First Interstate BancSystem, Inc. (FIBK) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to the First Interstate BancSystem First Quarter 2020 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please also note, today’s event is being recorded.I would like to turn the conference over to Ms. Lisa Slyter-Bray. Please go ahead, ma’am.

Thanks, Rocco. Good morning. Thank you for joining us for our first quarter earnings conference call.As we begin, please note that the information provided during this call will contain forward-looking statements, actual results or outcomes may differ materially from those expressed by those statements. I’d like to direct all listeners to read the cautionary note regarding forward-looking statements and factors that could affect future results contained in our most recent Annual Report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the Annual Report and our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any forward-looking statements made today.A copy of our earnings release which contains non-GAAP financial measures is available on our website at fibk.com. Information regarding our use of non-GAAP financial measures may be found in the body of the earnings release and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference.Joining us from management this morning are Kevin Riley, our Chief Executive Officer and Marcy Mutch, our Chief Financial Officer.At this time, I will turn the call over to Kevin Reilly. Kevin?

Thanks, Lisa. Good morning and thanks again to all of you for joining us on our call today. Along with our earnings release, we’ve published an updated investor presentation that has some additional disclosures that we’ll be speaking to on our call today. The presentation can be accessed at our investor relations website. If you haven’t downloaded a copy yet I encourage you to do so. I’m going to start today by providing a quick overview of our financial results, discussion on our response to the COVID-19 pandemic and provide some additional information around our exposure to the various industries.And now I’ll turn the call over to Marcy and she’ll provide more details on our financials. Despite the challenging environment we delivered another quarter of solid operating performance, while our net income and earnings per share were impacted by building our reserve to reflect the deteriorating economic condition resulting from the COVID-19 pandemic. We continue to generate strong pretax, pre-provision income and show positive trends in many key areas.We had a good stability in our core operating net interest margin which excludes the impact of interest recoveries and loan accretion. As we have been able to effectively offset the pressure on earning asset yield by reducing our cost of deposits. Our fee income continues to be a strong source of revenue as we saw a significant increase in mortgage banking revenues due to demand for refinancing.Our wealth management revenue also increased over the prior quarter despite the volatility in the market that pressured assets under management. Obviously, the big development during the first quarter was the COVID-19 pandemic. We’re fortunate that many of the markets that we operate in have been among the areas of the country least impacted by COVID-19. Montana and Wyoming have been very effective in managing the spread of the virus and rank among lowest states in the country in terms of infection per capita.Early this week, Montana starts the process of opening up the economy back up which is very encouraging. Wyoming never had a stay at home order in place, but did limit large gathering through the end of April and now the Governor is looking at options to loosen those restrictions. Likewise, South Dakota never had a stay at home. It has been in the news for an outbreak of the virus at a pork processing facility. But that is in the Eastern portion of the state and we have all of our presence in the western part of the state which really hasn’t been impacted much.Idaho and Oregon has seen a bit higher impact but nowhere near some of the harder hit states in the country. The Governor of Idaho has announced a phased approach to reopening their economy that begins today. The one state of our footprint that has been impact quite a bit, is Washington. But we have only a small portion of our employee base and loan portfolio in the Western portion of the state that has been hit the hardest.While at relative basis, we probably haven’t experienced the same impact to other banks around the country. We’ve certainly seen a negative effects of the pandemic to one degree or another across our markets. And I want to say that I’m very proud of our leadership team and our employees for their incredible effort during this difficult times. As the threat of COVID-19 pandemic accelerated we quickly made adjustments in our operations to protect the health and safety of our employees and our customers, approximately 68% of our employees are now working from home and we have closed all of our bank branch lobbies and reduced operating hours to limit exposure for both employees and clients.We have made significant investments to enhance our technology infrastructure over the past years and this has enabled us to officially transition our employees to a remote work environment without losing productivity and the ability to handle the increased juices of our digital banking platform by our clients, approximately 72% of our retail