WesBanco, Inc. (WSBCO) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to the WesBanco First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to John Iannone. Please go ahead, sir.

Thank you, Chuck. Good morning and welcome to WesBanco Inc.'s first quarter 2020 earnings conference call. Leading the call today are Todd Clossin, President and Chief Executive Officer and Bob Young, Senior Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for one year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings related materials issued yesterday afternoon, as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of April 28, 2020 and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd, please go ahead.

Thank you, John and good morning everyone. Hope everyone is staying safe in these unprecedented times. On today's call, we'll briefly review our results for the first quarter of 2020 and more importantly, provide an update on our efforts during the current COVID-19 crisis. Key takeaways from the call today are, we successfully converted Old Line Bancshares in February and achieved the majority of our anticipated 2020 cost savings by the beginning of April. We are focused on our current operating environment to ensure a stable and sound company for our shareholders while aiding our customers and our communities in this difficult time. We remain a well-capitalized financial institution with solid liquidity and strong credit quality. On February 21, we completed the signage and systems conversion of Old Line Bank in our new Mid-Atlantic market and everything went as planned. To date, we have experienced good customer and employee retention. Our Mid-Atlantic employees remain extremely excited about the opportunities this merger provides them, as well as the new products and services available for their customers. In fact, we realized strong sequential quarter annualized loan growth of nearly 6%. We remain positive about the long term opportunities in our newest market. While everyone is experiencing unusual times, we are focused on supporting our customers and our communities in many ways and we are fortunate to be in a strong position to provide support to others during, again, this unprecedented time. As you can see in the presentation we provided last night, we have put our customers, our communities and our employees first. In early March, we convened a cross-functional team that was tasked with ensuring everyone's safety. This team took immediate and critical actions that have helped to protect our employees and our customers. In addition, we have pledged more than $0.5 million to support various non-profit agencies throughout our footprint that were impacted by the coronavirus so they can continue to provide much needed services to our communities. I am proud to say that the WesBanco team has worked tirelessly with more than 2600 consumer and commercial loans to help them meet and support the needs of their families and businesses by making modifications and deferring payments on $1.7 billion of loans. Furthermore, dozens of our employees worked around the clock getting more than 2,300 loans, totaling approximately $570 million, approved and funded from the small business administration's paycheck protection program net numbers up over $700 million as of this morning. Our thoughts and prayers are with the essential service providers across all industries, as well as with the many individuals and families suffering from this pandemic. We are all in this together. For 150 years, we have been a source of stability, strength and trust for our customers, communities, employees and shareholders. While no one anticipated the current operating environment, we believe we positioned the company well, as we had proactively taken risk out of our loan portfolio during the last few years and developed appropriate long term strategies to allow us to succeed, regardless of the operating environment. We believe these proactive decisions will help to protect our balance sheet during this current crisis while allowing us to simultaneously work with our customers and our communities to ensure that they also successfully navigate these extraordinary times. During the first quarter of 2020, we reported strong pre-tax pre-provision earnings of $62 million, an increase of 13% year-over-year when excluding merger-related costs and our key credit quality metrics remained at low levels and favorable to peer bank averages. In addition, our capital levels are strong and significantly above both regulatory requirements and well capitalized levels. While we monitor daily deposit flows, we've not experienced any liquidity issues. In fact, we reported sequential quarter annualized deposit growth of 1.4% despite allowing the run-off of certain higher cost certificates of deposit. We believe our strong capital levels, sound credit and our sound risk culture, combined with our community first focus will help us, our customers and our communities to navigate these extraordinary times. I'd now like to turn the call over to Bob Young, our CFO for an update on our first quarter's financial results. Bob?

