Good day and welcome to the BancorpSouth First Quarter 2020 Earnings Conference Call and Webcast. 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 this event is being recorded.

I'd now like to turn the conference over to Will Fisackerly, EVP and Director of Corporate Finance. Please go ahead..

Good morning and thank you for being with us. I'll begin by introducing the members of the senior management team participating today. We have Chairman and Chief Executive Officer, Dan Rollins; President and Chief Operating Officer, Chris Bagley; and Senior Executive Vice President and Chief Financial Officer, John Copeland.

Before the discussion begins, I'll remind you of certain forward-looking statements that may be made regarding the Company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks.

Information concerning certain of these factors can be found in BancorpSouth's 2019 Annual Report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the Company's performance. If so, you can find the reconciliation of these measures into the Company's first quarter 2020 earnings release.

Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to bancorpsouth.com and clicking on our Investor Relations page where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon.

And now, I'll turn to Dan Rollins for his comments on our financial results..

Thank you, Will. Good morning. Thank you for joining us today to discuss BancorpSouth's first quarter 2020 financial performance. I'll begin by making a few brief comments regarding our pandemic response as well as our first quarter financial highlights.

John will discuss the financial results in more detail and Chris will provide more color on our customer and business development efforts. After we conclude our prepared comments, our executive management team will be happy to answer questions. Let's turn to the slide presentation. Slide 2 contains the legal reminders Will has already discussed.

I would like to spend just a few minutes talking about the current pandemic and our response as a company, a few highlights of which are included on slide 3. These are certainly challenging times in which we live. Our thoughts and prayers this morning for those impacted by this horrible virus both from a health standpoint and financially.

We have had several teammates across our footprint who have contracted the virus and obviously many others who've been impacted whether it would be through the help of friends or family or through financial hardships. As we look at the impact to our company operationally, we have taken many of defense steps as our peers.

Our priority from day one has been to protect the health and wellbeing of our teammates while also continuing to meet the needs of our customer and communities we serve. I would categorize our response into three broad categories; operations, frontline and our teammates.

Our business continuity team under the leadership of Jeff Jaggers has done the elements of efforts, implementing our adapting our pandemic planning for this particular situation, although 40% of our teammates have the ability to work remotely, at least in some capacity.

This has allowed us to create more space in our facilities to spread out our teammates whose job functions require them to be on site. Beyond that, we have physically separated teammates in highly critical areas, both in terms of space and work schedule such that personal interaction is very limited.

In an effort to adhere to the government guidelines and to protect both our customers and teammates, we did convert our branches to drive through only with deployment availability as necessary. I believe these actions are consistent with most of the banks across our industry.

These are just a few of the many steps our business continuity team has helped us implement. As to our teammates, more specifically, our first priority has been to protect their health, particularly those who are at high risk according to CDC guidelines.

We have provided our teammates the opportunity to take care of themselves and their families during this time in a way that's not damaging to them financially. Additionally, we've provided our teammates with an additional three weeks of paid time off that can be used specifically for family and dependent support.

Finally, I'd like to briefly address the customer impact. I think it's important to emphasize that our team is fit to meet any and all needs of our customers. Chris will talk more about the government stimulus and the SBA program in a moment, but the SBA programs are a great example.

While the paycheck protection program was designed and implemented at lightning speed, that has certainly been well received by our business customers, our bankers have been working around the clock since the CARES Act passed in Congress to ensure we can support our customers.

I'm extremely proud of our teams' effort, our technology team, our marketing team, our SBA team, our loan operations team, and almost all of our frontline bankers have invested countless hours into this program. In total, well over 2000 of our teammates have been actively involved in supporting the paycheck protection program effort.

In addition, while working 18 hour days to handle this loan demand, the team has been working diligently with our current customers to provide loan modifications for qualifying customers who needed assistance. These are just a few very high level highlights of our efforts.

I can't begin to cover all the steps that have been taken or give proper recognition to all of our deserving leaders and teammates during the time we have allowed at this morning. Let's now discuss the results for the quarter. Slide 4 contains our financial highlights for the first quarter.

Given the volatility in earnings associated with the provision which we will discuss more in a moment, we've heard a number of our analysts and investors the desire to monitor pre-tax pre-provision revenue or PPNR as we work through this cycle. Accordingly, we've added this non-GAAP metric to our disclosures this quarter.

Outside of the impact of the provision, our company continues to perform very well. We generated PPNR for the quarter totaling $91.7 million or 1.74% of average assets on an annualized basis. This represents an increase from 1.63% for the first quarter of last year and 1.68% for the fourth quarter.

I would point out that we adjust for non-operating items in our calculation of this metric, which is defined and reconciled in our earnings release. We reported GAAP net income available to common shareholders for the first quarter of $21.9 million or $0.21 per diluted common share.

We had a negative MSR evaluation adjustment of $11.1 million, while merger related expenses totaled $4.5 million for the first quarter. Accordingly our net operating income excluding MSR was $34.4 million or $0.33 per diluted common share.

Earnings for the quarter were certainly impacted by both the rate environment, as well as additional provisioning associated with the economic impact of this pandemic. We closed the acquisition of Texas First effective January 1. We completed the operational integration of this transaction late in the first quarter as well.

Our new teammates from Texas First under Rodney Kroll's leadership have done a great job working through this conversion and getting up to speed quickly, particularly in light of the current operating circumstances. As to the provisions specifically, while it is too early to estimate the ultimate impact of this crisis to our borrowers.

