Enterprise Financial Services Corp Q1 FY2020 Earnings Call

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 during these unprecedented 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 be a quarter that will soon not be forgotten. For our EFS team, it was a quarter that showed the financial strength and resiliency that we built over the last several years, along with 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 revenue margin and had a stable efficiency ratio compared to the linked quarter. Our loans and deposits were strong. Loans grew by $143 million or 11% annualized, and the deposits grew $219 million or 15% annualized. In response to uncertain economic conditions, we were proactive and prudent with our provision for credit losses, adding $22 million to our 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 go into specifics for the quarter, but you should know that I am particularly pleased with these results amid the rather large provision that I mentioned earlier. As it relates to credit quality, we have done all the work analyzing certain portions of the portfolio. Doug will speak to what we know currently but we will obviously know more about the resiliency of our growing portfolio in 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, 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-person meetings to virtual, and ultimately instituted a work-from-home mandate well ahead of restrictions by officials in our markets. I'm glad 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, making over 5,000 calls to clients and prospects over a three-day period to understand their needs and take the first steps in helping them with their current and upcoming requirements. Earlier, I mentioned our careful consideration of our associates that we have at EFSC. Slide 4 provides some perspective on what we've accomplished. All these measures are aimed at maintaining and improving our culture of working 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 on our commitment. Our clients are our top priority and we believe that taking the best care of them now will ultimately drive the greatest long-term value for our shareholders and other constituents. We've taken the implementation of the programs seriously and occupied both the government and our regulators in our role as a financial partner to get paychecks in the hands of 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 pertinent statistics around the Paycheck Protection Program, but you need to know that executing this plan has been especially rewarding for me, as I've witnessed the incredible dedication of our associates, combined with the entrepreneurial DNA of our company. We're also working with clients on corporate loan deferral strategies, the details of which Doug will comment on. Our relationship managers are not just speaking about the next eight weeks; they are meeting their clients to discuss the multiple phases that lie ahead, how important cash and capital will be in responding to the changing environment, and helping them see opportunities to improve their businesses over the next several quarters. Our history shows that out of crises come opportunities. The next several quarters will be no different. We'll stay focused on 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 our mission of 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 these recent times. Scott?

