Glacier Bancorp, Inc. (GBCI) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to People’s Utah Bancorp First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Olson, Chief Financial Officer. Please go ahead.

Thank you and good morning. Thank you for joining us today to review our first quarter financial performance. Joining me this morning on the call is Len Williams, President and Chief Executive Officer for People’s Utah Bancorp. Our comments today will refer to the financial results included in our earnings announcement and investor presentation released last night. To obtain a copy of our earnings release or presentation, please visit our website at www.peoplesutah.com. Our earnings release and investor presentation contains forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and beyond the control of the company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in or implied or projected by such forward-looking statements. These forward-looking statements are intended to be covered by the Safe Harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements speak only as of the date they are made and we assume no duty to update such statements except as required by law. I will now turn the call over to Len Williams. Len?

Thank you, Mark. Good morning and thank you for joining the call today. Before our prepared remarks, I would like to acknowledge and thank the healthcare professionals for their tireless and selfless efforts in the frontlines to help those infected with the COVID-19 virus. Our thoughts and prayers are with them and with their families impacted by the pandemic. I would also like to express my gratitude for the bank’s leadership team and the many associates who have adjusted their lifestyle dramatically to continue to be there for our clients and the communities we serve. Included with the 8-K we filed yesterday is not only our first quarter earnings release, but also a presentation that highlights our response to the COVID-19 pandemic, the efforts we have made to assist our clients, the business sectors and our loan portfolio that maybe the most impacted by the pandemic and the strength of our balance sheet to withstand the potential negative effects as shutting down the economy may have on our clients and us. We will be speaking to both the earnings release and the presentation on this call. As events began to unfold with the health risks of COVID-19, our immediate concern was the health and welfare of our dedicated associates. We immediately executed on our pandemic response incorporated into our business continuity plan. The response effort has been the largest coordinated project undertaken by the bank and I am incredibly proud of how our associates responded to the challenge. We have seen strength and leadership emerge through this unprecedented business twist. Some key aspects of our readiness response include identifying and isolating high-risk associates, initiating social distancing, eliminating all corporate travel for us and our vendors and dispersing those who already had secure remote access to our systems. We then significantly increased the number of associates who are able to work remotely, which included the procurement of approximately 100 additional desktops along with accompanying headsets and video equipment. This effort to reduce the density of our operations facility was a significant task which our information technology department performed admirably. They completed it in just a couple of weeks. This dispersion included departments that we have typically not considered working remotely, including our loan processing department, customer care center and even our central processing group. While we rapidly deployed our back office support teams, we did so in a safe and secure environment. We continue to ensure appropriate data security and as our operations shifted to new delivery methods. The other area of focus was our retail and commercial branches. We wanted to ensure that we could provide our clients with essential services, including access to cash, loans and the ability to move money. We instituted a daily review of all cash activities whether held in the branches or ATMs. So we plan to continue to monitor such activities until we are back to normal operation. On a positive note, we have seen deposit grow to an all-time high during this process. By the middle of March, we determined that for the safety and best interest of our associates, clients and communities, we would close our branch lobbies and transact day-to-day business primarily through our drive-up windows or in the branch by appointment only. These changes to our business were to ensure that we were following government mandates related to social distancing and to protect and support our workforce. Many of whom were balancing demands of the work environment with other issues such as care, the care of school age children who have been sent home. To ensure that our clients’ needs were addressed, relationship managers, made phone calls to their clients. In addition, we ask personnel from our branches to our network and remotely to reach out to our customer base, to ensure that their needs were being met as well as to assist any client in the use of our mobile or online banking sites for their day-to-day banking activities. While we hope that the business environment becomes easier as the number of COVID-19 cases peaked, we are prepared to continue to operate the bank in a state and sound manner for quite some time. Now, I would like to discuss our support programs that we are offering to our clients. We immediately instituted a borrower forbearance program to assist our business and consumers during the pandemic. To-date, we have offered assistance to approximately 400 commercial borrowers who have requested forbearance of payments of approximately $15.9 million on $340 million of outstanding loan balances. The average monthly payment amount is