Horizon Bancorp Inc /In/ Q1 FY2020 Earnings Call

Good morning, everyone and welcome to the Horizon Bancorp Conference call to discuss financial results for the three months ended March 31, 2020. Before turning the call over to management, I would like to remind everyone that today's call may contain forward-looking statements related to Horizon that may generally be identified as describing the company's future plans, objectives, or goals. Such forward-looking statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For further information about the factors that could affect Horizon's future results, please see the company's most recent annual and quarterly reports filed on Forms 10-K and 10-Q. You should keep in mind that any forward-looking statements made by Horizon speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and management cannot predict these events or how they may affect the company. Horizon has no duty to, and does not intend to, update or revise forward-looking statements after the date on which they are made. To the extent non-GAAP financial measures are discussed on this call, comparable GAAP measures and reconciliations can be found in Horizon's April 29th news release, which is available on its website at horizonbank.com. Horizon also published an investor presentation on Wednesday afternoon, and it is available on the company website with information that will be addressed this morning. Representing Horizon today is Chairman and CEO, Craig Dwight; as well as Executive Vice President and CFO, Mark Secor; President, Jim Neff; and Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn. At this time, I would like to turn the conference over to Mr. Dwight.

Thank you, Grant and good morning. We appreciate the listening audience joining us for Horizon's first earnings call. Horizon once contemplated the initiation of an earnings call in late 2020; however, you can imagine the COVID-19 national emergency accelerated our plans. Horizon issued its first quarter earnings release and supplemental deck on Wednesday, April 29th. Our comments today will closely follow the supplemental slide deck with our focus on Horizon's response to COVID-19, first quarter financial results and other key areas of operations. At the conclusion of our comments, we'll open up the call for a question-and-answer session. Now to discuss Horizon's response to COVID-19, this national emergency moved quickly. The first COVID-19 case in the United States was reported on January 20th and soon thereafter, on January 31st, the United States Secretary of Health and Human Services declared a public health emergency. Then on March 13th, the President of the United States declared a national emergency concerning COVID-19. We are now in day 48 of this national emergency. Amazing how fast things have gone. Horizon Bank's team response to the national emergency has been phenomenal. We mobilized our management team in February to review our existing pandemic plan, including preparation for the safety and well-being of our employees, customers and community. This early review of our pandemic plan helped our managers to better prepare for what was to come. The duty to provide a safe work environment for employees and customers is always paramount in our discussions. On March 12th, we implemented a business travel ban for all employees. Shortly thereafter, on March 19th, we limited access to our offices and lobbies to by appointment only. And effective March 24th, the Governors of Michigan and Indiana implemented a statewide emergency order to stay at home. The response by our employees during this national emergency has been incredible. This is best evidenced by the fact that all offices and departments remain open for business and are fully staffed. Horizon Bank's quick implementation of social distancing with approximately 42% of our employees working at remote locations; the quick expansion of the number of call center locations from three to four to better serve our customers and to handle the increase in call volume; the expansion of our interactive teller machines, also known as ITMs to provide extended banking hours for our customers; and the long hours put forth by our lending and operational teams to manage record mortgage and commercial loan volume. So thank you to all of our employees for their amazing work to serve our customers. On Page 5 of the supplemental slide deck, you will see a slide that states Indiana and Michigan are on the right side of Chicago. This has always been one of my favorite slides in our investor deck. Prior to COVID-19, we were experiencing population growth related to Illinois residents looking to move to Indiana and Michigan to avoid high taxes and other burdens associated with living and doing business in Illinois. Post COVID-19, our hospitals, especially those located along the border of Chicago, are seeing the large influx of Illinois patients. In addition, second homes owned by Illinois residents and located in Indiana and Michigan, are fully occupied as they seek safety from dense urban living. Being located in the right side of Chicago is even more relevant today as people seek safe environments and opportunities to lower their cost of living. Horizon Bank is located on the right side of Chicago. Slide 6 reflects our current footprint in the States of Indiana and Michigan. And similar to the rest of the United States, our markets are experiencing a rise in COVID-19 cases. We are hopeful that the curve will start to bend, and our governors will continue to move forward with plans to reopen. As of today, it appears that Indiana will reopen before Illinois and Michigan. Horizon is well positioned going into this national emergency. In addition to solid earnings, strong liquidity, and being well capitalized, which you will hear more about later this morning from our Chief Financial Officer, Horizon's leadership team has collectively more than 200 years of banking and related field experience. We have managed through multiple recessions. Our Board of Directors provides sound oversight. As a group, they are well diversified in Board tenure, demographics, experience, and skill sets. The Horizon team has completed 14 acquisitions and 11 de novo market expansions over the past 16 years, and therefore we know what it means to work hard, to get the job done, and to adapt to ever-changing conditions. Slide 9 exhibits Horizon's customer-centric and multichannel delivery systems, which have been resilient during this time and have helped deliver to our customers the level of service that they've grown to expect even during the current stay-at-home environment. Slide 10 speaks to the strength of our non-branch delivery channels, which have been an integral part of our long-term strategic plan for some time. As of March 31, 2020, 68% of our accounts are active users of our online and mobile banking platforms. Not surprisingly, during the first quarter of 2020, Horizon's digital transactions and call center volume increased by 35% and 32% respectively for the fourth quarter of 2019. Horizon's branch transactions continue to decline due to customer migration to digital banking channels and Horizon's efforts to consolidate offices. To conclude my comments, I'd like to focus on Slide 11 titled multiple revenue streams diversifies risk. Horizon has included this slide in our investor presentation since the Great Recession. This slide represents management's philosophy to diversify revenue streams to manage concentration risk and balance revenue during counter economic cycles. Today, Horizon's mortgage origination volume is robust and offsets headwinds related to pressure on net interest margin and slow loan growth. In addition, Horizon's balance sheet mix of investments, consumer and mortgage and commercial loans further diversifies credit risk and helps to manage net interest margin during a period of declining interest rates. Horizon is well positioned going into this state of emergency. Now to give you an update on our first quarter earnings results and liquidity management, it's my pleasure to introduce you to our Chief Financial Officer, Mark Secor. Mark?