Thank you, Jim, and good morning. As 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 accessed lines for additional working capital at modestly higher levels, with increased usage of roughly $40 million versus the prior quarter end. Slides 9 and 10 break down the change in loan balances by category and business unit. Commercial real estate 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 represents steady activity on projects originated over the past three or four quarters. St. Louis's 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 see a steady flow of new project opportunities in the affordable housing business, which was further bolstered this quarter with some refinancing. We were 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. Year-over-year, the deposit portfolio is up 8%. Growth in our commercial and business banking lines continues to be the main driver here. Deposit loan impacting our portfolio mix as DDA remains 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 particularly 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 executed well by reaching out proactively to large depositors, shifting the conversation from rate to financial strength and service. This type of proactive client communication is a theme that 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 their concerns and express our support. The takeaways from these conversations are helping us develop unique marketing content and analyze our portfolio based on the risks and stress points identified. At a high level, we are hearing several things. Certainly, revenue continuity is at the top of the list. The unknown duration of the shutdown 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 manifests itself in a relatively modest percentage of our business clients requesting deferred payments, as Doug will address in his comments. The demand for most of our manufacturing clients remains strong, although labor shortages due to illness, childcare needs, and mandatory shutdowns are creating significant challenges for executing orders. For manufacturers and distributors, supply chain issues are prevalent, and internationally dependent companies are running out of inventory. Other key points include stalled 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 specifics regarding key sectors and other aspects of the credit process. At the core of the PPP program outlined on Slide 12 was executed by experienced professionals from the sales, operations, and credit side of our organization. As the bank builds on serving private businesses early on, we made a decision to manage this process internally and to commit significant resources. Our existing partnerships and 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 over 1,500 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, which Keene will further detail. Taking a more focused look at where the portfolio can be most impacted by the economic slowdown, Slide 13 shows that 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 economically 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 to working with our clients, particularly 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 loan-to-value of 64% and personal recourse of 98% of the portfolio. In our segment stress testing, it was determined that 88% of the loans would be serviceable 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 being average per 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 is based on 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 clients 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 travel and shelter-in-place restrictions. We have responded to the needs of our hotel clients through our alternative 90-day payment deferrals and the funding of much-needed PPP loans. The average existing hotel loan size is $4 million and the weighted loan-to-value is just under 61%. 86% of the portfolio includes personal recourse to the owners. This is largely due to typical SLAG related 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 provided credit directly to producers. Rather, our $140 million in exposure, as shown on Slide 17, is largely to end-market convenience stores, fuel wholesalers, and railcars used for transportation of wells, as well as some manufacturing companies that sell products directly to the oil and gas industry. And finally, on Slide 18, our $168 million Ag portfolio is well balanced between crops, primarily corn and soybeans, cattle, and contract operations with minimal exposure to dairy. We have a seasoned team of bankers who are very well known and respected in the agriculture communities we serve. 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 recent announcements of temporary shutdowns at largescale 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. 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 through 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 were $0.48. Total revenue compared favorably to a seasonally strong fourth quarter and is solidly given for 2020. Net interest income added $0.03 of earnings per share in the linked quarter due to continued average asset growth as well as an 11 basis points total net interest margin expansion. Core net interest income was essentially stable, while incremental accretion added $0.02 per share. We would have expected fee income and expenses to compare unfavorably to the fourth quarter due to 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, allowing 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 options, and $0.8 million of discount accretion related to prepayment on core PCI loans during the period. Overall margin was stable during the quarter prior to the actions taken by the federal reserve in March. Portfolio loan yields were lower versus the linked quarter primarily due to interest rate resets during that 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 during the period. Our cost of funds declined 18 basis points from the loan quarter, benefiting from higher average customer deposit balances and lower levels of wholesale funding and CDs. Core non-interest-bearing demand deposits made up 23% of total deposits, and deposits excluding broker time deposits increased by $130 million on average compared to the fourth quarter. The cost of interest-bearing deposits was nine basis points lower, while money market rates were lower by 30 basis points. The reduction in deposit rates was primarily due to actions taken in response to the Fed’s funds rate and other short-term market rates during the quarter. Wholesale funding costs also declined during that period for similar reasons. The rapid change in the economic environment and the decline in interest rates at the end of the quarter placed downward pressure on our net interest margin in the upcoming periods. With strong loan and deposit growth linked quarter to balance sheets, our assets are sensitive to approximately 60% of loans 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 have also experienced deposit inflows and are 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 the loyalty 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 prosperous and challenging times. We are committed to this principle, which we know can help us build long-term value for all constituents. Regarding liquidity, our position remained strong. Our focused efforts to generate core deposits provided funding for loan growth in the quarter. The investment portfolio is expected to generate $40 million to $50 million of cash flow this quarter, and we have 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 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 our credit results. First, upon the adoption of CECL on January 1, we elected to remove some PCI loans from pools to account for them 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, 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 that are individually accounted for and 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 the absolute balance of the classified loans noted above. The day one coverage improved by more than 50 basis points, resulting in the 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 Q1. With that said, we recorded a provision for credit losses of $22.3 million due to the rapid deterioration of the economic forecasts associated with current conditions, resulting in allowance coverage increasing another 35 basis points to 1.69%, with the reserve for unfunded commitments including 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 continue to see the expectations for conditions worsen, and in that case, we are well-positioned to continue to proactively provide for future potential credit losses. I can reiterate that although we are coming through the portfolio talking to customers and working hard to identify issues, 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 market indices remain depressed from 2019 levels. 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 in 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% for the year compares favorably to a year ago and presents an encouraging start to 2020. We continue to work hard to ensure we're spending prudently in this environment, but we are also committed to supporting our associates and their families 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 we are successfully and safely serving clients while collectively working through this challenge. I'll conclude my remarks on Slide 27 regarding our capital levels, which remain 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 evaluated our capital position using adverse economic forecasts and our historical loss experience through downturns. Under these scenarios, we projected our capital levels 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 stood at 8.4% at March 31, down from 8.9% at the end of 2019. This trend was due to the impact from the adoption of CECL and building our credit reserves in the quarter, totaling $35 million or 48 basis points on our TCE ratio. Our significant level of capital, strong liquidity, and strong pre-provision income support the overall strength of our balance sheet. I want to conclude by saying that it’s clear to us that we value our relationships with customers and are utilizing the strength of our talent, balance sheet, and overall financial strength to support them. We are more focused than ever on ensuring we meet long-term financial decisions 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 exemplary expense management, this will allow us to serve our clients and our shareholders over the near and long term. We will continue to believe in our proactive and client-focused approach to create the best 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.