approximately $7,500 per loan and the average deferment period has been 5.1 months. The total amount of the payments deferred is $15.9 million. We offered assistance to approximately 80 consumer borrowers who have requested forbearance of payments on approximately $1 million of outstanding loan balances. And we have also implemented the permit options to mortgage clients we service in accordance with the Fannie Mae guidelines. We are participating in the small business administration Paycheck Protection Program. As of yesterday, we have processed approximately 225 applications totaling $65 million, which we expect to have fully funded by early next week. We also referred any overflow request to a fin-tech firm to assist those businesses we could not complete their applications or their process. I believe it’s important to note that the SBA has processed 14 years worth of loans in less than 14 days, an incredible accomplishment. We have also processed approximately 50% of our annual loan growth objective in 14 days. The percentage of our balance sheet that we have assigned to the SBA PPP is greater on a percentage basis than what most of the money center banks have allocated. We plan to participate with additional funds provided to this program by the federal government. There are other steps we are taking, including eliminating service charges on various transaction and the suspension of foreclosures on mortgage loans and other actions that makes sense in today’s environment. Next, I would like to discuss the credit quality of our loan portfolio and our balance sheet position. Over the past 24 months, we have communicated each quarter our efforts to fortify our balance sheet based on the perspective that we were at the end of an economic cycle and wanting to be prepared for an economic downturn. While we certainly did not anticipate that the economic downturn will be the result of a pandemic, we believe that our balance sheet strength provides safety and security to our stakeholders as we work through the negative effects of shutting down the economy to mitigate the health risk associated with the COVID-19 pandemic. Our balance sheet is reflected in our adoption of CECL are applying the full impact of CECL to our regulatory capital ratios at the end of the first quarter, which provides clarity of our regulatory capital position. Three is our maintenance of primary liquidity through continued deposit growth, secondary liquidity through holding high levels of cash and liquid investment securities and tertiary liquidity through pledging our loans and investment securities with the FHLB. And finally, our focus to reduce loan concentrations in our ADC and commercial real estate portfolios as well as placing limits on specific collateral types. With 30% of our balance sheet held in cash and securities and allowance for credit losses of 2.5% and a leverage capital ratio of 12.7%, we are positioned to support our stakeholders through this pandemic. As we evaluate our loan portfolio to assess the size and scope of those business sectors that could potentially be impacted by the COVID-19 pandemic, we have identified approximately 19% of our loan portfolio. These business sectors include retail, assisted living or nursing homes, hotels, motels, restaurants and arts entertainment recreation loans. I believe it’s important to note that the vast majority of such loans are secured by real estate and that our commercial and industrial exposure was small. For all ADC acquisition development and construction loans, we use the loan to cost ratio rather than a loan to value ratio and are underwriting these credits. Loan to costs on our acquisition development and construction loan is 51%. The average LTV on our owner occupied commercial real estate portfolio is 58% and the average LTV on our investor commercial real estate portfolio is 54%. Of the total loans potentially impacted the 19% of the portfolio, approximately 15% are acquisition development and construction loans. We have not seen a slowdown in construction activities through the pandemic. Another 36% of the potentially impacted loans are owner-occupied commercial real estate primarily in the retail space. Another 43% is in investor real estate, again primarily in retail, assisted living and hotel, motel. Lastly, approximately 6% of those loans potentially impacted are in the commercial and industrial loans. The ultimate extent of the impact to our overall portfolio is difficult to predict as is contingent upon the length of time that individuals are required to shelter in home and the length of time it takes to get businesses fully up and operating. With the deferment agreements we have entered into with various clients, we anticipate that we will begin to experience higher non-performing loans and increased credit losses in the later half of the year. We are monitoring the portfolio closely to determine if additional allowance per credit losses is required. At this time however, we believe our allowance for credit losses is adequate and our regulatory capital position is strong. The Board of Directors declared a quarterly dividend payment of $0.14 per common share. The dividend will be payable on May 11, 2020 to shareholders of record as of May 4, 2020. The dividend payout ratio for earnings for the first quarter of 2020 was 24.42%. We announced earlier this month that we discontinued the repurchase of PUB shares until further notice. At this time, we anticipate continuing to pay a quarterly dividend. We will actively monitor our capital adequacy to determine whether to repurchase shares or continue to pay quarterly dividends to shareholders in the future. Despite all the activities related to the pandemic, we earned net income of $10.8 million, achieved an ROA of 1.8%, and an ROE of 13% on 12.5% capital. I will now turn the call back over to Mark to discuss our financial results and specifics related to our adoptions of CECL. Mark?

