Enterprise Financial Services Corp
NASDAQ:EFSC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
37.54
61.17
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Enterprise Financial Services Corp
You don't have any saved screeners yet
Good day, everyone and welcome to the EFSC Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Jim Lally, President and CEO of Enterprise Financial Services Corp. Please go ahead, sir.
Thank you, Sera. Well, good afternoon and welcome to our 2020 first quarter earnings call. For all of you on the call I hope that you and your families are healthy and safe and there will be precedented times. Joining me on the call this morning is Keene Turner, Chief Financial and Operating Officer of our company; Scott Goodman, President of Enterprise Bank & Trust and Doug Bauche, Chief Credit Officer of Enterprise Banking Trust.
Before we begin, I would like to remind everyone on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to Slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K for reasons why actual results may vary from any forward-looking statements that we make today.
The first quarter of 2020 will a quarter that will soon not be forgotten. Our EFS team it was a quarter that showed the financial streak and resiliency that we built over the last several years, the operational efficiency punctuated by the culture of incremental improvements and prudent investments and entrepreneurial innovation that has been a hallmark of our company.
The sound fundamentals of our company were exhibited during the first quarter. We earned record operating revenue of $77 million, we extended our revenues margin and had a stable efficiency ratio compared to the linked quarter. Our loan and deposits were as strong. Loans grew by $143 million or 11% annualized and the profits grew $219 million or 15$% annualized.
In response to uncertain economic conditions, we were able to be proactive and prudent of our provision for credit losses addition $22 million to reserves. While we feel good about our financial results in the first quarter, we were unable to estimate the impact of COVID-19 on our business and operations in 2020.
As such, we are not going to provide guidance at this time and our guidance should not be relied upon. Keene will get into the specifics on the quarter but you should know that I am particularly pleased with these results amid the rather large provision that I previously mentioned.
As it relates to credit quality we did all the work analyzing certain portions of the portfolio. Doug will speak to what we know currently but we'll obviously know more of the resiliency of our growing portfolio for the next several quarters. We are committed to providing as much transparency as we can, when we can.
The good news is that we are starting from a very strong position as evidenced by our credit quality numbers that we reported yesterday. The bottom line is that our strong balance sheet and the liquidity and high capital level position us well for continued success.
I would like to take the next few minutes to update you on our approach and response to COVID-19. At this time we've been successfully serving our clients, associates and our communities. Slide 3 shows you our timeline of action. We have spent years strengthening and testing our business continuity plan. We formed the communication and action taskforce with swift actions to restrict travel, converted in-force meetings to virtual and ultimately instituted a work from home mandate well ahead of restrictions by officials in our markets.
I'm glad that we took these steps and happy to report that our company remained operational in support of client success. We had our relationships in all standards let over 5,000 calls to clients and prospects over a three day period to head and understand what their orders were and take the first steps to work and help them with current and upcoming needs.
Earlier I mentioned our careful consideration of our associates that we have at EFSC. Slide 4 gives you some perspective of what we've done. All these measures are aimed at maintaining and improving our culture of the work to support clients and individual associate needs including the recently established Associate Support Fund.
As it relates to our clients and communities, slide 5 provides you some perspective of our commitment. Our clients are our top priority and we believe that taken the best care of them now will ultimately drive the greatest potential the long-term value for our shareholders and other constituents.
We've taking seriously the implementation of the programs and occupy both the government and our regulators into our role as a financial congress to give paychecks in the hands of the American workers. Based on the number of loans that we have processed through the program, we are supporting upwards of 67,000 jobs. Scott will provide the pertinent statistics around the paycheck protection program but you need to know that the execution of this plan had been specially rewarding for me as I've seen incredible dedication of our associates combined with the entrepreneurial DNA of our company to create very successful program.
We're also working with clients on a corporate loan deferral strategies, the details of which Doug will comment on. Our relationship managers are not speaking about the next eight weeks. They are meeting their clients with discussions regarding the multiple phases that lie ahead, how important cash and capital will be in order to respond to the changing fee environment and help them see the opportunities to improve their businesses over the next several quarters.
Our history shows that out of crises comes opportunities. The next several quarters will be no different. We'll stay focused on the concerns of our business, sound credit and client acquisition. I'm very proud of what we've accomplished in the first quarter. Like never before we're living out of mission to guiding people to a kind of financial success.
I'd now like to turn the call over to Scott to provide much more detail about how our teams and regions are approaching amid recent time. Scott?
