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Enterprise Financial Services Corp (NASDAQ:EFSC)
Q1 2020 Earnings Call
Apr 21, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the EFSC Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jim Lally, President and CEO of Enterprise Financial Services Corp. Please go ahead sir.

James B. Lally -- President & Chief Executive Officer

Thank you, Sarah. Good morning 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 under this 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 Enerprise Bank & Trust.

Before we begin, I would like to remind everyone on the call that a copy of the release and the company's 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 EFSC, through the quarter that show the financial strength and resiliency that we bought 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 are exhibited during the first quarter. We earned record operating revenue of $77 million. We extended our net interest margin and had a stable efficiency ratio compared to the linked quarter. Our loan and deposit growth is strong. Loans grew by $143 million or 11% annualized, and deposits grew $219 million or 15% annualized and in response to uncertainty economic conditions we are able to be proactive and prudent with our provision for credit losses adding $22 million to reserves. While we feel good about our financial results in the first quarter, we are unable to estimate the impact of COVID-19 on our business and operations for 2020. As such, we are not going to provide guidance at this time and our prior guidance should not be relied upon.

Keene will get into the specifics of the quarter but you need to know that I'm particularly pleased with these results amid the rather large provision that I previously mentioned. As it relates to credit quality we've been hard at work analyzing certain portions of the portfolio. Doug will speak to what we know currently, but we will obviously know more of the resiliency of our loan portfolio over 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, ample liquidity and high capital level position us well for continued success.

I'd like to take the next few minutes to update you on our approach and response to COVID-19. In 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 task force, the 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 that we took steps, I'm happy to report that our company does remain operational in support of client success.

We had our relationship and wealth managers make over 5,000 calls to clients and prospects over a three day period to hear and understand what their worries were and take the first steps in working to help them with current and upcoming leads. Earlier I mentioned that careful consideration for our associates that we have at EFSC.

Slide 4 gives you some perspective of what we've done. All of these measures are aimed at maintaining and improving our culture and we want to support clients and individual associate needs including the recently established associates 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 taking the best care of them now will ultimately drive the greatest potential, the long-term value for our shareholders and other constituents. We have taken seriously the implementation of the programs and acted by both the government and our regulators and to overall as the financial conduct to keep paychecks in the hands of the American worker. The number of loans that we have processed through the program we are simply 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 has been especially rewarding for me as I've seen incredible dedication of our associates, combined with entrepreneurial DNA of our company to create a very successful program. We're also working with clients on appropriate loan deferral strategies, the details of which Doug will comment on. Our relationship managers are not just thinking about the next eight weeks, they're meeting their clients in discussions regarding the multiple phases that lie ahead. How important cash and capital will be order to respond to the changing environment and how we see the opportunities to improve the businesses over the next several quarters.

Our history shows that on a pricing comes opportunities. The next several quarters will be a little different. We will stay focused on the last key tenants 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 are moving out our mission guiding people to a lifetime of financial success.

I would now like to turn the call over to Scott to provide much more detail about how our teams and regions are amid these unique times. Scott?

Scott R. Goodman -- President

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 activity represented over 70% of this growth stemming from increases across the specialty business lines 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 break down the change in loan balances by category and business unit. Commercial real estate activity was steady as we captured opportunities with investors to both refinance and purchase properties particularly in St. Louis and Kansas City. Our construction loan fundings mainly represent steady activity on project originated over the past three or four quarters. 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 see a steady flow of new project opportunities in the affordable housing business which was further bolstered in this quarter with some refinancing. The ag team 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 low crop, pork in cattle farms, which had 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 flowed 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 to deposits on Slide 11. 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 continue to be the main drivers here positively 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 5 times that of closed accounts and at a lower cost. The growth and mix is 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 swiftly as the Fed reduced interest rates and our sales teams have been able to execute well reaching out proactively for large depositors and shifting the conversation from rates 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 this stress environment to understand their 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 something certainly revenue continuity is at the top of the list. The unknown duration of this downturn is creating significant concerns. Access to liquidity is also a major focus for these services. However, roughly 65% of our clients believe they have sufficient cash and working capital, the weather the storm without related program of shipments. This manifests itself in a relatively modest percentage of our business clients requesting deferred payment as Doug will address in his comments.

Within industry sectors, demand for most of our manufacturing clients remains strong, although labor shortage due to illness, child 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 depending companies running out of inventory. Other fee -- other key things include stalled construction projects, limited access to labor, maintenance and sterilization for real estate owners and lower productivity overall.

Given the current environment and I'll provide some commentary on our execution of the payroll protection program and turn it to Doug to discuss some specifics on key sectors and other aspects of the credit progress. Our deployment of the PPP program outlined on Slide 12 was executed by experienced professionals from the sales operations in credit side of our organization. As the bank built on serving private businesses, early on, 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 position ourselves with clients as a key point of contact for information and guidance. Including instructional webinars, website resources and video messaging our teams are highly effective in executing a 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 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 the C&I borrowers with an additional 27% in niche lending. At a high level, the loan portfolio is well diversified by industry with no significant concentrations within the heavily threatened industry types.