We recorded a provision for credit losses of $46 million for the quarter. Most of that is reflective of the new CECL adaption related outlook for COVID-19 effect on the economy and our loan portfolio. It should be noted that we came into this cycle with robust capital, low NPL and strong liquidity.

The quarterly provision was determined primarily by the adjustment of certain economic factors that are considered in our reserve methodology. Given the level of uncertainty associated with regulatory guidance, we elected to go ahead and adopt CECL as of January 1, 2020.

As previously disclosed, our total day one allowance increase was approximately $63 million, $23 million of which was a gross-up of previously purchased credit impaired loans, while the remaining $40 million was recorded straight to the beginning, retained earnings net of tax impact.

Mortgage had an excellent quarter in life of the right environment and refinance activity producing total volume of $477 million for the quarter, which contributed to production and servicing revenue of $20.6 million. Chris will discuss our mortgage activity in more detail in a moment.

But our experience has been that mortgage has been somewhat of a natural hedge for us in a declining rate environment. Coming into the quarter, we were in a unique position relative to many of our peers and that we raised over $470 million in capital during the fourth quarter of 2019.

We began the quarter looking to execute on our share repurchase plan to deploy a portion of this new capital. Accordingly, we repurchased 3.3 million shares in the first quarter for approximately $87 million.

We temporarily suspended our buyback program in March due to the changing economic environment and intend to wait until we have further visibility into the impact of this crisis before we repurchase additional shares. John will discuss capital more in a moment.

Needless to say, raising low cost capital late last year has turned out to be a very good decision for us. We are obviously pleased with our capital levels and confident in our ability to weather this economic downturn.

As of March 31, each of our regulatory capital metrics have buffers in excess of 300 basis points above the regulatory well capitalized thresholds. I'll now turn to John and allow him to discuss our financial results in more detail.

John?.

Thanks, Dan. Good morning, all. If you'll turn to slide 5, you'll see our summary income statement. In reviewing the summary income statement, net income available to common shareholders was $21.9 million or $0.21 per diluted common share for the quarter.

As Dan mentioned earlier, we did have two significant non-operating items in our first quarter results. We had a negative pretax MSR valuation adjustment of $11.1 million and pretax merger related expense of $4.5 million.

Accordingly, we reported net operating income excluding MSR available to common shareholders of $34.4 million for the quarter or $0.33 per diluted common share, compared to $67.8 million or $0.65 per diluted common share for the fourth quarter of '19 and $55.9 million or $0.56 per diluted common share for the first quarter of 2019.

I would like to remind you about the merger with Texas First that Dan mentioned earlier does impact the comparability of the financial information shown on this slide, as well as the subsequent slides that we will discuss.

In addition, the Summit in Texas Star mergers which closed late in the third quarter of '19 impact comparisons of the first quarters of 2019 and 2020. This slide also shows the pretax preprovision and net revenue metrics that Dan mentioned earlier both in terms of dollars and as a percentage of assets.

You can see from the comparisons provided that we fared well, relative to both first and fourth quarters of 2019. Our net interest revenue declined 1.9% compared to the fourth quarter of 2019 and increased 9.8% compared to the first quarter of 2019.

I believe that goes without saying that the net interest margin has been and should continue to be under pressure as a result of the ongoing pandemic, and related Fed rate actions. Our reported net interest margin for the first quarter was 3.54% while our net interest margin excluding accretible yield was 3.48%.

Comparable metrics for the fourth quarter of 2019 were 3.76% and 3.61% respectively. We reported a net interest margin of 3.86% for the first quarter of 2019 while our core margin was 3.74%. The accretion component of our GAAP margin was adversely impacted by the changes in the rules associated with accounting for PCB loans under CECL.

As we look at the quarter-over-quarter change in our core margin, the shift in earning asset mix is responsible for approximately 10 basis points of the 13 basis point total decline. As we mentioned in our fourth quarter call given the mid-November capital raise, only about half of the margin impact was realized in the fourth quarter results.

Also, we had a shift in asset mix attributable to the deposit growth in the quarter. Finally, the Fed actions contribute two or three basis points of that compression while closing of the Texas First transaction had a very nominal impact.

I'll take just a minute to talk about our liquidity position, whether in the form of the SBA paycheck protection program loans, requests for loan deferrals or mortgage forbearances the bank has more than sufficient resources of liquidity to address our customers' needs during this pandemic event.

In addition to $1.7 billion in unplanned securities as well as on balance sheet cash and cash equivalents exceeding $250 million at March 31, we do have substantial off-balance sheet liquidity including secured funding lines of $6.7 billion with the Federal Home Loan Bank and $950 million with Federal Reserve.

The bank also maintains unsecured Fed fund lines with other banks totaling about $1 billion. These off balance sheet liquidities sources together with unplanned securities provide approximately $10 billion in additional funding sources should we need it.

In addition, both FHLB and Fed had provided additional funding opportunities to assist with the stimulus programs. Suffices to say liquidity is not a concern for us at this point in the cycle.

Before we move to non-interest revenue expense, where you can clearly see the impact of the provision that Dan mentioned earlier on earnings, we had a provision of $46 million for the quarter compared to no recorded provision for the fourth quarter of 2019 and a provision of $500,000 for the first quarter of '19.

Dan has already mentioned the impact of the pandemic on our provision and Chris will touch on credit quality in more detail in a moment. If you turn to slide 6, you'll see a detail on our non-interest revenue streams.

Total non-interest revenue was $76.5 million for the quarter compared to $74.7 million for the fourth quarter of 2019 and $64.2 million for the first quarter of 2019. Mortgage revenue is the largest driver of volatility and these totals across quarters.