clients now utilize our digital platform which is up 9% from this time last year.To assist our employees, we have put in number of new programs in place. We have continued to pay our employees who need to be absent due to the COVID-19 either to care for themselves or a loved one, without having to use their own vacation time. We have updated our medical plans to eliminate the co-insurance payment for COVID-19 testing. And we have expanded our First Relief Employee Assistance Fund so that our employees experiencing financial challenges due to COVID-19 can apply for additional support. Our foundation is also double matching contributions to that fund.In terms of our assistance for our clients, we recognized that there are folks out there who are really suffering and we wanted to make sure that we provide the support they need to make it through this difficult time by waiving fees and early withdrawal pendings [ph] as appropriate. For our borrowers, we are working with our clients to consider deferring loan payments and accepting interest only payments for a certain period of time including considering waiving fees for deferrals. For residential mortgage customers we’re offering forbearance plans that allow for reduced mortgage payments or no mortgage payments for a period of three to six months.To-date we’ve granted loan deferrals on approximately $1 billion of commercial and CRE loans and $45 million of consumer loans and approved $130 million of forbearance request on residential mortgage loans. While we’re doing some loan modification to commercial clients, our primary means of support is providing them with access with the SBA Paycheck Protection Program.The investments we’ve made to adapt our lending to be scalable and to standardize process over the past years served us well in getting up and prepare for the PPP application process. As a result during the first wave of funding, we were able to get more than 6,800 applications approved for approximately $1 billion in loans. In aggregate, the companies we helped to access the PPP funding represented more than 107,000 employees in our markets.In total, we received approximately $35 million in fees from the first batch of PPP funding. During the first round we focused on just helping our existing clients. Over the past couple of weeks we’ve expanded our process to include new clients that have opened up deposit accounts with the bank so we can perform our due diligence. These clients will be part of the applications that we processed during the second wave of funding.In the updated investor presentation that we published we’ve provided quite a bit detail around our loan portfolio in individual segments and I want to spend a few minutes discussing some of the key takeaways. As a general comment about our loan portfolio we have not seen a meaningful drawdown on our credit lines since the crisis started which we believe is representative of two things: the strength of our borrowers and the lack of need to build up liquidity, and the limited disruption they have seen in their businesses.Looking at our exposure to high risk industries or loan types we have $369 million in outstanding loans to the hotel industry which represents 4.1% of our total loans. It’s a strong portfolio with more than 80% of the underlying properties being flagged hotels and we have an average LTV of under 48%. As of March 31, less than 1% of this portfolio was impaired.We have $483 million in Ag loans which represents 5.4% of our total loans and as March 31, just 2.3% of this portfolio was impaired. As we have mentioned in the past the largest segment of this portfolio beef cattle ranching and farming. And within this Ag segment most of the borrowers raised feeder cattle which are less than a year old and they get sent to the feed labs in the Midwest usually in the fall.So while there is some disruption in the beef processing plants, our customers are really at the beginning of the supply chain and that won’t have a really meaningful impact on them unless those plants stay close for a very long period of time. Our mall and retail trade exposure is only about 1% of our total loans with almost none of these loans being on a criticized category as of March 31.As we mentioned in the past, we have steadily reduced our exposure into the oil and gas industry and it now represents just 1.5% of our portfolio and only $4 million of those loans are impaired as of March 31. And lastly, I want to provide some information around our indirect portfolio which primarily consist of loans for autos and RVs. It’s a high quality portfolio in which approximately 58% of originations at FICO scores above 750 and approximately 85% have FICO scores above 700.With our strong underwriting we have consistently seen a delinquency rate that is well below our peer group in this business. And since the crisis has started, we have increased our collections efforts which has brought down our delinquency rate by 23 basis points during the month of April. And I think our experience in April is a good example of the point I touched on earlier. In our markets, our people are working or going back to work and they can make their payments. So we feel very comfortable with this portfolio and it should continue to perform better than the same type of loans at other parts of the country.And at this point I’m going to turn the call over to Marcy so she can provide a little more detail on our financials. Marcy, go ahead.