Thanks, Todd. And good morning to all of you. During the first quarter, we experienced continued declining rate environment with cuts in the Federal Reserve short-term interest rate now totaling 225 basis points since last July, a relatively flat yield curve, the continuation of the limitation on interchange fees for large banks like us above $10 billion in total assets, the impact related to our adoption of the new Current Expected Credit Losses accounting standard effective January 1 and the beginning of the COVID-19 pandemic. For the first three months ended March 31, we reported GAAP net income of $23.4 million and earnings per diluted share of $0.35 as compared to $40.3 million and $0.74 respectively in the prior year period. Excluding after-tax merger-related expenses from both periods, net income for the first quarter was $27.5 million with earnings per diluted share of $0.41. The year-over-year decreases in both net income and earnings per diluted share were primarily due to the adoption of CECL and its impact on the provision for credit losses in the current environment, as well as the impact from the limitation on interchange fees. In order to provide better comparability to prior periods and to demonstrate the strength of our first quarter operations, it is important to review pre-tax pre-provision results. For the first quarter of 2020, we reported $62 million in pre-tax pre-provision income, excluding merger-related costs, which increased 13.1% and 9.2% respectively compared to the first and fourth quarters of 2019. In addition, pre-tax pre-provision return on average assets calculated on a tax equivalent basis was 1.61% in the first quarter as compared to 1.65% for the fourth quarter of 2019. While financial results for Old Line Bancshares have been included in our results since its November 22, 2019 merger date, cost savings have not yet been fully reflected in our earnings. While no one expected the current operating environment, highlighted by the quickly developing pandemic and it's severe immediate economic impact, we believe our balance sheet is well-positioned for the near term operating environment. During the last several years, we have proactively addressed our various lending portfolios in order to more properly balance risks and reward. Let me review just a few examples of such portfolio positioning. In our commercial real estate portfolio, we proactively reduced our multi-family lending in several geographies and hotel exposures in the Marcellus and Utica Shale region of our footprint. In our commercial and industrial portfolio, we had right-sized several customer relationships that had outsized exposures relative to our comfort level. Further, we have not seen any material change in line utilization, which has remained in the low-40% range as most of our C&I customers are small-to-middle market-sized companies and their lines are mostly for working capital purposes, typically, collateral based and have limitations on how they can be used. During the first quarter, we did not see any significant deposit run off as we reported net deposit inflows of $39.3 million as compared to the fourth quarter of 2019, which was driven by strong inflows across demand deposits and savings accounts. Furthermore, when excluding the strategy-driven continued runoff of certain higher-priced certificates of deposit, quarter-over-quarter deposit growth would have been 7% annualized. We also proactively increased our liquidity in March as you can see on the balance sheet in our cash and due from banks line to support our customers as necessary from both additional Federal Home Loan Bank borrowings, as well as the sale of certain agency mortgage-backed securities from our investment portfolio. We also have significant additional liquidity resources from the Federal Home Loan Bank and Federal Reserve facilities, as well as the expected liquidity from cash flows in our investment portfolio. And our loan to deposit ratio remains in the comfortable mid-90% range. In the supplemental presentation we filed last evening, we provided some details on certain commercial loan portfolios, hotels and restaurants -- I'm sorry hotels, retail and restaurants and energy. And as you can see, on that page -- it's page 7, in the separate filing, as you can see across each of these categories there is good diversification, granularity and strong pre-pandemic credit quality. We have minimal exposure to the energy industry with most loans under $1 million. The loans in our hotel portfolio are to well-known seasoned flags and hotel operators across our footprint with a pre-pandemic average loan to value of 58% and debt service coverage ratio of 1.5 times. Our retail loan portfolio which conservatively includes approximately $250 million of mixed use properties that have some element of retail along with commercial or multi-family tenants also has very strong credit quality and is fairly evenly distributed across various subcategories. Further, within our restaurant portfolio, the average commitment is less than $500,000 and we do not typically lend to large restaurant franchisee companies. Consistent with our strong credit culture, during the last 12 months, we have made several enhancements to our credit review processes that put us in an even better position today. These internally driven enhancements were the result of prudent portfolio management practices, as opposed to being driven by any credit deterioration or the current operating environment. During the first quarter, we completed a larger credit internal loan classification methodology project, which began last year to more heavily weighed quantitative measures in our loan risk creating process, in particular, debt service coverage. We also implemented a more robust annual review process for commercial loan relationships over $1 million that will continue to ensure our portfolio is monitored appropriately. Turning now briefly to our credit quality measures. Key metrics such as non-performing assets, past due loans, criticized and classified loans and net loan charge-offs as percentages of total portfolio loans remained at low levels and favorable to peer bank averages, those with total assets between $10 billion and $25 billion. Now moving to net interest income and the margin. As we are seeing across our industry, net interest margins are being negatively impacted by the cumulative 225 basis points of cuts to the Federal Reserve Board's targeted federal funds rates since July of '19 as well as the relatively flat yield curve. Reflecting the significantly lower interest rate environment, we aggressively reduced our deposit rates during the second half of March, which combined with our efforts to reduce certain higher cost CDs helped to lower deposit funding costs to 55 basis points for the first quarter which was 10 basis points lower year-over-year and 8 basis points from the fourth quarter. For the quarter ended March 31, non-interest income increased 0.8% from the prior year to $28 million, driven by organic growth and the Old Line acquisition which were partially offset by approximately $2.7 million from the Durbin