As Dan mentioned, the rate environment resulted in elevated refi activity providing a significant increase in our mortgage production and servicing revenue in the quarter. Total production and servicing revenue of $20.5 million was somewhat offset by the non-cash MSR valuation charge of $11.1 million.

Chris will discuss mortgage as well as insurance and wealth management in more detail in a moment. The final item I would like to mention briefly is other non-interest revenue. During the first quarter we sold a book of business within our insurance agency to one of our producers, which generated a book gain of just over $4 million.

This gain was recognized in other non-interest revenue during the first quarter. Chris will also touch on this further in a moment, but it will have an impact on future commission revenue of about $2.5 million annually. Slide 7 presents a detail of non-interest expense.

Total non-interest expense for the first quarter was $168 million compared with $162.4 million for the fourth quarter of '19 and $150 million for the first quarter of '19.

Total operating expense which excludes merger related expense and other one-time items was $163.5 million for the quarter compared to $156.6 million for the fourth quarter and $149.1 million the first quarter of 2019.

Salaries and employee benefits expenses is the only item that really warrants additional color, the remainder of the expense categories were very stable quarter-over-quarter.

From a sequential quarter comparability standpoint, I would remind you that in our fourth quarter call we discussed year-end accrual true ups totaling approximately $4 million that provided a onetime benefit. Beyond that the quarter-over-quarter increase is driven by several seasonal factors in addition to the Texas First merger.

First of all, the seasonality and the renewal cycle in our insurance book of business drives higher producer commission pay outs in the first quarter. Second, the FICA limit resets adversely impact our first quarter expense as well. Beyond that, I don't believe there are any other large variances or other one-time items that warrants further color.

Slide 8 provides a graphical presentation of our total capital position. As Dan mentioned and as you can see here, our fourth quarter capital raise really bolstered our total capital ratio and provided some needed diversity to our capital stack.

As of March 31 each of our capital metrics is over 300 basis points above the regulatory prescribed well-capitalized minimums. We've stressed our capital using prior cycle loss experience as well as current economic forecasts. We do feel good about our capital levels at this point in the cycle. That concludes our review of the financials.

Chris will now provide some color on our business development activities.

Chris?.

Thank you, John. Good morning everyone. Slide 9 reflects our funding mix as of March 31st compared to both the first and fourth quarters of 2019. The total growth for the quarter $370 million was attributable to the Texas First acquisition, while $130 million was achieved organically.

The organic growth was a little bit lighter than our normal seasonal experience with first quarter growth. We had some public fund balances that were moved out a little earlier than expected into our historical experience.

While it's not shown in this slide, you can see that that trend in the average balances which were up $700 million in total quarter-over-quarter. We mentioned in our fourth quarter call that we believe we had reached the inflection point on deposits costs. We saw one basis point decline in the average cost of deposits compared to the fourth quarter.

However, this elevated seasonal public fund balances provide a headwind of approximately 3 basis points on our total cost of deposits. While the magnitude remains to be seen, we expect deposit costs to continue to trend down in light of the current rate environment.

As we look at geographical performance relating to deposits, we had several divisions across our footprint, standout this quarter. The East Central Mississippi, Memphis Metro, Northeast Mississippi, West Tennessee, Missouri, North Central Alabama and Pine Belt divisions all reported strong deposit growth for quarter.

Moving to slide 10, you'll see our loan portfolio as of March 31, compared to the fourth quarter of 2019 and the first quarter of 2019. As Dan mentioned, we closed and integrated the Texas First transaction, which added $185 million to our portfolio. Otherwise, our loan portfolio declined nominally on an organic basis.

The mix of our loan portfolio is consistent quarter-over-quarter. Beyond that, I would like to just make a few comments around our efforts to work with our customers. We've not seen the increases in line utilization that many banks in our industry have experienced. I believe this is largely attributable to the makeup of our loan portfolio.

As we've discussed in the past, we're not a large ticket C&I lender, and our average loan size is less than $150,000. In an effort to work with our customers through this pandemic, we are offering 90-day payment deferrals on loans that are less than 30 days past due and in compliance with all barring covenants.

As of the end of last week, we had received deferral requests on approximately 3700 loans and total payment deferral of approximately $28 million. These customers are taking prudent steps to preserve cash during this time of uncertainty.

Additionally, our lenders, SBA specialist and credit administrators have been working around the clock, helping our customers take advantage of the SBA opportunities provided under the CARES Act and specifically the PPP or P3 as we've started calling it program.

Our relationship managers received approvals for approximately 8500 loans totaling approximately $1 billion, which we are currently in the process of funding. Of these applications, approximately 40% of the loans were for less than $25,000.

We are pleased and proud that we're able to serve such a broad coalition of diverse businesses across our footprint and we are ready to support existing requests new request if additional funds are granted.

It was really a tale of two quarters and that we will up one morning with 3% unemployment and a good loan pipeline, and things came to an abrupt stop as businesses and projects were put in a conservative holding pattern.

Despite the overall organic loan growth pressure during this time it is still worth mentioning several divisions producing meaningful loan growth at the beginning of the quarter. Our Dallas, Texas, Missouri, South Arkansas and Northwest Florida divisions all had great quarters from a loan growth perspective.

Starting on slide 11, the next several slides provide some additional disclosure on those portfolios we consider to be higher risk as a result of the pandemic. I would like to reiterate, Dan's comments that it's simply too early to estimate the ultimate impact on the economy or our loan portfolio.