Thank you, Craig. I want to briefly summarize some of our first quarter results, which we believe underscore the strong position we put ourselves in headed into the current environment. For those of you following on our slide deck, I will begin on Slide 13. As many of you know, we believe an important measure of our profitability is core net income, which excludes gain on sales investments and BOLI death benefits. Core net income for the first quarter was $11.2 million, down from the trailing fourth quarter of 2019, primarily due to the $8.6 million of credit loss expense. Core diluted earnings per share was $0.24, down from the fourth quarter of $0.41 per share. Pretax pre-provision income was $21.8 million for the first quarter compared to $22.8 million for the fourth quarter of 2019. This decrease was primarily due to one less day in the first quarter and a slight drop in the margin, along with an increase in noninterest expense. The core net interest margin declined 5 basis points during the first quarter compared to the fourth quarter of 2019. The stated margin of 3.56% was down 2 basis points due to higher purchase accounting adjustments recognized in the first quarter. The drastic rate cuts during the quarter created a need to react fast to reduce funding costs as adjustable rate assets adjusted down. Our response was to drop deposit rates to follow the rate cuts. While we did not predict the speed or the magnitude of the Fed's March policy actions, we were ready to move rates quickly. This was due to work done in 2019 to align deposit products, interest plans, and pricing data to be prepared for something like this. Within a few days of each rate cut, we were able to lower deposit rates to better keep up with the asset pricing adjustments. Currently, our transactional deposit rates are at levels they were post the Great Recession when the overnight rate was where it is today. Noninterest income for the first quarter was stable compared to the fourth quarter, but service charge and interchange fees were down due to both typical seasonality and some impacts of the shutdown, and we experienced $322,000 of impairment on the mortgage servicing right asset. Higher gain on sale of mortgage loans helped to offset the lower fee income and impairment. Noninterest expense was higher in the first quarter compared to the linked fourth quarter of last year. Employing merit increases for 2020, seasonal increases in facility maintenance, additional investments in IT, additional investments in online customer service, new consulting services, and accruing for the FDIC insurance expense all contributed to the increase. The increases were partially offset by a reduction in the 2020 bonus accrual based on the current level of earnings. Slide 14, managing net interest margin over time to keep it stable through various interest rate cycles is key to maintaining earnings. Pricing disciplines in place allow for quick reaction as the market rates move on both assets and funding to help manage the margin in times when the market is more volatile. As we remain in this low rate environment, there will be pressure on asset yields as new and term products will be at lower rates. However, to partially offset this, additional deposit repricing will come from the time deposits and long-term debt roll-off. Slide 15, the interest rate-bearing deposit rates have been lowered to reflect the current overnight discount rate. The average cost of interest-bearing accounts for the first quarter was 53 basis points. To show the quick reduction to these costs, for the month of December 2019, the average cost was 61 basis points. For the month of March 2020, it was 38 basis points as rates were lower during the month. As stated earlier, at the end of March, interest-bearing accounts were priced at rates post the last recession. 24% of our deposits are in CDs. The opportunity for additional repricing will be in this portfolio over the next several quarters as CDs mature. Slide 16, Horizon maintains a strong capital position going into this next period, significantly stronger than in 2007 and 2008, even with the implementation of CECL. We have paused on share repurchases, and we consider a possible capital raise for future optionality in these uncertain times. We are committed to maintaining the quarterly shareholder cash dividend. In fact, we currently have cash at the holding company to sustain 10 quarters of fixed costs, including dividends. The management has been diligent in performing capital stress testing to ensure Horizon maintains adequate capital that remains strong in a range of scenarios from mild to extreme. This is done in order to determine what action plans would need to be taken in these scenarios. Slide 17, liquidity and liquidity management are key to withstanding an economic downturn. Horizon has a strong liquidity position, starting with a $1.1 billion investment portfolio. This portfolio is 20.6% of total assets at March 2020, higher than the peer median of 15.1%. Having access to liquidity on a daily basis to manage cash needs is part of liquidity management. Currently, approximately three fourths of our municipal securities in the investment portfolio are pledged to the Federal Reserve Bank discount window for immediate access as the FRB is the only institution that accepts municipal securities as collateral. With Fed fund lines available for borrowing at the FHLB and the pledge of municipal securities, Horizon currently has immediate availability of approximately $800 million of additional liquidity. In addition, we are participating in the FRB's program to fund PPP loans as we originate. The security portfolio is managed for liquidity and holds high-quality investments. The largest segment of the portfolio are municipal securities, which are comprised almost entirely of general obligation or essential service bonds. The remaining investments are federal agency products, except for a small portfolio of highly rated corporate products. Slide 18, as the details of the CARES Act and the potential delay to CECL were discussed, a lot of debate and discussion about what was best for the company took place regarding the implementation of CECL. We were ready to implement CECL but also had our prior incurred model prepared. Based on the final guidance, we determined to move forward with the planned implementation of CECL. The severity and the breadth of the pandemic was not fully known at the time of adoption, but economic forecasts were not positive. So at January 1st, our modeling determined the need for a day one charge to equity of $19.8 million. Having a significant portfolio of acquired performing loans, it created 37% of this charge and the negative economic outlook at the beginning of the year also contributed. We also transferred $2.8 million of acquired loan discounts to the allowance from purchased credit impaired loans that are now classified as purchased credit deteriorated loans. This was a 128% increase to the previous allowance of $17.7 million. Now moving forward to the first quarter, the credit loss expense, which the knowledge of a global pandemic and shutdown had to be included in the model. In a short time, analysis of our loan portfolios and those loan categories expected to have the most immediate impact were looked at in detail. More on this will be discussed later in the call. Based on moving our model's forward-looking calibration to current highest levels and additional allocation for specific risk categories, the credit loss expense in the first quarter was $8.6 million. With these allocations, the allowance for credit loss was at 1.3% of total loans at the end of March. And with the additional acquired loan discounts for performing purchase credit, the allowance for credit loss and acquired loan discounts to total loans was at 1.74%. For some additional comments on our strong asset quality as well as Morgan and Consumer Banking, I would like to introduce our President, Jim Neff.