amendment to the Dodd-Frank Act's mandatory limitation on interchange fees. Net securities gains of $1.5 million increased $0.8 million year-over-year, primarily due to the sale of approximately $218 million of securities in late March at a $2.2 million net gain to take advantage of market conditions and create additional balance sheet liquidity. These gains were partially offset by a negative $1.3 million market adjustment in the deferred compensation plan. And I would point out this produces a similar offsetting reduction on the employee benefits expense line. Turning to operating expenses, we were pleased that non-interest expense for the first quarter of 2020 came in approximately $2 million lower than our earlier expectations due to a diligent focus across the company on expense management and some initial Old Line Bank related cost savings. Excluding merger related expenses, total non-interest expense increased $14.8 million or 20.8% to $86.2 million compared to the prior year period, again, primarily reflecting the Old Line acquisition. As I just mentioned, employee benefits were positively impacted by the $1.3 million reduction in the deferred compensation plan obligations due to market declines and we experienced lower pension expense. Again, I would note that the deferred compensation decrease represents the offsetting entry to the market adjustment recorded in net securities gains. Turning to capital, for 150 years, the bank's management has a focus on being a strong and sound financial institution for our shareholders. While our capital levels remained strong during the Great Recession a decade or more ago, they are even stronger now, as we have regularly reported capital ratios significantly above both regulatory requirements and well-capitalized levels and we have grown our tangible equity levels. Regarding our capital management strategy, we remain focused on appropriate capital allocation to provide financial flexibility, while continuing to enhance shareholder value. Further, while we have strong capital levels, our actions in the near term will be made with an eye towards capital preservation. An update on CECL. On January 1, we adopted the CECL accounting standard despite the CARES Act ability to delay its implementation and that resulted in an initial adjustment to retained earnings of $26.6 million after tax. The corresponding increase in the allowance for credit losses, specific to loans was $38.4 million representing an allowance to total loans coverage ratio of 88 basis points or $90.8 million upon adoption compared to 0.51% or $52.4 million at December 31, 2019 under the incurred method; this represented a 73% increase upon adoption. At March 31, 2020, the allowance was $114.3 million or 1.10% of total loans, a further 26% increase, which also includes $5.8 million of purchased credit deteriorated loans from Old Line. And additional allowance for loan commitments totaled $5.6 million at quarter end, up from $0.9 million at year-end and $3.8 million at CECL's adoption. This is accounted for in other liabilities. Excluded from the allowance for credit losses and related coverage ratio, our fair market value adjustments, mostly representing initial credit marks, were prior acquisitions including Old Line, representing an additional 49 basis points of total loans. These fair market value adjustments will mostly be recorded in the future through net interest income, but they do serve to reduce a loans cost basis in case of future charge off. It is also worth noting that we completed a sale of certain commercial loans from Old Line in March consistent with our practice in prior acquisitions. The loss attributable to such sales accounted for through goodwill. However, if those loans had remained in the loan portfolio, they would have added approximately 19 basis points to the reserve at quarter end. The increase in the allowance and related provision for credit losses was related to the significant deterioration in macro-economic forecast in late March, primarily driven by the negative forecasted economic impacts of COVID-19. Our forecast, obtained from Moody's Analytics, was based on their March 27 COVID-19 baseline as adjusted judgmentally for consumer and business assistance provided by the extraordinary government and Federal Reserve stimulus and loan programs. With the unprecedented environment in which we are currently operating, which seems to change almost daily, it is difficult to provide meaningful expectations for the rest of the year. That said, I would now like to provide some limited thoughts on our current outlook for 2020. As a slightly asset sensitive bank, we are subject to factors expected to affect industry-wide net interest margins in the near term, including a relatively flat spread between the three-month and 10 year treasury yields and a continued overall lower long term rate environment. Our GAAP net interest margin for 2020 may decrease by 2 or 3 basis points per quarter due to lower purchase accounting accretion from the 22 basis points recorded during the first quarter. In addition, reflecting the 150 basis points in total Fed rate cuts implemented during March, partially offset by the aggressive pricing actions we took on our deposit cost, we anticipated our core net interest margin, excluding purchase accounting accretion, to decline from 3.32% during the first quarter by approximately 20 to 25 basis points over the course of the remainder of the year. I would add that this expectation does not include the impact from the SBA's PPP loan program, which should produce a slightly positive benefit on the net interest margin, primarily over the next couple of quarters. We will continue to maintain our focus on diligent expense management and delivering positive operating leverage. While we still anticipate typical mid-year merit increases for our hard working staff, we expect to delay the implementation of up to $2 million in planned 2020 brand awareness and other marketing expenses into 2021. Furthermore, FDIC insurance expense will increase from 2019 due to a higher assessment rate associated with our larger asset size as well as last year's $3.1 million realized assessment credit from the FDIC, mostly in the back half of the year. As a reminder, the anniversary of the impact from the Durbin Amendment on our electronic banking fees will occur during the third quarter of 2020. PCL, calculated provisions for credit losses will depend upon changes in the macroeconomic forecast, as well as various credit quality metrics and other portfolio changes. And I would note the forecast as of mid-April has changed to include expectations for higher unemployment for the remainder of the year. Lastly, we currently anticipate our effective full year tax rate to be approximately 16% to 16.5% subject to changes in certain taxable income strategies and that, right now, includes the State of Maryland in our total stated income tax provision. We're now ready to take your questions. Operator, would you please review the instructions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Russell Gunther of D.A. Davidson. Please go ahead.