So differently our risk is not limited to just these particular portfolios, but they are deemed to be the highest risk at this point in the cycle. Slides 12 to 14 provide additional detail and the granularity and diversity within each of these portfolios and across our geography.

As we've mentioned, several times our average loan size is less than $150,000, which is further evidenced by the SBA statistics I provided a moment ago from the PPP program as the average loan size under that program has been approximately $120,000. Slide 15 contains credit quality highlights for the quarter.

The first bullet contains information regarding our adoption of CECL some of which Dan covered earlier.

Our day one increase to the allowance was $63 million, $40 million of which was recorded to retained earnings net of the tax impact and $23 million was the result of recharacterizing PCI loans into the new PCD treatment and grossing up the credit mark. We recorded a provision of $46 million for the quarter.

Finally, we have net charge offs for $13.7 million for the quarter primarily from charging down previously marks from those former PCI loans. On March 31, 2020, allowance for credit losses totaled $218.2 million or 1.53% of net loans and leases. We are pleased with the level of coverage at this point in the cycle.

As you can see in the second bullet point, our net charge offs for the quarter were driven exclusively by acquired loans. We have discussed with many of you when we've been out on the road, the accounting under CECL will have a significant impact on charge off metrics given the accounting under the PCD rules as compared to the old PCI methodology.

The fact that the credit discount is grossed up in our allowance results in higher levels of charge offs when fundamentally there had been no economic change. We've attempted to provide good disclosures in our press release around all our credit quality metrics from an acquired versus legacy perspective.

Finally, aside from the impact of the acquired loans our other credit quality metrics are stable quarter-over-quarter.

We've tried to be as transparent as possible with additional disclosure around current activity and portfolios that can be impacted by the pandemic and we will continue to apply our allowance methodology in credit monitoring functions as the economic impacts become more visible and measurable.

Slide 16 provides a graphical waterfall presentation of the changes in our allowance, which I discussed on the previous slide. You can see the impact of CECL adoption, the Texas First merger, the net charge offs and the first quarter provision in the roll forward of our allowance for credit losses.

Again, though the adoption of CECL combined with our first quarter provisioning, our allowance coverage increased from 0.85 of net loans and leases at the year-end to 1.53% at March 31 2020. Moving onto mortgage and insurance, the tables on slide 17, provides prior quarter look at our results for each product offering.

Our mortgage banking operation produced origination volume for the quarter, totaling $277 million. Our mortgage team has worked long and hard hours to help our customers take advantage of historically low rate environment, particularly the dip that occurred in mid-March.

Home purchase money volume was $285 million or 60% of the total volume for the quarter. Given the timing of the rate declines, we expect refinances to be larger percentage of volume in the second quarter. Deliveries in the quarter were $409 million compared to $419 million in the fourth quarter of 2019 and $239 million in the first quarter of 2019.

Production and servicing revenue, which excludes the MSR adjustment totaled $20.6 million for the quarter compared to $6.9 million for both the first and fourth quarters of 2019. Our margin was 4.37% for the quarter representing an increase from 1.03% for the fourth quarter of 2019.

The velocity of the pipeline increase near the end of the quarter created an anomaly in the mechanics of the margin calculating for the quarter. The pipeline increased from $290 million at the end of the year to $570 million at March 31, 2020 to $570 million pipeline on March 31 consistent of approximately 70% refi and 30% purchase money.

With that said, spread was down in the quarter as a result of capacity limits from a processing standpoint. Finally, as Dan mentioned earlier, the MSR valuation adjustment during the quarter was a negative $11.1 million.

Moving to the insurance, total commission revenue for the quarter was $29.6 million, compared to $27.6 million for the fourth quarter of 2019 and $30.2 million for the first quarter of 2019. As we mentioned each quarter, we typically benchmark to the same quarter in the prior year given the seasonality of our renewal cycles.

First quarter is always one of the better two quarters for insurance as a result of the percentage of our renewals that occur at the beginning of the year. The slight decline compared to our first quarter of last year as a result of a couple of factors.

Our contingency commission estimates for the quarter were about $1 million less than the first quarter last year and additionally, as John mentioned, we sold a book of business to one of our producers, which generated approximately $2.5 million annually in revenue.

We are pleased with our ability to hold revenue in a tight range early on in the cycle. While our renewal rates are extremely high compared to industry averages, it's difficult to generate new business in this environment and insurance commission revenue could certainly be under pressure if this pandemic lingers.

Finally, I'd like to briefly mention wealth management. Wealth management revenue held up well during the first quarter at $6.6 million, which was flat compared to the fourth quarter of 2019 and up from $5.6 million for the first quarter of last year. With that said, our revenue is directly correlated to assets under management and those valuations.

Therefore, this is another area, where we could see some downward pressure on the revenue going forward if asset values remain low. Even with this volatility, we believe these not interest bearing business lines continue to be a core strength for our company. They give us a diverse revenue stream, not totally tied to the lending and credit space.

Now, I'll turn it back over to Dan for his concluding remarks..

Thank you, Chris. This pandemic and its impact on the economy is certainly not the start for 2020 that we had hoped for or envisioned. But I believe our industry and our company are in a much better position than we were entering the last financial crisis.

And looking at our specifically, we have a much risk management processes and functions across the board and particular as Chris mentioned, we have made significant strides in our Fed underwriting and monitoring processes as well as the diversification of our loan portfolio.

As John discussed, we are pleased with our regulatory capital metrics, as well as our funding mix and liquidity metrics.