Thanks Kevin and good morning, everyone. As I walked through our financial results unless otherwise noted all of the prior period comparisons will be with the fourth quarter of 2019. I’ll begin with our income statement. Our net interest income decreased $5.1 million from the prior quarters partially due to a $1.4 million decrease in accretion income. The remaining decrease was primarily attributable to one last day in the quarter and a lower level of earning assets.On a reported basis, our net interest margin decreased 4 basis points to 3.9% in the first quarter. Excluding the impact of interest recoveries and loan accretion, our operating net interest margin was unchanged at 3.77%. Our cost of funds declined 7 basis points from the prior quarter which helped to offset the pressure on our earning asset yields. We still have some opportunities to further reduce our cost of funds as our CDs mature and renew at lower rates.We have $766 million in CDs or 68% of the current portfolio that will mature by the end of the year and these deposits carry a weighted average rate of 1.48%. The CD repricing will help us continue to offset some of the pressure on our net interest margin from the decline in loan yields resulting from the recent fed rate cuts. For the second quarter, we expect our net interest margin to be flat as we’re able to fund a large portion of the PPP loans with our excess liquidity that was parked in overnight funds. Any accelerated fees as a result of loan forgiveness should be accretive to our margin, but this probably will not impact the second quarter.Moving to non-interest income. We saw an increase of $6.5 million quarter-over-quarter to $43.7 million. The increase was almost entirely due to higher mortgage banking revenue. This increase offset the seasonal decline we normally see in the payment services revenue which was further impacted by decreases in transaction volume in the last half of March related to COVID-19. All of our other major fee generating areas were relatively consistent with the prior quarter.Mortgage banking revenue increased by $5.5 million from the prior quarter due to higher demand for refinancing. Our mix of production for new purchases and refinancing which is about 50-50 this quarter. Our new digital mortgage application portal continues to make a nice contribution as we closed about $7 million of loans or about 6% of our purchase activity through this channel in the quarter.Right now our online process accepts only purchase originations. But starting in May it will be opened up to refinancing which should help generate additional volumes through this channel. We continue to see strong mortgage origination activity heading in May. Although we do expect it to taper off as we approach the end of the second quarter as demand for refinancing begins to drop off. In terms of our other fee income areas we’ll probably not have a seasonal pick up that we typically get in our payments services revenue as we expect consumer spending to remain muted until the economy fully opens up again.Moving to total non-interest expense. We had no acquisitions. Expenses in this quarter compared with $700,000 acquisition related expenses last quarter. Excluding acquisition related expense our non-interest expense increased $8.3 million from the prior quarter. This was primarily due to the impact of seasonally higher payroll tax expense, higher FDIC insurance following the credit that was recognized last quarter. A $2.9 million impairment to mortgage servicing rights due to higher prepayment speeds resulting from the increase and refinancing.And lastly, lower quarter-over-quarter gains on the sale of the other real estate properties, while we’re always mindful of expenses with the revenue pressures resulting from the current environment, we’re tightening our expense control even more particularly around discretionary spending like advertising, reduced travel expenses and reduced training cost.Business travel has stopped for all of our employees and we’re still not allowing outside vendors to come into our facilities. Required meetings whether for business or training are still continuing virtually in a very effective manner. For these reasons, we expect our non-interest expense to be lower in the second quarter.Now moving to the balance sheet, our total loans were about flat from the end of the prior quarter. Increases in our commercial real estate and construction loans were offset by small declines in our other portfolios. One thing we did not see this quarter were large drawn downs and unused lines many of the other banks have mentioned. As our unused line usage remained steady.In terms of our loan pipeline we’re down a bit from pre-crisis level. The macro uncertainty has impacted demand and many borrowers are opting to focus on applying for PPP loans or utilizing other federal lending program. Our total deposits decreased $98 million from the end of the prior quarter. This was due to a decline in non-interest bearing deposit from commercial customers along with decreases in time deposits. These decreases were partially offset by increases in interest bearing demand and savings deposit.Moving to asset quality, we saw slight increases in most problem asset categories. Our non-performing assets increased $14.2 million more than half of which was attributable to the reclassification of purchase credit impaired loans due to our adoption of CECL. Our past due loans increased $15.6 million but approximately half of that amount came current a week after the quarter end. The slip into past due status was due to issues with title companies and delays in getting documentation recorded due to COVID-19.In our presentation we’ve included a couple of slides discussing our adoption of CECL and I would like to touch on a few of the main pieces of information. While the CARES Act allowed us to consider delaying CECL at adoption. At this late date, we determined it was best to stay the course. That said, it’s been pretty interesting time to adopt new loan loss methodology.Our CECL model was built on an Oracle platform and considers an 11-year look back period of our historical data. As a result of adopting CECL, we increased our allowance for credit losses on January 1, by $32.3 million or about 44% to consider the lifetime loss in our portfolio loans. This amount includes a $2.3 million which was attributable to off balance sheet commitments as required under CECL which is included in other liabilities.In the first quarter we increased our allowance by an additional $26.1 million to consider the potential impact of COVID-19 on our portfolio. Within the CECL model, we used the Moody’s Baseline Forecast as of March 27, which assumed contraction in our economy during most of the year, with expansion beginning in the fourth quarter along with higher levels of unemployment through 2022. We also considered other economic factors as noted within our investor deck to develop of qualitative adjustment to the allowance.At this time it’s hard to determine the severity of the impact of this medical crisis on our economy. To-date we believe that this increase in our allowance is reflective of the non-COVID-19 impact on our portfolio but the full extent will remain to be seen. There are many variables that make it impossible to project the ultimate impact on the portfolio from the positive benefit of all the stimulus being injected into the economy, to the negative impact if there were to be a second outbreak.Our credit quality is at strong today as it’s been throughout the history of our company. As you’ll note on our investor deck the size of our loans are relatively small and spread across the diverse geographic and industry base. We spent the last four years improving our credit culture, our operational processes and developing a discipline around resolving problem assets. As such, we believe we’re well positioned to handle the next recession.I’ll wrap up by touching on provision expense. We have $3.1 million of net charge-offs during the quarter or 14 basis points of average loans on an annualized basis. Our provision expense was $29 million which was comprised of a $29.2 million adjustment to the allowance offset by a decrease in liabilities of $0.2 million [ph] for off balance sheet commitments.And with that, I’ll turn it back over to Kevin. Kevin?