Hey, good morning, guys. I wanted to follow-up on the commercial loan sales in the quarter from Old Line, if there is any additional color you could provide on types of loans and whether we should expect continued loan sales in the future.

The answer is no. Each merger that we've done since I've been here in the last five or six years, right before that, as well, we've looked at those loans and acquired portfolio that we just didn't think fit the profile that we wanted. And we did the same thing here with Old Line. Now, some of these were performing loans, just -- we looked at concentration levels and things like that, that we'd prefer to have not had a couple of those. So we looked at it all together and did that sale at the end of the quarter. But as you guys know, Old Line is a very clean bank, very solid credit quality. So there wasn't much there to sell, but we did take advantage of that at the end of the quarter. I don't anticipate any more loan sales from the Old Line Bank portfolio at this time. And it's, again, very consistent with what we've done in our prior mergers.

Got it. Okay, thanks for that, Todd. And then following up on some of the expense conversation. Bob, thanks for the comments there. Just curious if you could help us think about a 2Q run rate considering some of the dynamics in the first quarter as well as any potential offsets where we might expect to see from pressure on fee income in the second quarter.

Bob, why don't you go ahead and handle that?

Sure, Todd. So if you add back the deferred comp loss of $1.3 million [ph] which is an employee benefits expense, I come up with around $87.5 million net of merger related expenses as the core run rate in the first quarter. That I believe is $1 million to $2 million less than what we had guided to here back in January and the lower run rate is created from lower marketing expense and control of discretionary expenses. Obviously, things like T&E and some general administration areas would have seen COVID-related reductions and there are other categories where we applied some discretionary judgment or cost savings opportunities as well. I expect those to continue as long as we continue to have restrictions on travel and meetings and conference attendance, things like that and the aforementioned marketing adjustment that we talked about during the scripted portion of the call. So that suggests to me that day count wise, a little bit more in the second quarter, but right around that $87.5 million, $88 million. In the back half of the year, we typically have our merit increases in the middle part of the year, but should also be seeing some cost savings from Old Line kick in to offset that to some degree. And so it does, in my mind, suggest a lower run rate than what we had discussed back on the January call overall.

Okay, that's very helpful, Bob. Thank you. And then I had a bit of a ticky-tacky question in terms of whether you could quantify what the fair value marks were that you mentioned in the release within mortgage banking and I believe swaps.

Go ahead, Bob.

Yes, Russell. So we really had a very good quarter in mortgage banking. Before quarter end, TBA hedges -- we hedge our pipeline like many banks do, and our mortgage commitments also saw a loss. So the combined amount of that loss recognized at the end of the quarter, some of this is just the lower value of mortgage servicing rights and we do sell servicing released. That loss was $2.8 million against fees of $4.1 million. So a very nice increase in mortgage banking income but because of the market volatility, that unrealized loss at the end of the quarter. We do expect in the second quarter mortgage banking income to be impacted by the lower realized sales into the secondary market there, but in effect, we pull that forward here at the end of the first quarter in accordance with accounting guidance. A similar $2.8 million on the swaps book, we have a notional balance about $512 million that's up basically double over the last year at this time and again the market volatility and lower interest rates on the front end of the curve impacted that existing swaps book. It was almost offset entirely by fees of $2.6 million. And those are accounted for in other banking. So swap -- new swap fees $2.6 million, mark-to-market $2.8 million negative. Those amounts compared to losses in the first quarter of last year of $300,000 per line in mortgage banking and in other banking. So a pretty significant swing, but we were pleased to see how much we realized in mortgage banking income as the pipeline increased substantially in March, a lot of that from refi's. And then, as you can imagine, our customers are interested in locking in longer-term rates on the commercial side and we saw that as well. Hopefully, that's helpful. That's part of the reason, Russell, why we ended up recording -- taking advantage of market opportunities in the mortgage-backed side to offset a portion of that with the gain I mentioned of $2.2 million in selling over $200 million of security. So, one should look at that as somewhat of an offset.

Absolutely. No, thank you for that, Bob. And then, guys, sorry to jump around, but I just wanted to circle back to the loan growth result. So a strong result in the first quarter, particularly adjusting for those commercial loan sales. I'd imagine visibility is a bit challenging on core organic growth for the rest of the year, but any general thoughts you could share there in terms of expectations.

Yes, I'll answer that one. It's really hard to tell. Obviously, if you take the PPP loans, the ramp up and ramp down that should occur with that, if you set that aside for a little bit, we're still seeing some activity. We're still seeing loans being requested from customers unrelated to any of the COVID-19 activity. So there still are some activities going on out there, but I would tend to think depressed from what you would have expected otherwise. We didn't experience the same kind of line usage drawdowns that maybe the larger national trillionaire -- large regional banks did because they're just not our type of C&I customers, Bob mentioned during his comments. So that's still holding steady around 42%, 43% -- actually it dipped under 40% here in the last week or so, I think, as some of the PPP money started to show up. I would still say, longer term, we think low-to-mid single-digits are where we think we're going to be. It's nice to see some of the growth in the Maryland markets, really good leadership team over there that never missed a beat through the whole merger and conversion process and everything else. So hats off to Jim Cornelsen and Mark Semanie [ph] and the lending teams over there for what they did. So the next 12 months, just -- it's really hard to estimate what's going to happen, but longer term we would still think that the low-to-mid single-digits is where we ought to be in. I'm really glad we took some of the steps that we took over the last couple of years. You guys remember, we really shrunk down our indirect portfolio by several hundred million dollars over a couple of year time period, deemphasized hotels in Shale-related areas and also deemphasized -- brought our percentage of capital and multifamily down significantly over the last couple of years. And that took some loan growth away, but we didn't anticipate this kind of a downturn happening so quickly, but I'm glad we made those steps and took those steps when we did, but that's kind of the thoughts on loan growth.

Yes. I appreciate that, Todd. Guys, thanks for taking my questions and for all the granularity in the supplemental deck. I'll hop out for now.

Our next question will come from Steve Moss with B. Riley FBR. Please go ahead.