Thanks, Len. Our earnings release contains detailed information related to the series of events amongst and between regulatory bodies related to the adoption or delay in the adoption of CECL. The accounting for loan modifications related to the pandemic and the transitory options that take the impact of the adoption of CECL to regulatory capital over a 3 or 5-year period. In summary, we elected to adopt fully CECL. Second, we elected not to report loan modifications directly related to the pandemic as troubled debt restructurings going forward and we have taken the full impact of the adoption of CECL against our regulatory capital as of the end of the quarter. We believe that we are one of the smallest institutions to adopt CECL. In fact, there have been other banks larger than us that have already announced their first quarter results and they have announced that they have delayed adoption of this accounting guidance. We believe the steps we have taken provide transparency regarding our adoption of CECL and the impact of such adoption has on our overall capital position. Our allowance for credit losses increased $15.3 million or 59% to $41.3 million at the end of the first quarter compared with the year earlier. Allowances for credit losses to total loans increased 62.5% to 2.51% at the end of the quarter compared with 1.55% a year ago. Shareholders’ equity increased $38.8 million or 12.9% to $340 million at March 31, 2020 compared with the same period a year earlier. Our leverage capital ratio was 12.74% at the end of the quarter compared with 12.7% at March 31, 2019. Our first quarter results include the impact of adoption of CECL. Total risk-based capital was 18.6% at the end of quarter compared with 16.9% at March 31, 2019. Tangible equity plus allowance for credit losses totaled $353 million or 21.5% of total loans held for investment at March 31, 2020, which provides overall total credit protection for both expected and unexpected credit losses in our loan portfolio. With respect to CECL, we adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. We adopted ASC 326 using the prospective transition approach for financial assets purchased through an acquisition or business combination. Loans that were previously classified as PCI and accounted for under ASC 310-30 were reclassified as PCD loans. In accordance with the new standard, we did not reassess whether PCI loans met the criteria of PCD loan as of the date of adoption. On January 1, 2020, the amortized cost basis for PCD loans was increased by $1.5 million to reflect the addition of ACL. The remaining non-credit discount will continue to be accreted into interest income over the remaining life of the portfolio. For non-PCD loans, we increased ACL by $2.6 million using the same methodology used for originated loans with an offset to shareholders’ equity net of applicable taxes. The remaining credit and non-credit discounts for non PCD loans will continue to be accreted into interest income over the remaining life of the portfolio. The accretible discount on non-PCD loans was $3.1 million at the end of the quarter and provides additional credit protection to our overall loan portfolio. If we add this accretible discount to our ACL, total credit protection for our current expected credit losses is $43.6 million or 2.65% of total loans at the end of the quarter. We increased ACL by $5.4 million or 17% to reflex the change in accounting methodology for CECL. A cumulative tax-effected impact to total shareholders’ equity was $6.7 million or 2%. We used the weighted average remaining maturity or the WARM method, adjusted for prepayments, to calculate CECL at the end of the first quarter. The adjusted duration used in the CECL model for the loan portfolio was approximately 1.6 years. The extent that the duration of a loan segment was less than 1 year for example, our ADC loan portfolio, we increased the duration to at least 1 year. The unadjusted duration of our portfolio is approximately 1.4 years. We used the 10 year time horizon from 2008 through 2017 as our proxy for a normal economic cycle to evaluate our historical credit loss experience. The average historical loss rate for this 10-year period given our current loan portfolio mix was 0.64%. We used critical information for loan portfolio segment that to be extent we didn’t have any historical loss experience or if our loss experience was limited. We applied qualitative factors that provide approximately one standard deviation of credit loss experience above the mean for the economic cycle period which we evaluated by loan segment. Turning to liquidity, total deposits grew $171 million or 8.7% to $2.1 billion at March 31. 2020 compared with the same period year earlier as we continue to manage aggressively our overall liquidity position. Non-interest bearing deposits increased $81 million or 12.4% to $737 million at the end of the first quarter compared to the same period a year earlier and interest-bearing deposits increased $89.6 million or 6.9% to $1.39 billion at the end of the quarter compared with the same period a year earlier. Non-interest bearing deposits to total deposits, was 34.7% as of March 31, 2020 compared with 33.6% a year earlier. Cash and liquid investment or liquid investment securities grew $243 million or 50% to $735 million at March 31, 2020 compared with the year earlier. Cash and investment securities were 30% of total assets at the end of the first quarter. Loans held for investment declined $34.4 million or 2% to $1.64 billion at March 31, 2020 compared to the same period a year earlier. We have talked about this before. We have focused