Thank you, Jim and good morning. Sa Jim outlined and as shown on slide 7 and 8, the fundamentals of Q1 were strong as we grew the loan portfolio by $143 million or 11% annualized. The C&I actually represented over 70% of this growth, stemming from increases across the specialty business line as well as higher line of credit usage.
Borrowers access lines for additional working capital at modestly higher levels with increased usage of roughly $40 million versus the prior quarter end. Slide 9 and 10 breaks down the change in loan balances by category and business unit. Commercial real activity was steady as we captured opportunities for investors to both refinance and purchase properties, particularly in St. Louis and Kansas City.
Higher construction loan funding mainly represent steady activity on project originated over the past three or four quarter. St. Louis growth in the quarter also reflects increases in the affordable housing tax credit sector and new business originated by the agricultural lending team. We continue to be a steady flow of new project opportunities in the affordable housing business, which was further bolstered in this quarter with some refinancing.
The gain was able to successfully onboard three new relationships and significantly expand another during the first quarter. As a reminder, the clients in this unit represent traditional row crop, pork and cattle farms which have a history of solid operations and are well known to our experienced Ag lenders.
In the Specialized Lending Unit, enterprise value lending started the year strong with a solid pipeline and new growth from both M&A and recapitalization activity. This activity quickly slowed as deals were put on hold by sponsors in the latter part of Q1. Life insurance premium finance experienced growth from several new policy referrals and the funding of existing premiums.
Moving through deposits on Slide 11, total balances were up $219 million in the quarter or 15% annualized. The growth reflected net increases in balances from new account origination as well as solid seasonal inflows from existing accounts. The year-over-year the deposit portfolio is up 8%. Growth in our commercial and business banking lines continue to be the main driver here. Deposit loan impacting our portfolio mix as DDA continues to be around 23% of total deposits.
Behavior from depositors shifted within the quarter, with account closures slowing substantially in March and average balances of new accounts totaling roughly five times that of closed accounts and at a lower cost. The growth in mix was even more encouraging given the significant reduction in deposit costs which Keene will review in more detail during his comments.
We were able to react quickly as the fed reduced interest rates and our sales gains have been able to execute well reaching out proactively for large depositors and shipping the conversation from a rate to financial strength and service. This type of proactive client communication is a theme which has been strongly reinforced this quarter.
As Jim discussed, we reached out to businesses very early in the onset of the stress environment to understand our concerns and express our support. The takeaways from these conversations are helping us both offensively to develop unique marketing content and defensively to analyze our portfolio based on the risks and stress points identified.
At a high level, we are hearing some things. Certainly revenue continuity is at the top of the list. The unknown duration of the sound is creating significant concerns. Access to liquidity is also a major focus for these services. However, roughly 65% of our clients believe that they have sufficient cash from working capital to weather the storm without relief program assistance. This manifest itself in a relatively modest percentage of our business clients requesting deferred payment as Doug will address in his comments.
This industry sectors demand for most of our manufacturing clients remain strong although labor shortages due to illness, sound care needs and mandatory shutdowns are creating significant challenges to executing on the orders. For manufacturers and distributors, supply chain issues are challenged but internationally dependent companies running out of inventory.
Other key things include stall construction projects, limited access to labor, maintenance and sterilization for real estate owners and lower productivity overall. Given the current environment, I'll provide some commentary on our execution of the Payroll Protection Program and turn it to Doug to discuss the specifics on key sectors and other aspects of the credit process.
At the corner of the PPP program outlined on Slide 12 was executed by experienced professionals from the sales, operations and credit size of our organization. As the bank builds on serving private businesses early on, now we made a decision to manage this process internally and to commit significant resources.
Our existing partnerships and our investment in technology proved invaluable as we were able to provision ourselves with clients as a key point of contact for information and guidance, including instructional webinars, website resources and video messaging. Our teams were highly effective in executing this program for our clients and as of April 20, we've obtained approval for our over 1500 loans representing more than $680 million and as Jim mentioned impacting over 67,000 jobs.
Overall credit quality remains sound and key performance indicators are at acceptable levels as Keene will further detail. Taking a more focused look at where the portfolio can mostly impacted by the economic slowdown slide 13 shows roughly 22% of loans are to C&I borrowers with an additional 27% in niche lending. At a high-level, our loan portfolio is well diversified by industry with no significant concentrations within the headway threatened industry types.
Now, I'd like to turn it over to our Chief Credit Officer, Doug Bauche for some further comments, Doug?