Thanks Marcy. I’m going to wrap up with a few comments about our ability to manage through this crisis. Although no one knew that 2020 we would see an emergence of a global pandemic. It demonstrates the value of our conservative approach that we’ve always used to manage the bank. I’ve spoken a number of times over the past few years about how we refuse to comprise our underwriting criteria in order to generate loan growth, even though the economy has been relatively healthy over the last several years. We just don’t believe in ever straying from our disciplined approach.Our goal is to maintain a fortress balance sheet with strong asset quality based on conservative underwriting criteria, a high level of reserves, excess capital and ample liquidity. By doing so, we’re always prepared to manage through any downturn in the economy and protect the interest of all our stakeholders, our clients, our employees and our shareholders.Accordingly, we believe we are well positioned to weather this current storm and continue to enhance the value of our franchise over the long-term. I’ve been in banking for a long time and this situation is way different than any of us have ever seen before. We can’t anticipate how long the slowdown might last or at what speed folks might get back to work. The good news for our industry is that, unlike the financial crisis caused by the Great Recession we have a great opportunity to be part of the solution.Advances in technology are letting our clients interact with our bankers in an efficient and safe manner and allowing us to be highly productive and continue providing exceptional service under extraordinary circumstances. As we’ve indicated, we have plenty of capital and liquidity to manage through this crisis. From a capital management standpoint, our priorities will be maintaining sufficient capital to buy credit for our clients and support economic activities in our market. As well as maintaining our quarterly cash dividend. The dividend is relatively a small claim on our capital and we should be well supported by continued operating earnings.For the time being, we’re suspending activity on our stock repurchase program and we’ll be reevaluating this decision as conditions warrant in the coming quarters. I’ll wrap up by saying I’m extremely proud of the First Interstate team. They have demonstrated concerned for each other and taking care of their team mates. They have gone the extra mile to ensure we meet the needs of our clients in our communities. And you heard me say before, I have the best banking job in America. I also think, I have the best team in America. They’ve proven to be reliable, resilient and responsive to this very tough period of time.So with that, I’ll open the call for questions.

