
Do you assume $9 in.
Oil prices for this year and $36 next year.
Yes.
Is it the real big big that $36 and assume that if oil prices are higher prices next year above that mid Turkey.
Portfolio is a range of those four based on the stats and analysis that you perform.
Well. This did you say you assume that yes next year, it's in the low Thirtys, we'll see some Scott.
We're believing we'll see some increased demand I think one thing that's up you're seeing also with the with the destruction of production in the U.S. One thing that we have to keep an eye on its out are we going to see such a reduction in.
Over the next 12 to 24 months.
That we we see price movements up so I think they tend to not.
Not be small movements in just a small changes in the.
And.
Swing.
Hi ends up or down our tend to make fairly large price changes.
Well, we're expecting to see summary, resumption of usage in burn occur in inventory and that's why we have to 30 for next year.
36 is our 30 sinister headsets, we did right.
Tony.
Thank you.
Thank you.
Your next question comes from the line up Michael Rose Raymond James Your line is open.
Hey, Thanks for taking my questions.
Just two follow ups.
Like the total potential problem loans were up 71 million.
Looks like about nine or kind of that was was energy related what what made up the other component of it and how much of it was at higher risk category and you mentioned.
I believe that.
Well I believe it is the largest increase the biggest increase so we saw there was the.
Was it was a credit that I mentioned earlier and have mentioned for the last.
Couple of quarters for the quick Thats rely on sales of property.
And.
As I mentioned.
Equity drew.
Dried up and market.
And you saw this discount rates increase it made anybody needing to sell properties was.
Under some stress and would be under stress we saw that and then we saw prices go down so not only of discount rates really haven't price prices are low and so it really has hurt.
What's the operating model, but that that.
Credit had so and that as I mentioned before that one is about $50 million. If it's about 49 million dollar.
Exposure.
Okay. That's helpful. And then just one additional question on on capital.
You guys are really strong during the great financial crisis actually continue to increase your dividend Easco. Some updated thoughts on on the dividend and how you're thinking about buybacks at this point. Thanks.
Michael I think at this point, our focus would be around the dividend on the importance of that as opposed to buybacks I think you'll see US you know lean towards a dividend as opposed to buyback I think we're going to yeah. I think we've got 70 million last on a program that saw rise I think it expires in July we make the decision we're not going to do any buyer.
Back under that program.
Okay and additional ones yet.
Okay.
That's and then no other thoughts on the dividend I assume it's stable here.
Yes, yes, yes. It was full of house, we haven't announced something on that but.
And it's certainly a priority for us and something that.
We want to.
The maintaining place yeah, I mean that if we get it certainly yeah. It's important to US. We saw you saw in the press release, we continued our 71 cents a share dividend. This morning. So.
So yes, I mean, the import the dividend is important to us our we're focused on on ensuring that we keep that if we got good capital levels.
Yes, very focused on the dividend and continuing to keep that there.
Thomas.
That's our focus.
Great. Thanks for taking my questions this year.
There are no further questions at this time and they continue.
Okay, well, we thank everyone for your interest and.
With that will be journey. Thank you.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating you may now disconnect.
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