Thanks Scott and good morning. During these challenging and uncertain times our relationship approach to credit reveals its true value. While we are pleased with the solid performance of our credit portfolio during Q1, our attention is turned squarely it working with our clients in particular those who have been most severely impacted by the pandemic and related economic effects.
Scott touched on the diversification of our overall credit portfolio and I thought it would be helpful if I spent a few minutes talking more specifically about our exposure to the higher risk sectors including CRE retail, EDL, hospitality, oil and gas and agriculture. Slide 14 shows a breakout of our C&I and CRE portfolios. Of the investor-owned real estate, approximately $356 million includes retail CRE. Of that, the average commitment is $1.8 million with the weighted average LTD of 64% and personal recourse of 98% of the portfolio.
In our segment stress testing it was determined that 88% of the loans to be service for a period of 12 months in borrower and guarantor liquidity reserves. Our enterprise value lending or EVL portfolio consists of senior debt exposure to private equity, primarily SBIC owned middle-market companies. As referenced on Slide 15, our $441 million portfolio includes both $299 million of senior secured term debt and $142 million of borrowing based secured working capital lines of credit.
The portfolio is well diversified with approximately 90 unique borrowers, resulting in an average exposure of nearly $5 million per relationship with $2.5 million for loan. Industry segmentation includes manufacturing at 34% mostly of trade at 15% and professional and technical services at 15%. We've enjoyed long-term relationships with our proven SBIC sponsors and this portfolio performed quite well during the prior economic downturn.
Our general underwriting and space linked to a conservative senior leverage position of 2 to 2.5 times and total leverage of below four times. I should note that 60 of our 90 EDL portfolio of client were recently approved for a total of $75 million in round one PPP funding with an average of 1.25 million per portfolio company.
Slide 16 demonstrates our hospitality portfolio consisting of approximately $358 million of bank-owned commitments, $218 million of which is hotels and $75 million is restaurants. We recognize that the hotel industry has been severely affected by the travel and shelter in place restrictions. We have responded to the needs of our hotel clients through our alternative 90-day payment deferrals in the funding of much-needed PPP loans.
The average existing hotel loan size is $4 million and the weighted LTV is just under 61%. 86% of the portfolio includes personal recourse to the owners. These are large part due to typical slag aided to 100 key non-convention center type properties located within our metro markets.
In the oil and gas sector, I simply point out that we have not providing credit directly to producers. Rather our $140 million in exposure as shown on slide 17 is largely to end market convenient stores, fuel wholesalers and railcars used for transportation of wells as low as some manufacturing companies that sell product directly to the oil and gas industry.
And finally on slide 18 our $168 million Ag portfolio is well balanced between crop primarily corn and soybeans, cattle and contract card operations with minimal exposure to dairy. We have a seasoned team of bankers that are very well known and respected in the Ag communities we serve. Since our acquisition of JCB back in 2017, we have selectively onboarded top-performing local Ag producers with good debt to equity ratios, collateral coverage and ample operating cash flow.
While we have experienced minimal delinquencies or defaults in the portfolio to date, we continue to closely monitor performance in light of the international trade disruptions, fresh commodity prices and the recent announcements of temporary shutdowns at largely processing plants around the country.
We are certainly aware that we have clients outside of these high risk sectors that are feeling the brunt of the economic conditions on their businesses just as seen. The length of this uncertainty will ultimately determine the severity of the impact to our credit portfolios. Fortunately, as Jim commented, we entered this environment with our clients reporting very favorable results and strong balance sheets.
With the infusion of $680 million in liquidity to our clients in the PPP stimulus, we believe delinquencies and defaults will remain manageable in the near-term. In the meantime, our bankers aided and supported by our highly experienced resolution management team will continue to take prudent measures that both protect our capital and maintain our reputation as a truly great banking partner to businesses and individuals alike.
And with that I'll turn it over to Keene Turner.
Thanks for your comments and good morning, everyone. My comments reflect slide 21 of the presentation. Net income for the first quarter of 2020 was $12.9 million and earnings per share was $0.48. Total revenue compared favorably to a seasonally strong fourth quarter and the solidly given for 2020. Net interest income added $0.03 of earnings per share in the linked quarter both be the continued average asset growth as well as 11 basis points of total net interest margin expansion.
Core net interest income was essentially stable while incremental accretion added $0.02 per share. Also, we would have expected fee income and expenses to compare unfavorably to the fourth quarter due to the seasonality. Nonetheless there was an environmental item that helped make up for the expected trend in both categories which I'll highlight further in my comments.