Thank you, Mark. Good morning. I'd like to spend a little time talking about Horizon's consumer and mortgage portfolios. We feel we have a strong and conservative credit culture. Overall, these portfolios are expected to perform relatively well. The consumer is being supported by the government with stimulus checks and state and federal unemployment, averaging $900 a week, along with mortgage and consumer forbearance and extension programs. The level of deterioration will depend on the duration of the pandemic and lingering impacts it will have on our economy. If you turn to Slide 20, I'd like to talk about the characteristics of our consumer portfolio. We are predominantly a secured lender, with less than 1% of our consumer portfolio being unsecured. 95% of the portfolio was considered prime credit, with over 80% having a credit score of 700 or greater. Only 5% of the portfolio was considered subprime with a credit score less than 640. We rescore the entire consumer portfolio on an annual basis. This data is based on the customer's most recent rescore. On the equity side, we limit the CLTV on home equity lines of credit and equity term loans to 89.9%. We only lend within our branch footprint in the states of Indiana and Michigan. We had strong asset quality when the crisis hit and as of March 31st, delinquent loans over 30 days were just under half of 1% at 0.49%. NPAs were at 0.60%. We are receiving requests for payment extensions, and the average consumer extension is for a 60-day period. Through April 24th, consumer extensions represent 2.6% of our portfolio balances. Turning to Slide 21, our retail mortgage portfolio, the majority of our new mortgage production is sold on the secondary market, roughly 70% year-to-date. The majority of our portfolio is owner-occupied property and located within our branch footprint. Rental properties total less than 1% of the overall portfolio. Our portfolio loans are underwritten to Fannie Mae guidelines and require full documentation, including verification of employment, income, and assets. In any loan-to-value that exceeds 80%, we require private mortgage insurance, with the exception of our specialty doctor program and some CRA products. 97% of the portfolio is considered prime with credit scores of 670 or greater; and 71% have a credit score of 700 or greater. With only 3% of the portfolio having a score less than 670, which the industry considers to be a nonprime loan. We have taken steps to tighten underwriting guidelines where warranted and made pricing adjustments to compensate for increased risk. Our end investors continue to tweak their underwriting guidelines, which Horizon immediately adopts. As with the consumer portfolio, the mortgage portfolio also had a strong asset quality at March 31st, with delinquent loans over 30 days at 0.18%, NPAs were at 1.37%, and other real estate owned six properties totaling $336,000. We are offering deferments for our mortgage customers an average of 90 days for portfolio loans and up to 180 days for loans that we're servicing for others. Through April 24th, mortgage deferments represented 4.5% of our portfolio balances. Those are the highlights of the consumer and mortgage portfolio. And now it's my pleasure to introduce Horizon's Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn.