on reducing our loan concentrations in our ADC portfolio as well as our overall commercial real estate concentration. ADC loans to total capital declined from 149% at March 31, 2018 to 82% at March 31, 2020. Commercial real estate loans to total capital declined from 294% to 203% for the respective periods. Lowering our loan concentrations and limiting our portfolio for certain collateral types has made it more difficult to generate net loan growth, but we believe it is appropriate given our perspective that we are at the end of a credit cycle. Non-performing assets decreased to $6.6 million at March 31, 2020 compared with $8.8 million at the end of the year. Non-performing assets to total assets were 0.27% at the end of the first quarter compared with 0.37% at the end of this last year. Net income was $10.8 million for the first quarter 2020 compared with $11.7 million for the fourth quarter 2019 and $10.5 million for the first quarter of 2019. Diluted earnings per common share were $0.57 for the first quarter of 2020 compared with $0.61 for the fourth quarter of 2019 and $0.55 for the first quarter of 2020. As Len mentioned, our return on assets was 1.8% for the first quarter of 2020 compared with 1.9% for the fourth quarter and 1.95% for the first quarter of 2019. Annualized return on average equity was 13.1% for the first quarter of 2020 compared with 14.1% for the fourth quarter of 2019 and 14.4% for the first quarter of 2019. Pre-tax pre-provision income was $14.8 million for the first quarter of 2020 compared with $16.3 million for the fourth quarter of 2019 and $15.3 million for the first quarter of 2019. The decline of pre-tax pre-provision income was primarily a result of lower net interest margins and higher non-interest expense. For the first quarter, net interest income increased $0.3 million or 1.2% to $27.2 million compared with $26.9 million for the same period a year earlier. The increase is primarily the result of average interest-earning assets increasing $223 million or 10.8% to $2.3 billion for the same comparable periods offset by net interest margins narrowing 50 basis points to 4.79% for the same comparable periods. The narrowing of net interest margins is primarily the result of the Federal Reserve reducing benchmark rates near zero and an increase in the average amount of lower yielding cash and investment securities held by us stemming from average core deposits increasing $122 million or 10% for the same respective period. The percentage of average loans to total average interest-earning assets decreased to 73.4% for the three months ended March 31, 2020 compared with 81.2% for the same period a year earlier. Yields on interest earning assets declined 56 basis points to 5.17% for the first quarter compared with 5.73% for the same period a year earlier. The decline in yields on interest earning assets is primarily the result of average amounts of cash and investment securities held by us increasing $220 million, or 57%, to $605 million for the same comparable periods with the yield on cash and securities increasing 4 basis points to 2.25% for the same comparable periods. In addition, the yields on loans declined 32 basis points for the same comparable periods and average loans outstanding increased $3.8 million, or 0.23%, to $1.68 billion for the same comparable periods. For the first quarter cost on interest earning deposits decreased 8 basis points to 0.64% compared with 0.72% for the same period a year ago. For the first quarter, total costs of funds decreased 7 basis points to 0.42% compared with 0.49% for the same period a year ago. For the first quarter acquisition accounting adjustments, including the accretion of loan discounts and amortization of premiums and discounts on prime deposits added 16 basis points of net interest margin. We expect our net interest income and net interest margins to be adversely impacted in future periods because of the Federal Reserve lowering benchmark rates to near zero. For the first quarter provision for loan losses is $0.7 million compared with $1.6 million for the same period a year earlier for the first quarter incurred net charge-offs of $0.3 million compared with net charge-offs of $0.9 million for the same period a year ago. The decrease in provision for credit losses in the three months ended March 31, 2020 is due primarily to a decrease in charge-offs and no loan growth quarter-over-quarter. For the first quarter non-interest income was $3.7 million compared with $3.3 million for the same period a year ago. The increase here was primarily due to a $0.3 million increase in mortgage banking income resulting from higher loan volume of refinanced mortgages, which is primarily from a lower interest rate environment for the same comparable periods. For the first quarter non-interest expense was $16.2 million compared with $14.9 million for the same period a year earlier. For the first quarter, our efficiency ratio was 52.2% compared with 49.3% for the same period a year ago. The increase in non-interest expense for the three months ended March 31, 2020 was primarily the result of higher salaries and associate benefits resulting from higher incentive payments, and higher marketing and advertising costs associated with the rollout of the new brand. These higher amounts were partially offset by lower FDIC premiums due to the application of small bank assessment credits. For the first quarter income tax expense was $3.4 million compared with $3.3 million for the same period a year ago. For the first quarter, the effective tax rate was 23.9% compared with 23.8% a year earlier. I will turn the call back to Len.