Our strong revenue and expenses resulted in increased tax pre-provision net income of $38.1 million for the first quarter of 2020 and allowed us to be proactive with our provision for credit losses at $0.63 per share while still netting $0.48 per share of earnings.
Turning to slide 22, net interest income increased to $52.1 million in the first quarter. Core net interest margin was 3.71% an increase of 7 basis points from the linked quarter. Net interest income was aided by $1.3 million of non-core acquired loans accretion particularly related to free flow option and $0.8 million of discount accretion related to prepayment on core PCI loans in the period.
Overall margin was stable during the quarter, prior the actions by the federal reserve in March. Portfolio loan yields were lower versus the linked quarter primarily as a result of interest rate resets during the period and a 38 basis point decline in one month LIBOR. This was partially mitigated by higher average loan balances along with five basis points of yield related to the aforementioned prepayments on core PCI loans in the period.
Our cost of funds declined 18 basis points from loan quarter and benefited from higher average customer deposit balances and lower levels of wholesale funding and CDs. Core non-interest-bearing delay accounts receivable at 23% of total deposits and deposits excluding broker time deposit increased $130 million on average compared to the fourth quarter.
The cost of interest-bearing delay accounts was nine basis points lower while money market rates were lower by 30 basis points. The reduction in deposit rates was primarily the action taken in response to the client in the fed funds rate and other short-term market rates during the quarter. Wholesale funding cost also declined during the period for similar reasons.
The rapid change in the economic environment and the decline in interest rate at the end of the quarter placed downward pressure on our net interest margin in coming period. With realized strong loan and deposit growth linked quarter of balance sheet is asset sensitive of approximately 60% loan with variable rates. We responded aggressively to rate reductions by repricing deposit accounts swiftly and also securing other sources of low-cost funding.
Additionally, the impact of the SBA PPP loans on net interest margin can be substantial in the near term. We've also experienced deposit inflows and were increasingly vigilant about our on and off-balance-sheet liquidity, which will likely affect net interest margin results over the coming quarters. Nonetheless, as you heard from Jim, Scott and Doug, we're in a strong financial position and we remain focused on helping our customers during these difficult times.
We believe that execution on these fronts will further solidify royalty of existing clients and have the potential to attract newer clients that also see the value of having a trusted partner to help them navigate both the prosperous and challenging times. We are committed to this principle which we know can help us build long-term value for all the constituents.
In regard, I'll spend one more minute on liquidity. Our liquidity position remained strong, our focused efforts to generate core deposits provided funding from loan growth in the quarter, the investment portfolio is expected to generate $40 million to $50 million of cash flow this quarter and we've capacity for additional wholesale and brokerage funding if necessary.
As of March 31 we had access to nearly $2 million of funding through our secured lines of the federal home loan bank and Fed discount window along with holding company liquidity and fed funds lines. We anticipate that loans issued in conjunction with the SBA Paycheck Protection Program will be funded through the fed's Paycheck Protection Program including in this facility
With that, I want to spend a minute on Slide 23 which reflects credit metrics and asset quality changes during the quarter. We had several moving pieces that reflected credit results. First this upon the adoption of CECL on January 1 we elected to remove some PCI loans from pools that account from individually. This caused nonperforming loans to increase by $8.5 million as well as classified loans to increase by $26 million.
We believe that because the loans were and continue to be identified individually that they are well market reserved. However there is a gross up in terms of asset quality and allowance for credit losses. We also immediately charged-off $1.7 million on those loans according to our accounting policy for loans individually accounting for that have immaterial balances.
On that note, the day one adoption increased the allowance for credit losses by $28 million. This is nearly dollar for dollar increase in absolute balance of the classified loans noted above. Thus day one coverage improved by more than 50 basis points with the resulting allowance for credit losses to total loans of 14.34% on January 1. Comparatively, classified loan levels improved from January 1 while nonperforming loans experienced a modest increase of $4 million due to an accruing troubled debt restructuring of $3.7 million.
Turning to Slide 24 as Scott noted, loan growth was solid to start the year. Under the day one methodology, the related provision for credit losses would have been approximately $1.5 million as we experienced nearly $1 million of net recoveries during the first quarter. With that said, we recorded a provision for credit losses of $22.3 million as a result of the rapid deterioration of the economic forecasts associated with the current conditions, resulting allowance coverage increased another 35 basis points to 1.69% and the reserve for unfunded commitment includes another seven basis points of coverage.