[Operator Instructions] today’s first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.

First, I guess thanks for the detail. This is a great slide deck really helps us observe as we’re looking at stuffs, appreciate the time and effort you put into that. I guess just starting on asset quality. When you look at the qualitative factor input, I’m assuming one that, that increased the provision over the baseline and can you just sort of give us the sense of how much that increase overlook the baseline would have been otherwise on the Q1 provision?

Most of the increase in - for the day two for the first quarter that was a result of the qualitative factors.

Okay, but so your qualitative factors became more severe than the Moody’s baseline, is that correct?

That’s correct.

Okay and then, if we look at - I hear you saying Montana is going to reopen. If we get to the summer in the tourism attendance isn’t it strong as expected. How sensitive are your customers I guess to any potential slowdown in tourism? So as we look through the summer, when should we be looking for sort of warning signs with that.

Jared, I would say the warning signs are probably going to show up going into the third quarter, if we see anything. But as you know, Montana one of our biggest industry is the tourist industry. So we’re hoping that we’ll get back to that. It’s interesting that, during this whole pandemic there’s a lot of people from New York and around the country that are hiding out of Montana to stay safe. So I think it’s safe here and people might come here because it is one of the safer places in United States.

Okay, thanks and then on the Ag exposure, on the protein [ph] side. Do any of those customers hedge that out so as we move through the year, we still see some type of a log jam in the chain there? Do they hedge at all or is that not really an industry to hedge?

I don’t think many people hedge that. They’re [indiscernible]. I think they just ride with it. So yes it could have an impact if the prices stay down.

We could ask that question, off the top of my head I’m not sure.

One of the largest cow producers is the Scott family and I don’t think they hedged theirs, so they put out about 11 to 12,000 head of cows a year. So I don’t think they hedged their portfolio. But good question, we’ll get back to you. We’ll look into that.

Okay. And then, can you just give us an update on M&A? I know obviously that’s not a priority at this point given everything. But is this something that, is off the table for months or quarters or years or I guess what would have to happen for everybody to get any comfort to seeing a deal - the deal happened in the future.

I think things would have to settle down Jared to have something come about. I mean lot of bankers that were maybe thinking about partnering something, they’ve been really busy with trying to help their clients during this period of time. So talks have really stalled. But I think talks could continue if things stabilize and when that time comes about, I don’t know. But I think that - I think crisis always kind of separate the weak from the chaff. So people who did really well are going to do well and I think people who had a hard time, are going to think harder about continually to be independent.

Okay, great. Thanks for the color. I’ll jump off.

Our next question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

I wanted to - kind of a follow-on on just the return to open businesses more on the - less on tourism but just the kind of the businesses that you work with, trying to get sense for it. If you’ve had conversations about their thoughts on return of some normalcy of business and do you think it’s a phased in or foot traffic is minimized, but kind of give us a sense for the conversations you’ve had about just the local businesses and how they foresee that return?

I would tell you if it was Montanans, they would act like this thing is over and same with Wyoming. I think the thing is that, they’re trying to hold back on some of the stuff. I mean part of it is, people pose wearing mask and stuff. But I would tell you, the compliance scenario is about zero. I think it’s going to be slow at the first and then it’s going to pick up in some of the states that we’re in. time will tell, it’s harder to predict what’s going to happen. But if you really look at what’s going on in Billings which is the largest city in Montana. It’s getting pretty close back to normal.I’m surprised the amount of people that are in the various establishments and stuff. So I would say if it continues the way it’s going then it’s going to get back faster than I would expect. I mean Yellowstone County which is where Billings is, in the last three days we’ve had zero cases, no cases in the County and most of Montana. The county has never even had a case. so it’s really the biggest area of Montana was Gallatin Valley and that’s the Bozeman Big Sky area and due to fact, that, people probably brought it from out of town when they were trying to hide out in Montana. But besides that, I think a lot of the areas are going to turn back to normal. I think even Idaho the biggest areas impacted in Idaho was Sun Valley again people going to their second homes and stuff thing and bringing the virus. I think people are waiting to get back and if you look out, it’s getting back to pretty close to normal.