Thank you, Jim. Good morning, everyone. I'd like to share some insights into Horizon's commercial loan portfolio and our response to COVID-19. Horizon is a community bank providing a range of commercial loan products through a skilled team of lending professionals across Indiana and Michigan. We focus on building relationships, primarily as a secured lender, and we usually require recourse from business owners or project sponsors. Our commercial portfolio is diversified in terms of type and geography, with 59% of our loans coming from Indiana and 40% from Michigan, while the remaining 1% is from Columbus, Ohio. In Indiana, our largest market is Indianapolis, followed by Northwest Indiana, Lafayette, and Fort Wayne. In Michigan, Kalamazoo leads, followed by Grand Rapids, Midland, and Lansing. We have strategically concentrated our loans in larger growth markets to aid recovery post COVID-19. In broad categories, non-owner occupied commercial real estate constitutes 54% of our commercial loans, while owner-occupied real estate and C&I portfolios make up 46%. If you look at Slides 23 and 24, you’ll see more detailed views of our portfolios. The largest segment of non-owner occupied loans is multifamily, followed by retail, hotels, and office spaces. In the owner-occupied and C&I portfolios, no category exceeds 5% of total commercial loans, reflecting our strong diversification. If you refer to Slide 25, Mark Secor outlines our CECL adoption and first-quarter credit loss expense. I want to add insights into our special allocation of $7 million, mainly directed toward hotel and restaurant portfolios, which have been significantly affected by COVID-19 measures. Our hotel portfolio stands at $135 million, which is 3.6% of our total loans. Despite the challenges, we maintain strong metrics in this area, with 31 financed properties across 19 relationships, all of which involve experienced operators. The loan-to-value ratio for this portfolio is approximately 50%, and it consists mainly of select service properties close to interstates. Borrowers have been communicative, and we conduct weekly analyses using their breakeven data. Many clients have received modifications, and they have also accessed the SBA PPP loan program. The key challenge ahead is the duration of the executive orders and the timing of reopening. Our restaurant portfolio totals $65 million, just under 2% of total loans. This includes $35 million to full-service restaurants and $31 million to limited-service establishments. The full-service segment features $7.5 million in SBA guaranteed loans and includes successful long-time operators with multiple locations. Limited service borrowers primarily manage recognizable national chains and have reported a 20% to 30% drop in weekly revenues, nearing breakeven. Historically, limited service restaurants have been the first to rebound. Our exposure in this category largely consists of numerous smaller loans to independent operators. Other categories under observation include non-owner occupied retail and residential multifamily lessors. We are supporting our clients affected by COVID-19 through two main initiatives: loan modifications and SBA payroll protection. We also continue to consider conventional loan applications from our borrowers. Most modifications—about two-thirds—are interest-only extensions, with the remainder as principal and interest deferrals, requiring borrowers to be less than 30 days delinquent at the time of extension. Seventy-five percent of our modifications target owner-occupied real estate and C&I portfolios, with the remaining 25% in non-owner occupied commercial real estate. Please refer to Slide 26 for our SBA PPP experience to date. In the first round, we processed over 1,700 applications amounting to $280 million, with more than 95% approval, and 75% of those were for $150,000 or less. We're participating in the second round of PPP, where demand has been lower with smaller average loans. I want to acknowledge the fantastic efforts of our employees who have been working tirelessly to assist customers and communities during this time. Horizon entered this period in a solid position with strong asset quality and a proven ability to face challenges. We will continue to act cautiously and follow solid banking practices while helping our clients recover from this unprecedented situation. Thank you for your attention, and now I'll turn it back to you, Craig.