Good morning. Just wanted to start with the CECL reserve here using the late March economic forecast. Just wondering if you'd use the April forecast. What that -- how much higher the provision would have been? Just kind of get color for expectations going forward.

Bob, why don't you handle CECL questions?

Sure. It's hard to say, Steve, because we would have layered in some adjustments related to the unusual government assistance that I mentioned. There is additional folks that are eligible for unemployment. We think that knocks 1 point or 2 point off the real unemployment number. And actually get beyond 10%, the models really haven't been tested for any of us since the highest amount of unemployment that's been experienced in the last 20 to 30 years was during the Great Recession at just under 10%. So, as you know, the April update from Moody's anticipated a 12.5% unemployment rate here in the second quarter and then coming down throughout the rest of the year. We have not run that at this point in time. We had planned on staying on incurred loss and then towards the end of the quarter, both from a peer perspective, as well as, the way that the SEC was interpreting the CARES Act, we pivoted back to going to incurred loss and quickly had to catch up with where unemployment was at that point in time. So, obviously, if you just plug that end, it would create a higher number. I think it's too soon to say whether that unemployment rate would still be there at the end of the second quarter. I don't think it's fair to just say in mid-April, a 12.5% unemployment rate is what the forecast would be at the end of June. So I don't have a view on what that number would be as of the end of the second quarter, when we actually look at this. You could argue that it's going to be higher than what the expectation was on March 27, but I could also argue that the extraordinary government assistance is still going to provide us an opportunity for an adjustment in what that forecasted rate is at that time.

Okay, that's helpful. And then, I was just wondering if you could provide color around the loan modification and deferral process. Was it just blanket 90-day acceptance of request or just kind of -- how to think about what occurred and what your plans are going forward?

Yes, what we did was -- I had a chance to get on the phone early with -- you guys know the CEO of Ocean, Christopher, so I got on the phone with him, actually, probably, early March to find out how they handled Hurricane Sandy and I got a lot of really good insights from him in terms of what they did, how they approached it and successfully went through that. So I asked him if I could see those program and he said, yes, sure go ahead. So we went ahead and adopted something very similar to what he had done then and is doing again now with regard to payment deferrals. But I proactively asked the team to reach out to their hotel customers and pick up the phone and call and don't wait for the hotel customers to call us because we knew that you would expect there to be reduced occupancy with all the stay-at-home rules and everything that the governors we're putting in place. And we just wanted to get in front of any potential issues because you just don't know whether this is going to be a 30-day event, 60-day event, 90, 120, I mean, nobody knew then and still there's not a lot of clarity to that. So we may have had a number of those hotels, who would not have approached us at this point to ask for deferrals or for that matter restaurants or any other companies. But again we proactively reached out. We thought that was a really good risk mitigation strategy to do so that we didn't get the systems clogged up and things like that. It's interesting that trying to do the modifications and then pivot to do the PPP loans with limited resources and things like that in the organizations, how you prioritize your time to manage the risk for the customer basin and shareholders. It's important how we balance that. So I wanted to get out early in front of it and I think that's why you've seen 80% or so of our hotel portfolio has been deferred at this point. It was due to our aggressive -- telling them that basically we're going to defer your payments unless you tell us you don't want that. And pretty much put all those deferrals in place. So that's kind of the idea behind it and the approach behind it. And I've seen a number of peers that are up in that same 18 to 20 percentage point of their portfolio that they've deferred. I think that is -- it's just a really good risk mitigation strategy. But it wasn't an indication of a bunch of customers calling us, because they were -- we had customers that were struggling more than other banks. That wasn't the case at all. I think those banks that are up at that higher level have proactively reached out to companies, particularly those higher risk industries, like us and I just wanted to get things put in place and I think you also built a fair amount of goodwill with customers on those lines. So it's a lot easier to have your bank call you and say, would you mind if we defer your payments? Is it okay? than having to pick up the phone and call and ask for that type of stuff. So that was the idea behind it.

Okay, that's helpful. And then, just wondering in terms of the geographic exposure on hotels and restaurants. And what percentage of that is from recent acquisitions as well?

Yes, I would tell you that we've got about -- and I feel good about this, it's actually about 40% of the hotel portfolios in the Mid-Atlantic marketplace and I think the numbers I had were lower than that for Kentucky markets and then the rest are kind of sprinkled throughout the franchise, Pittsburgh, Columbus, Cincinnati, primarily urban area hotel portfolio. So on an overall basis, the loan to value in the 50-ish percent range and debt service coverage ratio above 1.5. We just feel good about where that portfolio is overall. I'd tell you, it's very well dispersed throughout the organization, major metro areas with the heavier concentration in the Mid-Atlantic markets and then maybe to a lesser extent, number two market would be the Louisville and Lexington related markets.

Okay, that's helpful. And just in terms of restaurants, is that also Mid-Atlantic? Do they have a similar concentration?

No, not necessarily. No, I think that's across the franchise and it's -- again, it's a pretty small part of our, relatively speaking, overall portfolio and the deferrals in there run in much lower in 25% to 30% range of that portfolio with a majority of those loans under $0.5 million. But those are dispersed throughout the footprint pretty equally.

Okay. And are those quick service or? Just kind of wondering what the types of restaurants are within the portfolio there.