Thanks Mark. We find ourselves in challenging and uncertain times a we navigate the effects of shutting down the economy to mitigate the impacts of the COVID-19 pandemic throughout this crisis our primary concern has been the safety and security of our associates I am very proud of our team and how they have effectively handled the crisis our next priority was the safety and soundness of this bank we believe that we build a fortify balance sheet that will withstand the negative effects of the pandemic and our other concern is our focus on providing relief to our impacted client’s it is our goal to provide as much assistance as we can to our client’s to support them through this crisis. I appreciate you all joining the call today. At this time, I will turn it back to the moderator to open the lines for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

Thanks. Good morning.

Morning Jeff.

Hi Jeff.

Len, maybe just to start I wanted to thanks for the detail on the your reference to 19% of the portfolio and then you have detailed retail assisted there being and so forth, would those fall in order of magnitude in terms of retail being the largest and then diminishing from there?

They would. And even those in that are retail supported, so I am not – or excuse me they are real estate supported, the bulk of them with some decent equity positions in it, but it’s a big unknown out there. We have been concerned about retail’s transformation to online and I think this pandemic may have just fed that up a bit. So that’s why we have spent the time getting into the portfolio and trying to find out exactly where the issues might be. And we will see where it takes us, but yes, that information we continue to dive into it as well.

And Jeff, even – I am sorry, go ahead.

No, I was just going to ask as a percentage of the portfolio if I could just like retail if it’s being your largest, is that 5% of loans or what is your largest single exposure there, I mean just in that category?

The loan size, is that you are asking?

No, no, in that classification, so you have got 19% of the portfolio is at risk, retail makes up of the portfolio 5%, 10%, okay?

10%. Yes, if you look at the investor presentation on Page 14, you can see that $160 million is retail related, $65 million is assisted living and nursing home, $58 million is hotel motel, $16 million is restaurants and $11.5 million is arts entertainment recreation.

Got it, okay. Got it, thanks. As a follow-on, go ahead.

Yes. The other comment I was going to make is even before the pandemic, we have spent a lot of time putting caps on each area type that we had and retail certainly was an area that we had limited the amount of capital we are going to allocate and I have actively managed down new business based on the amount of capital we wanted to set aside of each category. So, we have been working on that well before the pandemic.

Right. Okay, thanks. And maybe another question on well CECL related, I guess I’d start the question by more of a statement of that, I guess the Day 1, Mark and 2.5% of loans reserved is one of the highest I have seen it. I guess, the question follow-on is sort of nitpicking on, I guess the Day 2 or the provision being I guess small, I mean, you have got a significant Day 1 number, but then the Day 2, I guess on a relative standpoint seems lighter, but that I mean it’s all encompassing. Question being if the provision is real time view of CECL through the first quarter, maybe explain that level and what we could expect to see then if we sort of play out as the credit environment that you have assumed stays in line or perhaps even better, what does that provision do ahead? Thanks.

No, no, it’s a great question. And I guess you have got – I would suggest looking it in context from where we came from as Len mentioned. We have been preparing for downturn for 2 years. And with that, we have been setting aside reserves given our concern on how long the economic cycles. And so we have been looking at even pre-CECL and setting aside reserves on incurred loss basis based on our expectation of losses in the portfolio. And so as I mentioned you look at it for that 10-year cycle period that we are looking at from a CECL perspective, our annualized loss rate was 0.64%, so not significant. Now, obviously, extending that amount based on the duration of the portfolio, so you are taking your 64 basis points plus or times 1.6% that tells you kind of the mean of the loss experience in the portfolio that we have based on the mix that we have today. Anything above that is really related to our estimate of a downturn in the economy. And certainly we view that as needing additional reserves with respect to that. The reason for lower provisions in the first quarter really were a function of first just not any charge-offs and then second, the loan portfolio actually declining rather than increasing quarter-over-quarter. So, it’s difficult to set aside additional reserves when your portfolio is going down given kind of where we are at on economic prospective, where do we think the economy is now what is going to happen going forward is I think difficult for all of us to really determine and certainly as we look at economic data thus far other than the number of folks who are now falling for an appointment that hasn’t been a lot of metrics to be able to look at and assess what is going to happen in the future but we will continue to monitor each quarter and see where trends are going and determine adequacy on go forward basis but there is not a lot of information given where we stand in the pandemic to know what’s going on.