Thank you, Dennis, for the detailed disclosures. Our last slide displays an isosceles triangle. At the pinnacle are employees, the most important aspect of any business. The next two points are customers and community. These three points surround the middle of the triangle that represents shareholders. At Horizon, we believe to deliver shareholder value that we must first deliver on the three points of the employees, customers, and community. If we do that well, we will continue to retain and build market share and brand awareness. A strong brand builds long-term shareholder value. In the near term and during this national emergency, our immediate focus is to support our employees, customers, and community. For the shareholders, it's about building and preserving tangible book value and protecting dividends. Horizon has a long history of uninterrupted dividend payments even during the Great Recession. Horizon Bank looks forward to adapting to the new norms, whatever they may be, as we prepare for the opportunities that will emerge from this national emergency. Thank you, and we'll now turn it back over to the moderator for questions.

Our first question will come from Nathan Race with Piper Sandler. Please proceed.

Hi guys, good morning. Hope everyone's doing well, and I really appreciate all the added disclosures in the slide deck. I was hoping to maybe just start on credit. You guys obviously performed fairly well relative to peers during the Great Recession between 2008 and 2011. So just curious as you guys look at the portfolio today and stress that, maybe what you guys kind of anticipate in a stress scenario, and I'd be curious to hear some of the underlying economic assumptions within that scenario going forward?

Nathan, thanks for the question. And everyone's doing well, thank goodness. In our CECL model, the econometrics that we use are U.S. leading indicators, Michigan and Indiana indicators, Chicago Fed Midwest Economy Index, and some other factors including the unemployment claims which we're looking at here in the March time period. Some people are comparing that to the Moody's 12 models they've issued. And Moody's is focusing primarily at unemployment rates, which is kind of a lagging indicator. Our model that we benchmarked over the last 50 years to other recessions has a directional alignment with the history of our economy. So we feel very comfortable with our econometrics. Regarding the portfolio, we feel good about the asset quality and the mix, the concentrations, but who knows what's going to happen and how long the stay-at-home orders are going to remain in place. That's a difficult question to answer going forward.

Understood, that's helpful. And just curious, just putting in context kind of what you're hearing from borrowers, I think Dennis alluded to some loan modification requests and I don't know if I caught the total number across the entire portfolio, if you have that. And then along those lines, just curious what the amount of C&I line of credit draws that you guys have seen recently, perhaps late in the quarter or thus far in 2Q.

Dennis and Jim can you talk about the modifications and I will talk about the C&I portfolio.

On the consumer and mortgage side, I highlighted in the slides, but on the mortgage overall, it was 4.5% of the portfolio. On the consumer, it was 2.6% of the portfolio. As far as line utilization on consumer home equity lines of credit and personal lines of credit, we have not seen any uptick at this point in time.

And regarding line utilization, it's been very limited. It's been flat with hardly any growth, both home equity as well as commercial lines of credit. Dennis, do you want to talk about the modifications?