And our first question will come from Jeff Rulis with D.A. Davidson.

On the capital, in terms of doubling those loan-loss reserves, where does that capital come from? Any thoughts on the TCE comfort level here, given where we are today?

Jeff, this is Keene. I think we're extremely comfortable with our capital levels. Particularly, when you look at the confluence of factors here in the first quarter, you had day one adoption of CECL, a proactive day two provision, and we were also buying back some shares in the quarter. So we have 8.5% TCE, and I feel like that's strong. It's worth noting that regarding CECL, based on regulatory relief and phasing, PCE is one indicator, but all other ratios from a regulatory perspective remain strong. I think the earnings profile serves as the first line of defense on potential future provisions that we may need to take. I feel good right here with the 8.5% level moving forward. We've been stable, and we've paused on capital management, so I expect that the capital position will be sufficient here as we can have a few quarters like this and still maintain an $0.18 dividend moving forward.

Thanks. On expenses, I know you didn’t provide guidance, but with all the moving pieces in Q1 and the latter part of the quarter, do you think this level of expenses is a good baseline, or should we expect it to come in lower or increase in Q2?

Jeff, I would just say normally first-quarter expenses are high due to seasonal payroll taxes and a myriad of items, including merit increases in the first quarter. We do have that normal trend, but I would say that the environment has given us some natural mitigation. Additionally, we didn’t see significant incentive accruals in Q1. I would say the first-quarter level here felt pretty comfortable, and it included maybe a month of more extreme expense management. There are some variabilities, though; we’re definitely going to see some more professional fees as we consult on specific credits or challenges in this current environment that we haven't seen before. Overall, there’s nothing I would say would materially alter our expectations.

Thanks, and one last thing to clarify: in Doug's comments about the average PPP balance of your approved clients, was that $1.25 million, or did it get better?

Yes, Jeff, you're right, it’s $75 million total for the portfolio of clients with an average of $1,250,000.

And our next question will come from Andrew Liesch with Piper Sandler.

Just some thoughts on the margin here. The industry deals look pretty favorable on the transfer pricing side?

We've got, let me find my page here, I apologize. We have $3.2 billion in total variable-rate loans, and $1.2 billion of those loans are essentially 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. On the provisions, just trying to get a sense of the macro. Looking at multiple reversals, is there something we should expect later on in the quarter that could influence this?

Let me try to give you as much flavor as I can there, Andrew. We felt like it was important to use the most updated information we had concerning our economic forecasts, and that blended both downside and upside scenarios. Let's just say our base forecast includes nearly 9% unemployment in the near term and approximately 5% decline in GDP, which extends out 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 into the forecast and working that into the results early was the best approach. It allows us to be positioned either to add to that or take action to mitigate borrower stress points until we get clarity. We felt like this was the right posture and the right start to use in those updated forecasts, which I think are clearly a little more conservative than what we could have taken.

That's helpful. I will step back and take a question.

We'll now hear from Michael Perito with KBW.

Hey guys, hope you're all doing well. Thanks for your time. 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. Could you elaborate on that? What assumptions are you making regarding the businesses compared to those that are seeking some form of intervention or forbearance? What kind of assumptions are you making in terms of their ability to return to full operation later this year?

Let me handle that at a high level, and then I'll have Doug or Scott elaborate. The idea is that much of the relief has been to provide initial liquidity. When we've been looking at the deferrals and such, it's really not an income event. Certainly, there is a collectibility element that is currently uncertain and depends a lot on how people get back to work and the speed of recovery—all factors of which we are not in a position to forecast. Our provisioning level is based more on broad-based economic information and potential impacts across the portfolio. We think our approach is conservative, and we are monitoring how certain sectors, businesses, and industries perform as it relates to our portfolio.

This is Scott. I wanted to add that the diversity of our portfolio serves as the first barrier against risk. To Doug's point, we try to assess high-risk sectors by analyzing liquidity, loans to values, and guarantor support to determine how long they can weather the storm. The key issue remains the duration of the crisis; that’s the concern that weighs most on everyone.

Got it. Also, I know it's still early in terms of transactions, but have you seen any updated data points regarding how real estate prices in your markets are trending since this pandemic started? Is it still too early to comment on that?