Our capital metrics indicate we are positioned to be able to weather all of the stress scenarios that we have analyzed, whether there is still -- however there is still obviously a lot of uncertainty around that ultimate impact of this pandemic. With that operator, we’d now be happy to answer any questions..

[Operator Instructions] The first question today comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead. .

Hey, good morning everyone. .

Hi, Kevin.

How are you?.

Good. I'm doing good, Dan. Hope you are as well. I appreciate all the additional disclosure, very helpful. Specifically on the PPP program or the P3 program, I like that better. Can you walk us through in general terms, just the -- I would assume it's just going to be a lot of noise in second quarter from that.

So from a very top level, I would think there's some dilutive impact to the margin in a vacuum just from loans that are basically earning 1% are carried at 1%, you're going to have the balances carried in average loans, but then basically going away for the most part, third quarter. I'm sure there's expenses associated with this program.

And then origination fees, are they -- how should we think of those? Are those going to flow through the margin or flow through the non-interest revenue line? If you could just give us a sense on that. Thanks. .

Yeah, sure, Kevin. I think that's a -- those are good questions. And, again, we've never made $1 billion in loans in a week before. So it was an interesting time and it looks like they're going to turn on some more money. So our team is geared up for round two. So your specific questions had to do with the fees.

So there are fees associated with these loans that the SBA pays. We will book those and that will come in as interest income amortized over the life of the loan. If the loan pays off early or the loan is forgiven as you suggested in the third quarter, then we would have a windfall at that point for whatever amount of the loan is forgiven.

There's been discussion recently on how much of the loans are going to be forgiven, how much of the loans businesses are going to be just carried with low cost capital, and use the proceeds for different reasons. So this point, I don't know that we have a lot of clarity. And if all of it will be forgiven or something less than all of it.

But you're exactly right on your second quarter impact. The 1% carry plus the fee coming into interest income is still going to cause some reduction in our net interest margin. It will be dilutive to margin in the second quarter.

And then assuming we have big pay downs or big forgiveness in the third quarter, it would be hugely accretive to margin in the third quarter. There are certainly expenses involved in carrying that, so you'll see some elevated expenses in 2Q.

I don't know what those expenses would flow forward into 3Q because at that point the extra cost should have basically gone away. But we will definitely see some additional costs in 2Q for the processing of all of this.

Does that answer your questions?.

Yeah, that is great. One quick follow-up, because you alluded to the potential round two of the request you initially got.

What kind of percent would you say you fulfill? In other words, is there a pipeline of requests you didn't get to fill because the program ran out of money that will start the pipeline going for round two?.

Yeah. So, we were actually taking applications on Thursday morning and entering them and getting approvals up until the time the money ran out. So from a success rate on the first round, we were in the high 90s, 97% plus that came through in the first round.

Since then, our team has already seen a little over a thousand applications that are sitting ready to go in round two. We're took 300 applications plus yesterday. So the applications are still flowing through and I would a suspect we'll continue to grow until the money becomes available whenever they decide what they want to do and DC [ph].

Most of the stuff, remember self proprietorships are not allowed to apply until the second Friday or a week after it started, those are going to be the smaller dollars. Chris commented, we saw a 40% of the dollars that we -- the loans that we produced coming in at under $25,000.

Our average loan size that are $120,000 is half or less of the national average.

To me that continues to show the granularity of our overall customer base, which I continue to believe is a big positive for our company as a whole to have that granularity in our loan portfolio, our existing loan portfolio plus the size of these paycheck protection program loans that we put out. .

That's perfect. Thanks Dan. .

You're welcome. Thank you very much, Kevin. .

The next question today comes from Jennifer Demba of SunTrust. Please go ahead. .

Thank you. Good morning. .

Good morning.

How are you Jenny?.

I'm good.

How are you?.

Good. .

Can you talk about what kind of deferral rates you've seen on might be the more vulnerable loan buckets in your portfolio, whether the healthcare restaurant or whatever it is, hotel?.

I think we're saying deferral requests across the portfolio in total, it's interesting many of the folks that were the first ones calling meeting deferrals would maybe in the groups that we would wonder, we don't think they're going to need a deferral. But I think people were just afraid. I think there's still fear out there. Chris gave the numbers.

We've got about $28 million in payment deferrals sitting out there right now, which represents somewhere less than 9% of the number of loans within our portfolio. I don't think we break it down at all by loan type.

Do we, Chris?.

No, we don't have that granular look at it. Just to add some color to it. I think Dan is right. Some of the first requests that came through or from the medical community, they felt that pretty quick especially in the elective surgery, the orthopedic, that type of space.

What we've seen them do is they are weathering the storm by protecting cash with the loan payments. We've seen them reducing salaries, making furloughs, taking advantage of the PPP program and other things to get through this.

The visibility we see on those books now is their position well to get through the 90 days or 120 days, whatever that looks like. And then clearly the hospitality industry that was now to high percentage of those requested deferrals. Once again, what we're seeing them take action is they're consolidating down to a lower staff.

So operating on one floor, some of our operators that might have multiple hotels in one area or consolidating into one hotel and kind of a pod approach like we've done with branches to some extent. So really, the communication flow back and forth between those folks has been good.

I think to Dan's point, everyone was taking advantage of the deferral process. A lot of that, and I think frankly the regulators worked with this quickly too. So the regulators came out early and said it was -- gave us some TDR cover. And I think that gave the banks the ability to work with their customers quick and efficiently..

Suggested that we weren't supposed to be. .

Yeah..