Yes, I would say probably the largest would be UniWyo [ph] this is a -- it is a large organization -- restaurant organization but they operate in a very decentralized manner. McDonald's would be a good one, we do a fair number of McDonald's restaurant loans that would probably be -- if you were to click the category of the biggest, and in similar restaurants like that. We don't have a big book of business in restaurants. We aren't going out there looking for a restaurant loans, so to speak, and McDonald's would be the lion's share.

Okay, that's helpful. And then one last question, just on the energy portfolio here. I wonder if you could provide a more precise dollar amount and then curious as to, are -- is any of the underlying mix to oilfield services and also what the pass rating was as of December 31.

Bob, do you have that detail with you?

I have some of it. First of all, I did want to say on the restaurants, about two-third's limited service, one-third full service, just to complete the answer to that question. In terms of risk rates -- first of all, oil and gas is about $60 million in exposure, coal is minuscule at less than $5 million. There is some other utility generation that approximates $30 million and then the bulk of the rest of that is indirect energy sector exposure, I think tertiary or Tier 2 kind of companies, we've talked about that in the past, sand and gravel companies, water truck companies, things like that. So that's what comprises the bulk of the energy loan exposure. Energy to total loans at 1.22%. Total Energy as a percentage of capital at 10%. In terms of risk rates, there's really very little that is considered either criticized or classified. The bulk of that would be in the indirect portfolio at approximately $15 million or so, and I don't see anything else in any of the other buckets. So hopefully that's helpful. It's about 10% of the total.

Okay, great. Thank you very much, I appreciate that.

Our next question will come from Brody Preston of Stephens Incorporated. Please go ahead.

Good morning, everyone. How are you?

Good morning, Brody.

Just wanted to circle back on the hotel portfolio. So you noted that 17% was in Shale market. Just wanted to better understand, has the 17% that's there been impacted to a greater degree or just differently than the rest of the hotel portfolio?

I would tell you that we continue to get information and on that, obviously, with the drop in oil prices, it has a little bit of an impact, obviously that is driven more by natural gas prices than anything else and is the reason why we started to shrink our portfolio as a result of something being -- occupancy being determined by the price of a commodity. We didn't want that to be the case. So what we did was we went through that a couple of years ago. We exited a number of hotel loans that we didn't think had a lot of staying capacity and we really looked at those that could operate at 50% occupancy and still be able to debt service or had connections to other hotel entities maybe that were non-Shale related that had cash flow opportunities that could be directed towards those. So I think that portfolio held up relatively well as a result of it. Right now, I'm sure -- just like other hotels, they're well below 50%. And I've heard hotels could be in the -- if you take out the extended stay, might be in the 5% or 10% occupancy range right now. I'm not talking about our portfolio specifically because we haven't gone out and surveyed that, but just what I've heard about the industry in general in terms of kind of what they are experiencing right now because of the stay-at-home orders. So I'm sure that the ones in the Shale area are being impacted as well and we put loan deferrals in place as well too. So the answer to your question is, I would expect it to perform relatively similar to the rest of the portfolio only because we had more conservative underwriting guidelines for those portfolios to begin with. We -- just the breakeven point is much lower than it would have been for a typical hotel loan. So I don't see any reason why it would perform differently. But we'll have to wait and see once we get the occupancy reports, vacancy reports on a monthly basis. Now, we're tracking all that, and we'll be able to see any differences by geography or also any differences by Shale related versus non-Shale related.

Okay, great. Just thinking about the extended stay portion of the portfolio, is the bulk of that in the Shale gas market you're thinking about like the workers that are working there that might not necessarily live there longer term?

No, no, not necessarily. No, I think that's pretty dispersed throughout the portfolio. I mean, there's a lot of need for extended stay in a lot of our more urban markets and we've seen a lot of those request over the years in areas outside of the Shale related. It's interesting in the Shale related areas, it's -- there tends to be a lot of trailers and things like that, to be honest with you, they'd get set up, main camps that are set up, that's kind of where a lot of the workers end up or just in hotels. I stayed in that hotel the first year, six years ago I was with WesBanco, and every Monday, they all showed up and every Friday they all went home. So I think you still continue to see that cycle. And obviously, it's down at this point.

Okay. Okay, great. And then just thinking about the loans that aren't pass rated across the industry disclosures that you've provided on Slide 7. Would those loans make their way into delinquencies in 2Q, if they're delinquent or like does the risk rating not necessarily match up with who's eligible for deferrals?

Yes, I mean if there was a company that was in trouble from a delinquency and payment standpoint, then we still got to work with them through this time period. They don't get a pass necessarily because of COVID-19. I mean, we're going to work with them on it. But with regard to those companies that are directly impacted, let's say, performing companies that all of a sudden become nonperforming because they are impacted due to the stay-at-home requirements or anything else, those will go through a deferral period either a 90-day or if it gets extended to a 180-days. At the end of that deferral period is when you'll see whether or not they can bounce back quick enough to be able to cover their payments. So the guidance we've gotten from a regulatory standpoint and others is not to downgrade a company simply because it is getting the payment deferral. That may turn into a downgrade down the road if they don't come back very strong, but the fact that you deferred the loan should not factor into that. But again, if the company was having trouble before that and this exasperates it, then, yes, they'll have to address that.