Sure. On the modifications, again, I gave you a little bit of context from the standpoint of types of modifications, interest-only and painful payment deferrals. Our first line has been typically interest-only for 90 days. So across our commercial portfolio, we've granted $350 million in loans that have been modified. That represents 9.1% of our total outstandings for the bank.

What they set through, is it the 24th or what, April?

Yes, that's April.

So we're giving you a fairly current information, Nathan, April 24th, which may not compare well to other releases that have come out. Just anecdotally, I want to talk about the restaurants briefly here. We're seeing the mass migration into our market areas of the Illinois residents. And therefore, our restaurants are really surprisingly doing pretty well with the takeout/pickup orders, which was a pleasant surprise. It's an anecdotal comment though.

And this is Dennis again. Regarding commercial line usage, as Craig mentioned, during the first quarter, we did not see any increase in our December line utilization. This has been somewhat surprising, and we are monitoring it closely on a daily basis.

Yes. And our borrowing base lines of credit were in sync. We had one margin account that was out of sync; they brought in additional collateral, and now they're back in alignment with the borrowing base from the margin accounts. So far, the tracking has gone well. We did have one construction loan that we elected not to continue to build out with the borrower's agreement. They just broke ground, and we thought it best not to have an undeveloped property. So that was a mutual agreement.

Okay, great. I will step back and appreciate all the color. And I can particularly speak to you going into Indiana these days from Chicago just given all the shelter-in-place requirements here as well. Just one of your points Craig. So I appreciate the color. Thanks again, guys.

Thank you Nathan.

Our next question will come from Sam Solan with Retail. Please go ahead.

Thanks for taking the call and glad to hear that everybody's safe and feeling well so far. Initial question here is it looks like the liquidity position is quite strong with around $1 billion in securities and cash. On Slide 16, you mentioned potentially doing a capital raise. I was wondering if you could provide some more color around the use of funds and whether that would be a debt or equity raise.

Yes Sam, thanks for your question, and I hope your family is doing well too. We are considering and exploring a capital raise, which would likely involve subordinated debt or noncumulative preferred shares. Currently, we have no intention of issuing common stock at this pricing level, as you might expect. We're still uncertain about whether we will proceed with it, but it is under consideration as we evaluate our options. I believe that with additional capital, we would have more flexibility to navigate out of this recession, which could be advantageous for us. Additionally, it would help us manage the uncertainties arising from the ongoing COVID-19 national emergency. While we have not made a decision yet, we felt it was important to share that it is a topic of discussion. We regularly review our capital structure at our Board meetings, and we see the potential need for more subordinated debt and/or noncumulative preferred shares. Thank you for your question.

That makes sense. I appreciate the update. One quick follow-up, along the lines of the stock buyback program, obviously, a good chunk was repurchased in Q1. So a pause with this uncertainty seems to make sense. Do you have any feel, given all the uncertainty what the timeline might look like on getting the buyback program back up and running?

No. With the additional capital, it would certainly give us more flexibility as part of the options available due to the surplus capital resulting from this national emergency. We will continue to assess this regularly. However, at this moment, we cannot provide an estimate on the reopening. Thank you.

Our next question will come from Brian Martin with Janney Montgomery. Please go ahead.

Hey, good morning guys. Glad to hear you are well.

Good morning Brian.

Hey Mark, could you discuss the impact of the rate cuts? I appreciate the information about funding costs decreasing and the efforts to get those repriced. Could you explain the overall effect of the rate cuts on the core margin, what portion occurred in the current quarter, and how that impact might carry into the second quarter?

Thank you, Brian. In our remarks, we mentioned that in March, our funding costs were at 38 basis points. This figure reflects a mid-month review and some adjustments during that period. To provide some context, our funding costs after the recession in around 2012 were between 17 to 19 basis points for our entire transactional portfolio. This is the level we were operating at back then. Additionally, it's important to note that there will be a delay in the benefits from CDs, as well as in the repricing of assets as they come due or with new products being introduced.

Brian, just to give you little color, I'm extremely impressed with how the funding committee, treasury management team led the market down. There were two rate cuts by the Federal Reserve Bank in March, the 50 then the 100 basis point reductions, and we followed both like the next day. So our funding committee, treasury management team were very active, while the other banks were lagging within our markets. So they did a good job.