Got it. Okay, thanks and I think Marcy you mentioned on the overall NPA build half of that was a request of PCI. But that leaves about another I guess $7 million or so. Any sense of what industry was that in and do you think any of that was driven by kind of COVID pressure tipped over from that or was that a preexisting issue?

I don’t recall the industry. But I can tell you that it was a preexisting condition and it was not COVID related.

We have seen no COVID related pressure on our portfolio as of date.

Okay. On a credit perspective.

Right. Yes.

You mean there. Got it. Okay. And then maybe one last one, Marcy to pull out the crystal ball here. Your comment on the margin in the second quarter I appreciate that. I guess dots are positioning of the second half if you could frame up sort of how you think you manage the puts and takes. Obviously, PPP will be a bit of an impact but kind of core margin and expectations kind of leverage you can pull in the second half just framing that up, would be helpful. Thanks.

So I would say in terms of lowering deposit cost further except for the CD run off that will see that, we’ve kind of you know our powder is dry there. So I mean, our powder is all spent [ph] there. And so the biggest benefit we’re going to see is from the PPP loans and the acceleration of some of those deferred fees and I think that the acceleration of the deferred fees, will drive our margin higher as we head into the second part of the year.

Yes, so I’ll give my first - I think the margin, like Marcy says it’s going to be flat to - if we have some pretty some of those loans pay off earlier, could be up in the second quarter, but pretty much flat. But in the third quarter all bets are off. It probably could go north really fast because of all those fees being recognized. I think we returned to it and maybe a normal run rate in the fourth quarter. What we’re hoping for is, new growth from the addition of a lot of corporate customers.We’re very fortunate in the PPP process that we brought a lot of new customers into the bank and we’re going to hope that they move their relationship over to us. They were very dissatisfied by many of the institutions and the first goal around. We were able to pretty much take care all of our customers so that the second round we pretty much just open it up to take care of other banks customers. I’ll just give you an example we normally open about 500 corporate relationships a month. We had 2,000 come in the month of March well above our normal thing. So we believe that we have done with regard to taking care of the people in our communities hopefully that will translate into a lot of additional customers.

Great, thank you.

And our next question today comes from Jackie Bohlen of KBW. Please go ahead.

Just to continue on that line of questioning. So you said that was 2,000 new customers in March. Can you give us a sense if that will also be continued into April?

We don’t have it, the number in April. But I would actually say it probably picks up because that’s when we really started taking care of some. And it’s going to pick up even more due to fact that, we did some with just open little accounts and then, did their loans and they -. I mean I’ve never received so many letters from customers in the communities talking about how we helped them through this difficult time. It’s been very humbling to the fact that our employees have done such a wonderful job. So I think it’s going to translate into more additional customers.I mean the letters all said that I got and I just get a lot of them, which normally I only get letters of complaints and none of those are coming through on this program. But I would tell you that, it’s going to take time for the move the whole relationship over. But I mean just likes of Worlds and US fell down and Banner fell down, just an Umpqua and stuff like that.I mean we had sometimes where we, they came in and applied for loans and we were helping them because they couldn’t get it through their own bank and then we call the customer up and said, well we put it through. But it’s already been approved at Banner and they’re like well. We’re getting more information from you guys than our own bank about our loan process. So it was interesting that happened in number of different institutions. So I mean just pick out that one. But our employees just did an unbelievable job.

Great, no. I mean - my expectation from this is that. As we return to the new normal relative to growth you would otherwise expect, you could see a little bit of lift in both certainly in deposits and loans in the longer term from these new relationships, is that fair?