Okay. Okay, great. And then on the CD book, what was the cost of the CDs that ran off this quarter?

Bob, do you have that detail?

I do. I'm going to need a second to get it.

Yes. We've been in this shrinking the CD portfolio now, particularly single service CDs for the last seven or eight years. So a lot of the -- I would say the higher priced CDs are relative nowadays, came off in the early days. So the rate -- the loans now or the CDs now are actually that are coming off aren't as high rate as you might think. And our strategy has been particularly with the liquidity position that we've historically haven't had right now as to not to pay up for those because we haven't needed to. I would have thought if the COVID-19 impact had not happened, we might have been a couple of quarters away from having to look at our CD strategy a little differently, particularly with the loan growth and things that we were going to be expecting to get from our acquired markets but that ballgame has changed right now. So I think we're pretty comfortable letting the CD book go down.

It was about 149 basis points. I recall 1.50% is what repriced in the second quarter. Now, that does not include purchase accounting, which significantly reduces the overall cost of CDs on the income statement and in the margin because of Old Line.

Okay. And then, one last one from me. What was the -- I'm sorry if I missed this, but what was the average fee percentage for the PPP loans that you funded and do you plan on recognizing that in the third quarter?

I don't think -- we're not, at least I'm not tracking that actual fee percentage amount. We're kind of all hands on deck just to try to get them through the system at this point and getting daily updates on that. What I will tell you is, with our third-party processor, we pay $250 alone to the third-party processor and we set that up here in the last few weeks just in order to get more loans through. So the profitability impact of fees associated with the PPP program, I would say, would be marginal and a lot of banks are in that same spot. But in terms of our average, our average loan has been right around the $200,000 mark at this point. And I guess you could probably figure out from there, average loan $200,000 and then take $250 bucks out of each loan.

Okay, great. Thank you very much everyone.

Our next question will come from William Wallace with Raymond James. Please go ahead.

Thanks, good morning, guys. So, Bob, on the CECL as a follow-up to the question about CECL reserves and maybe what might happen in the second quarter. And it's my understanding that there is some recovery estimate built into the model. Can you talk a little bit about maybe what the baseline recovery scenario you have in the model? And then I think it seems like some banks differ, but sometimes there are some kind of stress scenarios that are given some probability. Can you just talk a little bit about the kind of recovery economic assumptions?

I would say we pivoted to adopting the forecast from Moody's pretty quickly at the end of the quarter. Recall, I said in my comments that we were thinking of being an incurred adopter post CARES Act. And so hadn't completed our work at the end of the quarter when we had, obviously, finished our day one work, had we been in a position to adopt. But when we did pick up the Moody's forecast and we looked at the probability analysis behind each one of their alternative scenarios, we just decided to stick with the baseline and then adopt, in effect, an adjustment that was qualitatively analyzed. So it's a negative adjustment to the overall level that the model would have otherwise produced based upon the level of unemployment at that time that was being projected. Again this was the forecast of March 27 which started with 8.7% and then basically averages 6.5% for the next three quarters. So as I suggested during my prepared comments, we used the qualitative adjustment to basically say, here's what we think the value is associated with the unusual government assistance. And so that's what created a little bit of a downward adjustment off that calculated level.

If we are -- if we find ourselves six months from now when we're kind of past these, a lot of this government stimulus and we're hopefully open back up and we are still uncertain as to what the recovery might look like because businesses are -- customers are slow to return to the businesses, do you anticipate that CECL will work as intended and you would -- if we're starting to experience losses, that you would be able to use CECL or do you anticipate that because of uncertainty, you'd have to continue to maintain your CECL reserves at or near levels where they are and then just cover losses with provision?

No, I think the former, not the latter. I do think that one thing CECL does is to bring forward our estimate of losses for future periods subject to changes in macroeconomic factors and changes in the portfolio. So theoretically, if the macroeconomic forecasts adjust downward even if you're bringing in net charge-offs, one should offset the other. If on the other hand, the forecast stays flat as to unemployment and you're experiencing charge-offs, then you would have to replace the charge-offs. There are other factors like -- and we noted them in our deck on Page 6 such as changes in prepayment speeds, changes in portfolio mix, changes in overall credit quality, the age of the portfolio. Some of that information will be found in the 10-Q here in a week or so in the so-called vintage table. But, if you just look at that change in prepayment speed alone, you can argue, some of this is related to the forecast for rates and the reduction in rates, but that, in a normal environment without a COVID-19 adjustment, would have produced really very little provision at the end of the quarter. And so if you have those kinds of adjustments and you have portfolio mix adjustments, then you could actually experience a reduction in the provision, a negative provision sooner than you would in the incurred model.

Okay. Thank you.

I'm not predicting that yet though.

Right, nearly. Okay, thanks. And my only other question that hasn't already been asked is for Round 2, if you will, of PPP. Can you give us a sense of your pipeline and where you stand today on getting that through the process?