Now I'd like to turn it over to our Chief Credit Officer Doug Bauche for some further comments. Doug?

Doug Bauche -- Chief Credit Officer

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. In particular, those who have been most severely impacted by the pandemic in the related economic effects. Scott touched on the diversification of our overall credit portfolio and I thought it would be helpful if I spend a few minutes talking more specifically about our exposure to the higher risk sectors including CRE retail, EVL, hospitality, oil and gas and agriculture.

Slide 14 shows a breakout of our C&I and CRE portfolios. For the investor-owned real estate approximately $356 million includes retail CRE. Of that the average commitment is $1.8 million with the weighted average LTV of 64% and personal recourse of 98% of the portfolio. And our segment stress testing, it was determined at 88% of the loans to be serviced 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 base secured working capital lines of credit. The portfolio is well diversified with approximately 19 unique borrowers, resulting in an average exposure of nearly $5 million per relationship, a $2.5 million per loan. Industry segmentation includes manufacturing at 34%, wholesale trade at 15% and professional and technical services at 15%. We have enjoyed long-term relationships with our proven SBIC sponsors, and this portfolio performed quite well during the prior economic downturn.

General underwriting and space leads to a conservative senior leverage position of 2 times to 2.5 times and total leverage below 4 times. I should note that 60 of our 90 EVL portfolio clients were recently approved for a total of $75 million in round one PPP funding for an average of $1.25 million per portfolio company.

Slide 16 demonstrates our hospitality portfolio consisting of approximately $358 million, a bank-owned commitment. $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 commonative 90-day payment deferrals in the funding a 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 in large part due to typical flag, 80 to 100 key nonconvention center type properties located within our mature markets.

In the oil and gas sector, I simply point out that we have not provided credit directly to producers, rather $140 million in exposure as shown on Slide 17, is largely to end market convenience stores, wholesalers and railcar is used for transportation of oil as well 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 hog 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 on-boarded 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, depressed commodity prices and the recent announcements of temporary shutdowns at large meat processing plants around the country.

We are keenly aware that we have clients outside of these high-risk sectors that are feeling the brunt of the economic conditions on their businesses, just the same. The length of this uncertainty will ultimately determine the severity of the impact to our credit portfolio. 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 will 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.

Keene S. Turner -- Executive Vice President & Chief Financial Officer

Doug, thanks for your comments and good morning everyone. My comments reflect Slide 21 of the presentation. Net income for the first quarter of 2020 rose $12.9 million and earnings per share was $0.48. Total revenue compared favorably to a seasonally strong fourth quarter and then the solid beginning to 2020. Net interest income added $0.03 of earnings per share in the linked quarter both be to continue to 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 seasonality. Nonetheless, there was an environmental items that help make up for the expected trends in both categories and which I'll highlight further in my comments. Our strong revenue and expenses resulted in pre-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 loan accretion, particularly related to CECL adoption and $0.8 million of discount accretion related to prepayments on core PCI loans in the period. Overall, margin were 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 points decline in one month LIBOR. This was partially mitigated by higher average loan balances, along with 5 basis points of yield related to the aforementioned prepayments on core PCI loans in the period.

Our cost of funds declined 18 basis points compared to the linked quarter and benefited from higher average customer deposit balances and lower levels of wholesale funding and CDs. Core noninterest-bearing DDA accounts were stable at 23% of total deposits and deposits excluding brokered time deposits increased $130 million on average compared to the fourth quarter. The cost of interest bearing DDA accounts was 9 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 decline in the Fed funds rate and other short-term market rates during the quarter.

Wholesale funding costs also declined during the period for similar reasons. The drastic change in the economic environment and decline in interest rates at the end of the quarter placed downward pressure on our net interest margin in coming period. While we realized strong loan and deposit growth in the quarter, our balance sheet is asset sensitive with approximately 60% of loans with variable rates. We responded aggressively to rate reduction by repricing deposit account 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 we're increasingly vigilant about our on and off balance sheet liquidity, which will likely effect 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 the difficult times. We believe that execution on these fronts will further solidify royalty with 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.

And with that, I'll spend one more minute on liquidity. Our liquidity position remains 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 have adequate capacity for additional wholesale and brokered funding if necessary. As of March 31, we had accessed nearly $2 billion of funding through our secured lines in the Federal Home Loan Bank and Fed discount window along with holding company liquidity in fed fund lines. We anticipate that loans issued in conjunction with the SBA Paycheck Protection Program will be funded through the Fed's paycheck protection program liquidity facility.