It's important to note that we've successfully implemented the SBA PPP program with our customer base and we continue to work with our customers to support their near-term operations through deferrals and other methods. The provision for the quarter is nearly entirely reflective of forecasted deterioration that might occur in the environment after the consideration of this or any other litigants.
With that said, we also can continue to see the expectations for condition worsen which in that case we are well-positioned to continue to proactively provide for future potential credit losses. I will reiterate that although we are coming through the portfolio talking to customers and working hard to identifying the issue, we are not seeing material credit stress manifesting at the current time.
With that, we'll turn to Slide 25 and reflect on fee income which was seasonally strong at $13.4 million for the quarter. We started to see some impact of the overall economic environment on our credit card and wealth businesses and we expect that they will continue to experience softness as commercial spending remains low and the market indices remain depressed from 2019 levels.
With that said, tax credit swaps and mortgages all started the year well, combined with a gain from bank-owned life insurance of $0.7 million per quarter fee income through the strong start to 2020. Expenses on Slide 26 were similarly strong coming in at $38.7 million for the first quarter. Lower incentive accruals, travel and FDIC insurance mitigated seasonal payroll taxes of nearly $1 million and some related expenses for our efforts to aid the community and employee families affected by current economic conditions.
Core efficiency at 51% to the year compares favorably to a year ago and has an encouraging start to 2020. We continue to work hard to ensure we're spending prudently in this environment but we're also committed to supporting our associates and our family through this challenging time. I'd also add that operationally we're faring well. Our business continuity is built around working remotely. With our geographic dispersion we were already used to working virtually out of the office. This is clearly another level and completely broad-based when our team was successfully and safely serving clients while collectively working through this challenge.
I'll conclude my remarks on slide 27 in terms of our capital, capital level remained strong with common equity tier one at 9.6% and total risk based capital of nearly 13%. As part of our ongoing capital planning process we expressed our capital position using adverse economic forecasts and our own historical loss experienced through the downturn.
Under these scenarios we projected our capital level would still meet well-capitalized elements and we can maintain our current dividend level. However in this economic environment, we temporarily suspended our share repurchase plan and kept our second quarter dividend at $0.18 per share. Prior to suspending our share repurchase plan we returned $15 million in capital to our shareholders through the repurchases in the first quarter.
Our tangible common equity and tangible assets which had 8.4% at March 31 down from 8.9% at the end of 2019. This trend was due to an impact form adoption of CECL and building our credit reserves in the quarter which combined total $35 million or 48 basis points on our TCE ratio. Our significant level of capital, strong liquidity and strong pre-provision income all support the overall strength of our balance sheet.
I just want to conclude by saying that it's clear to us in effort that we value our relationship with our customers and we're utilizing the strength of our talent, balance sheet and overall financial strength to support them. We're more focused than ever on ensuring that we meet long-term financial decision that are in the best interest of all our stakeholders. It is also evident that while we've worked so hard to build a robust revenue profile combined with an exemplary expense management will allow us to serve our clients and our shareholders over the near and long-term.
We will continue to believe our proactive and client focused in order to create the best possible enterprise in the years to come. I appreciate those who have joined us this morning and at this time, we'll open the line for analyst questions.
[Operator instructions] And our first question will come from Jeff Rulis with D.A. Davidson.
On the capital just in terms of double those loan-loss reserves sort of capital come from different sources, so any thoughts on that TCE comfort level of that here in excess make sense of the levels that comes in further, you guys did a good job outlining the liquidity and other sources of capital, but just per that metric any thoughts on comfortability levels where we sit today here?
Jeff, this is Keene. I think we're extremely comfortable with capital of these levels. I think particularly when you look at the confluence of factors here in the first quarter, you had day one adoption of CECL, you have a feel like is a proactive day two provision and we were also buying back some shares in the quarter. So we only 8.5% PCE I feel like that's strong and then I think it's worth noting just in terms of CECL and based on regulatory and relief and phasing that you get, so PCE is one indicator but the rest of the ratio from a regulatory perspective remained strong.
And again I think the earnings profile sort of that first line of defense on potential future provisions that we'll need take size, I think we feel good right here with the 8.5% level and moving forward at what obviously we've been stable and pause on kind of the capital management. So I do expect that the capital position will be sufficient here and we can have a few quarter like this and if you had call it a 50% quarter here with an $0.18 dividend here then you're building PCE every quarter.