Again, I think our team has been engaged with our customer base quite well. And at this point I think everybody's hoping that we can get some recovery and get back to work and do the things that everybody's talking about.

Chris specifically on the medical, the bigger medical clinics in the bigger hospitals clearly are going to get some government relief also not near enough to offset the losses and the revenue to them. But the medical business will allegedly I believe come back faster than some of the other things can. .

How do you think the reopening trends look in your footprint over the next several weeks, Dan?.

That's a great question. We're in eight states and we've got eight governors and we've got eight governors that all think differently and they're all putting out different advice. We're in some markets who have really locked down tight with local mayors that have required more stringent processes than the states are requiring.

So, it's a hodgepodge for us from market to market. We've been fortunate that we've only had a couple of locations where we've had some virus impact. Our company specifically what we've been able -- where we've had to take some action to protect our folks a little tighter.

But I think when you look at the restart process, to the local governor here in Mississippi is saying that he thinks that in the next couple of weeks they're going to allow some things to, again, to restart. I think all of us in the banking industry are concerned, we want to continue to protect our people. So I see us not jumping out front.

And wanting to bring everybody back into the same building and get close to each other. Again, I think we want to make sure that we stepped into this in a slow normal way. We've actually found out that we can work quite well remotely and we can communicate with each other.

Many of us, like me have been in the office most days and a lot of our folks have to come to the office every day. But by allowing the other 2000 plus people that can work remotely to do so has significantly lowered the headcount within our facilities. And that's protected us and helped keep us safe and not ill..

Thanks Dan..

Thank you, Jenny. Appreciate it..

[Operator Instructions] The next question today comes from Catherine Mealor of KBW. Please go ahead..

Good morning everyone.

Dan I wonder if you could give us any kind of color on the economic assumption that you used for your $45 million COVID reserve bill this quarter?.

Well, that's a good question, isn't it? We use some of the same providers that others are using out there. We use a list of economic forecasters. I'm not sure that any one of them is any better or worse than another. We use a group called 4Most, which is a worldwide economic forecasting team.

We used others capital economics capital at capital analytics, Wolters Kluwer. So we're watching a multitude of different folks that are out there. I think when you look at the specifics, we're seeing unemployment climb just like everybody else. We're seeing GDP contracting just like everybody else.

So I don't know that our numbers are going to be any different per se than anybody else is coming into March 31. We're now 20 days past the end of the quarter and things continue to change and adapt. I think today, most of the forecasters are saying unemployment is going to be worse than they thought on March 31.

So it'll be interesting to see what happens between now and June the 30th at the end of this quarter.

John, you want to add anything to that?.

Just that, we use the 4Most service, but certainly also guided somewhat by Moody's and some other services that a lot of our peer banks are using. We used a baseline forecast from 4Most that has projections on GDP, on unemployment rate. Unemployment rate is probably the most influential of those stats. .

Within our model. .

Within our model, yeah, within our model. So we have unemployment rising, I think to maybe 10% or 12% in the 4Most forecast. I think some services are showing higher..

Certainly after March 31. .

Well, but you combine adopting CECL and having life of loan estimates for the first time as opposed just to the incurred loss model. And then you combine that with COVID-19, it's a perfect storm of guesswork. And it's an estimate, but we feel pretty good about the process that we went through. We feel pretty good about our model..

So the perfect storm on all the different moving parts here in this quarter. The adoption of CECL we talked about it late last year and earlier this year. Our net charge offs went from zero to almost 40 basis points on an annualized basis.

But all of that or the 90% of that is due to this adoption of CECL where we marked loans up and then immediately charged them off. So that puts a lot of noise in our net charge off numbers. Loans that we originated, we actually had net recoveries in the quarter..

All right. I guess another for maybe the unemployment rate that was helpful that 10% to 12%. Because we're seeing some companies that are probability rate have a base scenario than an adverse scenario.

Is that in your forecast as well or do you just have kind of one base scenario with that 10% to 12% unemployment?.

Well, no, we run multiple scenarios. We run adverse, severely adverse. That's what we were talking about earlier. And one of our comments on, as we look at the stresses that we put through our system. The fact that we went out and raised $470 million in capital late in the fourth quarter makes us look pretty good at this point.

Makes us look pretty smart. I don't know that we were at the time. But raising $470 million late in the fourth quarter is a real benefit to us at this point in the cycle..

For sure, for sure. Okay, that's helpful. And then how about on energy exposure. I know you disclosed that you only have 1% of energy line, which is great compared to some of your other peers in Texas.

But how do we think about any kind of indirect businesses or markets that may be impacted so by the drop in oil in recently?.

Sure.

I think that the drop in oil had carries like every industry that has tentacles that reach out and touch other things and our footprint where oil and gas production is a big part of the economy that's going to be mostly in the rural markets in East Texas or the rural markets in Louisiana where there's wellheads out there pumping and maybe some drilling rigs, the drilling rigs are gone.

Those folks were in many times staying in hotels while the hotels aren't having any business, they already aren't having any business. The local Ford dealer and the local Chevy dealer isn't going to sell trucks because of the slowdown in that business.

So certainly the second and third degree impact into that industry can have longer damaging impact on the economy in many markets that are like that. I don't know that we have a number for that.

I mean, again, I would tell you that in some markets where it's heavily oil and gas weighted the whole town, everything in the town, the dry cleaners are related to oil and gas. .

Okay, that's helpful. All right. Thank you so much. .

Thank you, Catherine. .

The next question today comes from John Rodis of Janney. Please go ahead..

Hey John. .