With that I want to spend a minute on Slide 23 which reflects credit metrics and asset quality changes during the quarter. We have several moving pieces that affected credit results. First, as part of the adoption of CECL on January 1, we elected to remove some PCI loans from pools and account from 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 these loans were and continue to be identified individually that they are well marked and 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 accounted for that had immaterial balances. On that note, the day one adoption increased the allowance for credit losses by $28 million. This is nearly $1 for $1 to increase in absolute balances of 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 1.34% on January 1. Comparatively classified loan levels improved from January 1, while nonperforming loans experienced the 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 economics -- of the economic forecast associated with the current conditions, resulting allowance coverage increased another 35 basis points to 1.69% and the reserve for unfunded commitments includes another 7 basis points of coverage. Important to note that we had successfully implemented the SBAs PPP program with our customer base and we continue to work with our customers to support their near term operation through deferrals and other methods. The provision for the quarter is nearly entirely reflective of forecasted deterioration that might occur in the environment, absent consideration this or any other mitigants. With that said, we also continue to see the expectations for conditions 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 combing through the portfolio talking to customers and working hard to identify any issue, we are not seeing material credit stress manifesting at the current time.

That will turn to Slide 25 and reflect on fee income, which were seasonally strong at $13.4 million for the quarter. We started to see some impacts 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 level. 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, first 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 begin the year compares favorably to a year ago and is an encouraging start to 2020. We continue to work hard to ensure that we're spending prudently in this environment, but we're also committed to supporting our associates and our family through this challenging time. I would also add that operationally we are faring well. Our business continuity was built around working remotely with our geographic dispersion. We were already used to working virtually well out in the office. This is clearly another level and completely broad based, but our team were successfully and safely serving clients while collectively working through this challenge.

I'll conclude my remarks on Slide 27. In terms of our capital, our capital level remained strong with common equity Tier 1 at 9.6% and total risk-based capital at nearly 13%. As part of our ongoing capital planning process we have stressed our capital position using adverse economic forecast and our own historical loss experienced during the downturn. Under these scenarios we projected our capital levels would still need well capitalized units 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 ratio of 8.4% at March 31, down from 8.9% at the end of 2019. This trend was due to the impact from adoption of CECL and building our credit reserves in the quarter, which combined totaled $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 strengthen our balance sheet.

I just want to conclude by saying that it's clear to us whenever that we value our relationships 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 make long-term financial decisions that are in the best interest of all of our stakeholders. It is also evident that we have worked so hard to do 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 be who we are, 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from Jeff Rulis with DA Davidson.

Jeff Rulis -- DA Davidson -- Analyst

Thanks. Good morning.

James B. Lally -- President & Chief Executive Officer

Good morning Jeff.

Jeff Rulis -- DA Davidson -- Analyst

On the capital just in terms of -- you've doubled the loan-loss reserves sort of capital come from different sources, but any thoughts on that TCE comfort level of that 8.4% here and acceptable levels if 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 at 8.4%?

Keene S. Turner -- Executive Vice President & Chief Financial Officer

Jeff, hi, 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 had -- what we feel like is a proactive day two provision and we were also buying back some shares in the quarter. So we are ending up at 8.5% TCE, I feel like that's strong and then I think it's worth noting just in terms of CECL, I mean there is some regulatory relief and phasing that you get, so TCE is one indicator but the rest of the ratio is 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, 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 quarters like this and if you had call it a 50% quarter here with an $0.18 dividend here then you're building TCE every quarter.

Jeff Rulis -- DA Davidson -- Analyst

Got it. Thanks. And another one on expenses and really just a color I know that you looking to provide guidance, but there are a lot of moving pieces in Q1 and things moving rapidly toward 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 if its not indicate of both or maybe 2Q?

Keene S. Turner -- Executive Vice President & Chief Financial Officer

Yes. 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 just say with that said there are some -- there is some variability, we're definitely going to see some more professional fees as we consult with the attorneys and 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 as a material upside or outside to the level we're at. We feel pretty good about at least in light of current profitability and then 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 up later in the year.

Jeff Rulis -- DA Davidson -- Analyst

Thanks. And one last, just want to clarify I think it was in Doug's comments about the average PPA balance of your EBL clients, was that a $1.25 million or so did that get better?

James B. Lally -- President & Chief Executive Officer

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

Jeff Rulis -- DA Davidson -- Analyst

Great. Thanks guys. That's it from me.

Operator

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

Andrew Liesch -- Piper Sandler -- Analyst

Good morning guys. How are you?

James B. Lally -- President & Chief Executive Officer

Good morning Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

Just, questions on the margin here. The industry -- what percentage of your floating rate loan book is currently at the floors?

James B. Lally -- President & Chief Executive Officer

Andrew, 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 have a float 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.

Andrew Liesch -- Piper Sandler -- Analyst

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?