Thanks. And another one of expenses and really just color I know that you didn’t provide guidance but there are a lot of moving pieces in Q1 and thanks you probably towards the end of the quarter but if you can touch on this level of expenses in the first quarter giving thoughts of branch closures and travel limitations, is that figure a good level or would you expect that to come in or increase of nearly 2Q.
Jeff I would just say normally first quarter expenses are high because of seasonal payroll taxes and a myriad of items that go along with it including merit increases right in the first quarter. We do have that kind of normal trend, but I would say that the environment has given us some natural mitigate to that and also adding to that was reduced incentive accrual.
So I think the first quarter level here felt pretty comfortable and really it only had call it a month of some of the more extreme expense management in it. I would also with that said there are some variability, we're definitely going to see some more professional fees as we consult with the attorney who council on either specific credits or how to navigate challenges that the current environment provides that we haven’t seen that specifically before.
So there's a little bit of give-and-take there, but there is nothing that I would say would material upside or outside to the level we're at. We feel pretty good about at least in light of current profitability to the extent that things were to get better and we would have customer growth and things like that. Obviously the teams would be in line for some level of incentives there and that would have to accrued later in the year.
Thanks. And one last want to clarify I think it was in Doug's comments about the average PP balance of your deal approved clients, was that a $1.25 million of did that get better?
Yeah Jeff you're right, the $75 million total for the portfolio of clients with an average of $1,250,000 of portfolio of clients.
Thanks Jim. That's it for me.
And our next question will come from Andrew Liesch with Piper Sandler.
Just some thoughts on the margin here, the industry deals more roughly value is currently explored.
We've got, let me find my page here, I apologize, we've got $3.2 billion in total variable-rate loans, $1.2 billion of those for and you've got almost 50% of those currently on the floor. So that's where it fits and we'll provide some more detail when we file our Q on that as well.
Okay. That's helpful and then just on the provisions here just trying to get a sense on the macro liquid debt based on when I look at multiple reversed or maybe later on in the quarter just trying to get a sense of this could be some proof of our reserve just from an economic factor in the quarter to have?
Yeah, let me try to give you as mush flavors as I can there Andrew, we felt like it was important to use the most updated information we had in terms of our economic forecasts and so that blended both downside and upside scenarios and no let's just say our base forecast includes nearly 9% unemployment in the near term and then it includes almost 5% decline in GDP and then those extend out respectively to nearly 13% unemployment and an additional almost 7% decrease in GDP.
So I think it's safe to say that we felt like getting ahead of this or taking as much information as we could and incorporating them to the forecast and working that into the results early was the best approach and it allows us to be positioned to either continue to add to that or the efforts to mitigate borrowers to stop continue to stretch out will be sort of status quo until we get some clarity, but we felt like this was the right posture and the right start to use in those updated forecast which is I think clearly little bit more of a conservative view than we could have taken.
That's helpful. I will step back and then take a question.
[Operator instructions] We'll now hear from Michael Perito with KBW.
Hey guys, hope you're all doing well. Thanks for your time for that. I wanted to spend a little bit more time on credit, Keene in your prepared remarks you mentioned that you had not seen any material credit stress manifest at the current time. I was wondering if you could maybe extrapolate that a little bit further. Are you suggesting that I guess what is your assumption in terms of the business compared to quite a few that are taking some form of intervention or full balance.
What kind of assumptions in terms of their ability to return to kind of full operation later this year you guys making and kind of reserve fill that we have?
Let me handle that high level and then I'll have Doug or Scott to kind of color in maybe the borrowers. I think it's been pretty clear that the idea that it's inclined much of the relief have been to provide initial liquidity and belief and when we've been looking at the deferrals and things like that it's really not an income event.
Now certainly there is a collectibility element that I think right now is just uncertain and it's kind of depend a lot on how people get back to work and the speed of recovery and we're clearly not in the position to forecast that. So I guess what I would say is our provisioning level is based more on broad based economic information and potential that it could have across the portfolio and clearly I think our land was intended to be more conservative than more optimistic and what will work on through the next quarter or two is how certain sectors, certain businesses, certain industries perform and borrowers as it relates to our portfolio and their ability to get back to business and make the payment and then our expectation would be those will start to meet in the middle right.
But I think we're starting with a good coverage at one point 1.7% would double -- more than double from where we were at the end of the year for a variety of factors and from our perspective I think we just feel like that's the right approach and posture because there really is no other approach, there is no information in real detail that we had to be able to estimate those losses with the portfolio other than using a broader economic indicators.