That's helpful. Mark, I have one last question about the margin. If the core margin was down about 6 basis points, can we assume that it reflects about a third of what we expect, or is it possibly a bit less considering the measures you're taking to address that on the funding side? Do you think that two-thirds of that might be realized in the fourth quarter, but some of it is being mitigated due to your efforts on the funding side?

Yes, I think your assumption is right on the funding side just based on the 61 basis points for the quarter.

Okay, perfect. And then just two last things about the fee income in the quarter. You mentioned some impact from COVID. Do you anticipate that this will continue, and which areas do you think will still be affected until we have more clarity on how long this will last? I believe you mentioned service charges and possibly another area that experienced a decline, perhaps wealth management?

Yes, I think you're going to see it in overdraft just because there's going to be less activity. There's no people out shopping. So that's one area I think we're going to see it and in interchange income just because there's going to be less activity happening. That's just our assumptions on what we saw, just a little bit of it coming into the first quarter.

Okay, so a little bit more to come possibly.

Yes.

Sure. Can you provide some insights on how you expect the PPP program to perform and how it might impact the P&L in the upcoming quarters?

Brian, our average loan size falls between $150,000 and $200,000, and our average fees for the quarter are approximately 3.6%. We will spread those fees over the 24-month duration of the loan. Payments on our loans begin after a six-month interest moratorium, so they will be amortized from the seventh month to the 24th month. It seems that most banks have implemented a similar amortization schedule. We are not aware of any significant advisory fees that would affect this currently. We continue to monitor this closely. This program is evolving daily, so we will have a clearer understanding as we progress through the quarter. Thank you.

Okay, yes thanks. I got it, appreciate the color guys. Thanks so much.

Our next question will come from Nathan Race of Piper Sandler. Please go ahead.

Yeah, hi, thanks. Just a couple of follow-up questions. I apologize if you guys touched on this in the prepared remarks earlier, but just the uptick in NPLs in the quarter, any particular color on that front, albeit relatively small?

It was indeed a minor increase overall, primarily seen in the commercial loan portfolio. There were some changes both positively and negatively. We resolved several credits while also taking on a few that were completely unrelated, one from a manufacturer and another from a service business. Therefore, we don't see anything significant across the entire portfolio that is unrelated.

Okay, that's helpful. And then just on the tax rate going forward, Mark, any kind of color or expectations where that's going to trend back to, perhaps?

Yes, we used the same calculations as before, but as pretax income decreased due to additional provisioning, the effect of our tax-free investments and other benefits clearly influenced the tax rate. You can estimate it based on our current situation compared to last quarter to see how it might look, depending on your net income each quarter.

Okay. Got it. And then just on accretion expectations, I know that will be impacted by CECL going forward, but I think it was a little elevated in the first quarter relative to the fourth quarter of last year, so just any color on just overall accretion expectations going forward?

Yes, it will probably be impacted slightly just because we moved the $2.8 million into the allowance, so that will get recognized. But I don't foresee any changes from our past. That's why I've always looked at the past history of how it goes. I know it gets chunky here and there, but even an average of what we've seen is still the best scenario.

Got it, that's what I figured but just wanted to clarify. And then maybe just lastly on the securities portfolio, with the PPP funding that you guys are doing thus far in the quarter, do you expect to fund that with maybe some excess liquidity in the bond book or do you kind of expect the securities portfolio on an absolute basis to remain relatively static over the next few quarters just likely just given the kind of temporary nature of the PPP loans on the balance sheet?

You raise an important point. We aren't able to pledge all of them and secure all the funding right away because that would involve selling cash, which we prefer to avoid in the current environment. Therefore, we will be monitoring the situation closely. We have until September 30th to utilize the lending fund from the Fed, and we are also considering the option to pledge it into the discount window to allow for greater flexibility, rather than being tied to a term product like the actual PPP loan. We will manage our funding based on the various opportunities available to us.

Understood. Okay, that's all I had. Thank you again for taking the follow-ups.

Thanks Nathan.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Dwight for any closing remarks.

Thank you for the callers and listeners for participating in our first earnings conference call, and we look forward to our next call in July. In the meantime, if you have any questions or comments about the company, please feel free to call me or Mark Secor at any time. We always answer our phones and return our phone calls. So thank you for participating today, and we'll talk to you in July. Have a good day.

This concludes our conference call. Thank you for attending today's presentation. You may now disconnect.