James B. Lally -- President & Chief Executive Officer

Yes. Let me try to give you as mush flavorsas 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 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.

Andrew Liesch -- Piper Sandler -- Analyst

Got you. That's helpful. I will step back. Thank you for taking my question.

James B. Lally -- President & Chief Executive Officer

Thank you Andrew.

Operator

[Operator instructions] We'll now hear from Michael Perito with KBW.

Michael Perito -- KBW -- Analyst

Hey guys, hope you're all doing well. Thanks for giving up your time today.

James B. Lally -- President & Chief Executive Officer

Good morning Michael.

Michael Perito -- KBW -- Analyst

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, I mean, it seems you have quite a few that are taking some form of intervention or forbearance. I mean what kind of assumptions in terms of their ability to return to kind of full operation later this year you guys making in kind of reserve fill that we have?

James B. Lally -- President & Chief Executive Officer

Let me maybe handle that high level and then I'll ask Doug or Scott to kind of color in maybe the borrowers. I think it's been pretty clear that the idea that is 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 their 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 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 within the portfolio other than using a broader economic indicators.

Doug Bauche -- Chief Credit Officer

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 how we think about it.

Scott R. Goodman -- President

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.

Michael Perito -- KBW -- Analyst

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 or to say is it still too early to comment on that?

James B. Lally -- President & Chief Executive Officer

Now I can let Doug comment specifically if he wants to. I think it's early from a value standpoint. I think we've monitored our 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.

Doug Bauche -- Chief Credit Officer

No, I haven't seen in terms of 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 it 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.

Michael Perito -- KBW -- Analyst

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?

James B. Lally -- President & Chief Executive Officer

Yes. The bulk of portfolio or the alarming majority of the portfolio is aircrafts taken in on trades of floor plan 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.

Michael Perito -- KBW -- Analyst

Got it. Well thank you guys. I appreciate the extra time and help me with the questions this morning. I hope you all stay well in top motion.

James B. Lally -- President & Chief Executive Officer

Thanks Mike. Same to you.

Operator

[Operator instructions] We'll now take a question from Brian Martin with Janney Montgomery.

Brian Martin -- Janney Montgomery` -- Analyst

Hey. Good morning guys.

James B. Lally -- President & Chief Executive Officer

Good morning Brian.

Brian Martin -- Janney Montgomery` -- Analyst

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 kind of what was that as a familiar question earlier Keene was that as of March 31 or did it kind of -- looking a little bit after that with the most recent data as far as what the deferral look like?

Scott R. Goodman -- President

Yes, Brian it's Scott and I can take it. Okay, the deferrals that we talked about were really trying to give some color post March 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.

Brian Martin -- Janney Montgomery` -- Analyst

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?

James B. Lally -- President & Chief Executive Officer

Yes so let me just add one thing to Scott's 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 looks 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 don't, that will be a loan yield and 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 can stand business and we've done 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.

Brian Martin -- Janney Montgomery` -- Analyst

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?

Keene S. Turner -- Executive Vice President & Chief Financial Officer

Yes, 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 paychecks and for really the purpose of that we've intended for. So that can be forgiven.

Brian Martin -- Janney Montgomery` -- Analyst

Yes. Got you. Okay. That's helpful. 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?

Keene S. Turner -- Executive Vice President & Chief Financial Officer

Yes. I mean this is it's xxx, 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.

So I think it would be irresponsible if I tried to give you some sense for that. I will say that March margin was lower than January and February comparatively but 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.

Brian Martin -- Janney Montgomery` -- Analyst

Okay. All right, 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 1Q 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.

James B. Lally -- President & Chief Executive Officer

Yes 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 10-Q 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.

Brian Martin -- Janney Montgomery` -- Analyst

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.

Keene S. Turner -- Executive Vice President & Chief Financial Officer

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, they feel like they're in decent shape but I think it's definitely liquidity to weather that.

Brian Martin -- Janney Montgomery` -- Analyst

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?

James B. Lally -- President & Chief Executive Officer

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.

Brian Martin -- Janney Montgomery` -- Analyst

Okay. Perfect. That's helpful Keene. Thanks everyone and stay safe.

Keene S. Turner -- Executive Vice President & Chief Financial Officer

Thanks Brian. You too.

Operator

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.

James B. Lally -- President & Chief Executive Officer

Yes. So I'll take it. This is Jim and just want to thank everybody for their time today and your interest in our company. Please stay well, stay safe and look forward to talking to you again in the second quarter if not sooner. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

James B. Lally -- President & Chief Executive Officer

Scott R. Goodman -- President

Doug Bauche -- Chief Credit Officer

Keene S. Turner -- Executive Vice President & Chief Financial Officer

Jeff Rulis -- DA Davidson -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Michael Perito -- KBW -- Analyst

Brian Martin -- Janney Montgomery` -- Analyst

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