I think we transitioned from being able to portfolio analysis into what I call case management which you go customer and my comments about the nature of the first eight weeks that we had I think beyond that and valuable clients understanding where they stand and when does the economic slowdown impact in this if it does and then what do we need to do to prepare for that is who we think about.
And this is Scott. I was just going to add I think the way I look at it is the diversity of our portfolio as the first barrier and I think to Doug's comments we try to dial in through a lot of the work that our internal folks do to really dial into the sectors that we think are higher risk to do work around liquidity, loans to values, guarantor support to really see how long they can weather the storm. So I think the key point -- the key issue is what is the longevity because that's as I talked about that's the comment, that's the concern that weighs most on everybody is how long are we going to be in this state. But I think diversity of the portfolio is the key factor that obviously make it.
Got it and then I know it's still early in an transaction, volumes haven’t been high in the real estate arena but it seems like there is a bit of real estate collateral obviously in the portfolio and have you guys seen any updated data points yet in terms of how real estate prices in your markets of operation are trending since this some pandemic has really start to take older and is it still too early to comment on that.
Now I can let Doug comment specifically if he wants to. I think it's early from a value standpoint. I think only minor cash flows because I think that's obviously cash flows leading to valuations and I think generally what we've seen is those that are related more to the hospitality are certainly impacted those that are more commercial have a bigger buffer but I don’t think we've seen for example an overabundance of CRE take advantage of the deferrals, but I'll hand it to Doug if he has further comments there.
No, I haven’t seen in terms of the deferrals, first and foremost we ventured in very few forbearance agreements on commercial real estate and so far deferrals have largely been accommodated to those developers that are really just looking for an opportunity to preserve some liquidity during this temporary cash crunch, but I think in general changes in real estate values to this is early but certainly we're mindful of the potential long-term impact that COVID-19 could have relative to demand for particular office and retail space.
So we're mindful of that and we're watching it but I think early yet to determine the impact relative to current loan to values.
Okay. Thank you and then just lastly and I do appreciate all the added disclosures guidance that was helpful and all the areas of focus I think with market interest lies just on the aircraft just a small quick question on the aircraft portfolio, can you guys just confirm I believe this is true but none of the aircrafts are actually used to generate revenue correct?
Yeah the bulk of that portfolio or the alarming majority of the portfolio is taken in on trades of basically short-term. There may be less than 10% of the portfolio where the aircraft would be used to generate revenue, but that's not certainly the focus of the business.
Got it. Well thank you guys and I appreciate the extra time and help with the questions this morning. I hope you all stay well in top motion.
[Operator instructions] We'll now take a question from Brian Martin with Janney Montgomery.
Hey thanks for all the added color echo that, it's very helpful insightful but maybe just a couple things for me, just the -- did you guys mention the total deferrals at this point in the portfolio and what was that as a familiar question earlier Keene was that as of March 31 kind of looking a little bit after that with the most recent data as far as what the deferral look like?
Yeah Brian it's Scott and I can take it. Okay, the deferrals that we talked about were really trying to give some color post 31 and right now I would say we've done 30 to 90 day deferrals of P&I. Some borrowers will take less than 90 days. Some borrowers will take principle not just interest but impacting less than $500 million of the portfolio so 110% probably fewer than 400 loans overall will okay that's helpful.
Okay that's helpful. Okay and how about just secondly on the PPP program I may guess can you just walk through, how I guess if this -- do you anticipate that being a margin of '19 or is this a fee income and then just kind of the timing of how you're thinking about recognizing that revenue as we kind of model something in on that.
Yes so let me just add one thing that Scott comment which is on that $0.5 billion of principle balances that the loan the amount requested for deferral is not very big. So we're talking $20 million to $25 million of total payment deferral that's been requested for that period. So just we're sizing relative to the unpaid balance and then I would just say on the PPP loans the potential for the fee income is right now call it $16 million, $17 million, $18 million in fees plus the modest mix spread we'll get once we fund those loans.
Our results look pretty clear. We don't have specific instructions on how is that forgiven or necessarily be paid but it's probably some combination of second to third quarter recognition of what a majority of those will pay off and then in speaking with peers and trying their arms around maybe what might continue to drag on further, I think 20% to 25% might be around for some period of the full term that that's just us kind of guessing and modeling and figuring that out but we do think in the next couple quarters here, we can start to get some payoffs but to the extent that we've growth, that will be a loan yield than a margin drag or be it a 0% risk-weighted asset.