That’s fair to say, that’s why I’m hoping at the fourth quarter we have those new relationships and as things start to rolling off that are abnormal that will be supported with more core banking relationships.

Okay and I want to make sure that I understood the comments on your timing expectations. So at this point, you’re not expecting to see much of those accelerated fees in 2Q or expecting that to really hit in 3Q today, write that down correctly?

That’s correct.

That’s correct.

Okay. And the deferred fees you’re referring specifically to PPP, there’s no some other accelerated payoff or other portfolio that you were referencing, right?

That’s correct.

Okay. And then, just one last one from me and then I’ll step back. In terms of more of a housekeeping item. The MSR impairment was that part of the usual valuation of MSR just given the environment and the raise because it’s not something very unique and specific to both first quarter?

No that’s just, it’s just.

Every month actually.

Every quarter we look at it. But the thing as you said, it’s just the speed of prepayments. You have to then value your MSRs and as that speed of prepayment comes down, we might actually reverse some of that - it might come back to us in the future.

Okay I just wanted to clarify some things, the geography of the expense. Okay, thank you.

And our next question today comes from Gordon McGuire of Stephens. Please go ahead.

Marcy I was hoping you could reconcile something for me. So your NIM guidance was for flat next quarter, even where you’re not expecting those accelerated fees from PPP to come in.

Right.

Is that correct?

That’s correct.

Okay, so the replacement of overnight funds into 1% PPP, that’s going to be enough of a lift to offset any kind of loan repricing. I guess could just run through the loan portfolio repricing.

So you have the 1% you’re earning on this plus you’re amortizing those deferred fees, through the term and so then they accelerate when they get forgiven or paid down. So between the amortization from the fees which goes into interest income and the 1% earnings because we’re funding that with overnight funds that were at 10 basis points.

So quick story. These loans, the PPP loans with the fee will actually yield about 3% because at FAS 91 you capitalize those fees and amortize them over life of loan and then when they pay off, you get the remainder comes into income.

Immediately.

Okay. All right. And Marcy could you walk through the just loan repricing dynamics? What kind of floor protection do you have at this point?

You bet and so, 51% of our loans remain floating and off those that 51% which is about $4.6 billion, a $1 billion those have floors and off those that have floors, 81% have hit their floors. So we only have about $186 million that have not hit their floors.

Okay, great. Thank you. And then the mortgage fees up pretty significantly, but the volumes were down and I guess that implies a gain on sale spread that’s much higher than I would have thought they would have been, was there anything noisy in that that contributed to that number?

No, volumes were actually.

Volumes were up.

Up.

I guess I’m looking at the slide deck and it looks like volumes were down. Okay, how much were volumes up quarter-on-quarter?

Quarter-over-quarter. They may not be up quarter-over-quarter. What I was looking - first quarter last year. So yes, we did have some increase in our gain on sale margin.

And the reason for that because the volumes were coming so we had to start up and the price slow down the volume. So that’s why we got a better margin.

Okay, so nothing like an MSR.

No.

Benefit or anything like that. Okay. And how were margins trending so far into May now?

Just flat. Turning into May.

Okay flat compared to the first quarter?

Yes.

Okay and then just last thing. Could you within the payments, can you quantify what type of drop off you saw in March relative to January and February?

It was just in the last two weeks in payment services revenues and it fell off pretty substantially. I’ll get back to you on that Gordon.

You’ll have that answered.

Okay, thank you.

And our next question comes from Matthew Clark of Piper Sandler. Please go ahead.

First one from me, just on the deferral activity, the $1 billion of commercial deferrals. I guess what percentage of those are going to get PPP or have received PPP?

14% of the deferrals and there’s an overlap of 14%.

14%.

Great and then with the round two the wave of new customers coming to you. Are you requiring them to have a deposit account initially or is that something you just expect to get overtime?

No, they have to open initial deposit account. But it takes time for people to move corporate operating accounts over so.