Good morning guys.

How you doing?.

Good. .

Actually I was going to ask on Texas and stuff, but you just answered that. So, obviously negative prices and stuff yesterday pretty interesting.

Just curious back to the PPP loans, what is the average fee roughly on that $1 billion? Is it probably around 3% give or take?.

Yes, I think that's a good. John, you know how it works. It's 5% on under $350000 and 3% between $350000 and $2 million and 1% above $2 million. And we have loans in all of those categories, but we're weighted on the smaller side. So, 3%, maybe a little higher than 3% is probably a good number for us. .

Okay. And then just one other question on mortgage. Obviously if you -- like you said you back out the MSR impairment, you had a strong quarter, you've got a good pipeline.

As far as going forward, are you guys seeing any disruptions in the market? I mean, there's been a lot of stories out there about obviously just given what's going on in the operating environment stuff, but are you seeing any major disruptions to your mortgage operations?.

No, we've not.

Are you talking about the ability to sell mortgages and disruption? What disruptions are you specifically speaking about?.

I guess in general, the ability to sell..

Yes. We're producing Fannie, Freddie, Jenny paper and we're not doing any private label pools. So we've not had any issue at all and selling loans very quickly. And like you said, our pipeline is almost as full today or fuller today than it was coming into the beginning of the second quarter.

So, that team is continuing to hum and work remotely and move a lot of paper through the system. So we're proud of our mortgage team..

Okay. So -- and Dan maybe just one other question if I can. Just as far as, so you stepped back on the buyback plan.

What -- just any thoughts on M&A activity over the remainder of the year? Just given where we're at right now?.

That's a great question. John, I think when we look at M&A opportunities. Certainly folks were talking coming into the quarter. When you look back, as Chris said, January and February, things are rocking along fine. We've got 3% unemployment. The world is round.

Everybody's talking about, what do we do next? How do we keep things moving forward? And all of a sudden somebody had a wreck and off we go, we're off in the ditch. And all the things that we were working on are no longer getting worked on. I do think there's conversations out there. But I think with where we are today from a credit picture.

My guess would be that almost everything is going to be put on the shelf at least for a few months to try and figure out does the economy bounce as some think they're going to or does the economy linger in a bad state for a while, because that will impact M&A activity.

We continue to stay close and talk to many of our friends out there in the industry. But I don't think anybody's going to do anything at this point..

Okay. Makes sense. Thanks Dan..

Thank you. .

The next question today comes from Jon Arfstrom of RBC Capital Markets. Please go ahead. .

Jon, good morning. .

Good morning. Couple follow-ups, just back on mortgage.

Chris can you just go over the nuances that the margin on loans sold? And do you like tempering on a little bit for us in terms of the outlook that maybe you talked a little bit about the nuances and then your outlook on that?.

I’d like to have a 4% margin in the perpetuity. Chris can you arrange that for us..

No, that won’t happen. It's an accounting treatment when you have an increasing pipeline like that and the fees that are collected on the pipeline are calculated against the book, it closes that month. So that's why the margin can bounce around.

So typically, you'll see that in our numbers when you have a really rapid increase in the pipeline, that margin is going to go up. Now there has been some upward pressure on margin because of so much volume in the industry, so much the capacity issues, people are able to put a little more price in the margin and there's a little bit of that.

But on average I think when you look at it over time, like we've always said, our margin is going to average in that where we've been, probably in the high 1s, something like that over time. But you'll see it bounce around a little bit. .

I like four and a quarter. But when you look at the pipeline that went basically doubled our pipeline almost doubled from the end of the year to the end of March. And we're hanging in there above $500 million. That's a lot of volume coming through our system. .

Yeah, okay. That makes sense. On the topic of pricing, I know it's maybe not the most robust market for new loans, but can you talk a little bit about what you're seeing and what you're asking for on new loan commercial loan pricing. .

We are getting three requests today. It's; I want to lower my rate, I want to defer my payment, or I would like a PPP loan. I think what you're saying, you had a huge increase in the prime rate. So immediately everybody….

Decrease..

Decrease, yeah I'm sorry, decrease. So I'm a little fuzzy brained after the P3 activities. But so the first request that came out was, I need to get all my loans lowered and I'm busting my floors. So I think we've taken a conservative approach there. We're not refinancing a lot of loans or repricing a lot of loans.

I think it's our feeling today that a prime loan six months ago, the prime plus one loan today. And that's kind of where our stance is today. We're not seeing a lot of new requests, frankly right now. I think most people are in a holding pattern. So it's hard for me to give you any color on what new loan pricing looks like.

But I would tell you if we're pricing it today, it's prime plus one plus something. It's in the mid-fours. We're looking at those. .

I was trying to think, we've seen very few new loan requests at all the last several weeks. And the ones we've seen have been kind of a unique situation of some type that we've been able to jump in and help somebody with, but very little. Business people are trying to figure out how to get their teams back working. .

That's right. And yet they just think you're going to say until things stabilized from an economic certainty or some kind of certainty perspective, it's just not going to be a lot of loan activity and pricing new lines. I think the pressure's going to be on what you do with your existing credits.

How do you work with those customers do this?.

Okay, that makes sense. And then expense pace.

It's maybe a sensitive topic I guess, but you still see some flexibility in your expense base?.

Yeah. So that's a great question when you talk about expenses. And we're continuing to look to try and make sure that we're controlling controllable expenses in a tight way. One of the earlier questions was talking about what PPPs or P3 is going to cost us.