Yes. Yes, I think we put in the release about $570 million. We're now just over $700 million and actively putting things through the train [ph] system. Our first round, I think we did okay, but it was all manual, right. So then we went out and we got the third-party processor to get us set up on a more automated fashion that allow us to deal and operate a lot quicker for Round 2. So I don't have a real good estimate where I think we'll end up. We're at $700 million now but we'll be north of that. I would tend to think that -- I heard this with some others -- other calls too and I would agree with this that we would expect maybe 70% to 80% of that to get paid back. And then maybe the remainder of that, the 20%, 30% would be around for one to two years and you might see maybe 15%, 20% of that start to get paid back in the -- at the end of the quarter here. I think it's 60-day time period. And then the majority, probably another 50% would happen in the third quarter. But those are just kind of estimates at this point in time. But we could see a few hundred more million. It all depends on when they run out of money, but we've got a little more of an automated system now than we had through Round 1.

Okay. And to be clear, you're saying $700 million on top of the $570 million from Round 1.

No, no, that's inclusive of the $570 million. Yes, we put up $100 million, $130 million or so in over the last 36 hours, so open back up again. But it's growing daily.

Yes, all right. Okay. I'll hop out. I think all my other questions were answered.

All right, thanks.

And our next question will come from Stuart Lotz of KBW. Please go ahead.

Hey guys, good morning. Most of my questions have been answered but, Bob, maybe one follow-up for you on the margin. I mean, I appreciate the guidance for that 20 to 25 basis points of core compression over the course of this year. Just kind of thinking about from a quarterly perspective, do you think that the majority of that is coming through in the second quarter, given the rate shock, we get a full quarter up from the Fed funds cut, as well as some lower accretion and then kind of a stable core NIM in the back half of this year? Do you kind of see that flowing through 5 to 8 bps per quarter? Just curious how you guys are thinking about it from there.

Well, we really saw a nice -- we took some very proactive actions on the deposit side that had yet to be fully reflected in the quarterly deposit rate. You will see that here in the second quarter, but we cut rates between February and March that helped the deposit costs at that time by 21 basis points. I think it was 8 basis points is what we said quarter-over-quarter, but that additional amount happening in the month of March will benefit us going forward. But as you can imagine, loans, portfolio yields are dropping. Our home equity book drops on April 1 of the month after you experience the rate cuts and as loans reprice, you've got a $1.5 billion in prime or LIBOR adjusting, a lot of that's going to adjust here in the second quarter. And while LIBOR repricing initially would have been much higher than if you were pricing off of either treasuries or SOFR, as you can see, the last couple of weeks, those rates have come down as well. And so for those banks that have a large portfolio of LIBOR-based adjustable loans, that would be harmful in the second, third quarter. We have a lot of five-year repricing loans and inherited a fair amount of that portfolio north of $600 million from Old Line and so that actually reduced between the third and the fourth quarter, as I recall our asset sensitivity when we added in Old Line. And so sum and substance, I would say, that helps us a little bit, but the total guidance is between where we are today and where we expect to be at the end of the year. And yes, I would pull that forward. My expectation is the second and the third quarter, where a fair amount of loan repricing occurs is where we would experience more of that than say in the fourth quarter of this year or rolling into next year.

Got it. I appreciate the color there. And then maybe just one more follow-up on the expenses. You've mentioned the $87.5 million core run rate, you feel pretty good about that going into the second quarter. Just curious with the conversion of Old Line taking place in February, we really didn't get a full quarter of the expense savings from that. So I guess your second quarter guidance implies that you're going to get a full quarter post conversion, as well as some annual merit increases. Is that kind of the right way to think about it? I mean, do you anticipate the majority of the cost saves will be in the second quarter run rate or should we expect additional cuts maybe going into the third and fourth quarter this year? Thanks.

So, for instance, the duplicate systems we converted in February, you get those cost savings because we had to pay a one-time fee to get off their old system. So you experience that within a month or two after conversion as you shut down their systems. In terms of employees, we had attrition, both in the fourth quarter and the first quarter, but the individuals in the back office and in corporate finance and some other areas that were not going to stay with us post conversion left towards the end of March. So you have that in the run rate going forward. We'll get some back half of the year cost savings as well. Telecommunications is an area where we typically get that six to nine months after conversion, but the bulk of it begins here in the second quarter and then there is a little bit of an offset from merit increases that start towards the back half of the second quarter and then there is a day count, I think in the -- although this is a leap year, I think there is an extra day or two as we move through the year. So that's my guidance. I'm not going to give you quarter-by-quarter, but what I said earlier, that $87 million to -- $87.5 million to $88 million seems to me in the first half of the year to be a reasonable guidance point.

Great. Thanks for taking my questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Clossin for any closing remarks. Please go ahead, sir.

Well, thank you. I appreciate everyone's time this morning. A lot of really good Q&A, hopefully we've addressed questions that are out there during this unusual time. We feel really good about our liquidity position, our capital position, our pre-provision, net revenue. I mean, we think we're in good shape. We just -- there are a lot of uncertainty with regard to the future and what that's going to look like, but we anticipated that going into the kind of a downturn, we wanted to make sure we were positioned for success and we think going into this on a relative basis, we're in pretty good position. So I thank you for your time and hope to get a chance to talk to you or hopefully see you at a conference at some point in the future. Have a Good day.

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