Okay and then, can you quantify the purchase discount at the end of the first quarter, so we can gross up the reserve for the mark?

I don’t understand the question. What was the question?

The purchase accounting discount on your loan book that [indiscernible].

So that kind of goes away with CECL. I mean we’re still amortizing that. Yes into income it isn’t a factor anymore. We evaluate the full loan portfolio under CECL without any consideration for - I mean there’s just not that same factor.

Got it. Just thinking about loan production and kind of the opportunities that exist out there. I know you guys have tightened standards over the years in certain segments. Have you made any additional tightening since the pandemic emerged or and do you see opportunities for good business out there? Just trying to get a sense for whether or not you’re tightening the reins further or not?

No, we’re not tightening the reins any further. We’re going to stay with our same criteria. But I will tell you that right now there’s not a lot of people borrow a lot of money for expansion. There are everybody’s pretty much in the same camp to seeing where this is all going to go. So people are still doing business. But I don’t - there’s not a lot of people that borrow much of money to expand their businesses at this juncture.

Yes, understood. And then just a couple of minor items. The wealth management revenue, is it based on prior in terms of the fees. Are they either tied to the less quarter end in terms of the market, is that right?

Yes, we could see a little bit of pressure in our wealth management revenues.

Yes.

Okay and then just the tax rate going forward, given the lower level of income.

Yes, it’s probably right around 22%.

Okay, thank you.

And our next question comes from Garrett Holland with Baird. Please go ahead.

I just wanted to start on asset quality. I mean the recession appears less severe in your markets, which is great. But 12% of borrowers are still in forbearance. And there’s probably some impact from the quarantine. But are they asking for relief out of conservatism how do you expect that figure to trend from a fairly elevated level?

I think most people came in just to ask forbearance not because they’re in financial trouble, it was a rush to the door to get something like that just to ease what they might be ahead. So I don’t think a lot of those forbearance is due to fact that people - that was really a visible issue right now. They think they had the opportunity, so they took it. I think same thing with the PPP loans. A lot of people took the opportunity to get loans quickly. So I don’t see anything right now that’s kind of tip of the iceberg but time will tell.

That is helpful. And then maybe shifting to net interest income. Clearly, a very encouraging trend with new account acquisition and understand the muted underlying demand and puts and takes on the margin line. But overall, do you feel you’re going to be able to grind out spread income growth from here?

We’ve been pretty consistent. It’s one of those things that we talk to our lenders about all the time. Trying to kind of maintain consider the environment orient - to the credits you’re doing. Again because we have some smaller borrowers were able to kind of do a little bit better.

We’re trying to keep - credit spreads are widening as you even look at corporate debt out there. So we’re trying to educate our lenders that credit spreads even though rate environment is low. The credit spread should be high and especially during this period of time of pandemic. The credit spread should be really high. So I would tell you that, first of the customers came in they were talking about refinancing to a lower rate and we stopped that real quick because of the education of credit spread. So I think we’re going to hold the line on that and if we do any more lending, we’re going to try to keep credit spreads high. Until such time we understand what this environment is going to pan out to be.

That’s fair. And just one last one on expenses. Obviously, costs are seasonally higher in the first quarter and you’re flexing on savings. But how do you expect the expense run rate from a quarterly perspective to progress through the year?

So it should come down a little bit. I think initially we gave guidance between $97 million and $98 million run rate a quarter. We expect that we will be able to bring that down a little bit as we head into this quarter and the remainder of the year. Until at least things get back to normal.

I mean I think we can [indiscernible]. The thing is, if you back out the MSR adjustment we’re pretty much right on a mark that we say we’re going to be.

And normally that’s a higher quarter.

So that’s a higher quarter, so we believe that we should do better from that standpoint going forward.

Very helpful. Thanks for taking the question.

And ladies and gentlemen, this concludes question-and-answer session. I would like to turn it back over to the management team for any final remarks.

Thank you for your questions. As always, we welcome calls from our investors, analysts. Please reach out to us if you have any follow-up questions. Thank you for tuning in today and be safe and healthy.