You're going to say some expense creep and this quarter, because we're spending money to produce the 8500 loans that we've already got on the books and however many thousand more come in round two. So there's going to be some noise on the expense side.

When we look at just the core operating company though, our biggest expense line is going to be over and salary cost. And I think in 2Q, salary costs typically always comes down because we blessed through some of the tax pieces of the puzzle there and I think we'll do that again.

So I would expect that we will see some declining expenses on most of our lines. We're still in the process of finalizing and further integrating the acquisitions that we closed late in '19 and early in '20.

The guys over in Central Texas that came on board, we closed that on January one we converted them on, the first part of March, middle of March, in the middle of the stand down pandemic planning. So, I think we'll continue to be able to harvest a little expense saves out of those areas.

I think that's going to be offset, at least in this quarter by the run up in expenses around P3..

Okay. Alright, and then just last one, you got the M&A question. And I understand which you seen in capital.

But what would you need to see to start the repurchase program again to restart that?.

Yeah, I think we just need some visibility. I think we need to see what really could be happening. Right now everybody is waiting to see any evidence that the economy is going to bounce.

And I think if we can get some clarity around what’s going to happen there, I think again we -- when you look back, we raised $470 million in capital in the fourth quarter. We spent $80 million something of that in this quarter. We have net income in this quarter. So, not $80 million of that actually going to away from our capital base.

I think we continue to believe that we have got sufficient capital to weather whatever storm comes through at this point. And we would like to be able to take advantage of the pricing where we’re sitting today.

But I think the conservative stance and our stance is going to be, we’ve got to get some clarity looking forward before we’re ready to depart with the capital that we’re holding. I think it puts us in a position of strength to have the high level of capital that we have today..

Thanks a lot..

Thank you. .

The next question today comes from Matt Olney of Stephens. Please go ahead. .

Thanks, how are you guys. .

Good..

Just a few follow-up here. In the loan portfolio, could you just remind us how much of that portfolio is variable and will be repricing lower LIBOR or prime. And I assume the floors come more into play.

So just an update on the overall level of floors that will negate a portion of that variable rate loan portfolio?.

Sure.

John, you have got some of those numbers?.

Yeah, Matt. Floating rate loans are about 20% of our portfolio. That’s about $3 billion. About a third of those at March 31 were at the floor. That’s good news. The bad news, the two-thirds were not into floor. So that hopefully we’ll give you a little guidance. .

And from a LIBOR pricing, not a big --.

No, mostly [indiscernible]. .

Okay, that’s helpful. And then on the slide deck, you gave us a nice breakdown of the higher risk portfolios, whether it's oil and gas, retail, hotels and others, that's helpful. And you gave us a loan to values by state. Those are all the hotspots that I think most investors have identified as being vulnerable asset classes.

I'm curious what your views are.

Do you agree that those are the more vulnerable asset classes in the portfolio or do you have some other views that maybe differ from that?.

Yeah, I think Chris, I'll let you jump in here too, but I think we're, we're probably in the same boat with everybody else. This clearly comes to mind quickly. If the economy stays down long, this is going to bleed into the rest of the portfolio. This is not going to be limited to hospitality.

This could go a lot deeper into the portfolio if the economy doesn't recover quickly. The stimulus money that the federal government is spending is going to have an impact. The question is when do we see that impact and how does that impact flow through to us.

From a different industry perspective, Chris, was there some industry that you think we're not talking about here. I'm not, I'm unaware of any..

No, I think Matt, when you -- when this exploded, the first calls we got from customers or the first folks that we're reaching out the sync well up with this lift and I think you see that in what other banks are saying too. I think the next iteration would be as it flows through the real estate book and the tenants that support or pay those payments.

So I mean my own personal experience, I've got a real estate investment. My tenants are an orthodontist, a dentist, an eye doctor, a title company and a real estate company. The company is doing okay; the other guys are struggling a little bit.

So I think those are the kinds of things you're going to see from the real estate side as they start to deal with, how their tenants are able to make payments..

Yeah. The hospitality and the restaurant industry in particular, are not only are they stressing to pay us, but they're also stressing to pay the rent and wherever they're occupying the space..

And then you get down to the breakdown of your restaurant industry. So we're seeing our franchise groups, they're down about 20%. So they're hanging in there with drive through only business, the ones that aren't franchises or have a good drive through type model or the feeling it worse so that you start breaking it down from there. .

Okay. That's interesting. And then switching back to the rate environment, you mentioned the floors and the variable rate loans. What about on the deposit side? It sounds like you've got some more room to bring down deposit costs.

Any more color you can give us, whether that's kind of the current spot rate on deposit cost or expectations for how much deposit costs could move lower? Thanks. .

Yes. When you look at deposit costs, I think Chris talked about it or John, one of them talked about the fact that we've got. Coming into first quarter, we typically are collecting deposits from some of the public entities. So that the counties, the cities, the municipalities that we bank. Those deposits are priced higher.

So in the first quarter, one of you all said that that was about 3 basis points on our deposit costs and we've already seen that go away. We continued to reprice deposits down. So I think we'll see a nice move down in deposit costs in 2Q, I don't have a number for that. But we're able to manage those deposit costs down. .

Okay. That's helpful. Thank you guys very much. .

Thank you, Matt. .

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks..

All right. Thank you all for joining us today. If you need any additional information or have further questions, don't hesitate to contact us. We look forward to continuing to communicate with you and as we work our daily process with our customers and their respective communities.

We're going to take care of our teammates and take care of our communities. We're going to get through this together. Don't forget to wash your hands..

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