Jeff long as same line we knew coming into reporting time how the company has bared on earnings perspective and we went through the portfolio and saying these earnings are pretty high there is an opportunity if we think we are like now is the time we had to take that and fund it and we just couldn’t justify putting any more in at this point we will continue to watch going forward as you said it is one of the higher but our concern going forward is while we identified 19% of the portfolio the longer this lasts the more real estate would be impacted the more real estate is impacted the more we will be impacted so we are watching it closely

Great, thanks. And maybe one last topic is on the expense side when are they kind of catch up with lot of moving pieces with the macro climate but your own sort of investments that brand re-branding efforts trying to get a timing of so there is internal ride expenses and then may be external forces on working remotely the expense run rate this quarter how do you see that sort of plan out through the year that involves a lot of things but do we curb a lot of that brand re-branding costs and other investments just kind of walk us through there if you could?

Yes, we have already done that. Actually the first cut is in the marketing area we have taken a pretty significant hair cut to our budget we are trying to help our as many employees as we can through this process we have committed to continue to pay people for 60 days from when this started and then we have got a revaluate the business model in what’s happening out there as well there we are watching expenses very closely however this quarter we did have some significant equipment purchases most of a small equipments so I am not sure what the timeline for depreciation on those would be I think it will be pretty short so yes it is going to be a hard one to predict because we have had expenses with people moving offsite we have we are hoping we cover that with the marketing sales and some of the others but we recognize we have got some expense opportunities to focus on here to work down but we don’t have number for you at this point.

Jeff the only comment I would make is question is really good one the other is that we are working on is kind of the technology purchases and implementations we have transferred all the projects that we had budgeted for the year and to the extent that we can find a way to delay and defer we are doing that and where we need to be kind of getting ahead of the curve from a technology prospect we are still investing those money’s that we are really looking at costs savings there as well so we are looking at every dollar that we can to kind of reduce rates given the reduction in revenues

Okay, just to frame that up I mean the $16.2 million in non interest expenses quarter you want to try to hold the line given the moving pieces or at least curb additional growth probably speaking how would you catch that?

I would probably catch it and Mark you can speak to this quarter but I don’t think you will see a ton of change until quarter 3 and 4 because we are well into this one and there is some extraordinary first quarter expenses/

I wouldn’t we are going to try to maintain that level and reduce where we can for sure.

Thanks guys. I will step back.

Thanks Jeff.

Thanks, Jeff.

Our next question today comes from Andrew Liesch of Piper Sandler. Please go ahead.

Good morning guys. How are you?

Good, Andrew. How are you?

Good, thanks. I just want to focus on the margin here just with building the securities portfolio and increase in the yield there, just kind of curious what you guys were adding during the quarter to support the increase in the yield?

Sure. Well, and let me just say first that given kind of what was going on the repo market in the fourth quarter, we held on to a lot of cash and wanted to kind of get through those issues to make sure there was no issues for us and then in the first quarter, we purchased about $235 million of investment securities, pretty much all in mortgage-backed securities we wanted to have by amortizing securities so we get the cash back as quick as we can, so we can redeploy it into loans as our loan portfolio grew. We are looking at kind of across the band. We bought 15, 20, and 30-year mortgages. We bought jumbos and conventionals, I mean anywhere that made sense and we could buy at a good price we are doing it. You can see kind of the improvement it gave to the overall yield on the investment securities portfolio. We are actively looking at that, I mean, obviously with rates continuing to go to down, there is potential for higher prepayments and so we are trying to make sure that we are seeing as short as we can.

Got it. What’s your appetite for more mortgage-backed securities purchases given the environment right now?

It’s – we will probably buy as much as – as little as we can, but you look at it, if you are buying short duration or shorter duration 15 and 20 year securities, I mean we look at it right now and given the portfolio size of our investment securities portfolio, we are probably going to get $120 million coming back to us just as share loans. So, we are going to need to reinvest those funds to the extent that the loan portfolio doesn’t grow and so we will do that and we will probably end up with yields north of 2%, but probably not more than that.

Andrew, this is going to be an interesting quarter with that anyways, with these PPP loans coming on and then funded. We will utilize cash for that. But if all things work well that will be out in less than two quarters. We will see how that works. So, we have held a little excess there. And then we also going into April, we have had our largest loan backlog or pipeline since I have been here, which has been a couple of years whether or not that translates into deals now with the economy shifting we don’t know yet. So we will know a lot more at the end of this quarter.

Got it. Kind of you have alluded to in your prepared comments of market trend being downwards given the Fed rate cuts, but what opportunities are you seeing on the funding side to offset some of that as well?

Well, as you know, if you look at the numbers, our overall cost of funding is little north of 40 basis points. It’s hard to get much more squeeze out of it. Having said that, we monitor every week kind of what the market is doing and we have taken some pretty big cuts in rates as we look at it each week, but we are getting close the bottom quite honestly. I think if you go back and look, I think our bottom was like 30 basis points over the last several years. So, there is little bit there but not a ton.