So we're not overly focused on that. We're a bit more focused on making sure that our client withstand business and we've an excellent job of executing, but that's how we think about those moving back in here to earnings and shrinking down the balance sheet.
Okay so it's probably fair to say Keene in the second half of this year maybe you get 75% or 70% to 75% of that total revenue and the remainder just spread out over the quarter and however we think about it, is that fair?
Yeah I would hope so and with the intention of the plan which is to keep people employed we're hopeful that its 75% of mortgages that means that it went into the communities and paycheck and for really the purpose of that we've intended for. So that can be forgiven.
Okay. That's all. Thank you and then just on margin, can you just with the rate cuts and then the proactive efforts you guys have had on the funding side, how much of the 150 basis point rate cut was in the quarter just maybe if you talk about the March margin just with the starting point now that you’ve had the rate cuts in the cuts that you guys have been proactive just kind of how to think about that core margin going forward just in the near-term.
Yeah I'm in actually excess. I would say generally when we look back at our asset sensitivity tables, I think we expect that we'll be able to maybe mitigate some of that effect, so a really big wildcard that we've got right now Brian is there is a lot of liquidity coming into the banking and into the system and we're also taking actions to bolster liquidity. So I'd be hesitant to give an answer because I think some of this is about the relative margin and net interest income given the risk profile and we're working as hard as we can to maintain a highly liquid, highly capitalized institution to be able to support needs.
And so I think it would be irresponsible if I tried to give you some sense for that. I will say that you March margin was lower than January and February comparatively but now I also think you can see the results here for the first quarter and they were they pretty stellar. So I think you are on way to have a pretty good year before the Fed actions and the economic conditions started to darken.
Okay. That's helpful and just the one housekeeping question, Keene you guys have talked about for a while that seasonality of that tax credit line it looks like the first quarter was I guess it looks like maybe it's more expectation will be it's more streamlined or I guess more stable less volatile this year I guess is one indication of that or I guess would you still expect some volatility in the next couple quarters and for keeping back just big picture on the changes we made in the tax credit line trying to normalize it.
Yeah I would have said six weeks ago I would have expected it to be more consistent, but still probably weakest in the second quarter. I would say right now the predictability of the business is a challenge and it's mostly our ability to source credits as opposed to sell credits. So I think all of the equal we will expect some fourth quarter activity and then I was just also add that some of it depends on what happened to rates and some of the quarter results were good by the reduction in LIBOR which caused some of the credits that we fair value to be adjusted.
So a give a little bit clarity on that in the upcoming 10Q to those indication but right now we don’t have as Scott indicated on a variety, we don't have the clarity of what a 30, 60, 90 day delay in business in terms of timing that all comes back or if it pushes out or it meets the overall level of activity in the tax credit spaces I think no different.
Okay. And maybe just last high-level for me given that a people -- a lot of your client haven't taken deferrals or said they really don't need them in your comments about the exposure you guys have the greatest level of risk you view today when we kind of look at those buckets and it's really just a you outlined of one in particular I guess more concerning at this point from what you’ve seen as the way you gathered.
Brian I can take that, I think it's liquidity to weather the downturn is the theme that regardless of the industry that was what came through more than anything but I think the good news is based upon deposit inflows, based upon the rate at which our clients accepted deferrals, we feel like they're in decent shape but I think it's definitely our liquidity to weather that.
Okay. And normally you guys have 1Q seasonality with the deposit base with the tax payments from people, but obviously with that being pushed back and would you expect some I guess does that inflow of it normally in that 1Q following the 2Q now with the timing changes that which your expectation would be?
Yeah I would say Brian we're not, I don’t know that I can wage your guess as to what this will provide moving forward and what we're going to see. I mean clearly with lending and with the PDP program we're seeing that going to deposit accounts the client borrowings other places. We don’t know if that's come with the bank or not but we do continue to see a flight to quality and balance will grow as Scott mentioned as people put more cash in their balance sheet as they're worried about the outlook.
Okay. Perfect. That's helpful Keene, thanks everyone and stay safe.
And there are no further questions in queue this time. So I'll turn things over to our speakers for any additional or closing remarks.
This is Jim and just want to thank everybody for their time today and your interest in our company. Please stay well, stay and look forward to talking again at the end of the second quarter if not sooner. Thank you.
And that does conclude today's conference. Once again thanks everyone for joining us. You may now disconnect.