It's early from a value standpoint. There are only minor cash flows affecting valuations. Hospitality-related properties are certainly impacted, while those in commercial real estate have a bigger buffer. I don’t think we've seen an overwhelming amount of commercial real estate taking advantage of the deferrals, but I'll hand it over to Doug for any additional comments.

No, I haven’t seen deferrals specifically in commercial real estate. We’ve entered very few forbearance agreements, and the deferrals have mostly been accommodated to developers seeking to preserve liquidity during this temporary cash crunch. We are mindful of potential long-term impacts COVID-19 may have on demand for certain office and retail spaces. We're watching this but it's still too early to determine the impact on current loan-to-values.

Thanks for the added detail and guidance; I appreciate it. Lastly, can you confirm the details on the aircraft portfolio? I believe that none of the aircraft are used to generate revenue, correct?

Yes, the bulk of that portfolio, or the vast majority, is taken in on trades of essentially short-term positions. Less than 10% of the portfolio is generating revenue; that is not the focus of this business.

And we'll now take a question from Brian Martin with Janney Montgomery.

Thanks for the added insights. I have a couple more questions: Do you have total deferrals to share in the portfolio? As of March 31, looking past that, what do the deferral numbers look like with the most recent data?

Yes, Brian, it’s Scott. The deferrals are mostly 30- to 90-day P&I deferrals. Some borrowers will take shorter than 90 days. The total impacted is less than $500 million of the portfolio; approximately 110% fewer than 400 loans are in deferral.

Okay, that's helpful. What about the PPP program? Can you walk us through its influence on the margin? Do you anticipate it having fee income, and how are you timing revenue recognition as we model this?

Yes, let me add one note: on that $0.5 billion of principal balances, the loan amount requested for deferral is not considerable. We’re only talking about $20 million to $25 million of total payment deferrals requested. As for PPP loans, we estimate potential fee income to be around $16 million to $18 million, along with a modest mix spread once we fund those loans. We anticipate some loans being forgiven or a larger amount paid off in the second to third quarters, with some portion possibly stretching longer. Our main focus remains on executing and supporting our clients, which we feel we've accomplished efficiently.

Okay, so it’s fair to say that in the second half of this year, you might anticipate recognizing 70% to 75% of the total revenue, with the remainder spread across the quarters, correct?

Yes, I would expect that. With the intention of the plan being to keep people employed, we're hopeful that 75% of mortgages will meet our intended goals, so they would be forgiven.

Regarding margin: with the rate cuts and your proactive funding efforts, how much of the 150 basis point rate cut impacted the March margin? How should we think about the core margin moving forward in the near term?

I'd say we generally expect to mitigate some of the effect, but the rapid influx of liquidity into the banking system is a significant factor right now. While I would hesitate to make projections due to the unpredictable nature of these circumstances, I can tell you that March margin was lower than in January and February, but our Q1 results look quite strong overall. I believe we are on track for a successful year, barring these prevailing circumstances.

That’s helpful. Just a housekeeping question about the tax credit line. You’ve referenced seasonality; it appears the first quarter was seasonally strong, but do you foresee any volatility in the next couple of quarters?

I would have said six weeks ago that I would expect it to be more consistent, but still probably weakest in Q2. The predictability of the business is now a challenge, mostly regarding our ability to source credits rather than to sell them. We anticipate some activity in Q4, but that depends a lot on interest rates and the subsequent impact of LIBOR.

Finally, given that many of your clients haven't taken deferrals, which exposure categories do you find most concerning from what you’ve seen?

I think liquidity to weather the downturn is the prevailing theme here across industries. The good news is that deposit inflows and the rate at which our clients accepted deferrals indicate they’re in decent shape, but liquidity remains a key concern.

Thank you, and I'd like to reiterate the fact that standard seasonality applied to deposits this year due to tax payments being pushed back; will that inflow impact you in Q2?

I can't give you a definitive answer as to how this may play out. What we've observed is an uptick in lending to clients through the PPP program, resulting in deposit accounts; clients are also borrowing from other sources. We continue to see a flight to quality, and our balance sheet is growing as clients are putting more cash on it due to their cautious outlook.

And there are no further questions in the queue at this time. So I'll turn things over to our speakers for any additional or closing remarks.

This is Jim, and I just want to thank everybody for their time today and your interest in our company. Please stay well, and I 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.