Okay, thanks. You have covered all my other questions.

Thanks, Andrew.

Thank you.

The next question comes from David Buster [ph] of Raymond James. Please go ahead.

Hi, good morning.

Good morning, David, welcome.

Thank you. Thank you. Appreciate the commentary on the size of the pipeline heading into April, that’s terrific. Just curious what’s the composition of that and I guess what are you hearing from clients, what’s the pulse of the market? And ultimately, I mean how do you think about loan growth here exclusive of the PPP program? I mean, do you think that you could see net growth near-term given the size of the pipe or maybe some continued compression shrinkage?

Ye, it’s hard to give much guidance on it. We have been holding and slightly of late, but it’s relatively immaterial with a 1, what do we have a 1.4-year duration of a full portfolio, things are spinning pretty quickly. We would I am encouraged by the pipeline but I am discouraged by the potential future so I don’t know how much trade off and really what to predict with the economy we will stay in business we will stay helping our client’s best we can and we got a four to five balance sheet to endure and provide returns through this thing but it is hard to predict.

Okay, that’s helpful. So it sounds like what’s that?

It’s not. David, I just took it to say one of the positive areas we have certainly seen is on the construction side I mean much of the construction and you had a lot of construction demand continues to work on projects etcetera so hopefully there are some opportunity there but we will see.

So just taking the commentary maybe flattish loan growth combined with the commentary before on the provision expense I mean it sounds like if we are expecting not much balance sheet growth combined with may be some deteriorating economic factors that go into the CECL model there are probably not much in the way reserve build that you are expecting in the second and third quarter?

I wish I could say what that is going to look like but we believe we are adequate right now but it is hard to know given the number of people that are unemployed and how quickly does the states reopen and business get back to business so we are going to monitor closely but yes you are right I mean I don’t think we are going to see significant loan growth and with that there is it is only going to replenishment of charge-offs quite honestly/

In a normal – if things were normal I would say to expect a little bit of loan growth and you would see the reserves go up a little based on where we are today I totally agree with Mark’s comments we feel we are well covered now we are well covered for what we feel may happen but there is a big unknown out there.

Yes, that makes sense. And then just last one for me, just on the PPP program, you got $65 million, but just kind of how are applications coming today in our, I guess expectations going forward or kind of fee income could be generated and just what’s the relationship with the fin-tech firm, are you – they are just processing these or are you referring the loan to them?

Yes, we are basically referring them to them. With us, we have dedicated amount of the balance sheet to do that. We have the cash so there is no sense for us borrowing through the Fed window to do that. We have got capacity to manage what we have said we could take on, but outside of that, I think it becomes a big client service issue that we just don’t have the resources. So we have sent probably three times the applications through this fin-tech and they own them. There is a small little referral fee that really amounts to nothing. You won’t even see it. But it’s a tough process. The banks have been asked to distribute a lot of money over a short period of time with limited instructions. And we as I mentioned earlier after our employees, our top priority is keeping this banks safe. And we know what we can handle beyond that I think it jeopardizes relationships even more than it would be if we couldn’t do it upfront. So, we are trying to take care of our clients the best we can and through us it depends on what happens with the second round everything we have in has been processed and through us. So we are just waiting for the SBA to open up again and then we will process through their e-trans process and see what happens. At this point it’s almost going to look like a lottery. And then on the other hand, we had several process, but my understanding is this fin-tech [indiscernible], they were the only one to come to the table initially. And with that, I think they have had about 2,000 or 1,700 applications of ours times that by 70, because my understanding when we went on, there were 70 other banks already in the queue. So there is the percentage they are able to process we are going to have to deal with some of that too.

Okay. Just last quick one for me you talked about deferral requests on about 20% of your book as of March 30, how has that trended thus far in the second quarter and are there any industry concentrations or anything interesting that you have noticed in those?

Yes, it’s been interesting because our Chief Credit Officer anticipating this put a program together and a plan what we have actually got a worksheet on what was cash flow before, what’s causing the need to extend, when do you anticipate being out and then we are not going to increase payments, we will extend duration of these deals for a few months. So it is really a deferment. And a lot of companies that we are just not sure, but here is where we are at cash flow work. So we made the decision based on a little bit of knowledge of the clients versus this isn’t going to be able to pay now it will never be able to pay, those would have been different decisions that we would have to work through in other way. So they are good clients. We feel good about what we have done and we know them. I would say the same thing for most of the PPP loans with us if something happens with the programs some of these ends up in loans we are going to be okay with that, because they are good clients.

Okay. That’s helpful. Thanks guys.

Thank you.

Thanks, David.

[Operator Instructions] The next question today comes from John Rodis of Janney. Please go ahead.

Good morning guys.

Hey John.

Hey John.

Hope you guys are doing well. Crazy times.

It really is. It really is. The neat thing though is we are seeing some special things happen. We are seeing some superstars emerge out of this. We are seeing leaders lead. We are seeing solutions, creative solutions that are coming up. So I just continue to try to look at the good that’s coming out of this and the growth we have all had like many of us being through the hyperinflation in the late 70s and early 80s and interest rates where they were and we survived that and then the fall of the market in ‘87 we figured our way through that, the tech bust, 9/11, the great recession, this one is totally different new and we are seeing totally different new creative ways to work through it that I think will help frankly help business and the industry grow, but it is painful for now.

You learn a lot about people in bad times so.

You do.

Absolutely. Just, Mark, on the PPP loans what’s the average fee on that, is it around probably 3% give or take?

Yes, that’s about right. Maybe a little bit more than that to be honest with you, because we limited to where we are not taking the 1%. We are keeping them under $2 million.

Okay, okay. And then just back to your comment on the securities portfolio, so it sounds like you probably keep it around this elevated level for the foreseeable future, is that the right takeaway?

Yes, that’s right.

And then just on the margin directionally you said down and I know you don’t give formal guidance, but if I go back a few years to when rates were basically zero and you guys were a smaller company back then, but the margin was sort of 450ish, is that sort of the right way to think about it?

Yes, I think the only difference there would be that at that time I don’t think we had as much in cash and securities that has a negative effect I mean we have a large amount 30% of the balance sheet in the lower yielding products so that is going to have a negative effect as well.

Okay. So then and there, it could be below the 350 level 450 I am sorry?

Yes.

Can you say what the margin was for the month of March?

I can’t. I don’t actually have it in front of me I don’t know.

Okay, that’s it. That’s okay. Len maybe it’s too early for this, but as far as you guys are in a pretty good position you built the reserve, I know there is a lot of uncertainty, but M&A opportunities that could emerge from this situation?

John, that’s a great question and great point. I think over the past couple of years as we been trying to prepare and shift and manage the balance sheet little bit it has always been top of mind it continues to be top of mind I don’t know what the answer is I don’t know what shape out it will come we do keep in contact where some of the potential opportunities throughout our region and we are in position to support that so I would hope we would be able to help somebody out and frankly help our team and bank grow it is on our mind but I don’t think it is on a whole lot of sellers mind right now it is how we get through this PPP and survive through the quarter and then may be those discussions will pick up a little bit more.

I hear you. Okay. Thank you, guys. Be safe.

Thank you. You too.

You too.

The next question is a follow-up from Jeff Rulis of D.A. Davidson. Please go ahead.

Yes. Just a couple of quick housekeeping items. Mark, the FDIC premium expected to return and that would be about, what is that about $90,000 a quarter?

Yes, I think it’s a little higher than that. Just loot at the – go back to the first quarter, whatever that amount is that, that will be – what will be running at, but yes, we are done with the assessment, so it will be fully expensed going forward.

And then on the margin, what was the accretion impact this quarter and last, so you got 10 basis points increase reported, was there any sort of accretion, what were the levels of benefit?

It was 16 basis points this quarter. And we have got a combination of two things, it’s just the normal amortization of that accretible discount that we will have each quarter, but then to the extent that we have a loan payoff that we had credit discount on that full amount comes in to income when the loan pays off. And in the first quarter, we did have a loan that paid off that had a pretty good amount of discount on it. So that comes into income when the loan goes away.

So, what was the total benefit in the fourth quarter versus the 16 basis points this quarter?

I don’t have that in front of me. I think it was around 12 basis points, but I don’t know for sure.

Okay. That’s it for me. Thanks.

Thanks, Jeff.

Thank you.

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Len Williams for any closing remarks.

Well, thank you very much and thank you all for joining us. We know this has been an interesting – we are in an interesting time. It would be a lot more fun to celebrate the success of the quarter, but that’s old news now and onward to Q2 here as we try to negotiate through some new times. So, thank you joining us, love to also thank the employees, the associates who joined on the call. We miss you guys here. Stay safe and we will talk again soon. Thank you.

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